In the early 1980’s the United States faced a recession and a crisis in the Savings and Loans banking sector, known as the Savings and Loans debacle. There are many factors that led to this crisis. The most significant cause is the measure taken by Paul Volker, the chairperson of the U.S. Federal Reserve Board, to mitigate the extremely high (and growing) levels of inflation in the U.S. His process of disinflation, which involved a tight monetary policy, actually created a huge panic in the banking sector, ultimately leading to the S&L crisis. In order to understand Volker’s motives it is important to see the economic environment from 1976 to the early 1980’s. Starting in 1976, the inflation rate began increasing at a fast pace, as the government did not have any monetary policies in place that focused specifically on inflation. This was alarming to the US because as inflation rose, the growth in the economy remained stagnant. Hence, the period is identified as a time of “stagflation”, this is detrimental to all parts of the economy. The inflation began rising from 5% in 1976 to 11.6% in March of 1980 …show more content…
Since 1976 the dollar “lost 12% of its value against major foreign currencies” (federalreservehistory.org). Specifically, “during the first half of August 1978, the dollar sank to new lows against the German mark, a fresh vote of no confidence in America” (Bloomberg). The fact that the dollar weakened decreased imports, as Americans could no longer afford to maintain their consumption of foreign products. Foreign investors lacked confidence in the U.S. only decreasing the amount of foreign investments, adding to the already depressed economy. The devaluation of the dollar mixed with high inflation and little growth was a lethal combination that inevitably led the economy into a recession and a subsequent banking crisis in the S&L