Background
Savings and loan associations, commonly known as S&Ls or thrifts, are financial institutions that specialize in accepting savings deposits and making long-term mortgage loans. They play a crucial role in the US housing market by providing financing for residential properties.
Historical Context
Initially established in the 19th century, savings and loan associations were designed to promote homeownership by offering more favorable loan terms compared to traditional banks. The industry’s heyday was in the mid-20th century, but S&Ls faced significant challenges during the late 20th century due to economic shifts and regulatory changes.
Definitions and Concepts
Savings and loan associations (S&Ls) provide financial services such as savings accounts and mortgage loans. They collect funds from the public through deposit accounts and use these funds to offer mortgage loans. S&Ls historically offered fixed-interest rate mortgages, which presented certain risks when market interest rates fluctuated.
Major Analytical Frameworks
Classical Economics
From a classical economics perspective, S&Ls function in a competitive market where supply and demand determine interest rates and prices of financial products.
Neoclassical Economics
Neoclassical economists examine S&Ls through the lens of profit maximization and efficiency in financial markets. The assumption is that S&Ls work to allocate resources optimally under the constraints posed by regulatory bodies and market conditions.
Keynesian Economic
Keynesian economics would focus on the role of S&Ls in stabilizing the economy, particularly housing markets. Policy interventions may be recommended to support S&Ls during economic downturns to ensure that mortgage financing remains accessible.
Marxian Economics
From a Marxian perspective, S&Ls could be seen as financial structures that reflect broader class dynamics and inequalities within the capitalist system, particularly focusing on who benefits from housing finance.
Institutional Economics
Institutional economists would explore how regulatory frameworks and governance structures influence the operation and stability of S&Ls, emphasizing the importance of institutional factors over individual market choices.
Behavioral Economics
Behavioral economists might analyze how the behaviors of depositors and borrowers at S&Ls are influenced by psychological factors, such as heuristics and biases, particularly in decision-making under uncertainty.
Post-Keynesian Economics
Post-Keynesian approaches would focus on the financial stability of S&Ls and the implications of using short-term deposits to finance long-term mortgages, to highlight potential systemic risks.
Austrian Economics
Austrian economics would stress the importance of individual decision-making and the market process, suggesting that problems with S&Ls might arise from regulatory distortions rather than market forces alone.
Development Economics
In development economics, the role of S&Ls might be considered in the context of their contribution to economic development and increasing homeownership rates, particularly in underdeveloped areas.
Monetarism
Monetarist economists would look at the impact of S&Ls on the money supply and monetary policy, assessing how changes in interest rates by these institutions influence broader economic conditions.
Comparative Analysis
Savings and loan associations in the US can be compared to building societies in the UK, both of which are designed to promote homeownership through specialized mortgage financing. However, the financial problems faced by S&Ls due to mismatched interest rates highlight differences in regulatory environments and market dynamics.
Case Studies
Significant case studies of S&Ls include the savings and loan crisis of the 1980s, which led to widespread insolvencies and required substantial government intervention and reform.
Suggested Books for Further Studies
- “The Great Savings and Loan Debacle” by Lawrence J. White
- “Other People’s Money: The Real Business of Finance” by John Kay
- “The Reckoning” by Howell E. Jackson and Edward L. Symons
Related Terms with Definitions
- Building Society: A financial institution similar to a savings and loan association in the UK, offering mortgage lending and savings accounts.
- Mortgage: A loan used to purchase real estate, typically secured by the property itself.
- Fixed-Interest Mortgage: A mortgage with an interest rate that does not change over the term of the loan.
- Deposit Account: An account held at a bank or financial institution that allows the account holder to deposit and withdraw money.
