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Making thrifts more thrifty

IN October 1981, Richard Kopcke, an economist with the Federal Reserve Bank of Boston, delivered a paper at a conference on the future of the thrift industry. It sounded excessively gloomy then. But time has shown his observations to be remarkably prescient. Speaking at a time when interest rates were well into the teens, Kopcke held that around one-third of all savings and loan associations and mutual savings banks were ``potentially insolvent'' - even if interest rates dropped 4 to 5 percent - because of their failure to observe a basic principle of finance. Their liabilities (deposits) were short-term and subject to interest rate fluctuations; their assets (mostly mortgages) were long-term at fixed rates.

This imbalance meant that the thrifts were losing money on portfolios heavy with, say, 25-year mortages at 4-6 percent interest. Interest rates never went back to the low levels of the 1960s and early 1970s.

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To remedy this problem, Washington decided to allow the thrifts to invest some money in higher-yielding but more risky assets - loans to business, for example. But deregulation didn't work too well. A combination of incompetence, dishonesty among thrift executives, and misfortune (the oil bust in Texas) compounded the original problem.

Now the regulatory agencies are coming to the rescue with expensive bailouts. These could eventually cost taxpayers in excess of $50 billion. To prevent a recurrence, Congress and the regulators should consider insisting that thrifts return to conservative investment principles. To homeowners the result may be more mortgages with flexible rather than fixed interest charges.