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The economy slows because of “stagflation,” the economic problem of excess capacity and unemployment coexisting with inflation and no economic growth.
The S&L industry has huge volumes of low, fixed-rate mortgages that were issued in the 1950s and 1960s. The gap between what the S&Ls earn on these mortgages and what S&Ls pay for new deposits erodes the capital of the S&Ls.
In the era of financial deregulation in the 1980s, S&Ls embark on speculative ventures, many of which are in questionable real estate projects. When the real estate market weakens and oil prices fall, many S&Ls go bankrupt. During the 1980s, Federal Savings and Loan Insurance Corporation (FSLIC) capital is depleted.
Most new Lesser Developed Countries (LDC) bank loans cover accrued interest on existing debt and maintain levels of consumption. The new loans are not used for productive investments. Many banks write off the bad loans.
Stock market prices begin a steady climb, and the volume of shares traded increases dramatically. Many of those shares are traded by institutional investors, mutual funds, and large commercial investors.
Securities transactions are increasingly conducted by computers, which are programmed to buy automatically within specified parameters.
The electronic funds transfer (EFT) system is widely implemented.
S&L and bank failures rise because of economic, financial, legislative, and regulatory activities.
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