The savings and loan crisis is one of the more extraordinary developments in contemporary domestic affairs. It represents both public and private policy failures of major proportions, imposes costs on the public of between $100 and $500 billion, and creates exceptional new public management responsibilities. The Resolution Trust Corporation, created to “resolve” this crisis, is now the largest real estate agency in the nation, and, remarkably, the country's largest single employer of lawyers.

This disaster has left the public angry and mystified: What is a savings and loan (also called a thrift) and how is it different from a bank? What is FSLIC, and why did we have it if it couldn't prevent the trouble? Why does fixing the problem cost so much, and where does all the money go? Whose fault was it? Does this portend the collapse of the entire financial system?

Some reasons for the crisis are simple to see. Policy designed in the 1930s to create new financing opportunities for home mortgages was flawed and allowed to outlive its time. Thrifts were designed on the popular principle of local banks raising local funds to help local homeowners, and given a protected market. In their time, the thrifts created financing for housing where none existed before. Their capacity to do this was sustained by regulatory controls, tax policies, interest rate controls, and deposit insurance. But when interest rates rose in the 1970s, no amount of tinkering with the original scheme could protect an industry locked into long-term loans earning low rates, and paying out high rates to compete for new funds, and the thrifts could not survive.

To fill in the “black hole” between remaining S&L assets and what is owed to depositors will cost about $200 billion in 1991 dollars. By any measure, this is a lot of money and is in fact about equivalent to the undiscounted $500 billion figure ineptly professed by the General Accounting Office and widely echoed in media reports, political speeches, and on talk shows.

An important aspect of this cost is that it is history—gone for good. It will not come back as the result of an economic rebound, for instance. In fact, the longer it takes to pay off this bill, the higher it will go.

I speak with less conviction about such non-dollar costs of the S&L crisis as the loss of public confidence in public institutions and their officials. I do, however, believe they too are significant, and I do not agree with the cynics who argue that there was little or no confidence left to lose.

The U.S. savings and loan debacle is, or should be, of great interest to political scientists. Any public policy failure as costly as this one deserves study for that reason alone. Analysis of its origins and development may reveal why it has been so intractable. Such analysis also may illuminate a broader class of regulatory policy problems that the political process tends to manage poorly.

Most writing about the savings and loan crisis has focused on its proximate causes. The deeper political roots of the thrift debacle have not been identified. As someone who has tracked the development of the thrift crisis and analyzed deposit insurance issues since 1986, I am convinced that the problems have a deeper structure, rooted in the organization of the U.S. political/regulatory system and its interaction with private markets. More specifically, the potential for this disaster was inherent in the original 1930s' design of deposit insurance and its associated regulatory policies. At this level of analysis, the challenge to policymakers posed by the thrift disaster can be appreciated and its similarities or differences with other regulatory problems examined.

In the twentieth century, the savings-and-loan crisis rivals only the bank failures of the Great Depression and the hyperinflation of the 1970s in threatening Americans' confidence in their financial institutions. The costs promise to be truly astronomical. The U.S. General Accounting Office (GAO) estimates that at least $325 billion, probably much more, and at worst perhaps $500 billion, will be needed over the next thirty years to fund the bailout (Bowsher, 1990a, p. 15). Five United States Senators, the so-called “Keating five,” stand sullied in the fallout.

With such high costs and malfeasance, a host of villains but no fingerprints left at the scene of the crime, the bailout's problems are legion. The amount of money involved demands tight control, but the huge potential for political blame discourages any elected official from wanting to come close to the issue. Seats on the congressional banking committees, once prized plums because they often attracted PAC money, are now difficult to fill.

As the taxpayers' bill for the cost of the savings and loan debacle continues to increase—recent estimates suggest total costs of about $500 billion—and the insurance fund for the nations' banks runs close to empty, many people are asking how and why we got here, and where is the accountability for such a disaster? What was the government doing while all of this was happening? While much has been written about who should be blamed and the lessons learned from this crisis, it is important for those of us in government to evaluate our contributions to the analysis of this issue and examine what we have learned.

As an evaluator of the General Accounting Office (GAO), Congress' “watchdog” agency, I will focus on GAO's evolving role in the analysis of the savings and loan crisis. GAO combines the expertise of accountants, economists, and analysts familiar with the internal operations of the federal agencies to provide a unique and comprehensive analysis of major policy issues. The S&L issue is a particularly useful case study for GAO because it illustrates the dramatic growth in our expertise and ability to contribute to policy analysis over the last decade. In 1980 GAO issued no reports relating to the thrift industry, while in 1989 GAO issued 28 reports and testimonies specifically about thrifts.

The juxtaposition of “political science” with the “savings and loan crisis” is interesting in part because it appears a peculiar pairing. What does, or should, political science as an academic discipline have to do with the current crisis in the savings and loan industry? A case can be made, and indeed is arguably the present dominant view within the discipline, that political scientists ought not to seek to be involved in any systematic way with public sector management problems or with governance generally. Following this reasoning, political science ought not to be interested in the savings and loan crisis other than, possibly, to study it after the fact as a political phenomenon.

There are other political scientists, however, who are uneasy with this passive view of the discipline. They have seen the emergence of a massive institutional crisis in the financial system of the nation and no one has thought to seek their advice and counsel towards a solution to the crisis except for them to participate as taxpayers in picking up the bill. But of even greater concern to many of the thoughtful in these ranks is the realization that if someone were to call upon the discipline for advice and assistance, the discipline might have little to contribute. Few of the leaders in our discipline have expertise in the management of complex fields. Indeed, it is unusual today to find political scientists with any experience at all in governmental institutions or affairs. The estrangement between political science and the governance process of the Republic appears nearly complete.

The discussion of Perestroika has suffered on the whole from inadequate attention paid to the nature of Soviet society. Yet, it is only upon knowing the kind of society we have before us that we can grasp the specificity of its problems and the possibilities within the system for resolving them. Hence any serious inquiry into Perestroika and Glasnost must begin by determining the best way to characterize the Soviet Union.

There has probably never been a society anywhere that has been burdened with so many different names: “socialism,” “communism,” “actually existing socialism,” “state socialism,” “bureaucratically deformed socialism,” “dictatorship of the proletariat,” “workers' state,” “people's democracy,” “state capitalism,” “totalitarianism,” “red fascism,” and there are others. The problem of finding the right label, of course, is a reflection of the difficulty people have had in deciding which one or few of its attributes have been decisive in giving the Soviet Union its distinctive character, including too its real history and potential for future change.

President Gorbachev has fundamentally changed the Soviet political system. Whether Gorbachev survives another month, year, or decade, the Soviet system will not return to the party-state command economy that preceded his tenure. Although the Soviet changes have not yet resulted in the total repudiation of the communist system, as in Eastern Europe, and a neoconservative retrenchment is possible, those of us who study and teach Soviet politics must respond to these developments with a perestroika of Soviet studies and “new thinking” about the Soviet Union.

Concepts and techniques formerly alien to Soviet studies must become integral components of our analysis. Even if we cannot completely discard such concepts as totalitarianism, Marxism-Leninism, and democratic centralism, we must begin to include theories of pluralism, constitutionalism, and federalism. Patently, oldstyle Kremlinology and “black box” analysis must be supplemented if not replaced by public opinion polling, studies of electoral behavior, and legislative roll-call analysis. Rather than thinking and teaching about the USSR in isolation or in the narrow context of comparative communism, we should look at Soviet politics from a broader comparative perspective that draws on theories and examples from Western and Third World systems. Quite simply, the restructuring of how we teach and study Soviet politics must be as fundamental and as sweeping as Gorbachev's perestroika of the Soviet system.

Joseph Schumpeter, a great economist and social scientist of the last generation, whose career was almost equally divided between Central European and American universities, and who lived close to the crises of the 1930s and '40s, published a book in 1942 under the title, Capitalism, Socialism, and Democracy. The book has had great influence, and can be read today with profit. It was written in the aftergloom of the great depression, during the early triumphs of Fascism and Nazism in 1940 and 1941, when the future of capitalism, socialism, and democracy all were in doubt. Schumpeter projected a future of declining capitalism, and rising socialism. He thought that democracy under socialism might be no more impaired and problematic than it was under capitalism.

He wrote a concluding chapter in the second edition which appeared in 1946, and which took into account the political-economic situation at the end of the war, with the Soviet Union then astride a devastated Europe. In this last chapter he argues that we should not identify the future of socialism with that of the Soviet Union, that what we had observed and were observing in the first three decades of Soviet existence was not a necessary expression of socialism. There was a lot of Czarist Russia in the mix. If Schumpeter were writing today, I don't believe he would argue that socialism has a brighter future than capitalism. The relationship between the two has turned out to be a good deal more complex and intertwined than Schumpeter anticipated.

The Western democracies have gradually developed their legislative institutions over many centuries. Today the Soviet Union is building its own powerful legislature. Perhaps a look at the Western experience will be of interest to Soviet citizens who are currently thinking about how to make their own legislature an effective part of the democratic process.

Of course the Soviet Union is quite different from the Western democracies in many ways, including not only its political system, but also its economic system, its multinational character, and its social and cultural history, and the Western experience cannot be applied mechanically to such a different setting. But precisely because the Soviet Union is undertaking such bold experiments in restructuring, concrete experiences of others might be useful in suggesting ideas about legislative procedures, competitive elections, constituency relationships, and social norms.

Legislatures were originally developed in Britain, and later in France, because the kings constantly found themselves short of money. After trying many methods of raising money by command, they eventually realized that they would have to attain the support of broader and broader segments of the society.

“How to Recognize Democracy” and “How to Recognize Political Parties”—such were some of the newspaper articles I published after arriving in Estonia in November 1990. People expected the new freely elected Supreme Council (parliament) to pass laws quickly and with large majorities, and parties to have card-carrying mass memberships. Besides the ever-present threat of suppression by the Kremlin, democracy in Estonia was challenged internally by such superdemocratic expectations, rooted both in the earlier Soviet fake democracy and a reaction against its actual concentration of power.

Parliamentary democracy had been introduced, but parliament members were prohibited from becoming cabinet ministers. Unrealistically high quorum and majority requirements risked paralyzing legislative action, now that disagreement and absence had become possible. Perfectly sound democratic practices were denounced as dictatorial. The parliament produced major legislation at a breakneck pace, compared to its Western counterparts, yet was widely seen as too slow. Newly formed centrist parties were thought to be deficient because they lacked mass membership in the Marxist image.

While relentlessly knocking down Soviet-style authoritarian patterns, especially in attitudes toward women, I increasingly found myself reassuring Estonians that they were further along in building democracy than they dared to believe.