Government actions, unintended outcomes with S&Ls, schools
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Fast-forward to 1997 and the passage of the Pennsylvania Charter School Law: Act 22. This effectively deregulated the public educational system. Act 22 made the financial crisis facing the Philadelphia School District inevitable.
If you want to see how seemingly logical government actions can create massive problems, all you have to do is look at two outwardly different crises: the collapse of the savings and loan industry and the Philadelphia School District financial mess.
Changes in regulations and laws that allowed interest rates to move freely eventually led to the bankruptcy of many S&Ls, while the passage of the charter-school law set in motion events that ultimately bankrupted the School District.
Actions have consequences, especially when they alter the fundamental manner in which business is conducted. Consider the S&L crisis. The root cause was the repeal of Regulation Q, which had set a ceiling on what banks could pay for deposits. That decision was inevitable given the rapid innovation in the finance sector.
How did a needed market-based action lead to massive bank failures? Simple. Before deregulation, bankers operated under what was amusingly called the 3-6-3 Rule: Pay 3 percent for deposits, lend at 6 percent, and be golfing by 3 p.m.
Largely mortgage lenders, savings and loan associations used short-term, Regulation Q-limited cost deposits and lent them out long term at fixed rates to households who wanted to buy homes. Then the market for short-term deposits changed.
Repealing the limits on interest rates created what economists
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