IMPACT OF MONETARY POLICY ON THE THRIFT INDUSTRY
The savings and loan crisis in the 1980s was precipitated by the combined effects of a multitude of factors (Kidd, 1994, pp. 104-113). Among the more significant of these factors was monetary policy. This research analyzes the effects of monetary policy on the thrift industry in the United States from the early-1970s through the early-1990s. The functioning of the IS-LM model is emphasized in this analysis.
The IS-LM Model and the Thrift Industry
The IS-LM model is so named for the two curves included in its structure. The IS curve reflects the various combinations of national income and interest rates for which leakages will be equated with injections (Franke & Asada, 1994, pp. 273-295). The LM curve reflects the combinations of interest rates and income levels that are consistent with equilibrium in the monetary sector.
The early conception of interest was that it simply reflected the rate of return on capital invested (Ekelund & Hebert, 1990, p. 90). At this time, interest, as income on capital, was considered to be analogous to rent on land. As economic theory developed, however, the nature of interest, and the determinants of interest rates began to be perceived in more complex terms. Classical economic theory eventually held that interest rates were determined by forces affecting the supply of and demand for funds. The demand for funds was held by this theory to derive from the expectations of businesses with respect to profits. In turn, the expectations of businesses with respect to profits were held to be a function of the marginal productivity of investment. The supply of funds was held by this theory to be dependent upon the aggregate willingness of members of an economy to save. In turn, the aggregate willingness to save was held to be a function of the marginal rate of time preference for funds.
In the context of the theory of interest, investment...