tedly and timidly. Senior bank managements repeatedly evaded and resisted the Fed's efforts to restrain highly risky activities.(8) Banks struggled to survive wave after wave of crisis stemming from bad loans to developing countries, energy credits, and real estate speculation. By 1984, for example, Chicago's Continental Illinois Bank collapsed in the wake of its reckless expansion which the Federal Reserve and the comptroller of the currency failed to restrain. It led to the nationalization of that bank by the U.S. Treasury at taxpayer expense. During the next ten years, the collapse of oil prices and the crash of the real estate boom sent shock waves from California to Texas to New York and New England. Nine of the ten largest banks in Texas failed. By 1990, New York's Citibank was awash with bad real estate loans; it held more than any other bank in the country. Clearly, the federal regulators, including the Federal Reserve, failed to prevent problems from snowballing into systemic proportions. Yet, in its monetary policy decisions, the Federal Reserve acted decisively to tighten the growth of money and credit, and to push up the structure of interest rates. Monetary restraint did not, however, prevent many banks from failing. To the contrary, higher interest rates (i.e., high costs of funds) simply pushed the banks into new and riskier businesses at higher rates. During the last half of the 1980s, nearly 900 commercial and savings banks failed; in 1991 and 1992 more than 100 banks failed each year. The number of "problem" banks on the Federal Reserve's list of institutions requiring close scrutiny reached a peak of nearly 1,600 in 1987 and still remained at more than 1,000 as recently as 1991. According to Chairman Greenspan, "That 1991 figure was especially disturbing because, by then, it included some major institutions, which boosted the assets of problem banks to more than $600 billion" (Greenspan, September 22, 1994). Indeed,...
