Opportunity cost of capital forbearance during the final years of the FSLIC mess

Abstract

This paper uses a robust valuation model and data available in 1985–1989 to conduct a synthetic market-value accounting of the year-to-year opportunity cost of FSLIC forbearance. Although opportunity cost did not increase in every single year, it did increase on average over the period. Had robust mark-to-model standards for S&L capital adequacy been routinely enforced, FSLIC guarantees would not have displaced private capital on a mammoth scale and surviving members of the industry would have proved more profitable. Lessening hidden tax liabilities for households and hidden subsidies to risky lending would have shortened the disinflation process and allowed the U.S. to hold a more valuable capital stock today.