Early 1980s recession
Encyclopedia
The early 1980s recession describes the severe global economic recession
affecting much of the developed world in the late 1970s and early 1980s. The United States
and Japan
exited recession relatively early, but high unemployment would continue to affect other OECD nations through at least 1985. Long term effects of the recession contributed to the Latin American debt crisis
, the savings and loan crisis
in the United States
, and a general adoption of neoliberal economic policies throughout the 1980s and 1990s.
in the United States which began in July 1981 and ended in November 1982. The primary cause of the recession was a contractionary monetary policy
established by the Federal Reserve System
to control high inflation
. In the wake of the 1973 oil crisis
and the 1979 energy crisis
, stagflation
began to afflict the economy of the United States.
had risen from 5.1% in January 1974 to a high of 9.0% in May 1975. Although it had gradually declined to 5.6% by May 1979, unemployment began rising again thereafter. It jumped sharply to 6.9% in April 1980 and to 7.5% in May 1980. A mild recession from January to July 1980 kept unemployment high, but despite economic recovery unemployment remained at historically high levels (about 7.5%) through the end of 1981. In mid-1982, Rockford, Illinois
had the highest unemployment of all Metro areas with 25%. In September 1982, Michigan lead the nation with 14.5%. Alabama was second with 14.3% and West Virginia was third with 14.0%. The Youngstown–Warren Metropolitan Area had an 18.7% rate, the highest of all Metro areas. Stamford, Connecticut
had the lowest with 3.5% unemployment.
The peak of the recession was in November and December 1982, when the nationwide unemployment rate was 10.8%, highest since The Great Depression. As of 2011, it is still the highest since the 1930s. In November, West Virginia and Michigan had the highest unemployment with 16.4%. Alabama was in third with 15.3%. South Dakota had the lowest unemployment rate in the nation, with 5.6%. Flint, Michigan
had the highest unemployment rate of all Metro areas with 23.4%. In March 1983, West Virginia's unemployment rate hit 20.1%. In the Spring of 1983, thirty states had double digit unemployment rates. When Reagan won re-election in 1984, the latest unemployment numbers (August 1984) showed West Virginia still had the highest in the nation, 13.6%, with Mississippi in second with 11.1%, and Alabama in third with 10.9%.
, which had averaged 3.2% annually in the post-war
period, had more than doubled after the 1973 oil shock to a 7.7% annual rate. Inflation reached 9.1% in 1975, the highest rate since 1947. Inflation declined to 5.8% the following year, but then edged higher. By 1979, inflation reached a startling 11.3% and in 1980 soared to 13.5%.
A brief recession occurred in 1980. Several key industries—including housing, steel manufacturing and automobile production—experienced a downturn from which they did not recover through the end of the next recession. Many of the economic sectors that supplied these basic industries were also hard-hit. Each period of high unemployment was caused by the Federal Reserve, as it substantially increased interest rates to reduce high inflation; each time, once inflation fell and interest rates were lowered, unemployment slowly fell.
Determined to wring inflation out of the economy, Federal Reserve chairman
Paul Volcker
slowed the rate of growth of the money supply and raised interest rates. The federal funds rate
, which was about 11% in 1979, rose to 20% by June 1981. The prime interest rate
, a highly important economic measure, eventually reached 21.5% in June 1982.
s such as savings and loans
and bank
s.
. The Depository Institutions Deregulation and Monetary Control Act
of 1980 (DIDMCA) had phased out a number of restrictions on banks' financial practices, broadened their lending powers, and raised the deposit insurance
limit from $40,000 to $100,000 (raising the problem of moral hazard
). Banks rushed into real estate
lending, speculative lending, and other ventures just as the economy soured.
By mid-1982, the number of bank failures was rising steadily. Bank failures reached a post-depression high of 42 as the recession and high interest
rates took their toll. By the end of the year, the Federal Deposit Insurance Corporation
(FDIC) had spent $870 million to purchase bad loans in an effort to keep various banks afloat.
In July 1982, Congress
enacted the Garn–St. Germain Depository Institutions Act of 1982 (Garn–St. Germain), which further deregulated banks as well as deregulating savings and loans. The Garn–St. Germain act authorized banks to begin offering money market accounts in an attempt to encourage deposit
in-flows, removed additional statutory restrictions in real estate lending, and relaxed loans-to-one-borrower limits. The legislation encouraged a rapid expansion in real estate lending at a time when the real estate market was collapsing, increased the unhealthy competition between banks and savings and loans, and encouraged overbuilding of branches
.
The recession affected the banking industry long after the economic downturn technically ended in November 1982. In 1983, another 49 banks failed—easily beating the Great Depression record of 43 failures set in 1940. The Federal Deposit Insurance Corporation
(FDIC) listed another 540 banks as "problem banks" on the verge of failure.
In 1984, the Continental Illinois National Bank and Trust Company
, the nation's seventh-largest bank (with $45 billion in assets), failed. The FDIC had long known of Continental Illinois' problems. The bank had first approached failure in July 1982 when the Penn Square Bank
, which had partnered with Continental Illinois in a number of high-risk
lending ventures, collapsed. But federal regulators were reassured by Continental Illinois executives that steps were being taken to ensure the bank's financial security. After Continental Illinois' collapse, federal regulators were willing to let the bank fail in order to reduce moral hazard and encourage other banks to rein in some of their more risky lending practices. But members of Congress and the press felt Continental Illinois was "too big to fail."
In May 1984, federal banking regulators were forced to offer a $4.5 billion rescue package to Continental Illinois.
Continental Illinois may not have been "too big to fail," but its collapse could have caused the failure of some of the biggest banks in the United States. The American banking system had been significantly weakened by the severe recession and the effects of deregulation. Had other banks been forced to write off loans to Continental Illinois, institutions such as Manufacturer's Hanover Trust Company, Bank of America
and perhaps Citicorp
would have been insolvent.
In 1980, there were approximately 4,590 state- and federally-chartered savings
and loan institutions (S&Ls) with total assets of $616 billion. Beginning in 1979, S&Ls
began losing money due to spiraling interest rates. Net S&L income, which totaled $781 million in 1980, fell to a loss of $4.6 billion in 1981 and a loss of $4.1 billion in 1982. Tangible
net worth
for the entire S&L industry was virtually zero.
The Federal Home Loan Bank Board
(FHLBB) regulated and inspected S&Ls, and administered the Federal Savings and Loan Insurance Corporation
(FSLIC), which insured deposits at S&Ls. But the FHLBB's enforcement practices were significantly weaker than those of other federal banking agencies. Until the 1980s, savings and loans had limited lending powers. The FHLBB was, therefore, a relatively small agency overseeing a quiet, stable industry. Accordingly, the FHLBB's procedures and staff were inadequate to supervise S&Ls after deregulation gave the financial institutions a broad array of new lending powers. Additionally, the FHLBB was unable to add to its staff because of stringent limits on the number of personnel it could hire and the level of compensation it could offer. These limitations were placed on the agency by the Office of Management and Budget, and were routinely subject to the political whims of that agency and political appointees in the Executive Office of the President
. In financial circles, the FHLBB and FSLIC were called "the doormats of financial regulation."
Because of its weak enforcement powers, the FHLBB and FSLIC rarely forced S&Ls to correct poor financial practices. The FHLBB relied heavily on its persuasive powers and the states
to enforce banking regulations. With only five enforcement lawyers, the FHLBB was in a poor position to enforce the law even had it wanted to.
One consequence of the FHLBB's lack of enforcement abilities was the promotion of deregulation and aggressive, expanded lending to forestall insolvency
. In November 1980, the FHLBB lowered net worth requirements for federally-insured S&Ls from 5% of deposits to 4%. The FHLBB further lowered net worth requirements to 3% in January 1982. Additionally, the agency only required S&Ls to meet these requirements over a 20-year period. This phase-in rule meant that S&Ls less than 20 years old had practically no capital reserve
requirements. This encouraged extensive chartering of new S&Ls, because a $2 million investment could be leveraged into $1.3 billion in lending.
Congressional deregulation worsened the S&L crisis. The Economic Recovery Tax Act of 1981
encouraged a boom in commercial real estate building projects. The passage of DIDMCA and the Garn–St. Germain act expanded the authority of federally-chartered S&Ls to make acquisition, development, and construction real estate loans and eliminated the statutory limit on loan-to-value ratios
. These changes allowed S&Ls to make high-risk loans to developers. Beginning in 1982, many S&Ls rapidly shifted away from traditional home mortgage
financing and into new, high-risk investment activities such as casino
s, fast-food franchises, ski resort
s, junk bonds
, arbitrage
schemes, and derivative instruments
.
Federal deregulation also encouraged state legislatures to deregulate state-chartered S&Ls. Unfortunately, many of the states which deregulated S&Ls were also soft on supervision and enforcement. In some cases, state-chartered S&Ls had close political ties to elected officials and state regulators, which further weakened oversight.
As the risk exposure of S&Ls expanded, the economy slid into the recession. Soon, hundreds of S&Ls were insolvent. Between 1980 and 1983, 118 S&Ls with $43 billion in assets failed. The Federal Savings and Loan Insurance Corporation
(FSLIC), the federal agency which insured the deposits of S&Ls, spent $3.5 billion to make depositors whole again. The FSLIC pushed mergers as a way to avoid insolvency. From 1980 to 1982, there were 493 voluntary mergers and 259 forced mergers of savings and loans overseen by the agency. Despite these failures and mergers, there were still 415 S&Ls at the end of 1982 that were insolvent.
Federal inaction worsened the industry's problems. Responsibility for handling the S&L crisis lay with the Cabinet Council on Economic Affairs (CCEA), an intergovernmental council located within the Executive Office of the President. At the time, the CCEA was chaired by Treasury Secretary
Donald Regan
. The CCEA pushed the FHLBB to refrain from re-regulating the S&L industry, and adamantly opposed any governmental expenditures to resolve the S&L problem. Furthermore, the Reagan administration did not want to alarm the public by closing a large number of S&Ls. These actions significantly worsened the S&L crisis.
The S&L crisis lasted well beyond the end of the economic downturn. The crisis was finally quelled by passage of the Financial Institutions Reform, Recovery and Enforcement Act of 1989
. The estimated total cost of resolving the S&L crisis was more than $160 billion.
stated on October 18, 1981, that the economy was in a "slight recession".
The "Reagan recession," coupled with budget cuts (which were enacted in 1981 but began to take effect in 1982), led many voters to believe that Reagan was insensitive to the needs of average citizens. In January 1983, Reagan's popularity rating fell to 35%—approaching levels experienced by Richard Nixon
and Jimmy Carter
at their most unpopular. Although his approval rating did not fall as low as Nixon's during the Watergate scandal
, Reagan's reelection seemed unlikely.
Pressured to counteract the increased deficit caused by the recession, Reagan agreed to a corporate tax
increase in 1982. However, he refused to raise income tax
es or cut defense spending. The Tax Equity and Fiscal Responsibility Act of 1982
instituted a three-year, $100 billion tax hike—the largest tax increase since World War II.
The 1982 mid-term Congressional elections were largely viewed as a referendum on Reagan and his economic policies. The election results proved to be a setback for Reagan and the Republicans
. The Democrats
gained 26 House
seats, which at the time was the most for the party in any election since the "Watergate year
" of 1974. However, the net balance of power in the Senate
was unchanged.
When the Conservative Party
led by Margaret Thatcher
won the general election of May 1979
and swept James Callaghan's
Labour Party
from power, the country had just witnessed the Winter of Discontent
in which numerous public sector workers had staged strikes. Inflation was about 10% and some 1,500,000 people were unemployed; compared to some 1,000,000 in 1974, 580,000 in 1970 and just over 300,000 in 1964. Margaret Thatcher set about to control inflation with monetarist
policies and change trade union laws in an attempt to reduce the strikes which had blighted Britain for so many years.
Mrs Thatcher's battle against inflation resulted in the closure of many inefficient factories, shipyards and coalpits – mostly during her first four-year term in power. This helped bring inflation below 10% by the turn of 1982 (having peaked at 22% in 1980) and by spring 1983 it had fallen to a 15-year low of 4%. Strikes were also at their lowest level since the early 1950s.
However, it also resulted in unemployment reaching 3,000,000 by January 1982 – a level not seen for some 50 years. Even the 2,000,000 figure first seen towards the end of 1980 had not been reached in over 40 years.
By April 1983, Britain – once known globally as the "workshop of the world" due to its strong manufacturing base – became a net importer of goods for the first time ever, largely due to the loss of heavy industry under Thatcher. Areas of Tyneside
, Yorkshire
, Merseyside
, South Wales, the West of Scotland and the West Midlands
were particularly hard hit by the loss of industry and subsequent sharp rise in unemployment. The national average by January 1982 was around 12.5%, but in some of these regions it was approaching 20% and would remain similarly high for a number of years afterwards.
In the first three years of Mrs Thatcher's premiership, opinion polls gave the Tory government approval ratings as low as 25%, with the polls initially being led by the Labour opposition and then by the SDP-Liberal Alliance
which was formed by the Liberal Party
and the Labour breakaway Social Democratic Party
during 1981.
According to Keynesian economists
, a combination of deficit spending
and the lowering of interest rates slowly led to economic recovery. However, conservatives insist that the significantly lower tax rates caused the recovery. From a high of 10.8% in December 1982, unemployment gradually improved until it fell to 7.2% on Election Day
in 1984. Nearly two million people left the unemployment rolls. Inflation fell from 10.3% in 1981 to 3.2% in 1983. Corporate earnings
rose by 29% in the July–September quarter of 1983, compared with the same period in 1982. Some of the most dramatic improvements came in industries hardest hit by the recession, such as paper and forest products, rubber, airlines, and the auto industry.
By November 1984, voter anger at the recession evaporated and Reagan's re-election was not in doubt. Reagan was subsequently re-elected by a landslide electoral and popular vote margin in the 1984 presidential election
. Immediately after the election, Dave Stockman, Reagan's OMB manager admitted that the coming deficits were much higher than the projections released during the campaign.
As for the United Kingdom, economic growth was re-established by the end of 1982, although the era of mass unemployment was far from over. By the summer of 1984, unemployment had hit a new record of 3,300,000 (although the depression of the early 1930s had seen a higher percentage of the workforce unemployed) and it remained above the 3,000,000 mark until the spring of 1987, when the Lawson Boom
– so named as it was the consequence of tax cuts by chancellor Nigel Lawson
– sparked an economic boom that saw unemployment fall dramatically. By early 1988, it was below 2,500,000. By early 1989, it fell below 2,000,000, and by the end of 1989 just over 1,600,000 were unemployed – almost half the figure of three years earlier. Other incentives which aided the British economic recovery after the early 1980s recession included the introduction of Enterprise Zones, on deindustrialised land where traditional industries were replaced by new industries as well as commercial developments – with businesses being given tax breaks and exemption from rates for a certain period of time, as an incentive to set up base in these areas.
Recession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...
affecting much of the developed world in the late 1970s and early 1980s. The United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
and Japan
Japan
Japan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...
exited recession relatively early, but high unemployment would continue to affect other OECD nations through at least 1985. Long term effects of the recession contributed to the Latin American debt crisis
Latin American debt crisis
The Latin American debt crisis was a financial crisis that occurred in the early 1980s , often known as the "lost decade", when Latin American countries reached a point where their foreign debt exceeded their earning power and they were not able to repay it.-Origins:In the 1960s and 1970s many...
, the savings and loan crisis
Savings and Loan crisis
The savings and loan crisis of the 1980s and 1990s was the failure of about 747 out of the 3,234 savings and loan associations in the United States...
in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, and a general adoption of neoliberal economic policies throughout the 1980s and 1990s.
Recession in the United States
The early 1980s recession was a severe recessionRecession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...
in the United States which began in July 1981 and ended in November 1982. The primary cause of the recession was a contractionary monetary policy
Contractionary monetary policy
Contractionary monetary policy is monetary policy that seeks to reduce the size of the money supply. In most nations, monetary policy is controlled by either a central bank or a finance ministry....
established by the Federal Reserve System
Federal Reserve System
The Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913 with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907...
to control high inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
. In the wake of the 1973 oil crisis
1973 oil crisis
The 1973 oil crisis started in October 1973, when the members of Organization of Arab Petroleum Exporting Countries or the OAPEC proclaimed an oil embargo. This was "in response to the U.S. decision to re-supply the Israeli military" during the Yom Kippur war. It lasted until March 1974. With the...
and the 1979 energy crisis
1979 energy crisis
The 1979 oil crisis in the United States occurred in the wake of the Iranian Revolution. Amid massive protests, the Shah of Iran, Mohammad Reza Pahlavi, fled his country in early 1979 and the Ayatollah Khomeini soon became the new leader of Iran. Protests severely disrupted the Iranian oil...
, stagflation
Stagflation
In economics, stagflation is a situation in which the inflation rate is high and the economic growth rate slows down and unemployment remains steadily high...
began to afflict the economy of the United States.
Unemployment
UnemploymentUnemployment
Unemployment , as defined by the International Labour Organization, occurs when people are without jobs and they have actively sought work within the past four weeks...
had risen from 5.1% in January 1974 to a high of 9.0% in May 1975. Although it had gradually declined to 5.6% by May 1979, unemployment began rising again thereafter. It jumped sharply to 6.9% in April 1980 and to 7.5% in May 1980. A mild recession from January to July 1980 kept unemployment high, but despite economic recovery unemployment remained at historically high levels (about 7.5%) through the end of 1981. In mid-1982, Rockford, Illinois
Rockford, Illinois
Rockford is a mid-sized city located on both banks of the Rock River in far northern Illinois. Often referred to as "The Forest City", Rockford is the county seat of Winnebago County, Illinois, USA. As reported in the 2010 U.S. census, the city was home to 152,871 people, the third most populated...
had the highest unemployment of all Metro areas with 25%. In September 1982, Michigan lead the nation with 14.5%. Alabama was second with 14.3% and West Virginia was third with 14.0%. The Youngstown–Warren Metropolitan Area had an 18.7% rate, the highest of all Metro areas. Stamford, Connecticut
Stamford, Connecticut
Stamford is a city in Fairfield County, Connecticut, United States. According to the 2010 census, the population of the city is 122,643, making it the fourth largest city in the state and the eighth largest city in New England...
had the lowest with 3.5% unemployment.
The peak of the recession was in November and December 1982, when the nationwide unemployment rate was 10.8%, highest since The Great Depression. As of 2011, it is still the highest since the 1930s. In November, West Virginia and Michigan had the highest unemployment with 16.4%. Alabama was in third with 15.3%. South Dakota had the lowest unemployment rate in the nation, with 5.6%. Flint, Michigan
Flint, Michigan
Flint is a city in the U.S. state of Michigan and is located along the Flint River, northwest of Detroit. The U.S. Census Bureau reports the 2010 population to be placed at 102,434, making Flint the seventh largest city in Michigan. It is the county seat of Genesee County which lies in the...
had the highest unemployment rate of all Metro areas with 23.4%. In March 1983, West Virginia's unemployment rate hit 20.1%. In the Spring of 1983, thirty states had double digit unemployment rates. When Reagan won re-election in 1984, the latest unemployment numbers (August 1984) showed West Virginia still had the highest in the nation, 13.6%, with Mississippi in second with 11.1%, and Alabama in third with 10.9%.
Inflation
InflationInflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
, which had averaged 3.2% annually in the post-war
World War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...
period, had more than doubled after the 1973 oil shock to a 7.7% annual rate. Inflation reached 9.1% in 1975, the highest rate since 1947. Inflation declined to 5.8% the following year, but then edged higher. By 1979, inflation reached a startling 11.3% and in 1980 soared to 13.5%.
A brief recession occurred in 1980. Several key industries—including housing, steel manufacturing and automobile production—experienced a downturn from which they did not recover through the end of the next recession. Many of the economic sectors that supplied these basic industries were also hard-hit. Each period of high unemployment was caused by the Federal Reserve, as it substantially increased interest rates to reduce high inflation; each time, once inflation fell and interest rates were lowered, unemployment slowly fell.
Determined to wring inflation out of the economy, Federal Reserve chairman
Chairman of the Federal Reserve
The Chairman of the Board of Governors of the Federal Reserve System is the head of the central banking system of the United States. Known colloquially as "Chairman of the Fed," or in market circles "Fed Chairman" or "Fed Chief"...
Paul Volcker
Paul Volcker
Paul Adolph Volcker, Jr. is an American economist. He was the Chairman of the Federal Reserve under United States Presidents Jimmy Carter and Ronald Reagan from August 1979 to August 1987. He is widely credited with ending the high levels of inflation seen in the United States in the 1970s and...
slowed the rate of growth of the money supply and raised interest rates. The federal funds rate
Federal funds rate
In the United States, the federal funds rate is the interest rate at which depository institutions actively trade balances held at the Federal Reserve, called federal funds, with each other, usually overnight, on an uncollateralized basis. Institutions with surplus balances in their accounts lend...
, which was about 11% in 1979, rose to 20% by June 1981. The prime interest rate
Prime rate
Prime rate or prime lending rate is a term applied in many countries to a reference interest rate used by banks. The term originally indicated the rate of interest at which banks lent to favored customers, i.e., those with high credibility, though this is no longer always the case...
, a highly important economic measure, eventually reached 21.5% in June 1982.
Financial industry crisis
The recession had a severe effect on financial institutionFinancial institution
In financial economics, a financial institution is an institution that provides financial services for its clients or members. Probably the most important financial service provided by financial institutions is acting as financial intermediaries...
s such as savings and loans
Savings and loan association
A savings and loan association , also known as a thrift, is a financial institution that specializes in accepting savings deposits and making mortgage and other loans...
and bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
s.
Banks
The recession came at a particularly bad time for banks due to a recent wave of deregulationDeregulation
Deregulation is the removal or simplification of government rules and regulations that constrain the operation of market forces.Deregulation is the removal or simplification of government rules and regulations that constrain the operation of market forces.Deregulation is the removal or...
. The Depository Institutions Deregulation and Monetary Control Act
Depository Institutions Deregulation and Monetary Control Act
The Depository Institutions Deregulation and Monetary Control Act, a United States federal financial statute law passed in 1980, gave the Federal Reserve greater control over non-member banks.* It forced all banks to abide by the Fed's rules....
of 1980 (DIDMCA) had phased out a number of restrictions on banks' financial practices, broadened their lending powers, and raised the deposit insurance
Deposit insurance
Explicit deposit insurance is a measure implemented in many countries to protect bank depositors, in full or in part, from losses caused by a bank's inability to pay its debts when due...
limit from $40,000 to $100,000 (raising the problem of moral hazard
Moral hazard
In economic theory, moral hazard refers to a situation in which a party makes a decision about how much risk to take, while another party bears the costs if things go badly, and the party insulated from risk behaves differently from how it would if it were fully exposed to the risk.Moral hazard...
). Banks rushed into real estate
Real estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
lending, speculative lending, and other ventures just as the economy soured.
By mid-1982, the number of bank failures was rising steadily. Bank failures reached a post-depression high of 42 as the recession and high interest
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
rates took their toll. By the end of the year, the Federal Deposit Insurance Corporation
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
(FDIC) had spent $870 million to purchase bad loans in an effort to keep various banks afloat.
In July 1982, Congress
United States Congress
The United States Congress is the bicameral legislature of the federal government of the United States, consisting of the Senate and the House of Representatives. The Congress meets in the United States Capitol in Washington, D.C....
enacted the Garn–St. Germain Depository Institutions Act of 1982 (Garn–St. Germain), which further deregulated banks as well as deregulating savings and loans. The Garn–St. Germain act authorized banks to begin offering money market accounts in an attempt to encourage deposit
Deposit account
A deposit account is a current account, savings account, or other type of bank account, at a banking institution that allows money to be deposited and withdrawn by the account holder. These transactions are recorded on the bank's books, and the resulting balance is recorded as a liability for the...
in-flows, removed additional statutory restrictions in real estate lending, and relaxed loans-to-one-borrower limits. The legislation encouraged a rapid expansion in real estate lending at a time when the real estate market was collapsing, increased the unhealthy competition between banks and savings and loans, and encouraged overbuilding of branches
Branch (banking)
A branch, banking center or financial center is a retail location where a bank, credit union, or other financial institution offers a wide array of face-to-face and automated services to its customers....
.
The recession affected the banking industry long after the economic downturn technically ended in November 1982. In 1983, another 49 banks failed—easily beating the Great Depression record of 43 failures set in 1940. The Federal Deposit Insurance Corporation
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
(FDIC) listed another 540 banks as "problem banks" on the verge of failure.
In 1984, the Continental Illinois National Bank and Trust Company
Continental Illinois National Bank and Trust Company
The Continental Illinois National Bank and Trust Company was at one time the seventh-largest bank in the United States as measured by deposits with approximately $40 billion in assets. In 1984, Continental Illinois became the largest ever bank failure in U.S. history, when a run on the bank led to...
, the nation's seventh-largest bank (with $45 billion in assets), failed. The FDIC had long known of Continental Illinois' problems. The bank had first approached failure in July 1982 when the Penn Square Bank
Penn Square Bank
Penn Square Bank was a small commercial bank located in the rear of the Penn Square Mall in Oklahoma City. The bank made its name in high-risk energy loans during the late 1970s and early 1980s Oklahoma and Texas oil boom. Between 1974 and 1982, the bank's assets increased more than 15 times to...
, which had partnered with Continental Illinois in a number of high-risk
Financial risk
Financial risk an umbrella term for multiple types of risk associated with financing, including financial transactions that include company loans in risk of default. Risk is a term often used to imply downside risk, meaning the uncertainty of a return and the potential for financial loss...
lending ventures, collapsed. But federal regulators were reassured by Continental Illinois executives that steps were being taken to ensure the bank's financial security. After Continental Illinois' collapse, federal regulators were willing to let the bank fail in order to reduce moral hazard and encourage other banks to rein in some of their more risky lending practices. But members of Congress and the press felt Continental Illinois was "too big to fail."
Too Big to Fail policy
"Too big to fail" is a colloquial term in regulation and public policy that refers to businesses dealing with market complications related to moral hazard, macroeconomics, economic specialization, and monetary theory....
In May 1984, federal banking regulators were forced to offer a $4.5 billion rescue package to Continental Illinois.
Continental Illinois may not have been "too big to fail," but its collapse could have caused the failure of some of the biggest banks in the United States. The American banking system had been significantly weakened by the severe recession and the effects of deregulation. Had other banks been forced to write off loans to Continental Illinois, institutions such as Manufacturer's Hanover Trust Company, Bank of America
Bank of America
Bank of America Corporation, an American multinational banking and financial services corporation, is the second largest bank holding company in the United States by assets, and the fourth largest bank in the U.S. by market capitalization. The bank is headquartered in Charlotte, North Carolina...
and perhaps Citicorp
Citigroup
Citigroup Inc. or Citi is an American multinational financial services corporation headquartered in Manhattan, New York City, New York, United States. Citigroup was formed from one of the world's largest mergers in history by combining the banking giant Citicorp and financial conglomerate...
would have been insolvent.
The S&L crisis
The recession also significantly worsened a crisis in the savings and loan industry.In 1980, there were approximately 4,590 state- and federally-chartered savings
and loan institutions (S&Ls) with total assets of $616 billion. Beginning in 1979, S&Ls
began losing money due to spiraling interest rates. Net S&L income, which totaled $781 million in 1980, fell to a loss of $4.6 billion in 1981 and a loss of $4.1 billion in 1982. Tangible
Tangibility
Tangibility is the attribute of being easily detectable with the senses.In criminal law, one of the elements of an offense of larceny is that the stolen property must be tangible....
net worth
Net worth
In business, net worth is the total assets minus total outside liabilities of an individual or a company. For a company, this is called shareholders' preference and may be referred to as book value. Net worth is stated as at a particular year in time...
for the entire S&L industry was virtually zero.
The Federal Home Loan Bank Board
Federal Housing Finance Board
The Federal Housing Finance Board was an independent agency of the United States government established in 1989 in the aftermath of the savings and loan crisis to take over oversight of the Federal Home Loan Banks , and was superseded by the Federal Housing Finance Agency in 2008.The FHFB...
(FHLBB) regulated and inspected S&Ls, and administered the Federal Savings and Loan Insurance Corporation
Federal Savings and Loan Insurance Corporation
The Federal Savings and Loan Insurance Corporation was an institution that administered deposit insurance for savings and loan institutions in the United States...
(FSLIC), which insured deposits at S&Ls. But the FHLBB's enforcement practices were significantly weaker than those of other federal banking agencies. Until the 1980s, savings and loans had limited lending powers. The FHLBB was, therefore, a relatively small agency overseeing a quiet, stable industry. Accordingly, the FHLBB's procedures and staff were inadequate to supervise S&Ls after deregulation gave the financial institutions a broad array of new lending powers. Additionally, the FHLBB was unable to add to its staff because of stringent limits on the number of personnel it could hire and the level of compensation it could offer. These limitations were placed on the agency by the Office of Management and Budget, and were routinely subject to the political whims of that agency and political appointees in the Executive Office of the President
Executive Office of the President of the United States
The Executive Office of the President consists of the immediate staff of the President of the United States, as well as multiple levels of support staff reporting to the President. The EOP is headed by the White House Chief of Staff, currently William M. Daley...
. In financial circles, the FHLBB and FSLIC were called "the doormats of financial regulation."
Because of its weak enforcement powers, the FHLBB and FSLIC rarely forced S&Ls to correct poor financial practices. The FHLBB relied heavily on its persuasive powers and the states
U.S. state
A U.S. state is any one of the 50 federated states of the United States of America that share sovereignty with the federal government. Because of this shared sovereignty, an American is a citizen both of the federal entity and of his or her state of domicile. Four states use the official title of...
to enforce banking regulations. With only five enforcement lawyers, the FHLBB was in a poor position to enforce the law even had it wanted to.
One consequence of the FHLBB's lack of enforcement abilities was the promotion of deregulation and aggressive, expanded lending to forestall insolvency
Insolvency
Insolvency means the inability to pay one's debts as they fall due. Usually used to refer to a business, insolvency refers to the inability of a company to pay off its debts.Business insolvency is defined in two different ways:...
. In November 1980, the FHLBB lowered net worth requirements for federally-insured S&Ls from 5% of deposits to 4%. The FHLBB further lowered net worth requirements to 3% in January 1982. Additionally, the agency only required S&Ls to meet these requirements over a 20-year period. This phase-in rule meant that S&Ls less than 20 years old had practically no capital reserve
Reserve (Accounting)
In financial accounting, the term reserve is most commonly used to describe any part of shareholders' equity, except for basic share capital. Sometimes, the term is used instead of the term provision; such a use, however, is inconsistent with the terminology suggested by International Accounting...
requirements. This encouraged extensive chartering of new S&Ls, because a $2 million investment could be leveraged into $1.3 billion in lending.
Congressional deregulation worsened the S&L crisis. The Economic Recovery Tax Act of 1981
Kemp-Roth Tax Cut
The Economic Recovery Tax Act of 1981 , also known as the ERTA or "Kemp-Roth Tax Cut," was a federal law enacted in the United States in 1981...
encouraged a boom in commercial real estate building projects. The passage of DIDMCA and the Garn–St. Germain act expanded the authority of federally-chartered S&Ls to make acquisition, development, and construction real estate loans and eliminated the statutory limit on loan-to-value ratios
Loan to value
The loan-to-value ratio expresses the amount of a first mortgage lien as a percentage of the total appraised value of real property. For instance, if a borrower borrows $130,000 to purchase a house worth $150,000, the LTV ratio is $130,000/$150,000 or 87%.Loan to value is one of the key risk...
. These changes allowed S&Ls to make high-risk loans to developers. Beginning in 1982, many S&Ls rapidly shifted away from traditional home mortgage
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
financing and into new, high-risk investment activities such as casino
Casino
In modern English, a casino is a facility which houses and accommodates certain types of gambling activities. Casinos are most commonly built near or combined with hotels, restaurants, retail shopping, cruise ships or other tourist attractions...
s, fast-food franchises, ski resort
Ski resort
A ski resort is a resort developed for skiing and other winter sports. In Europe a ski resort is a town or village in a ski area - a mountainous area, where there are ski trails and supporting services such as hotels and other accommodation, restaurants, equipment rental and a ski lift system...
s, junk bonds
High-yield debt
In finance, a high-yield bond is a bond that is rated below investment grade...
, arbitrage
Arbitrage
In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices...
schemes, and derivative instruments
Derivative (finance)
A derivative instrument is a contract between two parties that specifies conditions—in particular, dates and the resulting values of the underlying variables—under which payments, or payoffs, are to be made between the parties.Under U.S...
.
Federal deregulation also encouraged state legislatures to deregulate state-chartered S&Ls. Unfortunately, many of the states which deregulated S&Ls were also soft on supervision and enforcement. In some cases, state-chartered S&Ls had close political ties to elected officials and state regulators, which further weakened oversight.
As the risk exposure of S&Ls expanded, the economy slid into the recession. Soon, hundreds of S&Ls were insolvent. Between 1980 and 1983, 118 S&Ls with $43 billion in assets failed. The Federal Savings and Loan Insurance Corporation
Federal Savings and Loan Insurance Corporation
The Federal Savings and Loan Insurance Corporation was an institution that administered deposit insurance for savings and loan institutions in the United States...
(FSLIC), the federal agency which insured the deposits of S&Ls, spent $3.5 billion to make depositors whole again. The FSLIC pushed mergers as a way to avoid insolvency. From 1980 to 1982, there were 493 voluntary mergers and 259 forced mergers of savings and loans overseen by the agency. Despite these failures and mergers, there were still 415 S&Ls at the end of 1982 that were insolvent.
Federal inaction worsened the industry's problems. Responsibility for handling the S&L crisis lay with the Cabinet Council on Economic Affairs (CCEA), an intergovernmental council located within the Executive Office of the President. At the time, the CCEA was chaired by Treasury Secretary
United States Secretary of the Treasury
The Secretary of the Treasury of the United States is the head of the United States Department of the Treasury, which is concerned with financial and monetary matters, and, until 2003, also with some issues of national security and defense. This position in the Federal Government of the United...
Donald Regan
Donald Regan
Donald Thomas Regan ,was the 66th United States Secretary of the Treasury, from 1981 to 1985, and Chief of Staff from 1985 to 1987 in the Ronald Reagan Administration, where he advocated "Reaganomics" and tax cuts to create jobs and stimulate production.-Early life:Born in Cambridge, Massachusetts,...
. The CCEA pushed the FHLBB to refrain from re-regulating the S&L industry, and adamantly opposed any governmental expenditures to resolve the S&L problem. Furthermore, the Reagan administration did not want to alarm the public by closing a large number of S&Ls. These actions significantly worsened the S&L crisis.
The S&L crisis lasted well beyond the end of the economic downturn. The crisis was finally quelled by passage of the Financial Institutions Reform, Recovery and Enforcement Act of 1989
Financial Institutions Reform, Recovery and Enforcement Act of 1989
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 , , is a United States federal law enacted in the wake of the savings and loan crisis of the 1980s....
. The estimated total cost of resolving the S&L crisis was more than $160 billion.
Political fallout
The recession was nearly a year old before President Ronald ReaganRonald Reagan
Ronald Wilson Reagan was the 40th President of the United States , the 33rd Governor of California and, prior to that, a radio, film and television actor....
stated on October 18, 1981, that the economy was in a "slight recession".
The "Reagan recession," coupled with budget cuts (which were enacted in 1981 but began to take effect in 1982), led many voters to believe that Reagan was insensitive to the needs of average citizens. In January 1983, Reagan's popularity rating fell to 35%—approaching levels experienced by Richard Nixon
Richard Nixon
Richard Milhous Nixon was the 37th President of the United States, serving from 1969 to 1974. The only president to resign the office, Nixon had previously served as a US representative and senator from California and as the 36th Vice President of the United States from 1953 to 1961 under...
and Jimmy Carter
Jimmy Carter
James Earl "Jimmy" Carter, Jr. is an American politician who served as the 39th President of the United States and was the recipient of the 2002 Nobel Peace Prize, the only U.S. President to have received the Prize after leaving office...
at their most unpopular. Although his approval rating did not fall as low as Nixon's during the Watergate scandal
Watergate scandal
The Watergate scandal was a political scandal during the 1970s in the United States resulting from the break-in of the Democratic National Committee headquarters at the Watergate office complex in Washington, D.C., and the Nixon administration's attempted cover-up of its involvement...
, Reagan's reelection seemed unlikely.
Pressured to counteract the increased deficit caused by the recession, Reagan agreed to a corporate tax
Corporate tax
Many countries impose corporate tax or company tax on the income or capital of some types of legal entities. A similar tax may be imposed at state or lower levels. The taxes may also be referred to as income tax or capital tax. Entities treated as partnerships are generally not taxed at the...
increase in 1982. However, he refused to raise income tax
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
es or cut defense spending. The Tax Equity and Fiscal Responsibility Act of 1982
Tax Equity and Fiscal Responsibility Act of 1982
The Tax Equity and Fiscal Responsibility Act of 1982 , also known as TEFRA, was a United States federal law that rescinded some of the effects of the Kemp-Roth Act passed the year before. As a result of ongoing recession, a short-term fall in tax revenue generated concern over the budget deficit...
instituted a three-year, $100 billion tax hike—the largest tax increase since World War II.
The 1982 mid-term Congressional elections were largely viewed as a referendum on Reagan and his economic policies. The election results proved to be a setback for Reagan and the Republicans
Republican Party (United States)
The Republican Party is one of the two major contemporary political parties in the United States, along with the Democratic Party. Founded by anti-slavery expansion activists in 1854, it is often called the GOP . The party's platform generally reflects American conservatism in the U.S...
. The Democrats
Democratic Party (United States)
The Democratic Party is one of two major contemporary political parties in the United States, along with the Republican Party. The party's socially liberal and progressive platform is largely considered center-left in the U.S. political spectrum. The party has the lengthiest record of continuous...
gained 26 House
United States House of Representatives
The United States House of Representatives is one of the two Houses of the United States Congress, the bicameral legislature which also includes the Senate.The composition and powers of the House are established in Article One of the Constitution...
seats, which at the time was the most for the party in any election since the "Watergate year
Watergate Babies
The "Watergate Babies" were the Democrats first elected to the United States Congress in 1974 following president Richard Nixon's resignation over the Watergate scandal. Tom Downey was the youngest among the babies -- being age 25 upon his election, which is the minimum age once can serve. Former...
" of 1974. However, the net balance of power in the Senate
United States Senate
The United States Senate is the upper house of the bicameral legislature of the United States, and together with the United States House of Representatives comprises the United States Congress. The composition and powers of the Senate are established in Article One of the U.S. Constitution. Each...
was unchanged.
Recession in the United Kingdom
As with most of the developed world, recession also hit the United Kingdom at the turn of 1980s, although the economy had been plagued by a string of crises for most of the 1970s and unemployment had gradually increased since the mid 1960s.When the Conservative Party
Conservative Party (UK)
The Conservative Party, formally the Conservative and Unionist Party, is a centre-right political party in the United Kingdom that adheres to the philosophies of conservatism and British unionism. It is the largest political party in the UK, and is currently the largest single party in the House...
led by Margaret Thatcher
Margaret Thatcher
Margaret Hilda Thatcher, Baroness Thatcher, was Prime Minister of the United Kingdom from 1979 to 1990...
won the general election of May 1979
United Kingdom general election, 1979
The United Kingdom general election of 1979 was held on 3 May 1979 to elect 635 members to the British House of Commons. The Conservative Party, led by Margaret Thatcher ousted the incumbent Labour government of James Callaghan with a parliamentary majority of 43 seats...
and swept James Callaghan's
James Callaghan
Leonard James Callaghan, Baron Callaghan of Cardiff, KG, PC , was a British Labour politician, who was Prime Minister of the United Kingdom from 1976 to 1979 and Leader of the Labour Party from 1976 to 1980...
Labour Party
Labour Party (UK)
The Labour Party is a centre-left democratic socialist party in the United Kingdom. It surpassed the Liberal Party in general elections during the early 1920s, forming minority governments under Ramsay MacDonald in 1924 and 1929-1931. The party was in a wartime coalition from 1940 to 1945, after...
from power, the country had just witnessed the Winter of Discontent
Winter of Discontent
The "Winter of Discontent" is an expression, popularised by the British media, referring to the winter of 1978–79 in the United Kingdom, during which there were widespread strikes by local authority trade unions demanding larger pay rises for their members, because the Labour government of...
in which numerous public sector workers had staged strikes. Inflation was about 10% and some 1,500,000 people were unemployed; compared to some 1,000,000 in 1974, 580,000 in 1970 and just over 300,000 in 1964. Margaret Thatcher set about to control inflation with monetarist
Monetarism
Monetarism is a tendency in economic thought that emphasizes the role of governments in controlling the amount of money in circulation. It is the view within monetary economics that variation in the money supply has major influences on national output in the short run and the price level over...
policies and change trade union laws in an attempt to reduce the strikes which had blighted Britain for so many years.
Mrs Thatcher's battle against inflation resulted in the closure of many inefficient factories, shipyards and coalpits – mostly during her first four-year term in power. This helped bring inflation below 10% by the turn of 1982 (having peaked at 22% in 1980) and by spring 1983 it had fallen to a 15-year low of 4%. Strikes were also at their lowest level since the early 1950s.
However, it also resulted in unemployment reaching 3,000,000 by January 1982 – a level not seen for some 50 years. Even the 2,000,000 figure first seen towards the end of 1980 had not been reached in over 40 years.
By April 1983, Britain – once known globally as the "workshop of the world" due to its strong manufacturing base – became a net importer of goods for the first time ever, largely due to the loss of heavy industry under Thatcher. Areas of Tyneside
Tyneside
Tyneside is a conurbation in North East England, defined by the Office of National Statistics, which is home to over 80% of the population of Tyne and Wear. It includes the city of Newcastle upon Tyne and the Metropolitan Boroughs of Gateshead, North Tyneside and South Tyneside — all settlements on...
, Yorkshire
Yorkshire
Yorkshire is a historic county of northern England and the largest in the United Kingdom. Because of its great size in comparison to other English counties, functions have been increasingly undertaken over time by its subdivisions, which have also been subject to periodic reform...
, Merseyside
Merseyside
Merseyside is a metropolitan county in North West England, with a population of 1,365,900. It encompasses the metropolitan area centred on both banks of the lower reaches of the Mersey Estuary, and comprises five metropolitan boroughs: Knowsley, St Helens, Sefton, Wirral, and the city of Liverpool...
, South Wales, the West of Scotland and the West Midlands
West Midlands (region)
The West Midlands is an official region of England, covering the western half of the area traditionally known as the Midlands. It contains the second most populous British city, Birmingham, and the larger West Midlands conurbation, which includes the city of Wolverhampton and large towns of Dudley,...
were particularly hard hit by the loss of industry and subsequent sharp rise in unemployment. The national average by January 1982 was around 12.5%, but in some of these regions it was approaching 20% and would remain similarly high for a number of years afterwards.
In the first three years of Mrs Thatcher's premiership, opinion polls gave the Tory government approval ratings as low as 25%, with the polls initially being led by the Labour opposition and then by the SDP-Liberal Alliance
SDP-Liberal Alliance
The SDP–Liberal Alliance was an electoral pact formed by the Social Democratic Party and the Liberal Party in the United Kingdom which was in existence from 1981 to 1988, when the bulk of the two parties merged to form the Social and Liberal Democrats, later referred to as simply the Liberal...
which was formed by the Liberal Party
Liberal Party (UK)
The Liberal Party was one of the two major political parties of the United Kingdom during the 19th and early 20th centuries. It was a third party of negligible importance throughout the latter half of the 20th Century, before merging with the Social Democratic Party in 1988 to form the present day...
and the Labour breakaway Social Democratic Party
Social Democratic Party (UK)
The Social Democratic Party was a political party in the United Kingdom that was created on 26 March 1981 and existed until 1988. It was founded by four senior Labour Party 'moderates', dubbed the 'Gang of Four': Roy Jenkins, David Owen, Bill Rodgers and Shirley Williams...
during 1981.
Recovery
The mid-term Congressional elections proved to be the low point of the Reagan presidency.According to Keynesian economists
Keynesian economics
Keynesian economics is a school of macroeconomic thought based on the ideas of 20th-century English economist John Maynard Keynes.Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and, therefore, advocates active policy responses by the...
, a combination of deficit spending
Deficit spending
Deficit spending is the amount by which a government, private company, or individual's spending exceeds income over a particular period of time, also called simply "deficit," or "budget deficit," the opposite of budget surplus....
and the lowering of interest rates slowly led to economic recovery. However, conservatives insist that the significantly lower tax rates caused the recovery. From a high of 10.8% in December 1982, unemployment gradually improved until it fell to 7.2% on Election Day
Election Day (United States)
Election Day in the United States is the day set by law for the general elections of public officials. It occurs on the Tuesday after the first Monday in November. The earliest possible date is November 2 and the latest possible date is November 8...
in 1984. Nearly two million people left the unemployment rolls. Inflation fell from 10.3% in 1981 to 3.2% in 1983. Corporate earnings
Income
Income is the consumption and savings opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings...
rose by 29% in the July–September quarter of 1983, compared with the same period in 1982. Some of the most dramatic improvements came in industries hardest hit by the recession, such as paper and forest products, rubber, airlines, and the auto industry.
By November 1984, voter anger at the recession evaporated and Reagan's re-election was not in doubt. Reagan was subsequently re-elected by a landslide electoral and popular vote margin in the 1984 presidential election
United States presidential election, 1984
The United States presidential election of 1984 was a contest between the incumbent President Ronald Reagan, the Republican candidate, and former Vice President Walter Mondale, the Democratic candidate. Reagan was helped by a strong economic recovery from the deep recession of 1981–1982...
. Immediately after the election, Dave Stockman, Reagan's OMB manager admitted that the coming deficits were much higher than the projections released during the campaign.
As for the United Kingdom, economic growth was re-established by the end of 1982, although the era of mass unemployment was far from over. By the summer of 1984, unemployment had hit a new record of 3,300,000 (although the depression of the early 1930s had seen a higher percentage of the workforce unemployed) and it remained above the 3,000,000 mark until the spring of 1987, when the Lawson Boom
Lawson Boom
"Lawson Boom" is a term used to describe the macroeconomic conditions prevailing in the United Kingdom at the end of the 1980s, which were indelibly associated with the policies of Chancellor of the Exchequer Nigel Lawson....
– so named as it was the consequence of tax cuts by chancellor Nigel Lawson
Nigel Lawson
Nigel Lawson, Baron Lawson of Blaby, PC , is a British Conservative politician and journalist. He was a Member of Parliament representing the constituency of Blaby from 1974–92, and served as the Chancellor of the Exchequer in the government of Margaret Thatcher from June 1983 to October 1989...
– sparked an economic boom that saw unemployment fall dramatically. By early 1988, it was below 2,500,000. By early 1989, it fell below 2,000,000, and by the end of 1989 just over 1,600,000 were unemployed – almost half the figure of three years earlier. Other incentives which aided the British economic recovery after the early 1980s recession included the introduction of Enterprise Zones, on deindustrialised land where traditional industries were replaced by new industries as well as commercial developments – with businesses being given tax breaks and exemption from rates for a certain period of time, as an incentive to set up base in these areas.