ABSTRACT
The costly bank failures of the 1980s, which nearly bankrupted our deposit insurance fund, were neither a passing cyclical phenomenon nor simply isolated instances of bad management decisions. They reflected deeper structural problems which have evolved to the point of threatening the very existence of our banking system. Should this crisis remain unresolved, its consequences for the U.S. economy could be quite detrimental. We need healthy and stable banks to promote economic growth. Banks collect savings and channel them back into the circular spending flow, thereby funding growth-promoting activities. In the process they create new money in support of the circulation of goods and services. The strategic position of banks is analogous to that of a human heart which pumps blood through the body to keep it going. Just as humans do not function well with a sick heart, so does the economy suffer when banks are weak.
