Reducing Financial Hazard Risk through Planning Intervention

Abstract

During the early 1980s, many developers used savings-and-loan (S&L) institutions to underwrite their financial risks. The Economic Recovery Act, the centerpiece of President Ronald Reagan's economic recovery plan, exacerbated the situation by increasing the tax benefits of real estate investment no matter how sound they were. The result was hyperspeculation by the development industry, leading to more than $80 billion dollars in direct taxpayer-subsidized “bailouts” of overextended S&Ls, with a total cost to the economy approaching a half trillion dollars. The S&L bailout is considered the nation's worst taxpayer-financed disaster, including natural disasters. Is there anything planning intervention could have done to prevent or minimize those losses? Natural hazard risk reduction literature is used herein to develop a theory of the role of environmental impact assessment and growth management planning regimes that include needs-assessment components in minimizing losses of financial institutions through overbuilding. An empirical model demonstrates a significant statistical relationship between such regimes and S&L losses among states. Policy implications are offered.