Thrifts, Extended Credit, and Monetary Policy

The thrift industry primarily serves as an intermediary between people who wish to save in relatively liquid deposits and people who wish to borrow mortgage funds. When long-term interest rates on mortgages are greater than short-term interest rates on deposits, thrifts generally can depend on a relatively stable supply of deposits and earn profits, retaining some of them in capital or net-worth accounts that are used to support additional mortgage lending. However, when short-term interest rates are higher than long-term rates, as they have been in 1981, many depositors withdraw funds from their savings accounts to buy higher-yielding assets. If net deposit outflows are large enough, then some thrifts may exhaust their liquidity and be forced to sell mortgage assets at a loss; if the loss is large enough, some thrifts could be forced out of business.