WASHINGTON (AP) -- Former Federal Reserve Chairman Paul Volcker denies that the high interest rates he encouraged in the early 1980s spawned the problems of the savings and loan industry later in the decade.
Volcker, appearing yesterday before the House Banking Committee, said the industry's ill-advised excursion into risky investments, not the highest interest rates since the Civil War, proved its downfall.
"The industry could have survived that episode [of high interest rates] and the great bulk of it did," he said.
As head of the nation's central bank from 1979 to 1987, Volcker quelled the double-digit inflation of the 1970s by drastically slowing the economy with interest rates topping 20 percent.
"It was very painful, but I don't think it was the fundamental cause of what was happening in the late 1980s," he said at the second of a series of hearing exploring the roots of the S&L mess.
Banking Committee Chairman Henry B. Gonzalez, D-Texas, who once sought to impeach Volcker for his monetary policy, agreed that interest rates weren't the fundamental cause, but he said they were a contributor.
Volcker primarily blamed the losses on the expansion of S&Ls into investments outside their traditional role of mortgage lending and serving family financial needs, and on the inability of inexperienced S&L examiners to monitor the new business.
"The whole atmosphere during those years was not conducive to strict supervision and strict regulation . . . it was not in the air, so to speak," he said.
Volcker was particularly critical of S&Ls' direct investment in commercial real estate projects as part-owners rather than as lenders.
"That is the single area that's bankrupted more savings and loans than any other area," he said.
"I thought that was a bad idea to start with. . . . I think that events have clearly demonstrated that it was even more catastrophic than I thought," Volcker said. "It is just an area that inherently is rife with conflicts of interest and temptations for self-dealing."
Former thrift regulator Edwin J. Gray, who appeared with Volcker, blamed former Treasury Secretary Donald T. Regan and other Reagan administration officials for his inability to hire and keep the competent examiners needed to oversee S&L expansions.
Gray said Regan and the Office of Management and Budget opposed his efforts to hire the examiners needed to monitor the activities of thrifts in states with liberal laws and denounced the system of state-regulated, but federally insured thrifts.
"The only reason why we ever had a dual federal-state thrift system ... was that this enabled state politicians to get political contributions," he said.
Gray also said Regan, a former chairman of Merrill Lynch, opposed his effort to clamp down on brokered deposits. Such high-interest-rate deposits placed by money brokers are blamed for fueling the explosive growth of risk-taking S&Ls. Merrill Lynch was the leader in that business.