national financial scandal in American history. By the end of the decade, large numbers of S&Ls had tumbled into insolvency; about half of the S&Ls that had been in business in 1970 no longer existed in 1989. The Federal Savings and Loan Insurance Corporation, which insured depositors' money, itself became insolvent. In 1989, Congress and the president agreed on a taxpayer-financed bailout measure known as the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). This act provided $50 billion to close failed S&Ls, totally changed the regulatory apparatus for savings institutions, and imposed new portfolio constraints. A new government agency called the Resolution Trust Corporation (RTC) was set up to liquidate insolvent institutions. In March 1990, another $78,000 million was pumped into the RTC. But estimates of the total cost of the S&L cleanup continued to mount, topping the $200,000 million mark. Americans have taken a number of lessons away from the post-war experience with banking regulation. First, government deposit insurance protects small savers and helps maintain the stability of the banking system by reducing the danger of runs on banks. Second, interest rate controls do not work. Third, government should not direct what investments banks should make; rather, investments should be determined on the basis of market forces and economic merit. Fourth, bank lending to insiders or to companies affiliated with insiders should be closely watched and limited. Fifth, when banks do become insolvent, they should be closed as quickly as possible, their depositors paid off, and their loans transferred to other, healthier lenders. Keeping insolvent institutions in operation merely freezes lending and can stifle economic activity. Finally, while banks generally should be allowed to fail when they become insolvent, Americans believe that the government has a continuing responsibility to supervise them and prevent them from engaging in unnecessarily risky lending that could damage the entire economy. In addition to direct supervision, regulators increasingly emphasize the importance of requiring banks to raise a substantial amount of their own capital. Besides giving banks funds that can be used to absorb losses, capital requirements encourage bank owners to operate 81