Government looks to bailout

“With stocks tumbling and established companies like AIG and Wachovia looking more like a gigantic house of cards, most students realize that something is wrong with America’s seemingly indestructible economy. The unprecedented economic bailout plan, enacted by President Bush on Oct.”

With stocks tumbling and established companies like AIG and Wachovia looking more like a gigantic house of cards, most students realize that something is wrong with America’s seemingly indestructible economy.

The unprecedented economic bailout plan, enacted by President Bush on Oct. 1, could easily affect college age Americans the most, though many of them do not fully understand the deeper issue.

Economists agree on one issue: America (and the world) is headed towards a major recession, regardless of the bailout’s success.

One example of America’s plight: one percent of Americans take in 20 percent of the country’s total income.  The last time the ratio was that large was 1928.

The problem’s roots can be traced back to the 1930s, when Franklin Delano Roosevelt proposed the Federal National Mortgage Association, commonly referred to as Fannie Mae, as part of his New Deal.

Fannie Mae, which was authorized to make loans and loan guarantees, held a near-monopoly on the American housing market for years.  Under the Johnson administration, the government-sponsored entity went private to clear room in the federal budget.

Later, in 1977, President Carter signed the Community Reinvestment Act, which strongly encouraged mortgage companies to target lower-income neighborhoods for business.  The act was designed to improve impoverished communities, and soon almost half of Fannie Mae’s portfolio became low-quality mortgages.

As long as the housing market stayed strong, people borrowed money with little interest and the economy thrived.

Then, last year, the housing market crashed.

Mortgage-backed securities lost almost all of their original value.  Securities were bought and sold so much that many mortgagers do not know who owns their own mortgage.

With all the distrust in the financial community, banks stopped loaning to each other, creating a massive credit squeeze.  Securing loans, a necessity in this credit-driven economy, may be next to impossible for businesses in the upcoming months.

Who is to blame?  Though no single factor or person brought the crisis to this point, the government and CEOs investing a great deal in low-quality mortgages for big payoffs are easiest to blame.

It should be noted that several mortgage company CEOs had the foresight to quit while they were ahead, taking their checks and retiring in the summer of 2007, leaving the mess they helped create to their replacements.

It’s a terrible mess, says Dr. Douglas Kahl, professor of finance and international business at UA.  I would say that we are in a major economic crisis.

Many analysts believe that the situation will get much worse. 

Optimists say recession; pessimists say depression.  The only thing they all have in common is the fact that none of them are quite sure what will happen, because America’s economy is treading in strange and unfamiliar territory.

The bailout plan that was passed last Wednesday will use up to $700 billion of taxpayers’ money to buy and hold the assets of the large companies that were affected the worst from the housing crisis.

Eventually, economists believe the funny mortgage problem will work itself out.  At that point, the government will sell the assets back to private investors.

The problem with the bailout plan is that it contains too many pork-barrel additions.  When first created, the bill filled 3 pages.  When passed, it was over 400.  One add-on provides tax breaks for toy wooden arrows in Oregon.

The media has ridiculed the bill and its add-ons, turning the whole thing into a punch line.

Dr. Kahl agrees, suggesting that whichever congressman put that turkey on there out to be taken out and tarred and feathered.

Politics aside, while the bailout plan may or may not work, but the economy’s prognosis for the next few years does not look good.

Legislators had hoped that with the passage of the bailout bill would come renewed confidence in the markets.  Unfortunately, the opposite occurred.

This weekend, the DOW slid to its lowest point in five years, and all markets continue to fall.

It’s purely a confidence problem, says Kahl.  We’re now into psychology.

The psychology of the situation is simple: interest rates are going up and prices are going down, creating deflation.

Dr. Kahl believes that people will be virtually unable to get loans unless they can prove that they have a steady job and have a near-perfect credit score.  House buyers will have to make a 20 percent down payment and agree to fixed interest.

Prices will fall, and people, who will function much less on credit than now, will put off buying new things until prices fall even more.  Eventually, this will hurt the economy.  The only time America has seen such a situation was in the 1930s, and only World War II brought the economy out of the deflation.

The stock market will stay low, and Akron’s class of 2008 may be 50 years old before they see the DOW over 1400 again.  Dr. Kahl believes that these changes could last for a generation.

You’re going to see it in Akron, he says.  Debt is going to be very, very, very hard to come by.

Though it is a plausible idea, no one really knows what will happen.

The only thing that Akron students can do in the here-and-now is to be prudent with their money.

The most important thing to remember for the future is the importance of a good credit rating.  To keep it perfect, pay every bill on time and start relying on cash more than credit.

Other than that, students can only learn all they can about the situation and sit back and watch, according to Dr. Kahl.

It’s probably not going to be a very good Christmas season.