LAST WEEK, any student who so much as glanced at a news paper or turned on the TV was bombarded with information about the current financial crisis. CNN’s online Business section offered headlines such as “The end of Wall Street”, “Wall Street on red alert” and “The meltdown”. The news wasn’t better from any other source. What made things particularly unsettling was how stories that were normally restricted to the business pages suddenly began appearing as general news headlines. Whenever that happens, it’s usually a wake-up call that things aren’t just bad; they’re borderline disastrous.
For undergraduates, it can be hard to figure out what all this apocalyptic financial stuff has to do with us. Certainly, for fourth-years (particularly those in the Commerce School), the job market in this sector is a top priority. A few of us might have investments that we see plunging, or at least our families do. But what should everyone else make of the headlines? As students, we should treat the current market pandemic as an intellectual exercise, using it to better understand how business and economics play a critical role in the future of our world.
One of the few bright sides of this “recession”— debate that terminology as you will — is that it has put Wall Street and everyone else under the microscope. Many non-Comm students who might have been just fine going through life never glancing at a commodities index suddenly have use for such a thing; soaring gas prices ensured that. Now the world of finance is getting a similar look, as thousands lose jobs and many multiples of that lose money. The subprime debacle and what ensued has awakened two (sometimes competing) fundamental forces inside of us: that of a skeptical consumer and a socially-conscious voter.
So what can be taken away from this economic fiasco? The first step is identifying what went wrong. According to CNNMoney.com senior writer Chris Isidore, “in the end, it all comes back to one issue — housing.” The basic idea is pretty straightforward. Earlier in the decade it was much easier to get a mortgage: Interest rates were low and banks doled out loans with increasingly loose borrowing terms. As a result, housing prices rose dramatically, creating a bubble. To make up for excess supply, as well as homes becoming priced much higher than their actual value, the housing market had to “correct” itself. In other words, the bubble popped. As a result, a host of companies such as Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers, Merrill Lynch and American International Group all suffered “staggering losses from their investments tied to mortgages”, said Isidore. So while the troubling economic situation we are experiencing is broad in scope, housing is what put it into a tailspin. While many central facts have been agreed upon by the experts, the question of whether this was a short-term or long-term bubble bursting is still being debated.
The next thing to figure out is what’s happening right now. This is a part of the equation most people have gotten, thanks to a glut of news articles, TV coverage and editorials as of late. For those out of the loop, where do we even begin? One century-and-a-half old investment bank goes bankrupt, another ninety-four-year-old one is in the process of being sold off. A major insurance firm has to negotiate for an $85 billion federal loan. Two quasi-private mortgage-lending institutions were taken over by the federal government. And that’s just within the past fifteen days. Throw in the Bear Stearns debacle from last March, and it’s obvious we’ve had quite a year.
Finally, we reach the million dollar questions: How much longer will this last, what can and should we be doing to mitigate the damage, and most importantly, how can we prevent this from happening again? Of course, if I had any of those answers, I wouldn’t be writing for a college newspaper. Still, as voters, at the very least we must consider the government’s role in stepping into the private markets. Needless to say, there isn’t a whole lot of agreement on this point, either. The takeover of Fannie Mae and Freddie Mac was probably a necessity, since those two firms seemed to have an implicit government guarantee against collapse. Beyond that, things get a great deal more muddled. Given the grave repercussions of allowing giants like Bear Stearns and AIG to fall, both of whom had innumerous ties to other companies, one can certainly make the case that the federal government was acting in the public interest. That lends a good deal of justification to the cause. Nevertheless, by failing to lay down any sort of common rules for federal rescue, the government has left many firms and investors dazed. The result has thus far been a lack of success in restoring confidence to the markets.
All of this is weighty stuff for a bunch of college kids to take in. It also seems more than a little irrelevant to most of us. Pay attention, though. The consumer in us will always want the best deals possible from our financial institutions, but the voter in us all knows these companies need to be able to prop themselves up during a crunch. One day we’ll be running the show, and I for one hope to never see a credit breakdown like this one ever again.
Ross Lawrence is a Cavalier Daily associate editor. He can be reached at r.lawrence@cavalierdaily.com.
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