Just the facts: What caused the economic crisis

by Brad VanEatonStaff Writer

A volatile stock market and talks of a $700 billion government bailout of the financial industry have left students worried. But what does it all mean?

In August 2007, the Federal Reserve stepped foot in the economy and placed massive amounts of money back into the financial system. Now, the government may have to issue another move that could mean rescuing many banks and insurance companies from bankruptcy.

“If there is not some sort of help, there is danger that the market will fail altogether with a serious impact on jobs and income,” John Epperson, professor of political science, said.

A contingency of several factors contributes to the current financial market. One factor involves subprime loans. Subprime loans are a type of loan offered at a higher interest rate than prime loans.

Subprime loans are usually offered to people who have been turned away from a prime loan due to their credit history or contributing factors to suggest that they may have a chance of defaulting.

Often times when a bank or other mortgage lender offers a subprime loan, a jump clause is attached. With the jump clause, once interest rates begin to rise, the interest the borrower pays increases as well.

These subprime loans also affect the housing market. While interest rates were increasing, house prices were falling. After the jump in interest rates, homeowners attempted to sell their homes, but could only sell them for much less because of the decline in real estate values.

The bank may then begin foreclosing on the homes in which owners cannot repay their loan or mortgage payments.

If the bank doesn’t foreclose the home, the bank has the possibility to sell the mortgage of the house to a larger bank. These banks pool all the mortgages together and sell their own IOUs to investors, through their mutual funds and pensions.

Not being repaid is another issue facing banks and insurance companies. This has led banks and other lending companies to not allow as many loans as in previous years.

In reference to the bailout, the federal government is debating whether or not to buy these mortgages that are not being paid so that investors are not losing their money.

Professor of Economics Frank Colella supports what some government officials are attempting to do.

“The plan the federal government is putting into effect is the right medicine for the problem,” Colella said.

Although the job market isn’t directly affecting current students, the future outlook is worrisome to some students who are graduating in a couple years.

“It’s amazing how much the crisis has spread already,” junior Andrew Dau said. “It’s clear to me that something has to be done to stop the spread and get the economy back on track.”

Junior Amanda Yanchury believes the fate of the next four years depends on whoever the country’s next leaders are.

“I think this election is going to make a world of difference,” Yanchury said. “Either the economy is going to keep going in the direction it is, leading to a possible depression, or it will start the slow rebuilding process and start stabilizing again. For me, it’s all political.”