The Blue Banner

Issue date: 10/9/08 Section: News

As stock markets around the world plunged over the past two weeks and 60 percent of respondents to a CNN poll said Tuesday another economic depression is likely, UNC Asheville students are among millions watching the economy with a fearful eye.

"I'm not an economist," junior student CeCe Hue said. "I don't understand all of this."

The 21-year-old philosophy major discussed what everyone is talking about lately: the economy. She acknowledged she's not alone in her confusion.

The Dow Jones Industrial Average suffered its largest point drop in history last Monday, falling 778 points. The largest bank failure in American history took place the week before, with the collapse of Washington Mutual.

The economy shed 160,000 jobs in September, the worst month in five years. Almost 800,000 jobs vanished since January.

"I think I have a general grasp of the problem," Hue said. "But I'm not as educated as I could be."

Hue said she has a lot of questions, the kinds of questions Robert Tatum, assistant professor of the economics department ,hears recently.

"I've had a lot of people who know I'm an economist come up to me and ask questions," Tatum said.

Tatum recently appeared on the local news to talk about these issues and said he recently became adept at explaining the problem. He said the root of the problem began on a surprisingly gentle note.

"In the mid-1990s, there was easier assessment of credit and financial innovation," Tatum said. "People found it easier to buy homes, cars and so on."

During this time, it was easy to find funds and invest, and the stock market reached a high point. The bubble began to burst in the beginning of this decade, yet investors kept buying stock because they hoped the price would continue to rise, Tatum said.

Tatum said this is inconsistent with the fundamentals and continues to the next phase of the problem as financial waters begin to get choppy.

The next phase began on the housing market. Banks actively loaned credit to people who were aggressively investing in real estate-buying houses and turning around and selling them. This pushed up housing prices, Tatum said.

Meanwhile, according to Tatum, another problem grew.

"People who had otherwise been unable to borrow now could," he said.

Tatum said this is when the borrowing process got a little too creative.

"There were interest-only loans for a while and there were pick-your-payment loans," he said.

Tatum said some banks even offered low-documentation or no-documentation loans, which came to be known as liar loans, where borrowers monitored and reported their own loan activity.

"Conceivably, you could lie in this situation," Tatum said.

Tatum said he does not like to place blame, and during this time of increased investing and predatory lending, both the borrower and lender were at times both unscrupulous.

The housing price fell and investors, as well as borrowers who were just realizing they had gotten in over their heads, wanted to walk away.

"They couldn't do that," Tatum said. "There was now a stalled housing market and people foreclosed."

Banks began selling these bad loans to institutions like the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) in hopes of stabilizing the problem. The government rescued both institutions last month.

The financial waters had overflowed, and because Fannie and Freddie couldn't absorb all these loans, they repackaged them as mortgage-backed securities, Tatum said. Now, the individual investor could buy a package of loans and when people paid on their loans the investors made money.

"What's interesting is that financial institutions were also buying these mortgage-backed securities," Tatum said.

So the financial system brought this risk back into itself, which Tatum said brings the economy to its current negative situation.

Banks still have questionable loans and mortgage-backed securities to deal with, the values of which are even more unsure.

"And when financial institutions are unsure of what the balance sheets look like, they are hesitant to take anymore risky behavior," Tatum said.

Unfortunately for the economy, that risky behavior includes making loans to individuals and to other businesses. These two problems combine to make a bigger problem for everyone.

Tatum explained when individuals cannot borrow money they cannot buy homes, cars, go to college or make the consumer purchases that stimulate the economy. The economy as a whole suffers. When businesses cannot borrow money they go under or take measures to keep from going under, such as production cuts or layoffs, which makes unemployment go up.

Enter a $700 billion bail out, which, after some retooling, passed the Senate Oct. 1 and the House of Representatives Oct 3.

According to Tatum, the government plans to buy these troubled assets through a reverse auction, where the lowest seller gets the deal. $700 billion is the limit Congress wants to spend on these purchases.

"This is not without risk to the taxpayer," Tatum said. "When the government does turn around and sell these a few years down the road, the taxpayers could make money or maybe not."

In the meantime, banks, once free of these troubled assets, will be more willing to lend again, he said. Then legislators hope the economy will begin to recover.

Uncertainty about the recovery process scares students like Hue.

"I have two jobs and I'm still struggling to make ends meet and that bothers me," Hue said. "Everyday expenses are getting harder and harder to meet."

Hue said she knows she should save more, but is unsure when she will be able to begin.

"I do plan on going to grad school and I'll have to take loans out for that too," Hue said.

Tatum said he hopes students will save more.

Lane Brown, manager of the UNCA bookstore, said he has not seen a change in student spending habits.

Of course, students cannot avoid buying books but they are still purchasing computers, pencils and UNCA hooded sweatshirts, according to Brown. Sales have not slowed down since last year. He says Rocky's Convenience store is doing even better and attributes the trend to another economic problem: gas.

"Students aren't driving from campus to buy things or eat as much," Brown said. "I don't either. I've probably only left campus for lunch or to run errands during the day five or six times this semester."

Things will not get easier, even with smarter savings, according to Tatum.

"It won't be easy finding a job in a weak market where there is unemployment and you're the one with the least experience out there," Tatum said about students who will be graduating soon.

There are some things to feel good about, he said. The local area seems calm and local businesses have not seen the impact they could.

"Local banks didn't get into the sub-prime mess, our local banking seems strong." Tatum said, although he does note Wachovia's recent troubles. Wachovia's headquarters are in Charlotte.

In an Oct. 3 news release, Wachovia announced it was courting Wells Fargo for a buy-out in a deal that would exclude government regulation.

"This could turn into a defining moment of this generation," he said. "It depends on how bad this gets but look back at the Great Depression generation, they were forever affected."

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