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Crisis will affect jobs if left unchecked
Published Monday, September 29, 2008
If Congress doesn’t pass a proposed $700 billion economic bailout, jobs might become scarce, local analysts said.
“It’s not just a problem on Wall Street,” said Robert Earl Stewart, a professor of finance at Troy University. “It is a problem on Main Street.”
In a conference Monday sponsored by Troy University and Troy Bank and Trust on understanding the financial crisis, Stewart, along with Director of the Center for International Business and Economic Development Judson Edwards, broke down the basics of the nation’s economic crisis.
“We’ve been using our mortgages as a form of welfare,” Stewart said.
Edwards said jobs have been eliminated in the country every month this year, totaling 605,000 so far, and 32 percent of employers said it will only get worse.
In the state, Edwards said jobs have been added, but they are fewer in number than the previous year.
“In Alabama, 8,500 jobs have been added from May 2007 to 2008, but in 2006 to 2007, 30,000 were added,” Edwards said.
And though jobs may be only continue to decline from here if the mortgage lenders aren’t “bailed out,” the House of Representatives voted to reject the $700 billion bailout plan Monday, after stocks already started plummeting that day, the Associated Press reported.
Stewart said the problem originates not just in people not paying their mortgages, but in the reduced credit standards for obtaining a loan.
“We’re now in the age of automatic credit qualifying,” Stewart said. “We are in an age where individuals don’t approve loans anymore.”
Stewart said the loaning standards for automatic qualifying were devised not by private lenders but by Fannie Mae and Freddie Mac.
“In moving into this area of lending, it should be obvious Fannie Mae took more risks, which may not pose any problems during economic good times, but it does when the economy is down,” Stewart said.
If a bailout plan, or something like it, is passed, Stewart said the money will not fall back on the taxpayer, but it will be obtained in government securities.
Edwards said the economy hasn’t gone into an economic recession yet, but the financial crisis has already started extending into other areas of the economy.
“We’re not technically in a recession, but boy does it feel like one,” Edwards said.
Aside from job market concerns, Edwards said housing values, rising food and fuel costs and inflation coupled with lower income are areas of concern.
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Comments
Posted by aumom71 (anonymous) on September 30, 2008 at 7:23 a.m. (Suggest removal)
Congress got us into this mess by all but legislating the “right” to home and car loans for those with no business having them. Now we want Congress to “fix” it…right….
And instead of firing Paulson for incompetence we are allowing him to author a recovery plan???
Why in the world are we trying to buy out all of the loans when the numbers are showing that only around 7% of them are in default?
Let them fail. Capitalism will not be fixed with socialism.
Posted by rivethook (anonymous) on September 30, 2008 at 8:48 a.m. (Suggest removal)
I guess I don’t understand the credit crunch, last night I got an e-mail from one of the my credit cards saying my limit had been increased, of course I don’t make late house payments and all my bills are paid on time. I bought a house and car I can afford, I don’t think I should have to pay for other peoples poor choices again and again. Call me old fashioned but if you can’t afford don’t buy it !!!!
Posted by TFan (anonymous) on September 30, 2008 at 8:56 a.m. (Suggest removal)
....and we're asked to "Trust the System" to fix what "The System" broke?? This country needs to "vote out" every congressman that supported relaxing mortgage loan standards.
Bush bought the bailout hook, line and sinker...he'll buy ANYTHING! Sorry that I voted FOR him before I voted FOR him again. (But consider WHO ELSE was running??) Gad, we are running out of choices.. now where's that moonshine mentioned elsewhere??
Posted by TFan (anonymous) on September 30, 2008 at 8:59 a.m. (Suggest removal)
"Capitalism will not be fixed with socialism."
aumom71- I like it.. has a basic, fundamental ring to it.
Thanks.
Posted by TUT (anonymous) on September 30, 2008 at 10:02 a.m. (Suggest removal)
The real problem with this "bail-out" is that so few people in America understand the underlying situation with mortgage-backed securities and their impact on our banking system.
The problem commercial banks are facing is that the mortgage-backed securities they are holding were forced to be written down to market values because of accounting standards. As stated above, 93% of the mortgages that make these securites are still performing (compared to 97% before), but due to uncertainty, the prices of these securities (from those few that will buy them at bargain-bin prices on some days) have been cut in half.
This is similar to getting a quote on selling your new $50K SUV on the day that gas prices hit $5/gallon. Nobody wants it and those that do will try to lowball you with a $5k offer. However, it is still a fine vehicle and when gas prices subside it will be worth much more. However, your bank doesn't force you to write your car value down and collect on your loan when you can't cover the difference everytime an event happens outside of your control.
The commercial banks are required to recognize that difference in their book cost and the going market value at given times. When that change happens they write the difference (in percieved value) off in a loss and deplete the capital that they must have to issue loans.
The government simply wants to buy these securities (at these rediculously low levels), which will allow the government to collect the payments from the 93% of mortgages that are still paying and maybe give some flexibility that will help some of the problematic 7% become collectible. The banks will restore their capital by liquidating these securities and be able to function properly (outside of the burden placed upon them by the accounting standard) and the government can collect far more value from the investments than the initial cost ($700B).
The government did decide during the Clinton administration to reduce credit standards to allow more people to own houses (even those with very poor credit backgrounds that brought zero equity into the purchase). In my opinion, this action opened home ownership up to millions of new people (which Bush did pat himself on the back for) and helped build the housing bubble that started to breed speculation, rising prices, etc. that exasperated the situation before the bottom fell out and the American consumer culture (no savings, too much debt) started getting hit with rising fuel and food costs.
Posted by Ramsey (anonymous) on September 30, 2008 at 4:29 p.m. (Suggest removal)
@TUT
Thanks for the explanation. It is a problem that is complicated by many other sources and one that won't be fixed over night.
Posted by inaword (anonymous) on September 30, 2008 at 5:53 p.m. (Suggest removal)
That comment was 2X better than the original article TUT. Thanks!
Posted by TUT (anonymous) on October 1, 2008 at 9:43 a.m. (Suggest removal)
Thanks.
I read a good article this morning that addressed the huge amount of instruments from third world countries that the United States and European countries were holding in the early 1980's. Had there been a 'Mark-to-market' rule back then, we would have had a crisis much larger than the current situation. That rule was not in effect then, and the situation unraveled on its own in due time as world markets strengthened.
I believe we get out of this and become more conservative financially for a while- until things get so good for so long that we all start relaxing and making dumb decisions again.
Posted by inaword (anonymous) on October 1, 2008 at 8:22 p.m. (Suggest removal)
Didn't the U.S. and Europe "forgive" almost all of that third world debt back in the mid to late 80's?
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