Oct 072008

Economic hysteria is in the air, and students struggling to secure student loans, find employment and pay the bills can blame much of their panic to a troubled mortgage and lending financial base in the economy, which turning to government bailouts for help.

Monday a panel of five economists traded turns throughout a session on the economy trying to cram hours’ worth of economic discussion into a one hour lecture and a half hour question and answer period. More than 200 people sat scratching their head and raising their hands with questions trying to clarify the economy that many students still may not understand.

“This whole foundation was built on very shaky foundations,” said Deepankar Basu, a CSU economics professor.

Basu opened the discussion, explaining the causes of the economic crisis, which he said has been sub-prime mortgages and the circulation of assets with no collateral or liquidity to back them.

In the U.S., unregulated banks have been allowed to issue loans without asking the customer a single question about their income or assets to prove they can repay them.

Martin Shields, another CSU economics professor and panel member, said these loans are often referred to as “liar loans,” which distort the true value of assets.

Banks have packaged thousands of these loans and sub-prime mortgages and have been selling these packages of overvalued assets to commercial banks, insurance companies, pension funds and hedge funds.

Shields said the consequences from the buying and selling of these bad assets came after foreclosures started coming on the rise and mortgages started to default.

Now banks and other businesses with mortgage-backed securities (MBS) and assets in “liar loans,” are feeling the impact.

Since banks and major investors are now in the red, the credit line has dried up, and that has meant a domino effect to Main Street where the middle class is being squeezed.

The $700 billion bailout was part of the treasury secretary, Henry Paulson’s, troubled assets relief plan to take off the bad mortgages from loans that investors, like banks, have been buying and selling and now hold as liabilities.

The economists at the panel expressed some concern of how this bailout will actually help. Ramaa Vasudevan, a CSU economics professor and panel member, said that even after socializing the losses, the private sectors might still reap the benefits.

Vasudevan said markets still might not provide finance even after the bailout.

In addition, the bailout bill did not cover changes in bankruptcy provisions and some other critical elements were missed.

What this could mean for CSU students

Money that has been lost in assets has translated into banks’ inability to issue loans and offer credit, which for students at CSU could mean a harder time funding college or finding jobs.

Trish Torrez, the manager of accounts receivable operations at Perkins and Health Professions loans on Howes Street, said they have already seen more than a 50 percent decline in the amount of money they can lend to students.

Torrez said three to five years ago, Perkins Loans was able to distribute $4 to $5 million to student financial services to offer CSU students. However, their available credit to offer students shrunk to $3 million in 2007, and this year is down to around a mere $2 million.

The decline in available money to lend, Torrez says, has been due to an increased number of alumni and current students applying for deferments to extend their deadline to repay loans.

“(Perkins Loans) can only loan out what we are refunded through repayments,” Torrez said. “If fewer people are in repayments, we give out fewer loans.”

Torrez said Perkins and Health Professions Loans has about 6,000 active loans and about 1,300 are in the repayment stage. Perkins Loans is a microelement of the general lending trends.

Uncertainty but

remaining optimistic

Although Monday’s panel discussed countless issues with the financial system and potential negative impacts, Gerard Nalezny, one of the speakers and the president and CEO of Fort Collins Commerce Bank, gave the crowd some optimism to draw their attention away from panic.

He said the economy will eventually turn around, but no one can say when exactly that will happen.

Nalezny highlighted the opportunities for some people to make money and buy homes and stocks at cheaper prices. In addition, he said other sectors of the economy like the clean energy economy will grow and replace failing businesses so that unemployment rates can be slowed through new industries.

Once consumers gain confidence back in banks and the economy, Nalezny said there should start to be a turn around.

Ann Malen, director of the career center at CSU, said students need to work hard to build experience and apply for internships so that they can have a higher level of job security.

She said jobs in engineering, information technology, computer sciences and accounting should remain strong fields to work in but that predicting the effects now is still too difficult.

“I’m not sure that we’ve seen the full effect yet. It takes a while for it to trickle down,” Malen said.

Malen said the career fair in September had its biggest turn out of employers and graduates schools in its history but there is no telling what the next career fair will bring.

Malen said, “We’ll see what happens for the Spring fair in February.”

Staff writer Kaeli West can be reached at news@collegian.com.

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