The House defeated a $700 billion emergency rescue for the nation’s financial system on Monday. The Dow Jones industrials plunged nearly 800 points, the most ever for a single day. But what does it all mean?
Jeff Brown, Karnes professor of finance and the director of the Center of Business and Public Policy at the University, answered a few questions for The Daily Illini following Monday’s events.
Daily Illini: What was the Treasury’s proposal intended to do?
Jeff Brown: The intent behind this legislation is not about bailing out Wall Street. It’s about trying to take steps to make sure the economy continues to function by giving firms and individuals access to credit. … Due to the tremendous uncertainty in the market right now, credit is just drying up. And the concern here is what we a call a liquidity crisis. Companies don’t have the ability to access funds they need for day to day operations.
DI: So why are some citizens claiming that the government proposal isn’t really helpful, but just spends taxpayers’ money?
JB: What Secretary (of the Treasury, Henry) Paulson was requesting was authority for the federal government to go into the market and buy up assets that financial institutions own that are linked … to the mortgage market.
It’s not about just giving away money for free, it’s using that $700 billion to buy assets currently on the books. The idea is that this would inject money back into the system, until the markets got moving again.
DI: Is this the only solution to the problem?
JB: The flow of credit and money in the economy has just kind of seized up. It’s just like throwing a bunch of sand in the gears of the economy. If you don’t do something to get the sand out, get the money flowing again, it’s hard to carry on day to day economic transactions.
There are a lot of different ways to address this and it’s not 100 percent clear this proposal was the best way to do it – for better or worse, it was the best thing on the table … and it just failed. So it’s not clear where things are going to move from here.
DI: Could a recession equal to the Great Depression really be on the horizon?
JB: It’s possible, but that’s not the likely outcome. I would certainly not rule out the possibility that events could continue to worsen … absent some source of major intervention …. Maybe it’s only a few percentage points of possibility, but even that is higher than we’d like it to be.
If you’d have asked me the question three years ago, ‘What is the probability you’ll see a Great Depression during your lifetime,’ I would have said nearly zero. Now that number is still low … probably about 2 percent.
DI: What can students expect if the problem isn’t solved?
JB: Students could see interest rates on credit cards go up, they could see their parents’ financial situations decline, they could see repercussions in the job market.
But I would add one caution – all of these bad outcomes are not necessarily going to happen. There’s some chance we could slip into a major recession, and that chance is much higher when we’re in a credit crunch. It’s possible that even if no legislation passes we might well see our way out of this.
DI: What about the University of Illinois?
JB: Certainly anytime the economy suffers and there is less tax revenue to go around, all publicly funded institutions will feel the pain of that. Furthermore, we’re going to find loyal alumni and donors … are going to take significant negative hits to their personal portfolios.
Having said that, I don’t necessarily view higher education at a particularly greater risk than any other organization. More individuals might even decide that’s a good time for them to go back and pursue graduate education. It’s not out of the question that some types of programs might see an increase in demand
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