2008 Woodie Awards
Borrowing out of a bad situation
Brian J. Egerton
Issue date: 9/29/08 Section: Features
Media Credit: www.thinkquest.orgHas the Flame caught the financial version of the Loch Ness Monster -- the "money tree"?
Most UIC students cannot fathom what 700 billion dollars would look like in cash. It is more than the most wealthy of individuals earn in their entire lifetime. The Bush administration is asking Congress to help bail out financial firms by buying up nearly seven hundred billion dollars in bad mortgages. This crisis is deemed to be one of the worst since the great depression in 1929.
In order to understand this dilemma it is important to analyze how it occurred. Much of it was fueled by sheer greed and speculation. The first thing that triggered this was a housing bubble. Before 2007, interest rates were low and house prices were rising. This meant that you could borrow money and not have to pay much interest to your lender.
These two economic conditions led to an increase of prospective home buyers. Banks, eyeing an opportunity, issued mortgages to investors with questionable credit history. For a while it seemed like a rosy picture. Home owners saw increased value in their homes and banks made money from lending to the home owners. Much of this money was generated by investor real estate and financial companies such as Bear Stearns, Countrywide Financial, Fannie Mae and Freddie Mac.
Unfortunately, in the spring of 2007 this all began to change and go horribly wrong. Interest rates on housing loans increased and home prices began to fall. The speculation on the housing market had gone too far. Home owners began to default on their mortgages and left the banks with risky investments. In a downturned economy with many defaulted houses on the market it was nearly impossible for the banks to sell the houses.
Many students do not know how this will affect them in the future. There are two things that might be of concern for students. Students may have a more difficult time securing loans for their educational pursuits. Second, the majority of students at UIC work and pay taxes to the federal the government. It should be an outrage that hard earned taxes are being paid to help out greedy investment bankers and financial institutions. It seems that few speculators remembered and learned their lesson from the internet investment craze from the late nineties.
To make comparisons and understand this proposed "bail out", it roughly equals the amount of money spent on Operation Iraqi Freedom. Astonishingly the federal government is 10.6 trillion dollars in debt and with this loan it will be 11.3 trillion dollars in debt. That is a lot of debt!
Sadly it seems that many are left with foreclosed houses and the investment bankers are given financial relief for their poor-sighted mistakes. If the bank loan officers were doing their jobs more carefully they would never have approved risky loans and this dilemma would never have occurred.
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In order to understand this dilemma it is important to analyze how it occurred. Much of it was fueled by sheer greed and speculation. The first thing that triggered this was a housing bubble. Before 2007, interest rates were low and house prices were rising. This meant that you could borrow money and not have to pay much interest to your lender.
These two economic conditions led to an increase of prospective home buyers. Banks, eyeing an opportunity, issued mortgages to investors with questionable credit history. For a while it seemed like a rosy picture. Home owners saw increased value in their homes and banks made money from lending to the home owners. Much of this money was generated by investor real estate and financial companies such as Bear Stearns, Countrywide Financial, Fannie Mae and Freddie Mac.
Unfortunately, in the spring of 2007 this all began to change and go horribly wrong. Interest rates on housing loans increased and home prices began to fall. The speculation on the housing market had gone too far. Home owners began to default on their mortgages and left the banks with risky investments. In a downturned economy with many defaulted houses on the market it was nearly impossible for the banks to sell the houses.
Many students do not know how this will affect them in the future. There are two things that might be of concern for students. Students may have a more difficult time securing loans for their educational pursuits. Second, the majority of students at UIC work and pay taxes to the federal the government. It should be an outrage that hard earned taxes are being paid to help out greedy investment bankers and financial institutions. It seems that few speculators remembered and learned their lesson from the internet investment craze from the late nineties.
To make comparisons and understand this proposed "bail out", it roughly equals the amount of money spent on Operation Iraqi Freedom. Astonishingly the federal government is 10.6 trillion dollars in debt and with this loan it will be 11.3 trillion dollars in debt. That is a lot of debt!
Sadly it seems that many are left with foreclosed houses and the investment bankers are given financial relief for their poor-sighted mistakes. If the bank loan officers were doing their jobs more carefully they would never have approved risky loans and this dilemma would never have occurred.
Viewing Comments 1 - 1 of 1
Arline Pohovey
posted 9/30/08 @ 8:54 PM CST
This is a very well-written article because the author gives his readers a complete but simple and direct explanation of the reasons for the bail-out. (Continued…)
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