All over the United States, the economic future seems uncertain — from experts who have devoted their lives to studying economics, to college students who are on the brink of entering the real world. For the past month, the economy has become the main theme of the presidential campaigns. Each candidate thinks they have the solution to the problem. But how did we get here? And where are we going?
Election ‘08: The Economy
Voters, politicians and experts, including UMass economist Robert Pollin and former Virginia Governor George Allen, talk about what the economic crisis is going to mean for the upcoming election.
The week of the big collapse began Sept. 15, after the federal government declined to take over Lehman Brothers. Lehman Brothers filed for bankruptcy because there was too much debt in their investments and not enough equity to back it up. The Economist reported on Oct. 2 that “Lehman went bust with $613 billion of debt, of which $160 billion was unsecured bonds held by an array of investors around the world.”
Lehman Brothers, like many other investment and commercial banks, had given out risky loans that people used to purchase houses. Fannie Mae and Freddie Mac, the government supported investment and mortgage lenders, had a mission to “expand affordable housing.” CEO Richard Syron was quoted in an Aug. 6 article in the Boston Globe saying: “If you’re going to take aid to low-income families seriously, then you’re going to make riskier loans.”
Since 2006, home prices have fallen, as the housing bubble has burst. Banks and investors continued to give out zero-percent down mortgages under the assumption that prices would continue to rise. Normally, potential homebuyers are required to put down 15 or 20 percent of a home’s value. A FactCheck.org article from Oct. 1 explains how mortgage brokers continued to give people who were not credit-worthy homebuyers sub-prime adjustable rate mortgages with low initial payments, yet exploding interest rates. Brokers and investors thought that value and price of homes would continue to rise, but when homeowners defaulted on their mortgage payments, banks were left with foreclosed homes and mortgages that were worth much less than their initial value. These investments continued to pile up, and the number of foreclosures has risen across the country.
Ruth Simon, of the Wall Street Journal, said in a Sept. 20 article that the largest delinquencies of defaults “came on sub-prime loans, where the delinquency rate jumped more than 2.2 percentage points from June and July levels to 24.48% in August.” Forbes magazine reported that the number of mortgage foreclosures has doubled to 303,000 since August 2007.
It seems the weight of mounting defaults on homes and the lack of equity to back up investments has crippled the investment system of Wall Street. The stock market has been a roller-coaster ride since the week of Sept. 15.
Economic analysts and professors are unsure of what brought us here, but some, like Stephanie Luce, an associate professor at the City University of New York, has some idea.
“I think it was a long time coming,” said Luce. “Really the U.S. has been creating a bad situation for itself. We’ve been running our economy on debt and credit increasingly so for the last couple of decades. It’s an unsustainable situation and it seemed bound to collapse in one way or another eventually.”
Along with credit being used as payments in society, Luce also cites the years of deregulation as a source of the problem.
“An analogy would be if we just started taking away the rules of the road,” said Luce. “We just started taking away signs and traffic lights and speed limits. Eventually we’re going to have a lot of accidents and we’re going to wonder why.”
The blame for the crisis has been scattered around. Economist.com said it is a case of “layered irresponsibility” from millionaire investment banks to homebuyers. While it seems Luce lays the blame on Republican market philosophy, one economics professor from the University of Massachusetts saw the blame spread out among several different areas. He thought that it was possibly a lack of regulation, and claimed the corporate executives at companies allowed it to get out of control.
Each presidential candidate has laid the blame for the economic crisis on each other. Sen. Obama links Sen. McCain to failed Bush policies.
“If you want to know where John McCain will drive this economy, just look in the rear-view mirror. Because when it comes to our economic policies, John McCain has been right next to George Bush,” Obama said at a political rally in Sarasota Florida Oct 30.
During the debates, McCain tried to “expose the Democrat as woefully unprepared” and not ready to handle the economic crisis.
University of Massachusetts student Kyle Johnson, 22, an operations management and economics major, put the blame on the housing market and banking executives who helped cause this mortgage collapse.
Johnson said the country needs to look to “whoever decided that everyone should be able to buy a house for cheap, and whoever started the housing bubble where people could buy a house and make money off of if without making actual payments.”
The effects of the economic collapse could take a long time to feel, yet already, judging by what some students say, it is evident how they will be affected. For Johnson, also a Massachusetts resident, the effect will be realized after graduation.
“The biggest effect is in terms of jobs,” Johnson said. “There are definitely fewer jobs offered than there were in the past. A few years back, there were a lot of sort of finance related jobs where you could go into banking. A lot of the jobs being offered now are writing companies, internal sort of production jobs.”
For Colin Magruder, 21, a history, politics and government major at Ohio Wesleyan University, the economic downturn has affected him in other ways.
“The biggest effect for me is in the amount I drive,” Magruder said. “Even with gas prices lowering, I still have to drive my car less just so that I do not have to fill up my car once a week for $60.”
Magruder also feels that, for others in Ohio, the first place that seems to be taking a hit is the service industry.
“I know restaurants in my school’s town have seen a drop in business,” he said.
Kris Casey, 21, an acting major at Pittsburgh’s Point Park University, has not personally felt the effects of the economic downturn, but said his parents are “probably struggling a lot more now because of the drop in the stock market.”
Corrinne Connolly, 21, a communications and psychology major at UMass, from Whitman, Mass., said, “If we keep going the way we are, there isn’t going to be any money for student loans, then interest rates are going to go up and I won’t be able to go to grad school.”
Now that everyone has realized the economic situation is serious, the question becomes, which candidate holds the answers? Just like the confusion of the economy, this has become a partisan issue, and neither candidate has been able to fully explain in debates how they are going to save the economy.
In order to stop the failing economy, McCain offered a total spending freeze on all federal programs except defense, leading Obama to say: “Why use a hatchet when you can use a scalpel?” to cut unnecessary spending.
According to their Web sites, both candidates have “creating jobs” in their economic plans. Obama wants to do this by investing in clean energy, supporting biofuels, using American workers and manufacturing, and by giving tax relief to companies that keep jobs in the United States by eliminating capital gains. He also wants to cut taxes for 95 percent of working class families through a “Making Work Pay” tax incentive, while fighting for fair trade that opens foreign markets.
McCain sees small business at the heart of job growth. His Web site says he will do this by lowering energy costs with domestic exploration of oil and natural gas, lowering health care costs by giving every family $5,000 to help them pay for their insurance plans, and keeping tax rates low, even by cutting the corporate tax rate from 35 percent to 25 percent.
Luce seemed worried about each candidate’s proposed solutions.
“I don’t see either candidate as offering real structural solutions,” she said. “McCain’s solutions primarily reflect continuing in the direction of how the economy has been going and that’s a problem. Obama is offering some changes from the current but they are not huge changes from the status quo. I think voters are thinking he can’t be any worse than Bush and McCain.”
Kyle Johnson felt that “McCain didn’t react well with what happened,” when he suspended his campaign to return to Washington, and that he doesn’t think McCain has given a clear answer on his solution.
“If he wants to be in charge of all this, he hasn’t demonstrated that he knows what’s going on,” Johnson said. “Obama has said quite a bit, he hasn’t done as much, but at least the idea of one being more ready than the other has gone away.”
Johnson is not sure who is the most capable, and thinks it would be more important to see whom each candidate would pick for their cabinets.
Magruder, in Ohio, also believes whom a candidate chooses to be their treasury secretary is an important talking point.
“I have supported John McCain for a long time, and I feel like he is very able to handle the situation that our country is now languishing in,” Magruder said. “[McCain] is the best candidate to navigate us through the crisis.”
He cited McCain’s experience as his strongest quality.
Connolly sees things a bit differently.
“Republicans got us into this mess and a Republican is not going to get us out of it,” she said. “The economy was at its best with Bill Clinton, and he was a Democrat.”
Casey, who was born in Philadelphia, also feels that we need a change from the past eight years.
“I am going to vote for the person that will help us out of the debt that [President] George Bush has put us in . . . probably Obama,” Casey said.
While another Great Depression seems unlikely, a recession is a reality. James Cooper, in Business Week magazine, explained in an article on Oct. 13 that consumers are finally beginning to buckle, and spending will eventually decrease. With the holidays coming soon, it seems it will be a tough year for many. Americans are looking at this election as an opportunity to stop the economic downturn. It is the most important issue of the 2008 presidential election.
Andrew Smith, S.P. Sullivan and Julianne Vaccaro contributed to this report.