Iowa State Professors Respond To Economic Fallout

This story was written by Dylan Boyle, Iowa State Daily

The Dow-Jones industrial average closed nearly 778 points below what it began Monday.

Iowa State University finance professor Richard Carter said the number represents a 7 percent drop and since the Dow-Jones industrial average reached its peak in October 2007, it has dropped 24 percent, as of Monday evening. Carter said Mondays 7 percent loss does not mean that every stock fell exactly 7 percent, but the number was an average loss.

He said many people think this sharp decline means in the longer term, things arent going to be good. In other words, people are concerned that stock prices are going to continue to fall.

When [the stock market] moves like that, its foretelling the future, Carter said of others beliefs. They may just be overreacting.

He said there have been so many changes in the way the economy works since the Great Depression that its unlikely wed get into something like that.

For one thing, Carter said, the economy is much more diverse than it was during the Great Depression, and there are more checks and balances in the financial world. Also, he said, there were other factors involved in the Great Depression than the financial market going into a crisis.

Carter said that over the course of the next several weeks, or perhaps the next several months, it will take some time for the financial market to get back to normal.

If [Congress doesnt] pass any bill at all, things may take even longer, Carter said.

Carter was referring to the $700 billion bailout bill that was voted against Monday. He said the fact that the proposed bill was not passed surprised him.

It would have been more than just Wall Street that would have been helped with this [bill], Carter said, commenting on a Republican politicians recent comment that he did not want to bail out Wall Street.

Dave Swenson, associate scientist of economics-Agriculture and Life Sciences, said the Houses decision was difficult but legitimate, given the circumstances.

I think Congress is wrestling with an incredibly complicated issue, and its a lot to ask Congress to make a $700 billion decision with only a limited amount of discussion and debate, Swenson said. I think the way Congress has acted is reasonable.

Swenson said there is a lot of paranoia in the market right now and investors and banks do not know whom they can count on, so they are turning to the government to act as their big insurer.

It looks, right now, as if [consumer confidence] is very contingent on Congress acting, and we dont know if the Congress ultimately does act if thats going to be durable, he said.

The big issue we will see coming out in the next couple of days, Swenson said, is quarterly reports. Companies quarterly reports start to be published in a couple of days, and that is when we will actually see how badly companies are doing, he said.

I think what you saw today was the market anticipating that tomorrow and in the next couple of days, were going to see a lot of negative quarterly reports, Swenson said.

He said Mondays fallout could have been a response to people predicting negative quarterly reports and deciding to get out early, rather than waiting to see what the numbers actually are.

Swenson said the problem is uncertainty, and unlike risk investors have no way of calculating uncertainty, so they act in unpredictable ways.

As long as they are dealing in uncertainty, they are going to behave erratically, he said.

Student impact

The failure of the bailout bill and the dive the stock market took Monday wont necessarily affet students loans at Iowa State.

Students who are anticipating disbursements from federal loans, such as the Federal Direct Stafford, Federal Direct Unsubsidized Stafford, Federal Direct Grad PLUS or Federal Direct PLUS, will see no interruption in their student loans, wrote Roberta Johnson, director of student financial aid, in an e-mail. Iowa State University participates in the Federal Direct Loan program and funding comes directly from the government.

But for students who have private loans, it may be a different story.

Students who are anticipating disbursements from private lenders for an alternative loan may see some interruption, she wrote. Depending on the financial situation of the bank, some lenders may need to delay disbursements until the markets have stabilized. Others, however, may cease operations all together.

The Office of Student Financial Aid continues its monitoring the receipt of funds through private lenders and will work with any students whose lenders suspend or delay operations, she wrote.

Swenson said the credit crunch will affect the amount of money there will be available for student loans and could hurt students, depending on how much money the local, state and federal governments are willing to put toward higher education. He said students graduating in several years will be better off than students graduating at the end of the semester.

If youre a student getting ready to graduate this December, it doesnt look very good out there for you, Swenson said. If youre not getting ready to graduate this December, the economy always climbs out of these pits ... its going to get better down the road.

Political impact

Presidential candidates and Senators Barack Obama, D-Ill., and John McCain, R-Ariz., as well as President George Bush, all supported the bailout bill.

Both Obama and McCain will probably try to contend they did the most to help get the bill passed, said Dianne Bystrom, director of the Carrie Chapman Catt Center for Women and Politics.

Bystrom said the bill was rejected by the most conservative Republicans as well as the most liberal Democrats, while a larger number of Democrats supported the bill.

I think a bill will pass, just not this bill, she said. My guess is its going to be another compromise.

Bystrom said a lot of Americans are worried about the economy, so the most recent problems will keep the focus of the election on the economy.

Steffen Schmidt, university professor of political science, said economics is always the biggest thing in elections. When people vote in a presidential election, he said, they almost always end up voting based on the economy.

I think all the other issues are going to be secondary to the whole question of what went wrong with the economy and whos to blame, Schmidt said.

In general, he said, whoever is running the country gets blamed when the economy is bad, and is hailed as a genius if the economy is doing well.

For example, Schmidt said, President Clinton was given a lot of credit for good economic times when he was the president because the federal budget was balanced.

The president does not always, in fact, have a lot to do with the state of the economy, Schmidt said.

However, Schmidt said, the Republican administration under President Bush and the Republican philosophy of little regulation does have something to do with the current situation.

Schmidt said good, plain, common-sense business regulation that makes sure companies arent taking stupid risks could have helped prevent the current situation.

He said he thought the Republicans would have a hard time convincing voters that tey should be back in the White House. At the same time, however, Schmidt said the Democrats, including Senator Obama, dont appear to have a really clear idea of what should be done.

So its one of those situations where everybody, just everybody, is groping for answers and solutions, without anyone really understanding what the answers are for all of this, Schmidt said.

Richard Mansbach, professor of political science, was astonished by the Houses rejection of the bailout bill. He said Americas current economic crisis could jeopardize our standing in the world, because countries like China will not trust the dollar or American markets.

This is no longer a major economic power. Its now a minor economic power, Mansbach said. We may not be a second-rate country, we may go straight to third-rate.

Mansbach said the bailout was the only thing the government could do to infuse confidence back into the market, and that he will vote against any Congressman till [his or her] dying day who voted against the bill Monday.

The U.S. government is doing its best, especially the Congress, to see if they cant re-create the 1929 depression, Mansbach said. We have a ways to go yet before they finally get there, but they may try, given the astonishing degree of stupidity that exists in Washington at this particular time both Republicans and Democrats.

While Mansbach said he didnt know if the bailout bill would completely reverse the economic crisis, he did say it was a necessary move Congress should have made.

At least its worth trying, Mansbach said. The worst thing they can do is what theyve done ... which is nothing.

Daily Staff Writer Kim Norvelll contributed to this article