Iowa State Professors Say The Economy Needs Immediate Help

This story was written by Andrea Fier, Iowa State Daily

Some Iowa StateUniversity professors agree the crisis on Wall Street deserves immediate attention, and that it is having sweeping effects on the presidential race.

The government is working out the details of a $700 billion bailout of financial institutions to help the economy recover from the crisis.

This bailout is really about the government buying up this debt that these companies have, in an effort to keep these mortgages alive and keep homeowners in their homes, said Joydeep Bhattacharya, associate professor of economics.

Bhattacharya said the government wants to shore up, or support, these businesses because they are so large that if they fail, the ripple effects on the U.S. economy and possibly the world would be catastrophic.

He said students will experience the effects of the bailout the same way as those who are nearing retirement.

If you have a long enough horizon of earnings and all that, these things come and go, and on the whole, the market does a very good job of giving high returns, Bhattacharya said.

Although some may be skeptical about what the bailout will mean for them as taxpayers, they will get their money back later in some form or another, he said.

Sometimes people lose confidence in the market, Bhattacharya said, and the government has to intervene to restore that confidence, but that is the nature of the free market economy, and there is no need to take all your money and put it under the mattress.

The situation is having an enormous political impact, specifically on the presidential race as people scramble to place the blame, said Steffen Schmidt, university professor in political science.

We have no idea how it is going to play out, essentially because nobody was prepared for it, Schmidt said. When this thing became a crisis it forced everybody to stop doing everything they were doing Congress, the president, Obama, McCain because the size of this problem is so big.

Schmidt said the situation has rewritten all the topics and time schedules for each of these institutions, and everyone is waiting to see how all the different pieces deal with it.

The president has sent his cabinet out to basically bail out these companies and is asking for a gigantic amount of money, Schmidt said, but he has to get permission from Congress first, and Congress isnt all that sure it wants to give that much power to the executive branch.

Because [Obama and McCain] have been out on their campaigns and dont know that much about the issue, Schmidt said, they seem to be struggling to find what their positions should be on the issue, and are scrambling to find their economic advisors.

Theyve made a lot of mistakes, especially McCain made a lot of mistakes at the beginning of the crisis when he said a bunch of things that were basically his campaign slogan, that the economy is basically okay and he had to run away from that, Schmidt said.

He said Obama hasnt been in Washington as long as McCain, which puts Obama at a political advantage on this issue. McCain, who has been in Washington for a long period of time, has voted to deregulate businesses, which, Schmidt said, is part of the problem.

If I had to score it, this is a basket or goal for Obama, Schmidt said.

The attitudes people have about the stock market and the overall economy can have a big impact on how effective the bailout is, said Richard Carter, professor of finance.

One of the issues surrounding the bailout is whether or not it is just a quick fix that wont solve the underlying problems.

It may or may not be a quick fix. Who knows? Carte said. A lot depends on what happens and peoples attitudes. If everybody stops spending, our countrys economy is going to grind to a halt.

The bailout is important, Bhattacharya said, because although there may be some people who think the government should not intervene and let markets take their road, it is connected with the idea that too many peoples economic lives are at stake for the government to sit and watch passively.

Something has to be done and its almost certain that if its done on a huge scale its going to work, Bhattacharya said. People may disagree on the amount, but I dont think theres any disagreement that its going to work.

Carter said he disagreed to a certain extent. He said that although he thinks the bailout is a positive thing, the situation will resolve itself eventually if the government does not move forward with the bailout.

Eventually it would all shake out one way or another, he said. Some banks would lose, a lot of the investment banks would have trouble and it would take a lot longer for things to turn around, but I have faith that they would.

Carter said he thinks the word bailout is loaded because it sounds as though the government isnt getting anything for its money.

They are buying mortgages, a lot of which probably arent quite as bad as they think, he said. They are going to be able to hold [the mortgages] or sell them to somebody else, so they are not throwing the money away the government could actually end up winning at the deal.