This past Friday afternoon, President Bush set a historic precedent when he signed into law the Emergency Economic Stabilization Act of 2008. The bill, referred to by many as the “bailout bill”, is the culmination of two weeks of bipartisan work in both the House of Representatives and the Senate. It allows the federal government to purchase up to 700 billion dollars worth of troubled assets, specifically mortgaged-backed securities, in hopes of stabilizing the economy and improving investor confidence. Ultimately, the government hopes to resell the purchased assets at a profit ensuring, according to President Bush, that “the cost to taxpayers will be far less than the initial outlay.”
But what exactly is “far less” than $700 billion? And as a Marquette student, who does not own a home nor have significant amounts of money invested in freefalling stocks, you may ask yourself, why am I being asked to pay to stabilize a situation in which I seem to have so little invested?
Many students at Marquette recognize the transient nature of their residence in Milwaukee, so they rent apartments, rather than purchase homes. They take on demanding course loads, which leaves few students time enough to maintain full-time employment. The lack of a full-time job certainly leaves most students without an excessive amount of disposable income, but it also means that they don’t have life savings, our future children’s college funds or our own retirement funds tied up in plummeting stocks.
So, as someone who is not watching their home value decline or their life savings evaporate, as someone who could have very well continued on with daily life oblivious to any sort of fluctuation in the stock market, turning on the television and hearing President Bush proclaim that America was in an economic “crisis” seemed a bit dramatic. Few Marquette students, if any, were glued to the television as the bailout bill was debated in the Senate and the House of Representatives, and very few singled out the bill as their sole topic of conversation. Blame what some students and faculty refer to as the ‘Marquette bubble’, but around campus, there did not seem to be an extreme amount of concern for recent economic events, and certainly nothing approaching panic.
However, the contents of this bill and the precedents its passage has set are of grave importance for all Americans. Never before have taxpayers been asked to become so deeply involved in the events of Wall Street. To many Americans, intense government participation in the private business sector seems fundamentally against the principles of capitalism upon which this country’s economic system are founded. Yet this bill forces all Americans to become invested, through their tax dollars, in the fates of private businesses, and in doing so sets a dangerous precedent for future levels of government involvement in the private business sector.
Most Marquette students are at the mere dawn of their tax-paying careers; for many, their investment in the federal government will only increase. With the federal government long operating in the red, the passage of an additional $700 billion bill adds further burden to the already unenviable position of young American taxpayers. However, the real issue is not the $700 billion check that Congress just forced taxpayers to sign. Unfortunately, this piece of legislature is a mere symptom of some fundamental problems in this country’s economic system.
According to Dr. Abdur R. Chowdhury, professor of economics in Marquette’s College of Business Administration, the current economic problems were created by inadequate regulation of private businesses. “It started with the housing market. Lenders gave out mortgage loans without looking at buyers income or wealth.” And although there were laws that regulated the actions of these lenders, “…they were never effectively enforced.” Thus many Americans were approved for loans on homes that they could not really afford. The lack of oversight allowed lenders to make these risky loans, which lead to an increase in demand for mortgages and an apparent increase in property value.
However, most lenders knew and chose to ignore the fact that the recipients of their loans would not be able to pay them back. These lenders accumulated millions of risky mortgages and used falsely inflated property values to back up the assets of many non-housing related companies. Many unqualified buyers soon began to default on their loans, increasing the number of foreclosures. Property values began to decline as more and more homes became available, leaving many homeowners owing more on their mortgage than their house was actually worth.
Furthermore, the investments backed by these mortgages began to collapse and affect assets of non-housing related companies, such as Lehman Brothers and AIG. The decline of mortgage-backed assets has drastically decreased these firms’ capital and liquidity. Across the country, banks have become wary of lending money and often impose extremely high interest rates on the loans that they do grant. The recent sudden withdrawal of credit has paralyzed businesses that rely on daily credit use, and driven many into bankruptcy. The entire financial institution is currently taking the hit for the reckless business strategies of mortgage lenders. The federal government has tried to remedy the situation by buying up the mortgage-basked assets from banks. This will release banks from their ties to these impaired assets and hopefully encourage further lending between banks to eventually stabilize the financial market. Ultimately, the sheer enormity of the $700 billion bailout bill is indicative of just how grave America’s economic troubles have become. To Americans heavily invested in the fate of the market system, the bill still does little to soothe the well-founded fears about their investments. To every American, the passage of this bill should drive home the message that this country’s future economic security is far from guaranteed.
Though many Marquette students are not part of the group that is heavily invested in the fate of the market, we will still see the effects of the current economic situation in many different areas. Marquette students nearing graduation will enter a job market drastically different from just five or ten years ago.
According to Chowdhury, “Business firms have been affected by the lack of liquidity. Firms will take on a waiting attitude; they will not invest, expand, hire.” Indeed, a government report issued last Friday reveals that September was the ninth straight month of job loss in the United States, and the largest monthly job decline in the past five years. This means that unemployment rates, already at 6.1%, will likely continue to rise. For companies looking to scale down their budgets, paid internships are usually the first things to get cut. That means many of the jobs Marquette students held last summer might not be available come this May, or might not be paid positions. Marquette seniors graduating this year will likely find themselves entering a job market with fewer opportunities and far more competition. This trend will also affect graduates applying to graduate school; as fewer people are able to find jobs, more and more will choose to go back to school, increasing competition for entry into the school, for scholarships and for grants.
One of the more immediate and most relevant concerns for many Marquette students will center on student loans. Recently, there has been a drastic decrease in the market’s liquidity. This means that banks are unable to or are extremely cautious about lending money, which is typical behavior in a recession. As credit institutions become increasingly wary of lending money, the opportunities for funding student loans diminishes. Students receive either federal loans, such as a Stafford or a Perkins Loan, or private loans, from private banks or companies such as Astrive Student Loans and Sallie Mae. Of the two, private loan institutions are the first to be affected by changes in the market. The federal government does not guarantee these private loans, so banks run the risk of students defaulting on their loans. Companies like Sallie Mae, which grants both private and federally backed loans, grant private loans by borrowing money from other investors and lend that money out to students. The companies make a profit when students pay back their loans plus interest.
However, with less money available for lending, there is widespread fear that the initial rate at which these companies borrow money will be higher than what they will earn from lending this money out to students. Investors in these private companies are becoming increasingly unconvinced that companies like Sallie Mae will be able to turn a profit, and thus increasingly unwilling to invest in them. Indeed, Sallie Mae reported over 1.5 billion dollars in losses at the end of last year and, despite a stronger performance this year, has still watched its market value plummet over 50 percent in the past four months. To address these investors’ fears and the financial losses these companies have experienced over the past months, many companies such as Citigroup, Bank of America and Wells Fargo have made large cuts in the number of student loans they grant, or have stopped making private student loans entirely. The companies that continue to grant students private loans are raising interest rates and tightening restrictions on which applicants receive loans, decisions that will no doubt affect Marquette students who rely on private loans.
However, even Marquette students who rely on federal, not private, loans to assist them in paying for tuition may eventually feel the effects of the nation’s economic situation. These federal loans are far more common than private loans. In some cases, the loans that Marquette students receive passes directly from the federal government to the university and then to the student. In 75 percent of cases, students receiving a federal student loan receive a second type of loan, one that is funded by private capital and made available through private companies such as JP Morgan Chase or Citibank. However, the federal government guarantees these loans, so banks assume no risk of student default. Furthermore, the federal government guarantees the interest rate on these loans, so any change in the rate would require a change in federal law. This further removes their interest rates from influence of the market, and makes it less likely that student with federal loans will see increased rates. Last year, Congress approved legislation to secure money for federal student loans through the 2009-2010 academic year, so students relying on these loans appear to be safe for now. However, if the national trend of decreased capital availability continues, even federal loan lenders could find themselves unable to secure money for student loans. For Marquette students with federal loans who will not graduate before July 2010, the fate of the federal loan program remains an issue.
The recession will undoubtedly be felt right here on campus as well. Many states are already trimming down educational costs by cutting courses, programs and other student activities. As a private university, many of these government cuts will not have an effect on Marquette. However, that does not mean the university will not be influenced by market changes. On the contrary, Marquette’s status as a private university requires that it rely heavily on private donations. Though many of the large donations that we hear about—the $25 million and $50 million donations to the engineering college this past year, for example—are made in anonymity, it is important to remember that these donors are not just nameless entities, infinitely wealthy and impervious to economic changes. They are real people, Marquette alumni and friends, and their gifts create the experiences that all current Marquette students share. Their donations cover the 38 percent of the cost of education not covered by yearly tuition. They have created and continue to sustain scholarships like the Raynor and Ignatius Scholarship, as well as Marquette’s student-athlete scholarships. These donations also contribute to campus safety programs and access to and improvement of student computer labs, as well as sustain numerous extracurricular activities.
From just that brief, incomplete overview of how donations benefit the lives of Marquette students, it is obvious that the extent upon which the university relies on the generosity of these donors cannot be overstated. As the country’s economic situation continues to decline, these donations will unquestionably drop. Speaking at the MUSG-sponsored forum on September 30, Father Wild acknowledged the donors’ vital role in maintaining and developing the university, and admitted that the “environment for fundraising is a lot tougher than it’s been.” To the many Marquette students who benefit from the university’s current donor-sponsored programs, that is an extremely concerning statement. Obviously, the university will have to respond to the decrease in donations, and how they address the situation will assuredly impact the lives of students However, Marquette University has weathered troubled economic times before, and for all those students anxious about how the university will address the problems of the coming recession, it is reasonable to examine how the university handled itself in a previous financial crises.
In 1931, the university was set to celebrate the 50th anniversary of its founding. Father William Magee, president of the university since 1928, was in the midst of planning a large celebration and a fundraising drive when October 24, the infamous black Thursday, came and sent the country spiraling into what is now known as the Great Depression. Federal student loans as most Marquette students know them had not yet been created, and as more Americans fell upon hard times, many families could not afford full tuition. Thus the number of full-time Marquette students decreased. The rise in unemployment also meant increased competition for any work, and the part-time jobs once available to students became scarce. As private donations used to fund undergraduate scholarships decreased, the awards and the students who relied on them disappeared from campus.
The decrease in students put further financial strain on the private, tuition-dependant university. Aside from canceling both the celebration and the drive for funds, Father Magee was forced to take other actions to keep the University from closing. Cuts were first made in the arts; the College of Music was officially closed in the summer of 1930 and the radio station disappeared in 1934. Student publications, including the Marquette Tribune, the Hilltop and the Marquette Journal were more than once threatened by a lack of funding, and all were forced to significantly reduce their size. Periodical subscriptions and the amount of new book purchases in the library were slashed, as were faculty salaries. As the budget grew increasingly tight, Marquette began to hire more and more Jesuit priests to save money on faculty salaries.
Since the nature of Marquette University as a private, tuition-dependant institution has not changed, previous responses to an increasingly tight budget are still relevant to students today; if the University falls upon hard times again, students can expect to see the same sort of actions taken in the past. Ultimately, it seems increasingly unlikely that students and the university will remain unaffected by the current economic troubles. Certainly those poised to graduate and move beyond the Marquette campus will be forced to address those troubles sooner than some other students. However, this recession will eventually have profound affects on all of us, and the university, as well as each individual student, must be prepared to address what are sure to be difficult times ahead.