As the threat of a recession looms, many students may find themselves wondering what sparked this economic crisis and how it affects them.
Economics professor Kevin O’Brien said the crisis started with the housing bubble earlier this decade.
“Housing prices increased faster than economic conditions could explain,” he said. “Supply and demand factors couldn’t explain the increase. One part of the bubble was the subprime market.”
O’Brien said subprime mortgages were created so people who would be considered risky borrowers, or those who had low credit scores, could still secure a mortgage. And when the bubble “popped,” the subprime mortgage holders could no longer afford to pay their mortgages.
The issue there is that large mortgage brokers, such as Lehman Brothers, had bought trillions of dollars in these subprime mortgages. When those mortgages lost their values after the housing boom, those companies lost a lot of money.
“Banks became afraid to loan money,” O’Brien said. “They’re afraid of the next company to fail and not getting their loan back.”
All these financial problems then boil over into what O’Brien calls the “real economy.”
“People will see unemployment increase and spending decrease,” he said. “These are the things that lead to a recession.”
While O’Brien said he thinks the United States is headed for a recession that will last about nine months, he said there’s no way there will be another Great Depression.
“While we don’t have a perfect conception of the economy, we have a much better one that we did [in the depression era],” he said. “The Federal Reserve and the Treasury Department are actually doing something [to remedy the situation].”
O’Brien also said students don’t need to worry about any money they might have in a bank.
“Even if the bank goes under, the deposits are insured up to $250,000,” he said. “Your deposit is safe. Don’t pull your money out of the bank because it will make the problem worse.”
According to a McClatchy Newspaper article by economics reporters Kevin Hall and David Goldstein, the blame for the crisis does not lie with Fannie Mae or Freddie Mac, but with private lending firms.
Fannie Mae and Freddie Mac are federal institutions that ensure funds are consistently available to lending institutions, which in turn lend money to borrowers.
“Most of the loans made by depository institutions examined under the [Community Reinvestment Act] have not been higher-priced loans,” President of the Federal Reserve Bank of San Francisco Janet Yellen said in the article.
Basically, Yellen meant that government-owned institutions, such as Fannie and Freddie, did not hold many of the subprime mortgages that caused the crisis.
According to the article, 84 percent of the subprime mortgages in 2006 were issued by private lending firms.
O’Brien said the private lending firms were not obligated to lend to subprime borrowers such as Fannie and Freddie but did so because it seemed like a good investment.
While some students may be concerned with a recession, Director of Financial Assistance David Pardieck said students needn’t be worried with securing loans and other financial assistance from the university.
“Although Bradley is not immune from the impacts of a souring economy, the university will not retreat from its long-standing commitment to fund, at necessary levels, student financial support available through a variety of grant and scholarship programs,” he said.
Pardieck also said Bradley students really haven’t been affected by lenders tightening their budgets, but a few students were unable to secure private loans. He said students with access to a cosigner with a good credit rating shouldn’t have problems getting private loans.
Loans secured by the federal government, including the PLUS and Stafford loans, aren’t in any danger, Pardieck said.
“As a Direct Loan school, Bradley parent and student borrowers receive the proceeds of their loans directly from the Federal Treasury – there are no private or commercial lenders involved,” he said. “Depending on the length and severity of the impending recession, Congress may actually expand financial assistance opportunities particularly for families impacted by job losses or other, related, economic hardships.”
loans, aren’t in any danger, Pardieck said.
“As a Direct Loan school Bradley parent and student borrowers receive the proceeds of their loans directly from the federal treasury – there are no private or commercial lenders involved,” he said. “Depending on the length and severity of the impending recession, Congress may actually expand financial assistance opportunities particularly for families impacted by job losses or other, related, economic hardships.”