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Bailout caused by risky loans, investments
David Taintor
Issue date: 10/6/08 Section: News
After failed attempts, uncertainty and much deliberation, Congress approved the $700 billion financial bailout on Friday.
But some might still be wondering how it got to this point and what it's personal significance to them is.
UW-Eau Claire economics department chair Wayne Carroll said that it is a very complicated situation.
"To put it as simply as possible, in the last few years, borrowers and lenders were taking on lots of risk and they were able to shift that risk to others," he said.
Carroll said that in the last year or so, it was discovered that those risks were excessive, and were hidden in the system. People who borrowed money for mortgages for homes that were bigger than they could afford found out they can't pay their mortgage payments anymore, he said.
Student senator Cassie Carter said that for many years, the United States had a 100 percent ratio of being able to pay back mortgages, which was attractive to international banks. International banks purchased mortgages, allowing local banks to give out more loans for sub-prime mortgages.
Carroll said people are just now finding how much excessive lending there was. He said an effect of the current economic situation is that banks and other financial institutions are tightening up their lending standards.
"It's going to be more difficult for business to get loans or borrow money," Carroll said.
Because of the steep drop in the stock market, Carroll mentioned that people who are close to retirement age might decide to wait on their retirement until the market turns around and the value of their retirement assets goes up.
Student Senate treasurer Michael Umhoeffer said that students should know that there has been nothing like this bailout in the history of the United States. He said that while students will still be able to get loans for school from the government, the extra loans for houses, cars and extra tuition won't be easily available.
But some might still be wondering how it got to this point and what it's personal significance to them is.
UW-Eau Claire economics department chair Wayne Carroll said that it is a very complicated situation.
"To put it as simply as possible, in the last few years, borrowers and lenders were taking on lots of risk and they were able to shift that risk to others," he said.
Carroll said that in the last year or so, it was discovered that those risks were excessive, and were hidden in the system. People who borrowed money for mortgages for homes that were bigger than they could afford found out they can't pay their mortgage payments anymore, he said.
Student senator Cassie Carter said that for many years, the United States had a 100 percent ratio of being able to pay back mortgages, which was attractive to international banks. International banks purchased mortgages, allowing local banks to give out more loans for sub-prime mortgages.
Carroll said people are just now finding how much excessive lending there was. He said an effect of the current economic situation is that banks and other financial institutions are tightening up their lending standards.
"It's going to be more difficult for business to get loans or borrow money," Carroll said.
Because of the steep drop in the stock market, Carroll mentioned that people who are close to retirement age might decide to wait on their retirement until the market turns around and the value of their retirement assets goes up.
Student Senate treasurer Michael Umhoeffer said that students should know that there has been nothing like this bailout in the history of the United States. He said that while students will still be able to get loans for school from the government, the extra loans for houses, cars and extra tuition won't be easily available.
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