Economic downturn could affect SDSU students

Jordan Jones

Jordan Jones

Two major issues are on the minds of many Americans: politics and the economy. Articles on the proposed $700 billion bailout covered the papers last week.

Both the U.S. House and Senate approved the $700 billion bailout Oct. 3. The measure is a governmental plan to help stabilize the economy by purchasing “toxic” bank assets.

SDSU economics professor John Sondey said the $700 billion bailout would trim bad loans from banks, stabilize the banking industry and hopefully encourage banks to extend credit to deserving borrowers.

“When banks face constraints such as growing volume of bad loans, the cautionary ploy is to restrict new loans, which, in turn, crimps economic growth,” Sondey said.

Economics professor Joseph Santos said, “The plan will likely benefit, if only indirectly, anyone who wishes to borrow money.”

Opinions on the bailout range from those who say the economy is better off to those who do not want taxpayers to support others’ mistakes. If one takes the U.S. population at 281 million (2000 census) and the $700 billion bailout, the cost is about $2,500 per person. With today’s estimated U.S. population at 305 million, the amount of the bailout costs $2,300 per person.

“The Treasury may profit from the plan, that is, the Treasury will purchase from the banking system otherwise illiquid – difficult-to-sell – financial assets, and, by doing so, free up the cash required to make loans,” Santos said. “And, because these assets consist for the most part of residential mortgages, which most homeowners will likely repay in full, the Treasury stands to recoup much of its near-term outlay.”

Economics graduate student Daniel Bielfeldt conditionally supports the bailout.

“I disagree with government intervention, but I think that it was necessary,” he said.

While some segments of the economy are hurting, the availability of federal financial aid is staying the same or increasing slightly. Congress recently passed the higher education act authorization for students. Jay Larson, director of financial aid, said the bill consists of two parts. One part is the authorization, the other portion of the bill is the amount the president budgets for federal aid to students. But that appropriation has increased the past few years, Larson said. The Pell Grant also increased.

“For a time, from 1997 to 2005, the federal loans remained the same,” Larson said. “(The) May 2008 Congress and Legislation funded $2,000 of federal unsubsidized Stanford loans annually. This increased aggregate loans so students have more access.”

On a good note, Larson said that scholarships available to SDSU students have recently increased.

Less encouraging is the possibility of increased inflation. Sondey said that inflation could accompany recession, giving the U.S. the worst of both worlds: inflation and high unemployment. If the country continues in the direction of a recession, students could face extra challenges. One statistic states that on average, students in a recession “settle” for jobs that pay nine percent less, and they can earn less for a period of eight to nine years by comparison to students in expansion years, said Bielfeldt.

Sondey said harder economic times could also affect Brookings jobs.

“A recession would reduce demand for some of the light manufacturers produced in the Brookings area – but not substantially,” he said. “In terms of most service jobs, I don’t think there will be any fall-off in opportunities for student employment.”

High prices are another potential concern, although gas prices are lowering gradually.

“In Brookings, they’ve already fallen about 10 percent from their recent peak. Recession will take them down further,” Sondey said.

Those prices were rising due to more competition overseas.

“Ninety percent of global population growth is in developing countries, and the demand for autos and complements (gas) should continue to grow in the foreseeable future if economic growth continues,” Sondey said.

“Petroleum producers have profited from these elevated market prices, which in recent years have signaled alternative-energy producers to enter the broader marketplace,” Santos said. “As global economic growth slows over the next few quarters, so too should the growth of the price of petroleum.”

Housing prices in the Brookings area should stay the same.

“We’ve got 12,000 students and a limited number of affordable rentals. Prices will stay up, but expect little added apartments to be constructed,” Sondey said.

Inflation has already hit area grocery stores.

“Inflation is the big problem recently with food,” Sondey said. “Anyone with any memory of food prices a year ago realizes that basic food items in grocery stores have raised substantially.”

Sondey encouraged students to shop wisely.

“Shop sales, stock up,” Sondey said.

Santos encouraged a similar philosophy.

“The current financial crisis will affect the real economy – income, employment, consumption, etc. – over at least the next few quarters; as such, we should all be concerned about our abilities to obtain credit and employment,” said Santos.