How did this happen? Recession raises questions

Melissa Dilley

Stimulus bill, bailouts and national debt explained in troubling economic times

If understanding how America’s economy works isn’t difficult enough, President Barack Obama’s 1,000+ page stimulus bill doesn’t make it any easier.

Tuesday night, Obama addressed Congress, asking for legislation to be passed concerning jobs, health care and another $700 billion bank bailout.

Obama also spoke about the $787 billion stimulus bill that became law two weeks ago.

The bill has many parts to it, each combining to stimulate the economy through tax cuts and government spending.

While there is still excitement about Obama’s presidency and vast optimism since the stimulus bill was passed, many still wonder: Will it work?

In September 2008, the government offered a $700 billion bailout to top lenders to stimulate bank loans.

However, political economics professor Thom Yantek said the bailout didn’t work as planned because the banks were not required to begin loaning again. Instead, the money was hoarded for security purposes.

Obama promised to ensure that banks will be required to loan money the next time a bailout is passed.

In addition to the stimulus bill, prior tax cuts and bailouts, it may seem the government will take over the economy, but Yantek said that is unnecessary.

“We’re in a capitalist society; the government isn’t taking over,” he said. “We need a solvent banking system because it’s important that banks instill confidence in the rest of the economy.”

Helpful definitions:

Economic bubble:

A phenomenon in economics in which too much loose cash finds its way into an area of the market, e.g., stocks, housing, dot-com, etc., resulting in a buying frenzy that leads to wildly inflated prices. Economic activity in those areas affected is not sustainable in the long run, so large numbers of late investors eventually go bankrupt.(Urban Dictionary)

Default: Failing to make payments, which typically results in foreclosure.

Mortgage Rate: A mortgage is the transfer of an interest in property to a lender as a security for debt. While a mortgage in itself is not a debt, it is the lender’s security for a debt.

Subprime mortgage: A type of mortgage offered to those who don’t have the credit rating to get a loan. The catch is that for the first few years the buyer pays only the interest on the loan, but later the buyer must begin paying the mortgage rate.

Tax Cut: A reduction of a tax rate.

Trickle down theory:

The policy of providing tax cuts or other benefits to businesses and rich individuals, in the belief that this will indirectly benefit the middle and lower classes.

Tax Break: A deduction in taxes that is given as an incentive. For example, if you buy a new car or a new home, you won’t have to pay as much in taxes because you are stimulating the economy.

‘Pizza Money’

Beginning April 1, the average worker will see an extra $8 on each paycheck, Yantek said.

The extra money will come from the tax-cut portion of the stimulus bill, based on earnings and taxes.

These tax cuts are unlike those of the Bush administration that relied on the trickle-down effect by giving out checks, with those in the top 5 percent of the population faring better than the middle and lower classes.

Although Yantek said that while he thinks Obama has the right idea by giving the money to those who will spend it, the amount, which he refers to as “pizza money,” won’t do much.

“When I explain this to my students, I tell them that it would be like having enough to buy one small pizza a week for a year,” he said. “I’m not sure how that is going to stimulate business. Maybe for pizza places?”

College Republicans President Drew Seachrist said he agrees that an extra $32 a month per household won’t likely make a difference, especially when Obama is asking that all Americans consider at least one year of higher education in the near future.

“I don’t know if it is going to be that much of a big difference,” Seachrist said. “$32 a month isn’t going to pay for a four-year or even a two-year degree.”

Depression of 2009?

When “going-out-of-business” signs are posted on store windows at malls across the country and foreclosure auction listings litter newspapers, it may be difficult to imagine the economy getting better.

Although those who are working will make more money, the 7.6 percent of currently unemployed Americans can’t receive a tax cut.

The spending portion of the stimulus bill is geared toward creating jobs and extending unemployment for those who still won’t be able to find a job.

College Democrats treasurer Kyle Galindez said he thinks the most important aspect of the bill is that it will create jobs that deal with new energy and green technology.


&bull With all the loose money floating around because of an economic bubble, the housing market took off and banks began liberally offering subprime mortgages.

&bull The unemployment rate went up instead of the buyer’s incomes, which is what was expected and probably why buyers figured they could handle the increase in monthly mortgage payments.

&bull Thousands had to default on their bank loans and give up their homes. Because of this, most lending practices at banks were put on hold.

“My favorite part of the bill is its commitment to energy policies and environmental issues,” he said.

While many jobs will deal with green energy and technology, Obama is taking the “New Deal” approach because the majority of the spending will be put toward infrastructure.

Franklin D. Roosevelt used the New Deal to create jobs and federal assistance programs to end the Great Depression.

Yantek said all the ingredients are present for another depression, but because of the deterrents set in place in 1933, such a disaster is not likely to happen again.

“The federal government and the treasury could only do what they have done in the last six months because of what we set in place after the Great Depression,” Yantek said..

How can we afford this?

The current economic state may be hard to grasp for some because the national debt doesn’t seem like real money to most people.

The government borrows the money from three major sources: The private sector, institutional investors and other countries, mainly China, India and Japan.

Yantek said the nation’s debt and the fact that it will be passed on to future generations is the reason there is so much political discord concerning the stimulus bill.

“We have achieved the highest deficit accumulation since World War II,” he said. “We will produce a record deficit this year and next, and the money to pay it back is coming from me, you, my kids and your kids to be.”

Stimulate your mind and the economy

In Obama’s address, he made it a point that the economy wasn’t going to be fixed by itself or by the government, but by the people.

The president offered suggestions such as making sound money choices and conserving energy to stimulate economic growth.

Seachrist said College Republicans will have a table on the second floor of the Student Center next week to educate students about the stimulus bill and what they can do to use it in their favor.

College Democrats also encouraged students to gain an understanding of the bill by discussing it at its weekly meetings.

The group is also taking part in Obama’s “Organize for Change,” which calls on communities to meet and create a discourse about current policies and legislation.

In addition to gaining a better understanding of politics and the economy, Yantek said people need to take advantage of tax cuts from the stimulus bill.

“Hopefully we’ll learn from history and avert issues,” he said. “If we want to do that, we have to take that money and spend it now.”

Contact student politics reporter Melissa Dilley at [email protected].