CC’s Expert Series: Understanding The Economic Situation

We’ve sorta been freaking out lately about this whole economy thing. What the hell is going on? How bad is it? Should we start stocking up on non-perishables?

Depending on what channel we are watching, or what paper we are reading, we are hearing very different things. Most of which we do not understand.

So, we at CollegeCandy decided to bring in an expert: a VP of an Investment Banking Firm. He knows his stuff and he’s gonna break it down for us in ways we can finally understand. Pay attention; he offers great advice for us college ladies for saving, spending, and not getting depressed.

(Note: We had so many questions that it was just way too much info for a single post, so we will be breaking this one down into two. Come back tomorrow at the same time to find out the rest!)

CC: We keep hearing the words “Recession” and “Depression” – What’s the difference between them and which one are we REALLY dealing with now?

VP:The market, especially now that it has been globalized, is very cyclical. It goes through growth periods and reduction periods. A recession, in its most simple terms is an extended and significant contraction of the market that is evident in several indicators that are generally accepted as representative of the market. The REASONS for contraction are endless; everything from housing to taxes to the results of Rose Bowl affect the market, but it is important to note that a recession refers to SIGNIFICANT losses across the country for over 1 quarter (3 months), but – this part is important – it should be visible in the GDP. A depression is simply a sustained recession.

We are not in a depression, no where near, not even close. We are not really in a recession because there has not been effects throughout the gamut of indicators that people rely on to say, “Oh yeah – sh*t – we are in a recession.” We are going through a “market correction,” which is what people say when we are heading into a loss period but either don’t want to say recession, or feel that the losses are limited to one area. In this case, real estate and finance.

CC: What is coming next for this country – worse news? More bank closings? More housing crises? …Better news?

VP: It is going to get a little worse. There is still a lot to give back, but it will continue with banks and mortgage partners. No one really knows how deep the mortgage issue is because, thanks to creative accounting, you can hide stuff like that for a year or two. Here is the problem: the government bailouts. What this does is prevent people from “learning” from their mistakes. Fannie Mae and Freddie Mac were pretty much government organizations to begin with, but once the government gets involved it deters foreign investment.

Here is the short version: I am a Chinese Commercial Investor, I bring in $1B of investments to the US market. But when the government nationalizes AIG, my equity in that company is taken over by the government. My ownership basically disappears. So the $1B I started with is now $500M. Yes, the US market is one of the strongest in the world, but why should I risk my money here when Japan is much more stable and uses more conservative business practices? If China were to pull their money from the US market, even a small portion of it, we are f–ked, and the value of the American dollar will drop.

CC: How do you think college students are going to be affected by this crisis?

VP: It is going to be more competitive during the job search. If I can’t buy a house, college kids are f–ked when it comes to buying real estate in ANY major market. Rent will go up slightly, because while the real estate market corrects itself owners will take advantage of the rental markets stability.

CC: Is the Bush administration directly to blame for this economic crash? Is Wall Street? What about greed?

VP: Don’t get me wrong – I didn’t vote for Bush, but his strategy had nothing to do with this. Look to the Fed, look to average stupid people and look to the people who lent money to the mortgage industry. You can’t even really blame the mortgage brokers because if someone lends you money with no guidelines, you are going to get creative.

The Fed should have taken more control over the interest rates – they were too low for too long. Average stupid people said, “Oh, I make $20,000 a year, you will give me $1M to buy a home? Whoohoo, let’s head to Sizzler – on me!” And the lenders wanted to see big returns and knew that they could sell high-risk mortgages across the world. Once people stopped buying them, the problems backed up into what we are seeing right now.

CC: Why is the job market so sh*tty?

VP: The job market is sh*tty because employers are scared that people will stop spending money. Pure and simple. As long as people keep spending money, the economy moves. Furthermore, companies are afraid that they won’t be able to borrow money to grow. Many banks and lenders are not willing to lend to anyone right now.

Doesn’t it all seem a bit clearer now?! We’ll finish talking to the VP tomorrow to get the rest of the story and more advice for ways we can protect ourselves!