_$ and Know: Economics with Elias Tezapsidis

By Elias Tezapsidis

Regardless of our fields of study and interests, there is a crisis that we have been hearing a lot about. You can leave the Botox aside, I am not talking about a midlife crisis; it is a credit crisis. Our credit crisis comes with different names, such as credit crunch (but it isn’t tasty like chocolate) and credit squeeze (but it isn’t a squeeze of a pleasant nature). The credit squeeze is here to linger, but what exactly is it? And how did it happen?The catastrophic condition of the economy started on Aug. 9, 2007, when the European Central Bank and the U.S. Federal Reserve injected $90 billion in risky financial markets. At the same time, consumers in the U.S. and the U.K. were leading lifestyles more luxurious than they could afford, borrowing money to buy homes and indulging carefree spending habits. Asset prices rose due to the willingness of consumers to spend, and lenders decided to relax their criteria for granting loans. Think of the lender as a bad professor: you receive good grades even though your work does not deserve it, you feel great at the start, but the long-term effect is not wonderful. Underwriting standards are like über lenient professors.

Then the housing market started suffering. What is somewhat puzzling is the fact that all people expect to be able to afford houses; it is a cornerstone of the American dream. Not everybody needs to own a house- some of us will have to rent, at least temporarily. Then we can move to our summer mansions in the Hamptons-just give it time. While everyone was wondering how big the housing market losses were, the market’s problem was the same one we face on bad Saturday nights, on the nights we walk home by ourselves: lack of confidence. Banks stopped providing loans to other banks and eventually became more reluctant to lend to their customers. The basic concept of the credit crunch is that borrowing became a hustle- harder and more costly. When credit is cheap and easy (think Britney Spears during the 2003-2004 “Toxic” era) the U.S. and the U.K. economies were flourishing.

The first companies to suffer from this bad crunch were financial institutions that had an active role in mortgage lending, such as Bear Stearns and IndyMac. IndyMac is a great name for Macalester students’ preferred bank; it is too bad it collapsed this summer. Other firms influenced in a very negative way included AIG, Lehman Brothers, Merrill Lynch and Washington Mutual.

-Hopefully the problem of liquidity will be solved via the bailout plan, but now governments have to ensure that the lenient professors do not get tenure; financial institutions that provide loans in a too generous manner should be discouraged from doing so to invigorate the economy. In the meantime, the only thing you can do to help the economy with the liquidity problem is to spend. Therefore, what I have to suggest for us to do as citizens to protect ourselves from the financial crisis of 2007-08 is to achieve our high spending goals. My therapist says it’s very normal.