By Alex Park

These days, it is fair to say that Macalester has one of the better economics departments among small colleges in the United States. Having taken 11th place for quality of program and seventh place for faculty research among top liberal arts colleges in a 2001 study by researchers at Claremont McKenna College, it’s not hard to see why the department continues to attract a wide range of students from around the world year after year. Nonetheless, with so many F1 student visa-holding international students whose very foothold in the country not long after they graduate will depend on securing a job, perhaps it is worth asking if with all the talk of a crisis in the American marketplace there’s any worry among some of them about being employed come graduation day.

The short answer is, well, there is.

“I’m a little worried about getting jobs when I graduate” said Sid Vyas ’09. Demand for entry level candidates in the banking industry is related to market activity, and so if things are slow, there may be fewer jobs on offer for us.”

Like most international students at Macalester, Vyas has an F1 student visa which allows him to stay in the country one year after graduating. After that, he expects to have a job at a company in the finance industry which will sponsor an H1 work visa and allow him to stay in the country from then on. With no job, and no sponsorship, he would be forced out of the country after his student visa expired.

So how realistic is that prospect? For anyone not intimately familiar with the nuances of the economy, it can be hard to interpret how damage to specific areas of the market affects all the others, to what degree, and how that translates to prospects for jobs and internships in any of those sectors.

The good news is that despite how much the word “crisis” is tossed around in the media, what is happening now in the marketplace does not mean that the whole economy is melting down. But while that might be comfort to some, the reality is more complicated than merely that, and more importantly, the future is still rather ambiguous.

Sophisticated, large-scale economies like that of the United States are built through a complex system of trade and finance with various “sectors” or “markets” creating relationships between the two that constitute the building blocks of that system. At the core of the housing market, for instance, where the current dilemma finds its root, is a relationship of exchange between aspiring home-owners and realtors. Home buyers offer money in exchange for a certain product, in this case, a house.

Since few first-time home owners have enough cash on hand to pay for a house up front, they rely on banks to front them the money so they can pay off the debt over time, with an interest rate that later constitutes the bank’s profits. It’s an old system, and for a while it worked without a glitch, so long as the person who borrowed the money was the one to pay it off, and paid it off to the firm they borrowed the money from.

But a few years ago a change occurred in the way that mortgages could be paid off, which suddenly shifted that fundamental relationship at the crux of the housing market ever so slightly. People who a generation earlier would not have been able to take out mortgages suddenly could, and for what appeared to be a relatively low interest rate. The resulting debt, instead of being kept within the bank itself, was bundled up and sold at bulk rate further up the chain, until, finally, the big and powerful Wall Street firms such as Merrill Lynch, Citigroup and others starting buying the bundles of debt for themselves, and riding the wave of easy money that they promised to provide.

For Wall Street, it meant a lot of small debt that would theoretically translate into big money. But the relationship between borrower and lender had become too convoluted and the terms of the agreement got adjusted to make up the profit; the interest rates went up. But back in the suburbs and small towns across America, the so-called “sub-prime” borrowers who had originally taken up the loans found that they could no longer pay them, and Wall Street learned that its multi-billion dollar investment had suddenly turned to nothing; it was all “bad debt,” like a basket full of promises that weren’t going to be kept. That’s when O’Neal and Prince both lost their jobs.

According to Garry Krueger, chair of the economics department, “When you get a lot of bad debt, you get bankruptcies, foreclosures, and restrictions on lending” – all of which stalls the economy. “Bad debt,” he says simply, “is bad.”

Think of an economy as a body. Each sector is like an organ, and each firm is like a cell. When bad debt hits, it acts like a malignancy in a group of cells, eventually spreading to the whole organ. Naturally, some firms get hit hard. The weakest and least diversified die completely, and others run the same risk depending on how close they are to the crisis’ epicenter, and how strong they are.

What was unusual about this crisis, and the reason it’s making the headlines that it has, is that Wall Street’s investment banking firms were so close to the center, and therefore so heavily affected.

Nonetheless, the big Wall Street firms are strong enough to survive anyway, even without scaling back employment.

“So far [the crisis] hasn’t seemed to have effected I-banking as much,” said Krueger. “The real damage hasn’t fallen on Wall Street just yet.” Statistics from this year’s graduating class would seem to agree. This year, Citigroup is hiring three Macalester grads while two more are going to Merrill Lynch. But the panic is hitting more than just those firms. How does that affect the job prospects of those just entering the financial industry?

Realistically, that’s not the question we should be asking. Since everything within the economy is theoretically affected by everything else, it’s fair to say that the crisis will affect the job market. The question is if will affect it enough to cause firms to cut back on their hiring quotas, and if so, which firms, in what sectors, and when.

In the past, some Macalester graduates have gone on to finance jobs in the housing sector specifically at companies like GMAC Residential Finance in Minneapolis. This year, as far as jobs go in that area, Krueger says plainly “that’s out.”
But that’s just one sector.

As with any financial crisis, the effects of this one on employment are only immediate within the sector where the crisis started, according to Krueger. It may affect others later on, but how and to what degree is currently not known, even by the smartest brains in the business. Like a malignancy, how much the effects have spread within the finance industry is largely uncertain until the real damage has already occurred.

“We had heard commercial banking had not been affected, and investment banking had not been affected,” Krueger said. “But that could change.”

If it does, the affect will be felt later rather than sooner in the job market. As bad as the economy looks this year, “It will probably end up being slower next year,” Krueger said. How that changes job prospects for econ majors from the class of ’09 just entering the finance industry then like Vyas remains to be seen.

Special thanks to Varun Dutt for his consultation on this story.