2008 Woodie Awards
World markets suffer blow after Bailout approval
NYSE suffers worst
Brianna Conway
Issue date: 10/10/08 Section: News
Last Friday, President Bush signed a $700 billion plan that will bail out the nation's banks and get the economy up and running once again. The market saw its biggest one day drop in history when the bill first went to House members and wasn't passed. The Dow Jones dropped 778 points as stock holders quickly took their money out of the markets.
But what exactly does this all mean? Why did it happen and who's behind it? What happens now?
When asked to describe this historic catastrophe in simple terms, Associate Professor of Economics Cullen Goenner laughed. "To say it's so simple is relative," he said, "I would not explain this to a ten-year-old." But for the average college student, here's the breakdown.
What happened
When banks give out loans and mortgages, their money is tied up until the borrower pays it back. "The banks want more action with their money," says Goenner, "They don't want it tied up in illiquid loans."
In order to free up their money again, banks sold off the loans to entities such as Fannie Mae and Freddie Mac. These are government sponsored enterprises. Once these entities paid back the loans to the banks, the banks were then able to turn around and give out more loans and mortgages.
When real estate properties began to decrease in value, homeowners were forced to foreclose on their homes and for some, declare bankruptcy. With an unpredictable economy and the ups and downs of real estate, loans were eventually difficult to determine the value of.
There were trillions of dollars out in mortgage loans. Banks, insurance companies, investment companies, bodies such as Freddie Mae and Freddie Mac all bought up those mortgage loans.
"They purchased all the mortgage loans, held onto them, and then one day woke up and couldn't determine the value of those loans," Goenner says, "People became scared. Nobody knew how many people would fail to pay back their loans because nobody knew how bad the market would get."
But what exactly does this all mean? Why did it happen and who's behind it? What happens now?
When asked to describe this historic catastrophe in simple terms, Associate Professor of Economics Cullen Goenner laughed. "To say it's so simple is relative," he said, "I would not explain this to a ten-year-old." But for the average college student, here's the breakdown.
What happened
When banks give out loans and mortgages, their money is tied up until the borrower pays it back. "The banks want more action with their money," says Goenner, "They don't want it tied up in illiquid loans."
In order to free up their money again, banks sold off the loans to entities such as Fannie Mae and Freddie Mac. These are government sponsored enterprises. Once these entities paid back the loans to the banks, the banks were then able to turn around and give out more loans and mortgages.
When real estate properties began to decrease in value, homeowners were forced to foreclose on their homes and for some, declare bankruptcy. With an unpredictable economy and the ups and downs of real estate, loans were eventually difficult to determine the value of.
There were trillions of dollars out in mortgage loans. Banks, insurance companies, investment companies, bodies such as Freddie Mae and Freddie Mac all bought up those mortgage loans.
"They purchased all the mortgage loans, held onto them, and then one day woke up and couldn't determine the value of those loans," Goenner says, "People became scared. Nobody knew how many people would fail to pay back their loans because nobody knew how bad the market would get."
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