Proposed $700 Billion Bailout Worries Elon
Short term remedy and long term implications cause pause
By Hannah Williams
Sept. 24, 2008
Elon, N.C. - The proposed $700 billion bailout of U.S. financial firms raises concerns of practicality and feasibility at Elon. Federal Reserve Chairman Ben Bernanke hopes the plan will ease financial turmoil and restore faith in U.S. markets.
Tom Frick updates the financial information at the Reed Finance Center at Elon University.
“Wall Street has changed more in the last week than it has in the last half century,” said Tom Frick, a business finance and economics major at Elon University who works in the Reed Finance Center.
Frick supports the effort as a preventative measure and expects that the $700 billion plan – an equivalent of $2,333 per American – to preempt a collapse of the financial sector will be less costly than repairing a failed economy if the problem festers.
“Nobody likes to hear that taxes are going up,” said Mike Dula, Elon town manager. He said most taxpayers would be resistant to any new taxes, especially those due short-term.
Dula said a failed economy, however, would hurt Elon more than new taxes to stabilize the economy.
Elon’s main tax revenue is from residential taxes. Dula said with the current economy and waive of foreclosures, Elon has almost no residential construction.
Dula approved the effort behind the bailout. “I don’t think that letting it take its own course is probably a good thing.”
Stephen DeLoach, department chair of economics at Elon University, said the general idea of the plan is right, a needed effort to infuse liquidity into the financial markets.
“We don’t want banks and financial institutions to stop loaning money, because the main groups in the economy that borrow significant chunks of money are businesses,” DeLoach said.
He explained, “If businesses can’t borrow money, they’re going to go under. Then we lose jobs. Etcetera, etcetera.”
DeLoach’s qualms with the bailout are in the details. The apparently no-strings-attached plan to salvage the U.S. financial institutions is not the best solution, DeLoach said.
“If we, worst case scenario, buy $700 billion dollars of bad debt, that $700 billion will now get added to the national debt, which will eventually cripple the economy. Or we’re going to have to pay higher taxes, which also cripples the economy,” DeLoach said.
DeLoach said an alternative to the buyout is purchasing stock in the institutions to have a stake in their recovery, following the model Sweden set when it faced a similar situation.
“We could save ourselves hundreds and hundreds of billions of dollars, if we demand stock in return for taking on this bad debt, which basically is not going to get paid off,” DeLoach said.
Student Government Association President Chase Rumley said that private investors should get involved, citing Warren Buffet’s recent $5 billion investment in Goldman Sachs.
“I don’t think the government bailout is going to do anything,” Rumley said. “It’s just going to make us a more like a socialized economy.”
Mike Duff, a junior from Boston taking a finance class at Elon, also expressed concern about the long-term implications of the plan.
“The economy is in a really bad slump right now, and it’s almost getting to the point where I don’t know if we’re ever going to be able to come out of this recession for a while,” said Duff.
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