Sep 23, 2008

CAUTION: Financial roadblock ahead

by Katy Palmer

 “Request declined due to insufficient funds.”

For college students, such a message on an ATM is not far-fetched. But soon they may receive this response when applying for a loan.

While eyes remained locked on the continuing coverage of Hurricane Ike, pure panic engulfed Wall Street. Less than 24 hours apart, two major financial security firms met their fates. Simultaneously, an insurance giant nearly imploded.

To begin the domino effect, a German-based company, the Lehman Brothers, filed for bankruptcy.

Soon after, Bank of America purchased Merrill Lynch, a company the New York Times considered to be an influential Main Street stockbroker.

The main reason these two institutions had to make such decisions was due to a history of bad mortgage finance and real estate investments, reported New York Times columnist Andrew Sorkin.

“It’s fear. You don’t know who… might not be getting their money anymore. It’s a domino effect. You never know who might fall next,” said senior money-market trader Imke Jersch, from Norddeutsche Landesbank Girozentrale AG, Germany’s fourth largest bank, in the New York Times article.

When I first heard about these stories, I didn’t understand their implications for my life. I am not a customer of Bank of America, and the only reason I recognized the other names was due to their TV advertisements.

But, I do have loans. The expense of attending a private college is out of the reach for many middle-class families. We apply for financial help with the assumption that the loan company can provide the funds. But if the economy continues down in this path, such money may not always be guaranteed.

Since the Sept. 14 collapse, banks around the world have pumped more than $210 billion into the financial system to alleviate the credit freeze.

After the destinies of Merrill Lynch and Lehman became public, the future of insurance institution American International Group (AIG) hung in the rafters. Due to credit crisis, AIG begged the Federal Reserve for a $40 billion dollar loan.

However, the Federal Reserve cannot always be the life support of the economy. Eventually, the banks will have to breathe on their own. The weaning process needs to start in order to break the economy of its dependence on federal bailouts. At some point, the favors must end.

For graduating college students, it is not uncommon to have to borrow money to get a jump-start on life. But where do you go if the banks simply run out of money? As for me, I’m going to tell my parents not to dump my bed just yet.

 


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