The mounting economic crisis, both domestic and international, has prompted concern and confusion from the general public. Moreover, mounting monetary problems in the Commonwealth have resulted in significant state budget cuts to the College - seven percent of proposed cuts so far.
The Government Fix
The iconic symbol for the current crisis has been the “Emergency Economic Stabilization Act,” more commonly referred to as the federal “bailout” plan, which was enacted on October 3. The plan provides up to $700 billion to the U.S. Treasury Department to stabilize the economy - to most likely purchase bad mortgage-based assets from banks.
However, this economic bailout plan did not become a law easily. The first version of the bill was voted through by the Senate but was killed in the House of Representatives by a vote of 228-205 on September 29. A revised version, amended by the Senate to include “sweeteners” and gain support for the bill, passed in the Senate, by a vote of 74-25, and subsequently in the House, by a margin of 263-171.
The act, signed into law by President Bush just hours after the House vote, established the Troubled Assets Relief Program. The program, known as TARP, seeks to stabilize the U.S. banking industry by relieving banks of their bad mortgage assets.
“The broad authorities in this legislation, when combined with existing regulatory authorities and resources, gives us the ability to protect and recapitalize our financial system as we work through the stresses in our credit markets,” said Treasury Secretary Henry Paulson, Jr.
Senators from Virginia, retiring Republican John Warner and Democrat Jim Webb, both voted in favor of the bailout act. In his remarks on the Senate floor prior to the vote, Warner noted the severity of doing nothing in a time of crisis.
“My careful deliberations on this legislation and my understanding of the economic problems facing our nation lead me to believe that the consequences of not taking this action poses an ever greater threat to our economy and to all Americans,” Warner said.
Webb, in a statement released following the passage of the Senate bill, echoed Warner’s sentiments of the dangers of not taking action and also looked to stabilizing the economy beyond the bailout package in the future.
"Going forward, I will work aggressively with members of Congress from both sides of the aisle to ensure that this legislation is implemented fairly, and in a way that safeguards the American taxpayer,” Webb promised. “Equally important, the next Congress must restore to our financial system a regulatory structure that will prevent this terrible chapter in American history from ever happening again."
Representative Rob Wittman, a Republican from the 1st Congressional District, which includes Williamsburg, voted against the Emergency Economic Stabilization Act. In his statement, Wittman explained that he had not supported the plan because he believed it put taxpayers in too much risk.
“I have argued over the last two weeks for a bill with much less taxpayer exposure and substantially more financial sector involvement,” explained Whitman. “I believed we should focus our efforts to develop more of a ‘work out’ and less of a ‘bailout.’ Ultimately, the Emergency Economic Stabilization Act of 2008 fell far short of my goals and I could not support it.”
Economic uncertainty has undoubtedly come to Virginia. Governor Timothy M. Kaine recently announced that the state was facing a $2.5 billion shortfall for the two-year budget covering fiscal years 2009 and 2010. Kaine has suggested a series of cuts that include slashing funding at institutions of higher learning throughout the Commonwealth. Virginia General Assembly law requires a balanced budget each year. The state is also facing major transportation costs and problems.
Here at William and Mary, Kaine ordered a seven percent budget cut, resulting in the loss of $3.4 million in state funding for the fiscal year that runs through June 30, 2009. President W. Taylor Reveley, III noted the severity of such a loss in a campus-wide e-mail, especially in light of the loss of $2.7 million in state funding last year.
Hitting the College Wallet Hard
The impact of the budget cuts are already felt - in the form of a hiring freeze on campus. Planned salary increases are also on hold. However, Reveley conveyed his intentions to avoid layoffs as long as feasibly possible.
“Bad news from the state has been expected,” said Reveley, “and we have been planning for it. Before final cost-saving measures are put in place, there will be campus forums in the next few weeks to get your thoughts on funding priorities.”
College Vice President for Finance Samuel Jones explained in a memorandum to Reveley that Kaine’s guidance in dealing with the loss of state money included requests that no mid-year tuition increases or reductions to financial aid be implemented.
Jones noted that the College has been proactive in already reducing operating costs by approximately one-third of the demanded cuts. However, he also noted that the College should prepare for these budget cuts to become permanent, not temporary, as Kaine shifts his attention towards the budget for 2010.
The high tensions resulting from an uncertain economic future prompted the College to hold a forum on the state of the economy on October 15.
“Understanding the Current Financial Crisis” featured a panel of professors with backgrounds in business, law and economics. Each panelist presented outlooks on the state of the economy as it pertained to his area of expertise. Collectively, the panelists fielded questions from the audience, comprised of area community members and students.
Brinkley-Mason Professor of Economics and Finance John Boschen focused his remarks on the housing boom and bust and how it began the current economic crisis. The solution, according to Boschen, is for housing prices and income levels to realign.
“Sooner or later - and this always happens with housing prices - they have to come back in line with the growth of income,” said Boschen. “If that’s true, then when housing prices decline, I would say roughly 12 to 16 percent more, they’ll be back in line with historically what the ratio is between income and housing prices.”
Panelist Till Schreiber, assistant professor of economics, told audience members, “Not all is lost. I doubt we’ll see anything like another Great Depression.”
Keeping interest rates low, prompting investment in other sectors, should help the economy recover, Schreiber said, though he predicted that unemployment rates will rise two percent in the next year, creating additional woes.
Eric Kades, professor of law, was also confident that the economy would recover, however his remarks also focused on a long-term projection.
“My prediction is, in the end, five years from now, the law will not have changed. So ten years from now we may be meeting in this room again,” Kades said.
Fellow panelist Richard S. Reynolds and Associate Professor of Business John Merrick focused on the TARP program created by the Emergency Economic Stabilization Act. Merrick was particularly keen on creating what he called “truth squads” to go out and discover all of the bad assets the banks have.
“The vision behind that is that you clean them up, and they will be able to go out and raise new capital because they will be transparent,” Merrick said.
The panelists’ optimism, while not sugar-coating the seriousness of the crisis, left many in attendance reassured that it will not become a full blown depression.
While the blows of the crisis have had crippling impacts on financial markets worldwide, a trickledown effect has yet to really permeate the lives of many William and Mary students.
Chris Lettich (’11) has not seen any drastic changes to his spending habits as a result of the economic crisis. “I still go out to dinner and buy things that I like despite the state of the economy,” said Lettich.
Lettich and others point to the isolation factor of the college experience, especially in terms of the top college expense: food. Because many students are on one of the meal plans where a swipe is all it takes to get food, many don’t feel the price increases that have come about as a result of the worsening economy.
Katie Moody (’11), who has cut back on going out to eat, agrees that the convenience and set prices of a meal plan factor into her spending habits.
Both Lettich and Moody agreed in thinking that the economic crisis will have a bearing on the presidential election, especially considering that the winner will inherit the weakened economy and associated problems.
“The next president will have to deal with it,” Moody said.
While the individual impact of the worsening economy may have yet to be substantial for the average college student, most can point to the most important impact on the so far: “our state-funded budget cuts,” said Megan Hermida (’11).
It is that measure that will likely create the most lasting legacy of the 2008 economic crisis on our community at the College.
This piece originally appeared in the November 2008 issue issue of The DoG Street Journal.