News Cut: September 30, 2008 Archive

What to expect from economic apocalypse

Posted at 11:21 AM on September 30, 2008 by Bob Collins (22 Comments)
Filed under: Economy

The Web site, The Consumerist, has put together a list of 10 things to expect from "the new post-apocalyptic economy."

Number 1 is worth considering: A much less leveraged economy -- Cash will be the thing to have.

What would things look like if we have to pay cash for everything, once credit cards dry up (maybe they'd eliminate the grace period and start charging a finance charge from first dollar)?

I've got two, and you can add yours in the comments section.

-1- More lottery ticket sales, and sales of car air fresheners and other junk. Why? Pay at the Pump, baby. It'd be history. You'll have to actually go inside the convenience store/gas station and wait in a long line of other people. From boredom, you'll start picking up little trinkets and trashy things that the stores know you'll buy on impulse. They're smarter than we are. Oh, and there'll still be people who want to pay with a check who won't have filled any of it out while standing in line.

-2- No mail today? If there's no credit cards, there'll be no more credit card mailings. I got four yesterday, alone. State Farm offered me 0% on balance transfers until July 2009. Hey, here's an idea, bailout voters in Congress, stick a provision in that puppy when you revote this week that forces credit card solicitors to put the true cost of this scam right on the front page. Outlaw asterisks.

Capitol One (how does Capitol One have any money after the cost of sending at least three credit card solicitations a week to every American and every household pet?) offered 0% on purchases and transfers until 2010.*.

Life after credit, what's it look like? Be funny, now, we all need a good laugh.

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Is student debt a coming economic crisis?

Posted at 2:59 PM on September 30, 2008 by Bob Collins (2 Comments)
Filed under: Economy

Is a perfect storm about to swamp the boats of graduating college seniors? A study from the Accounts Receivable Management industry suggests so.

Credit card operations are the biggest money-makers for banks and as a story recently by MPR's Martin Moylan pointed out, banks are working the college market hard. Meanwhile, a significant number of students are using credit cards to pay for tuition, which is rising faster than the rate of inflation.

There's plenty of risk in doing so, according to the Kaulkin Ginsberg Company report. It says 31 percent of college students polled said they didn't worry about debt, because they could pay back outstanding balances once out of school and earning a regular paycheck. Twenty-three percent chose to ignore overdraft penalties and the prospect of months of repaying a debt for a moment of fun.

Yeah, about that job thing, students, there's something we need to tell you: there aren't any. According to the report, what few summer jobs were available for college students in the past, were taken instead by adults who picked up extra part-time work to help their own struggling finances. Last July alone, the report said, 308,000 individuals entered into the part-time work for this reason.

Higher tuition and associated costs, fewer jobs, and now the credit crunch. Over the summer, more than two dozen banks stopped private lending to students.

Up to now, about 10 percent of student borrowers depend on private loans. With major lenders tightening credit, the report suggests 1 in 4 college students will be putting college costs on a credit card and may find it very difficult to pay it back.

But the National Association of Student Financial Aid Administrators said in a campaign over the summer that "financial aid will be available to students. The credit crunch caused by troubles in the real estate lending industry has no effect on most financial aid including (but not limited to) Pell Grants, Federal Work Study, and education tax benefits."

That's not quite the case, according to a story this week in Time, which says since the summer of 2007, 137 lenders have stopped funding federal loans, and 33 have suspended private programs.

"Part of that had to do with a cut in federal subsidies, but part was directly related to the credit crunch -- issuers that pulled out tended to be those that packaged and resold loans, a market that has evaporated.

Students at community and technical colleges, especially institutions that are for-profit, are having the toughest time of it. The reason: those students are more likely to use private loans (whose credit standards have tightened), and lenders under profit pressure are less willing to write loans for shorter, one- and two-year programs -- especially at schools with historically high default rates."

"Last month, a student who was looking for a college loan qualified with a co-signer," a spokesman for JP Morgan Chase said. "A year ago that student, with a marginal credit history might have qualified on their own."

"Any sort of shortfall in their tuition they're going to have to make up either by borrowing from their parents or using their credit card as a bridge loan," Dimitri Michaud, who wrote the Kaulkin Gisberg report said. "I think the biggest pain will probably be in nondirect educational expenses; you might see students struggling with their room and board or how best to pay for their meal plans or books and supplies."

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Bungee investing

Posted at 6:23 PM on September 30, 2008 by Bob Collins (3 Comments)
Filed under: Economy

This must be what bungee jumping is like. Way down, a little up, down more, up less. The Dow 30 on Tuesday jumped 485 points, a day after diving 777 points.

When the "financial meltdown" became public last Monday, the market plunged 540 points in the first two days of trading, then ended the week down only a couple hundred points.

Is it really worth getting all hot-and-bothered -- or giddy -- on a day-to-day basis?

On the first day of trading after September 11, the Dow dropped 684.81 points (at the time only the 14th worst decline ever). It went on to lose a total of 1,369 points that week, and got half of it back the next week. Within two months, the Dow was back to its previous 9/11 levels, and then some. All that worrying that it was the end of the world, and it wasn't even the end of the quarter.

After 9/11, the biggest one-day drop was February 27, 2007, a day when the Taliban tried to assassinate Dick Cheney. The Dow dropped 416 points. It snapped back 52 points the next day. It took a little over a month to return to the previous levels.

Here are the other big point losses

April 14, 2000 -617.78 . It went up 276 points the next day and blasted back to its previous level within 6 days.

October 27, 1997 -554.26. It regained 337 points the next day, and was back to its old self two weeks later.

August 31, 1998 -554.26. The market regained almost 300 points a day later, and reached its previous level two weeks later.

October 19, 1987 -508. It regained 288 points over the next two days, but it took 13 months to return to the level the market was at.

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