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ECHO EDITOR-IN-CHIEF
Financial woes arent just
on Wall Street these days.
N.C. Central University is
joining the club, along with
the 15 other North Carolina
public universities.
About $4.4 million from
NCCUs 2008-2009 certified
budget of approximately
$109,803,916 has been cut.
Alan Robertson, vice
chancellor for administra-
tion and finance, said that on
Oct. 9, an e-mail was sent
from Gov. Mike Easley and
the Office of State Budget
and Management to the UNC
General Administration
authorizing budgets from
N.C. agencies be downsized
by 4 percent to maintain
financial stability in an
already shaky state and
national economy.
Ive been in this field for
more than 30 years, and I
have never seen anything
like this before, Robertson
said in regard to the current
economy.
The first mandate came
on Sept. 18 from state budget
director Charles Perruse,
stating that due to the slow-
down of the national econo-
my, Easley recommended
lowered revenue expecta-
tions for all state-wide agen-
cies.
In order to reach this goal,
Easley first proposed a 2 per-
cent cut in authorized budg-
ets for state agencies.
We are not immune from
the nations economic slow-
down, Perruse said in the
letter.
(We) are implementing
measures now to give as
much as possible to manage
revenue shortfall should it
arise.
Perruse also stated that
Easley is attempting to
ensure that N.C.s budget is
stable by June 30, 2009.
Campus Echo
Campus. . . . . . . . 1-4
Beyond . . . . . . . . 6-7
Photo Feature . . 8-9
A&E . . . . . . . . . . . 11
Classified. . . . . . . 12
Sports . . . . . . . . . 13
Opinions . . . . . . . 14
OCTOBER 15, 2008
Opinions
Want to understand the
financial crisis? Its the
Federal Reserve,
argues Roundtree.
Page 14
N O R T H C A R O L I N A C E N T R A L U N I V E R S I T Y VOLUME 100, ISSUE 4
1801 FAYETTEVILLE STREET
DURHAM, NC 27707
919 530 7116/CAMPUSECHO@NCCU.EDU
WWW.CAMPUSECHO.COM
BY SADE THOMPSON
ECHOSTAFF REPORTER
Since 2001, Jorim Reid,
director of bands, has led
N.C. Central Universitys
Sound Machine in a tri-
umphant rendition.
Yet when funds show no
sign of increasing, the
music doesnt always make
it to the stadium. And the
instruments dont always
get purchased.
The Sound Machine is
funded by Student Affairs.
The number of students
in the marching band has
quadrupled, said Reid.
The budget has not.
The band did make it to
the Oct. 11 game against the
Presbyterian Blue Hose.
Its disappointing when
we put in 20 hours of hard
work during the week and
cant play at the game, said
Beyond NCCU
How we got into this
mess the financial
crisis explained.
Page 6
Photo Feature
Echo photographer
Sebastian Frances
turns his camera on
the Big Apple.
Pages 8-9
Sports
Eagles are stopped
at the 1-yard line;
now theyre 1-5.
Page 13
On the road, less and less
Tight budget, farther-away games means fewer road trips for Sound Machine
Former Sound Machine assistant drum major Austin Chambers shows the crowd how to get low at the 2004 Aggie-Eagle Classic
Echo File Photo
Budget
cuts hit
home
BY KEVIN G. HALL
MCCLATCHY NEWSPAPERS (MCT)
WASHINGTON The
Treasury Department con-
firmed Friday evening that it
will buy stakes in major U.S.
banks and financial institu-
tions, announcing the bold
move as leaders of the
world's leading industrial-
ized democracies agreed to
guidelines for joint action
but stopped short of taking
coordinated steps sought by
investors worldwide.
The revelation that
Treasury will take nonvoting
stakes in U.S. banks adds to a
growing list of unprecedent-
ed government interventions
into private financial institu-
tions not seen since the Great
Depression.
The list includes the
seizure of mortgage-finance
companies Fannie Mae and
Freddie Mac, the rescue of
global insurer American
International Group with an
$85 billion loan, emergency
lending to several financial
firms, and the direct pur-
chase of short-term promis-
sory notes from U.S. corpora-
tions to bypass clogged credit
markets.
The announcements came
after another turbulent day in
world financial markets, and
after Treasury Secretary
Henry Paulson held an emer-
gency meeting in Washington
with the finance ministers
and central bank presidents
from the Group of Seven,
which includes the U.S.,
Canada, the United Kingdom,
Crisis,
Feds
get bold
n See CRISIS Page 6
Economic slowdown hits
state $4.3 million cut
from NCCU budget
n See BAND Page 2
ELECTION NEARS | OBAMA AHEAD IN POLLS
Washington University sophomore student Nicole Lopez jockeys for the best sign position as MSNBC tapes students before the
vice presidential debate to be held at Washington University in St. Louis, Missouri, Thursday, October 2, 2008.
ROBERT COHEN/St. Louis Post-Dispatch (MCT)
INSIDE
See our Campus
Election Special.
Its in the fold.
I
ts been a long presidential campaign for everyone. Now its almost time
to head to the polls early voting starts tomorrow. The Republicans have
occupied the White House for eight years. Will John McCain make it 12?
Or will Barack Obama make history and become the first African-American
elected to our highest office? Read about it in our special elections section.
Well tell you where and when you can vote. Theres even a sample ballot.
n See BUDGET Page 2
2
Campus Echo
WEDNESDAY, OCTOBER 15, 2008 Campus
N O R T H C A R O L I N A C E N T R A L U N I V E R S I T Y
The NCCU Sound Machine at this years Aggie-Eagle Classic in Charlottes Memorial Stadium.
BRYSON POPE /Echo Staff Photographer
BAND
CONTINUED FROM PAGE 1
So how does this affect
NCCU?
The mandate from Easley
affects public schools, com-
munity colleges and the uni-
versities in the UNC System.
On Sept. 24, Chancellor
Charlie Nelms issued a
University-wide e-mail
explaining the contents of
the mandate from Easley
and outlining the NCCU
administrations plan to
carry out Easleys initia-
tives.
Nelms said the slow-down
in N.C.s economy could be
credited to scenarios
Americans are facing, such
as the credit crunch, bank
failures, high unemploy-
ment and businesses going
under.
This thing has a ripple
effect, said Nelms.
If anyone ever wondered
about the global nature of
the economy, if they need
proof, this is certainly it.
Nelms said that although
the University was not
entirely prepared, he was
not surprised at the cuts.
He said he believes they
are reasonable and that the
University system is general-
ly well supported by the
state.
Any cut is too much, but
its understandable because
this is a situation that is
affecting all of us, he said.
We are going to continue
to do our share.
Nelms approved NCCUs
budget committee recom-
mendations:
All state-funded vacan-
cies were to be stopped as of
Sept. 24.
In order for any vital
University position to be
filled, it must go through the
approval of department
chairs, deans, the provost or
vice chancellor and the
chancellor.
Hiring decisions will be
based on the urgency of the
position and availability of
funds.
As of Sept. 30, the funds
for positions that have not
yet been filled will be seized
by NCCU administration.
Travel and purchasing
decisions should be weighed
heavily.
Purchases should only be
made that are vital to
University priorities.
The Office of State
Budget and Management
will monitor the revenue
position monthly.
The budget cuts may be
lifted when the economy
improves.
BUDGET
CONTINUED FROM PAGE 1
Reubin Ahukanna, a trom-
bone player in the Sound
Machine.
Reid said he has pur-
chased meals and paid for
transportation for the
marching band out of his
own pocket.
He also has purchased
items such as drumsticks,
reeds and sheet music,
often because they were
needed immediately.
Due to scheduled per-
formances, the band cant
spare the time to wait two
or three months for monies
to be approved by the
school.
Price increases espe-
cially gas prices have
also hit the Sound Machine
hard and cut into their abil-
ity to travel to away games.
There was a time where
diesel used to be cheaper
than regular gas, but now it
costs more, said Reid.
According to Reid, it now
costs about $1,800 dollars
per bus per trip, compared
to $600 dollars per bus
three to four years ago.
People have to get out
of the CIAA culture and
mentality, Reid said.
New stipulations come
with transferring to the
Mid-Eastern Athletic
Conference, and the march-
ing band will not be at
every game.
Schools that NCCU used
to play regularly including
Shaw University and
Johnson C. Smith
University, are located clos-
er to NCCU.
But MEAC games, at
schools like Howard
University in Washington,
D.C., and Florida A&M
University in Tallahassee
are farther way.
Reid said that even when
the band is not present,
fans should be excited to
see the Eagles play.
Students should be stu-
dents and pep up the
game, he said.
Reid said he reaches out
to outside corporations,
like Yamaha, for support.
The corporation gave the
Sound Machine equipment
valued at half a million dol-
lars for $100,000.
Regardless of color, religion, or ethnicity, Martin Luther King Jr. believed in equality for all Americans.
Now its our turn to keep his dream of hope alive. Help build The Martin Luther King Jr. National
Memorial on the Mall in Washington, DC. Your support will help future generations learn that
without the tireless work of Dr. King, the world they live in could be a very different place.
WASHINGTON DC CALL 1 888 4-THE DREAM or VISIT BUILDTHEDREAM.ORG
These shoes were found 46 yards from
the crash caused by a drunk driver.
Carissa Deason was thrown 30 yards and
not even her father, a doctor, could save her.
Friends Dont Let Friends Drive Drunk.
Campus Echo Online
c a m p u s e c h o . c o m
c a m p u s e c h o . c o m
c a m p u s e c h o . c o m
Campus Echo
WEDNESDAY, OCTOBER 15, 2008 Campus
N O R T H C A R O L I N A C E N T R A L U N I V E R S I T Y
3
Book fair fares well
Scholastic Book Fair provides resources for
NCCUs Curriculum Materials Center
Re4
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Just bring this ad
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Jewelry Jeans Purses
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Access Your
Health Career
Undecided about your major?
Want to become a health professional?
Want to attend health career seminars and workshops?
Want to meet recruiters from health professions schools?
Want to meet students pursuing health professions?
If so, find out about the N.C. Health
Careers Access Program at NCCU.
Health Careers Center
521 Nelson Street
Durham, NC 27707
919 530-7128
Barbara S. Moore, Director
Alfreda D. Evans, Program Assistant
BY MIKE
DEWEESE-FRANK
ECHO STAFF REPORTER
N.C. Central Universitys
Curriculum Materials
Center hosted its fourth
consecutive Scholastic
Book Fair Oct. 6-9 to publi-
cize the center and to add
more childrens books to its
collection.
The fair was held at the
Curriculum Materials
Center in the H.M. Michaux
Education Building.
The CMC was originally
located in Shepard Library;
in 2004, it moved to the new
Education Building.
Yash Garg, CMC director,
said the book fair was good
publicity, helping bring peo-
ple to the center and pro-
viding an introduction to its
services.
The Curriculum
Materials Centers primary
purpose is to provide
resources to tomorrows
teachers, said Garg.
The center provides edu-
cational materials for the
teachers training program
in the education depart-
ment.
Angela Terry, CMC assis-
tant, said that the
Scholastic Book Fair went
very well, and is good for
the center. The fair
lets people know that
were here and that we
exist, said Terry.
Besides publicity, CMC
needed more childrens lit-
erature for its collection.
The center now has more
than childrens 1,000 books.
Scholastic will donate
books to CMC based on how
many are sold.
We get to keep a certain
percentage of sales for our-
selves, said Garg.
The Scholastic Book Fair
was not held to raise funds
for CMC, but rather to
receive in-kind donations
from Scholastic.
I dont want to make it a
business venture, said
Garg. I want to make it an
academic venture.
Last year, CMC sold
$1,200 worth of books at the
fair, which resulted in book
donations valued at $550.
According to Garg 30
titles were selected this
year, with a value of $350.
Most of them are educa-
tional titles like Freedom
on the Menu, Birmingham
- 1963 and Hooray for
Reading Day.
Other are storybooks like
The Rabbit and the
Turtle, By the Light of the
Silvery Moon and Old
Bear.
Others acquired include
pre-school titles, such as
Alphabet and Come
Rhyme with Me.
Garg said she strives to
offer a variety of literary
genres, including adven-
ture, science, fantasy,
graphic novels, reference,
history, and picture books.
She said she tries to
choose books for the CMC
collection that will cater to
a variety of interests and
levels of reading.
Garg said, we want good
literature, and describes
herself as being very selec-
tive in choosing not only
what will be available at the
Scholastic Book Fair, but
what titles will be donated
to CMC.
Campus Echo Online ~ www.campusecho.com
Breaki ng news, past i ssue archi ves, adverti si ng i nformati on, and more.
Yash Garg, director of the Curriculum Materials Center, at the
annual Scholastic Book Fair, Oct 6-9.
MICHAEL DEWEESE-FRANK/Echo Staff Photographer
ATTENTION STUDENTS
NOTICE OF HISTORICAL ELECTION EVENT
Tuesday, November 4, 2008
The Durham County Board of Elections will conduct a General Election on Tuesday, November
4, 2008. All of our 57 polling places will be open from 6:30am until 7:30pm.
Races on the ballot will be: US President and Vice President, US Senate, US House of
Representatives, Governor, Lt. Governor, Attorney General, Auditor, Commissioner of
Agriculture, Commissioner of Insurance, Commissioner of Labor, Secretary of State,
Superintendent of Public Instruction, Treasurer, NC Senate 18,20, NC House 29,30,31,55,
District Attorney, County Commissioner (5), Register of Deeds, NC Supreme Court Associate
Justice, NC Court of Appeals Judge (6), District Court Judge, Soil and Water Conservation
District Supervisor, and Tax Referendum.
All registered voters residing in Durham County are eligible and encouraged to vote in this
election. Voters who are currently registered need not re-register. Citizens who have not regis-
tered or voters who have moved or changed other information since they last voted must notify
the Board of Elections by 5pm, Friday, October 10, 2008.
NOTICE OF ONE STOP NO EXCUSE ABSENTEE VOTING
Any Durham County registered voter can vote early---youll receive the exact same ballot as
you would at your precinct on Election day. If you have moved, it is easy to update your
address at any one stop site.
ONE STOP LOCATIONS
Board of Elections Office: 706 W. Corporation St, Durham, NC 27701
NCCU Campus: Parrish Center Meeting Room, 1400 S. Alston Ave, Durham, NC 27707
Duke University Campus: Old Trinity Room, West Union, 114 Chapel Dr, Durham, NC
27708
North Regional Library: 231 Milton Rd, Durham, NC 27712
East Regional Library: 211 Lick Creek Ln, Durham, NC 27703
Forest View Elementary: 3007 Mt. Sinai Rd, Durham, NC 27705
Southwest Elementary: 2320 Cook Rd, Durham, NC 27713
ONE STOP HOURS (SAME FOR ALL 7 LOCATIONS)
Thur-Sat Oct 16-18 9am-5:30pm
Sun Oct 19 12noon-3pm
Mon-Sat Oct 20-25 9am-5:30pm
Sun Oct 26 12noon-5:30pm
Mon-Wed Oct 27-29 9am-5:30pm
Thur-Fri Oct 30-31 9am-7pm
Sat Nov 1 9am-1pm
SAME DAY REGISTRATION-Voters are allowed to register and vote at one stop sites.
It is quicker and easier to register in advance, but if you have not registered you can do
it at one stop with proper identification. (This same day registration is not allowed at the
precincts on election day.)
VOTING IS THE
CORNERSTONE
OF DEMOCRACY
YOUR VOTE IS YOUR VOICE
REGISTER NOW& VOTE
Information regarding registration, polling locations, absentee by mail voting, one
stop hours, or other election matters may be obtained by contacting the Board of
Elections at: 919-560-0700 or www.co.durham.nc.us/elec or 706 W.
Corporation St., Durham, NC, 27701
Campus Echo
WEDNESDAY, OCTOBER 15, 2008
Campus
N O R T H C A R O L I N A C E N T R A L U N I V E R S I T Y
4
NC TEACH an alternative route
BY CARA OXENDINE
ECHOSTAFF REPORTER
Undecided about what you
want to do with your life or
your degree?
NC TEACH, or North
Carolina Teachers of
Education for All Children,
offers students an opportuni-
ty to enter the teaching pro-
fession without a teaching
degree or prior teaching
experience.
N.C. Central University is
one of 12 colleges in the state
that offer the program.
NC TEACH was developed
nine years ago by the State
Board of Education and the
N.C. Department of Public
Instruction and has provided
licenses to more than 1,500
students in 85 North Carolina
counties.
Graduates are hired as lat-
eral-entry teachers, which
means that prior teaching
experience or a teaching
degree is not required, just 24
credits in a specialized area.
Students are allowed to
begin teaching right away,
while taking coursework to
complete their teaching certi-
fication.
Its like a temporary
license or a provisional per-
mit for teachers, said
Katrina Billingsley, NCCUs
site coordinator for NC
TEACH.
The program provides
new, alternative routes to
teacher certification and
enables school districts to
respond quickly and more
efficiently to high-need
schools.
The drawbacks to being
lateral-entry is that you are
learning as you are doing,
says Ragan Spain, a high
school science consultant for
the N.C. Department of
Public Instruction,
Curriculum Instruction and
Technology Division.
They dont have the luxu-
ry of a student teaching expe-
rience, he said.
Often your beginning
teachers are saddled with
more problem kids, lower lev-
els, and lower couses.
Some advantages of enter-
ing lateral entry are that stu-
dents can avoid taking Praxis
I by maintaining a 2.5 GPA
and can start with higher
salaries because of previous
work experience.
Even better, the program
allows out-of-state students to
be eligible for in-state tuition.
Its the local systems that
give supplements that differ-
entiate the pay, he said.
This means that students
must find schools that offer
loan forgiveness programs
and pay incentives.
Teaching is a rewarding
profession, said Spain. One
where your hands actually
shape the future every day.
I doubt it will ever get the
money it deserves, but retire-
ment salaries in N.C. are
among the highest national-
ly.
NCCU offers certification
programs for grades K-12 in
special education, and for
grades six through nine in
math, science, language arts
and social studies.
5
Campus Echo
WEDNESDAY, OCTOBER 15, 2008
PAID FOR BY OBAMA FOR AMERICA
MAKE SURE YOUR VOTE IS COUNTED
VOTE EARLY OCT. 16 THRU NOV. 1
FOR ONE-STOP EARLY VOTING LOCATIONS NEAR YOU
CALL 1-888-NC-EARLY (1-888-623-2759) OR VISIT
6
Campus Echo
WEDNESDAY, OCTOBER 15, 2008 Beyond NCCU
N O R T H C A R O L I N A C E N T R A L U N I V E R S I T Y
BY EDWIN GARCIA
SAN JOSE MERCURY NEWS (MCT)
SACRAMENTO, Calif. Get
ready to remove your fin-
gers from that tiny key-
board while driving.
Gov. Arnold
Schwarzenegger on
Wednesday signed into law
a measure banning
motorists from text mes-
saging and e-mailing while
operating a vehicle.
The law, written by state
Sen. Joe Simitian, D-Palo
Alto, takes effect Jan. 1.
Building on legislation
already helping save lives
in California, I am happy
to sign this bill because it
further encourages safe
and responsible driving,
Schwarzenegger said in a
statement.
Banning electronic
text messaging while driv-
ing will keep drivers
hands on the wheel and
their eyes on the road,
making our roadways a
safer place for all
Californians.
Drivers caught using
their phones to write, read
or send messages will be
hit with a $20 ticket the
first time and $50 on each
subsequent offenses.
CRISIS
CONTINUED FROM PAGE 1
For more information or
to get involved in Campus Ministries
contact Rev. Michael Page at 530-6380 or by e-mail at
mpage@nccu.edu
United Christian
Campus Ministry
525 Nelson Street, NCCU Campus
Michael D. Page
Campus Minister
MID WEEK MANNA
Lunch and Learn Bible Study
Every Wednesday 12:00 Noon to
12:50 P.M.
Old Holy Cross Catholic Church
Guest Lecturers:
Wed., Oct 15 ~, Dr. Herbert R. Davis,
Pastor, Nehemiah Christian Center
Wed., Oct. 22 ~ Minister Tammy
Rodman, Abundant Hope Christian
Church
Wed., Oct.. 29 ~ Wilbur Fletcher,
Evangelical Lutheran Fellowship
Calif. restricts texting, driving
Students, Sign up to join Christian Student Fellowship,
FITT MEN's Ministry or the new Women's Ministry.
Housing values never go down. That simple premise enticed American consumers and Wall Street
to load up on mortgage debt. Plunging home values now threaten to drag down the global economy.
THE BOOM 2000-2006
Clinton and Bush administrations and Congress,
as part of their domestic agenda, push to
increase homeownership from about 63 percent
of U.S. households to 68 percent. Underwriting
regulations are eased to allow more low-income
borrowers to obtain a mortgage.
2000: The dot-com bubble
bursts in March, followed by
the 9/11 terrorist attacks in
2001.
Stock markets tumble.
The Federal Reserve, under
Alan Greenspan, cuts interest
rates 12 times beginning in
January 2001. By June 2003,
interest rates are at a 40-year
low.
New home construc-
tion, existing home sales and
median home values surge.
Lenders use the cheap
money to create ever-more
exotic mortgages, including
adjustable-rate loans with
teaser or introductory rates
as low as 1 percent.
Subprime loans, those
made to borrowers with poor or
risky credit histories, soar from
7 percent of all home loans in
2001 to 20 percent in 2006.
Lenders pool the mort-
gages to sell on Wall Street,
which embraces the real estate
sector and its promise of high
returns.
Credit ratings agencies
bless these mortgage packages
with their safest rating, AAA.
A key assumption: home val-
ues will continue to rise.
Banks, insurance com-
panies, hedge funds, pension
funds and foreign governments
gobble up these supposedly safe
mortgage-backed securities.
Some firms buy insur-
ance policies fromAmerican
International Group and simi-
lar firms to protect them in the
event of defaults.
THE SUBPRIME CRISIS
LATE 2006 TO EARLY 2008
The Federal Reserve raises interest rates in
June 2004, the first of 16 increases. The bub-
ble begins to deflate a year later with the first
wave of foreclosures, a slowdown in new-
home construction and a slide in home values.
January 2006:
Ameriquest Mortgage Co. set-
tles 49-state probe into decep-
tive subprime practices for
$325 million.
April 2006: Fed Chairman
Ben Bernanke acknowledges
signs of softening in housing
market.
Median home sale
prices stall, then fall.
Housing starts to fall.
February 2007: New-
home sales drop 20.1 percent
from same month in 2006.
Sales of existing
homes fall.
The consumer econo-
my stalls as home sales a
key indicator of future con-
sumer spending fall.
Teaser rates give way to
higher monthly payments.
Owners, unable to refi-
nance or sell, start missing
payments.
Foreclosures mount.
The value of those
mortgage-backed securities
sinks.
THE MELTDOWN 2008
Accounting rules require owners of the mort-
gage-backed securities to write down their
value. As the housing market worsens, confi-
dence in the value of any mortgage-backed
security evaporates. Investors are forced to
write off hundreds of billions of dollars.
February: AIG and other
agencies that sold insurance
against defaults have to pay up
and take similar writedowns.
March: Bear Stearns, a
major investment bank and
underwriter of mortgage-backed
securities, runs out of capital and
is sold to J.P. Morgan Chase.
April: New Century
Financial, the second largest
subprime lender, files for
bankruptcy.
Sept. 7: Mortgage giants
Freddie Mac and Fannie Mae,
with more than $5 trillion in
mortgage-back securities, are
taken over by the federal gov-
ernment to avert a bankruptcy
after their market values fell
by more than half.
Sept. 15: Lehman Brothers
investment bank goes bankrupt.
Sept. 15: Merrill Lynch
hastily accepts a purchase offer
from Bank of America to avoid
Lehmans fate.
Sept. 16: AIG is rescued
by the Federal Reserve with an
$85 billion secured loan in
exchange for a 79.9 percent
government stake.
September: Bankers,
unsure of their total exposure
to bad mortgages, raise interest
rates for their best customers
and shy from lending money
to others.
September: Fear of a
deep global recession grows.
September: Saying piece-
meal interventions are not
enough, Treasury Secretary
Henry Paulson and Bernanke
propose a $700 billion bailout
under which the government
would buy and then attempt to
resell mortgage-backed securities.
FROM WASHINGTON . . .
Politicians of all stripes, long preaching the virtues of home-
ownership, resist efforts to tighten lending standards. The American
economy depends heavily on free-spending consumers, and interest
rate cuts beginning in 2001 were tinder for the housing boom.
. . . TOWALL STREET
Banks and mortgage lenders opened the vault to anyone who
had a pulse. Platoons of mortgage brokers canvassed the country,
offering deals that seemed too good to pass up. Wall Street bun-
dled packages of good, bad and ugly loans for eager investors.
. . . TO MAIN STREET
American consumers go on a borrowing binge. They buy
homes they cant afford, use their homes as an ATM and specu-
late in real estate. Some are victimized by largely unregulated
mortgage brokers. When the bills come due, theyre tapped out.
BY KEVIN G. HALL
McClatchy Newspapers
any Americans are nervously watching the
wild swings on the NewYork Stock
Exchange for signs of a Wall Street col-
lapse, but its the opaque credit markets
that matter most right now to consumers
and businesses alike.
These markets can be mind-numbing in their complexity, but
they are vital to corporate Americas ability to fund its daily cash
flow, and to Main Street itself. And theyre the reason why
President Bush proposed the controversial $700 billion rescue plan.
Here are some answers to questions about the credit markets.
Q: Whats the credit market?
A: Its not one but several interconnected markets. Some of
these markets involve banks lending to each other at overnight
rates, while others involve issuance of a variety of debt instru-
ments such as bonds that carry a short lifespan.
Q: Why do banks need to provide each other
overnight credit?
A: The Federal Reserve requires banks to keep a certain
amount of cash in reserve on the premises or in one of the Feds
district banks. The amount is actually a ratio to the level of
deposits the banks have. The required ratio of reserves-to-deposits
goes up and down, so banks lend to each other to cover this ever-
shifting target.
The Federal Reserve establishes a target for the rate that banks
charge in overnight lending called the Fed funds rate. This tar-
get is set through the Feds rate-setting Federal Open Market
Committee, which normally meets eight times a year. But the
actual overnight lending rate is set by the banks themselves.
The Feds target interest rate for overnight lending has been at
2 percent since April, but the market-set rate actually shot up to 7
percent Tuesday morning before tapering off to 3 percent. Thats
still a full point above the Feds target, and it means banks are
hoarding cash and only willing to part with it for a high price. The
result: They borrow less, and thus lend less.
Q: How does this translate to problems on Main Street?
A: Commercial banks take a cue from the Fed funds rate when
they set the prime rate, which is the interest they charge on loans
to customers with the best credit. The prime rate is usually 3 per-
centage points higher than the Fed funds rate, but banks do set this
rate based on conditions on the ground. Changes in the Fed funds
rate affect short-term interest rates, foreign exchange rates and
indirectly the price of goods and services and even employment.
So overnight rates are a vivid, immediate expression of the con-
fidence or lack thereof in credit markets. When nervous banks
charge each other higher overnight rates, it ripples across all kinds
of lending in the economy.
Q: How is this credit crunch affecting corporate
America?
A: Corporations dont have piles of cash sitting in bank accounts
to pay their bills. They issue IOU-like short-term notes, sometimes
called commercial paper, that often mature in 30 days. In some
cases, the collateral on these notes is a companys inventory or other
assets, so these bonds are also called asset-backed commercial paper.
When these largely unregulated short-termnotes mature, investors
can cash in or roll themover for another 30 days. If there is the percep-
tion of more risk, the yield or the interest paid to investors rises.
When theres confidence in the markets, the yields are low, which
means that borrowing costs for corporations are low. When fear is ram-
pant, as it is now, investors are reluctant to hold these bonds, fearing a
default. They demand a higher interest rate, or yield. As the yield rises,
it becomes more costly to borrow to fund day-to-day operations.
Q: So what? These Wall Street fat cats deserve
whats coming to them.
A: Maybe so, but remember that although the investors who
buy these short-term debt instruments may be on Wall Street, the
companies issuing this debt are corporations that employ millions
of people in the U.S. and around the world. When their costs of
borrowing go up substantially, they have to cut costs elsewhere,
and that often translates into layoffs. Thats how Wall Street prob-
lems quickly become Main Street problems.
Q: Any other examples?
A: Automobile dealerships. Carmakers dont just give them
cars. Dealerships borrow money to purchase the cars they will
then sell to customers. When the cost of borrowing goes up for
dealerships, theyre forced to raise the price of the vehicles they
sell at a time when there are already few buyers and when loan
terms have tightened sharply for consumers.
The credit crunch also hits developers and civil-engineering
firms that build shopping malls, office buildings and public works
projects. When funding for their projects dries up, construction
workers are laid off.
Q: How are local communities hit by the credit crunch?
A: Many local governments rely on issuing debt, often in the
form of municipal bonds, to fund road projects or other develop-
ment in their region. They too are being squeezed as the cost of
credit goes up. Local quality of life will suffer.
I think its going to limit (bond issuance) because it is going
to be expensive to borrow. Its going to be tough on small commu-
nities, said Michael Long, the treasurer for Klamath County in
Oregon, on Californias northern border.
MORE Q&A: McClatchy correspondents Kevin G. Hall and
Tony Pugh are available to answer your questions about the eco-
nomic meltdown at http://www.mcclatchydc.com/turmoil/.
M
IN
N
E
A
P
O
L
IS
S
T
A
R
T
R
IB
U
N
E
/M
C
T
*Measures changes in residential real estate
values by tracking repeat sales of individual properties.
Germany, France, Italy and
Japan.
In a news conference,
Paulson said he told the
visiting financial leaders
how hell carry out the
recently enacted $700 bil-
lion U.S. financial rescue
package.
He revealed that he
plans to go beyond pur-
chasing distressed bank
assets to take nonvoting
stakes in U.S. financial
institutions to help recapi-
talize them.
We are developing
strategies to use the
authority to purchase and
insure mortgage assets and
to purchase equity in finan-
cial institutions, as deemed
necessary to promote
financial market stability,
Paulson said.
He added that Treasury
is working to develop a
standardized approach for
a wide array of companies
to help them attract private
capital as well.
In a joint communique,
G-7 finance ministers and
central bankers said that
the current situation calls
for urgent and exceptional
action.
We commit to continue
working together to stabi-
lize financial markets and
restore the flow of credit,
to support global economic
growth.
Their five-point guide-
line plan includes prevent-
ing bank failures; ensuring
that credit and money mar-
kets return to normal func-
tioning; enabling banks to
raise capital from public
and private sources; ensur-
ing sufficient insurance of
bank deposits; and restart-
ing the secondary markets
where mortgages and other
loans are pooled into bond-
like instruments.
This is a period like
none of us have seen
before. ... There were not
(questions) on what we
needed to do, Paulson
insisted, dismissing con-
cerns that global investors
wanted to see more imme-
diate G-7 steps taken in
unison.
Action would be coordi-
nated where possible, he
said, but individual coun-
tries are going to have dif-
ferent needs and are going
to approach the problems
differently.
Perhaps the statements
most important point, how-
ever, was its message to the
world that the G-7 powers
are committed to coordi-
nated and united action.
Market analysts
had stressed that such a
stand was necessary to
improve global confidence.
Thats the point Paulson
emphasized in a statement
he issued following the
meeting:
The G-7 is compelled to
robust international part-
nership and cooperation.
Never has it been more
essential to find collective
solutions to ensure stable
and efficient financial mar-
kets and restore the health
of the world economy,
Paulsons statement said.
Over the weekend,
Paulson will continue meet-
ing with leaders of the
worlds 20 most important
economies including big
emerging markets such as
Brazil, Russia, India and
China to seek additional
ways of restoring confidence
in the financial markets.
Theyre in Washington
for meetings of the
International Monetary
Fund.
The G-7 meeting came at
the end of a turbulent week
in global financial markets.
In the U.S. on Friday, the
Dow Jones Industrial
Average swung more than
1,000 points in a wild day of
trading, the biggest point
swing in the blue-chip
stock indexs 112-year his-
tory.
The Dow closed down
128 points to 8,451.19, the
best daily finish in a dismal
week that had the index
down more than 18 percent,
the worst week of its sto-
ried history.
Before getting to that
final number, however, the
Dow fell almost 700 points
after the opening bell
Friday and briefly crossed
below 8,000 for the first
time in five years.
In a rare bit of good
news, some battered bank
stocks including Citigroup
and J.P. Morgan Chase
rebounded, preventing
even steeper losses in the
Dow.
The tech-heavy Nasdaq
actually closed up 4.39
points, or 0.27 percent, to
1,649.51. The S&P 500 post-
ed modest losses of 10.70
points, or 1.18 percent, to
899.22.
And the Russell 2000, an
index of smaller compa-
nies, rose 4.6 percent.
The U.S. numbers were
tame compared to the tur-
moil abroad Friday, as
investors projected into the
future and fretted about a
sinking global economy.
Japans Nikkei exchange
fell 9.6 percent, losing a
quarter of its value this
week. Exchanges in Hong
Kong and Australia fell 7.2
percent and 8.3, respective-
ly, on Friday.
Asias turmoil spread to
Europe, where Londons
FTSE exchange was down
8.8 percent and exchanges
in Germany and France
closed down 7 percent and
7.7 percent, respectively.
There is no safe haven,
said Evariste Lefeuvre, an
economist with the French
investment bank Netixis,
told the BBC.
Most economists now
project a U.S. recession
and the possibility of a
global one.
Another bright spot: Oil
prices tumbled 10 percent,
settling at $77.70 a barrel
on the New York Mercantile
Exchange, almost half of
Julys record of $147.
For U.S. motorists, that
translates to lower pump
prices.
The nationwide average
price for a gallon of unlead-
ed gas fell to $3.35 on
Friday, according to AAA.
Thats down 76 cents
from the July 17 high of
$4.11 a gallon and down 31
cents from a month ago.
Meanwhile the credit
market at the heart of the
global financial turmoil
sent conflicting signals.
The most closely
watched credit measure is
the London interbank offer
rate, or Libor, a rate banks
charge each other for
short-term loans.
The British Bankers
Association said Friday
that the overnight Libor
rate improved markedly, to
2.46875 percent on Friday
from 5.09375 percent a day
earlier.
But the Libor rate for
three-month loans, a sign of
future confidence, actually
rose from 4.75 percent to
4.81875 percent.
Libor rates affect the
cost of borrowing for U.S.
businesses, as well as some
rates on car loans, student
loans and adjustable-rate
mortgages.
www.campusecho.com
7
Campus Echo
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