By Hilary Hagerman
When the United States puts together the largest financial rescue plan since the Great Depression to bail out its investment banks, people get worried.
So it seems natural that after last week’s devastating blow to Wall Street, where the stock market plunged to the lowest it’s been in a decade, there are fears the Canadian economy might suffer too.
Some experts are saying that the world could be heading into the worst financial situation since the global market crash of 1929, and that’s leaving Ryerson students unnerved.
“I think it will affect us a lot, actually,” says Henry Quach, 21, a second-year economics student, “because our economy is so heavily tied in with America. What they do affects us.”
Quach worries that if the economy worsens, tuition costs may rise, and it will also be more difficult to afford basic school supplies, like pens and notebooks.
Emily Preston, 19, a first-year image arts film student, also thinks that the cost of living and tuition may rise, which she worries about.
“The last time the stock market crashed, all of North America was screwed,” she says.
The crash on Wall Street, which happened Sept. 15, was the result of major changes for two large investment banking firms — Lehman Brothers Holdings Inc., and Merrill Lynch, both of which have been struggling since the emergence of a “credit crisis” on Wall Street a year ago.
The Bank of America originally attempted to acquire the struggling Lehman Brothers, who had fallen victim to billions of dollars of debt, and saw share prices fall 95 per cent since the beginning of the year, as a result of bad mortgage-backed assets.
Last week, Lehman Brothers finally filed for bankruptcy. The Dow Jones industrial average subsequentally fell 300 points, or 2.6%. And it’s seen several sharp drops since.
However, despite dire economic predictions, experts are saying that the average Canadian will not be affected, at least in the short-term.
“What the average person needs to know is that our system is different from the U.S., and is completely sound,” says Patricia McGraw, a Ryerson professor who specializes in financial intermediation and banking, and who has co-written a textbook on financial institution management.
McGraw says that the consolidation of American investment banks into commercial banks already happened in Canada in the late 1980s, and so now we don’t have any major investment banks, like Merrill Lynch, that are beginning to fail.
She adds that since most of our banks have already been consolidated into commercial banks, we don’t have to worry as much about people withdrawing their funding, because commercial banks rely on deposits.
McGraw stresses that the situation in Canada is fundamentally different from that in the U.S.
“Our unemployment doesn’t seem to be creeping up, and our markets are different,” she says. “We don’t have people walking away from our homes, so we don’t see mortgage rates spiking up yet. Our lives are just going to go on in the short-term,” she says.
One long-term effect people in Canada might see is that mortgage and credit card rates may rise because of the world-wide credit crunch. According to Mcgraw, the Canadian economy might eventually go into a bit of a recession, although it would probably be short-lived.
Scott Anderson, a Ryerson professor who specializes in banks, investment, and finance, says that while what happens in the U.S. stock market affects most global markets, it shouldn’t be a big concern for students.
In fact, it might be an oppurtunity. If the market does go down, it actually may be a good time for students to start investing he says.
“Share prices will be lower and most likely they’ll climb again in the future.”
However, he admits that if credit rates rise, it may be more difficult for students to borrow money for school.
For most students, that might not be a concern. “Most students have already borrowed the money they need and will be trying to pay off their loans, not borrow more.”
Overall, the majority of students at Ryerson aren’t panicking just yet.
“I’m adopting the ‘wait-and-see’ thing,” Quach says. “The affect it will have on us relies on the holders of the stocks themselves, and until it filters down to us, we can only just wait.”
Erin Fitzsimmons, 19, a second-year arts and contemporary studies student is also cautious, but not immediately worried.
“I don’t know a lot about the stock market and I don’t put money in it so I don’t think it will directly affect me right away,” she says. “But I do think it will change things in the economy that will have an affect on me.”
So what should students do if Canada’s economic situation does worsen? Anderson advises students to try to pay off their loans, and to stay away from borrowing more. McGraw agrees.
“Pay down your debt if you can, and don’t be over-leveraged.”
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