“Entire economy is in danger,” read the front page of the Seattle Post-Intelligencer Sept. 25, quoting George W. Bush. Five days later the headline read “Economy in shock,” in response to the 700 point drop in the DOW Jones Industrial Average that occurred the day before. The next day, a headline in the Wall Street Journal referred to this meltdown as “the worst financial crisis since the Great Depression,” and the United States government began talking about using 700 billion dollars of the taxpayers’ money to “fix” the problem.

But what is the problem, exactly?

Much like the great depression of the 1930s, there are many factors that have lead to this economic downturn. However, it largely boils down to one overarching issue: credit. People are spending more money than they have, and banks are losing money when people can’t pay their loans back. In the ’30s it was largely credit used to buy consumer goods and cars that caused the problem; this time it’s home ownership.

According to an article in the New York Times, between 2000 and 2006 home prices rose fairly sharply every year. Because of this, the demand for mortgage backed securities -a kind of investment that relies on multiple mortgages- increased greatly. Small banks were encouraged to create as many loans as possible, even if it meant giving loans to people who might not be able to pay for them.

“[The loan originators] started lowering their requirements for loans. They didn’t require 20 percent down. They didn’t verify people’s income. They took people’s word for how much income they earned, even though they weren’t earning that income,” said Fred DeKay, associate professor of Economics. “The people were willing to lie, because they wanted to get into that house.”

The risk for the bank itself was very little -after originating the loans they would then sell them to a larger bank or mortgage firm like Freddie Mac who would use them to create those mortgage-backed securities. On the other hand, the people getting the loans assumed that their house would rise in price and they could refinance if they started not being able to make their monthly payments.

“Some of these people got loans fully knowing that they wouldn’t be able to pay for them right now, but optimistically thinking they would be able to pay for them in the future because their incomes would rise or they could sell it back in a few years for more than they paid for it.” DeKay said.

The prices didn’t go up. Once the housing bubble popped in late 2007 people were sitting on mortgages that were worth a whole lot more than their house, and the idea of refinancing to get a lower monthly payment went out the window. People started defaulting on their loans, and the big banks and firms who bought up these loans started seeing a much lower rate of return on their investments than they were expecting. These banks started to fail, and since August 2007 there have been 15 bank failures, including Seattle’s own Washington Mutual.

Since all of these failures create stress among investors, the stock market is at risk of a sharp decline. The government’s solution to this risk is the “Emergency Economic Stabilization Act of 2008.” The bill, which was signed into law on Friday, is commonly referred to as a “bailout” of the United States financial system. The purpose of the bill is to purchase these bad mortgages from the large banks, essentially saving them from failure and hopefully restoring investors’ faith in credit markets. While it may seem like a necessary step to take, it was a hot issue in Washington.

“Democrats and Republicans in Congress have legitimate concerns about it. I know many Americans share these concerns,” said Sen. Barack Obama at a rally in Michigan, “but it is clear that this is what we must do right now to prevent a crisis from turning into a catastrophe.”

While this crisis is extremely large and complex, it shouldn’t affect the credit of an average college student. Banks will still be itching to give out credit cards, and people who have the financial resources to buy a house will still be able to. What should change with all of this is how careful banks are about lending money. They simply can’t afford to make the same mistakes again.

“You’re still going to get access to credit, just not as easily,” DeKay said.