E-mail a friendMichael Sivy
original airdate August 20, 2007
In addition to being editor-at-large at MONEY magazine, Michael Sivy also writes a monthly column on investing strategy that focuses on America's top companies and helps readers invest for long-term growth. He initially joined the magazine as a staff writer, but left for stints as a securities analyst and an analyst for the equity-trading division of a commodities brokerage. He's also worked on projects in Hong Kong and London to expand TIME International's personal finance coverage.
Michael Sivy
Tavis: Michael Sivy serves as editor-at-large for "Money" magazine. Late last week on the magazine's website he published a piece about the current credit and stock market turbulence called "Your Best Moves in a Crazy Market." He joins us tonight from New York. Mr. Sivy, nice to have you on the program.
Michael Sivy: I'm delighted to be here.
Tavis: Let me start with a basic, fundamental question: what is going on?
Sivy: Well, this is sort of the equivalent of an old-fashioned, 19th century bank panic, where there are fears about the soundness of credit, and the danger is that lenders will stop lending. And that's the only thing that can become really serious, and that's what the fed stepped in on Friday to prevent and to signal that it'll do more to prevent. So assuming that all that is done properly, this is a serious situation but it's not a disaster.
Tavis: Tell me more - to your point of a moment ago - tell me more about what they are panicked about. What are they panicked about? What led to this panic?
Sivy: Well, American society today in general is just too dependent on debt, and you've had a lot of borrowing, a lot of mortgages being made to people whose creditworthiness is not very good, or who will have trouble paying the mortgage payments every month, and a lot of lenders were kind of irresponsible about the way they did it and they offered a lot of mortgages and other kinds of loans without any kind of real oversight of the creditworthiness of the people they were extending the credit to.
And now, because interest rates are rising and the housing markets are a little softer, you're seeing that start to unravel. And the actual scale of the losses is not that huge. It's not comparable to the S&L crisis of 18 years ago, but the fear that it can engender - if people begin to worry about lending in general - is the thing that can cause the shocks.
And that's what motivated the fed to cut the discount rate - that the fear of lending and the fear of the soundness of loans was spreading beyond so-called subprime loans into regular loans, and the debt that is essential for any modern society to run on.
Tavis: Let me ask you this. Because the little guy in America gets squeezed all the time, and because the folk who have not versus the folk who have got always get blamed for stuff that goes wrong in this country, is it true that we're in this crisis because people, for whatever reasons, are not paying their home loans? Is it something more than that?
Because if I were a cynic - I'm not, but if I were a cynic I would say that what you've just shared with me on the part of lenders, at least, is blaming the everyday guy who's just trying to make his mortgage payment, and there's got to be more to the story than just the fact that these people have just decided to stop paying their home loans.
Sivy: Well, I think it's actually kind of a complicated situation, in a way, because if banks didn't extend credit to people who were poor or not particularly creditworthy, then you'd have large parts of the country shut out of buying a house. You don't want to say that if somebody is a bad credit risk they have no possible way of ever buying a house.
So there has to be some mechanism for providing credit to people who are poor. And the trouble is, you have to have some kind of oversight that goes along with that. Somebody has got to make sure that the borrowers can really afford to carry the loan. And it gets a lot more complicated - a lot of people have refinanced mortgages and borrowed equity on their homes to pay off credit card debts.
And they're living on credit too much. But when you get to a situation where interest rates start to rise, or real estate prices start to fall, people who are overextended begin to default. And the question of sort of who's at fault for allowing that situation to develop is a more complicated one. And you don't want to say that people who are poor can't borrow to buy a home. There's got to be some mechanism for allowing them to buy homes.
Tavis: And that's what I was trying to get at. I just hate to hear the everyday guy get blamed for the condition of this, and suggest by inference that people who are struggling, people who are not as wealthy, ought never have a chance at achieving the American dream. And that was my point by asking that question. Let -
Sivy: Well, yeah.
Tavis: I'm sorry, go ahead.
Sivy: No, I agree with you. And in fact, the opposite of the kind of lending that's gone on is essentially redlining.
Tavis: Exactly.
Sivy: If the banks just said, "We just won't make loans to any poor neighborhoods" and they sat down with a map and just crossed whole areas off, that would be a problem too. So there's got to be a way to extend credit to people. The poor people in this country, and particularly people of color, have much lower homeownership rates than White people do and then middle class and upper middle class people do, obviously. And you don't want to sort of say that because you're going to insist on strict creditworthiness that parts of the society can't buy homes.
Tavis: The only thing I'd add to that is you're right, it would be redlining, but it's not just a matter of would be. It is redlining, and it does, in fact, happen in this country. Now, I know that and you know it and everybody else knows it happens, and it's a horrible process. But we'll come back to that at another time. That said, let me ask you, again, a pretty silly question, maybe.
But how do, to your earlier point - when you say lenders will stop lending, how does that happen? How can lenders just stop lending? Because if lenders make money lending, then it doesn't make much sense they just stop lending.
Sivy: Well, a lot of the lending in this country takes place not through banks but through the commercial paper market, which is like a money market fund for companies. And if people are afraid and they sort of just step back from the market, the liquidity in the market can dry up and companies have to roll over these loans every night.
So if you get a panic, it's the fear - it's not actually the magnitude of the losses, it's the fear that you get if people don't know how big the losses might be. And if you have a mortgage lender just say our accountants have told us we can't make any loans until we know how much we've lost, so we're just not even going to lend to creditworthy people. Just until we can get the accountants in here, no more loans.
Well, that would just cause the economy to, like, come screeching to a halt. So that was why the fed went in and said, “We'll make money available to banks, and we'll see that good credit - creditworthy loans get rolled over and ensure that this doesn't spread from the areas where there are actually defaults into larger areas.”
Tavis: So as is usually the case, the corporations have been taken care of so the fed has come to the rescue to help them out in the short term, but what do we say, to your article now, to the everyday person that his or her best money move is in this volatile market?
Sivy: Well, as far as anybody who's an investor in the market through a 401k at work or an IRA or mutual funds, you basically don't want to do anything as a result of this kind of short-term disruption. You ideally want to have some kind of long-term investing plan in place and just stick with it and ride out whatever is happening.
If you're in the position of being a homeowner and you're not going to sell right away - there is a drop in home prices that's going on, particularly in certain parts of the country like Las Vegas and south Florida and Southern California - if you're in a situation where you're not going to be selling right away, then you basically ride it out.
If you're somebody who is in a situation where they have a risk of bankruptcy or a risk of losing their home, I think you basically go to some kind of debt counselor as fast as you can and try to work out some kind of agreement. Banks don't want to foreclose. They don't want to get stuck with property that they then have to try to sell in a bad market. So the thing to do is to go and try to work something out, and not to put off reacting to what's going on.
Tavis: Well, to your earlier point, I am in Southern California and I won't be selling any time soon. (Laughter) I'm going to be right where I am for a little while. Michael Sivy, editor-at-large of "Money" magazine. Nice to have you on the program, all the best to you.
Sivy: Well, thanks very much.
Tavis: No, thanks for your insight.
Back to August 20, 2007