TOPICS > Economy

Consumers Fret as Wall Street’s Turmoil Continues to Unfold

September 18, 2008 at 6:35 PM EDT
Loading the player...
Personal finance concerns have jumped across the country as trouble among U.S. financial firms has roiled Wall Street. Columnist Jane Bryant Quinn and economist Diane Swonk discuss the impact of the crisis on everyday Americans.
LISTEN SEE PODCASTS

TRANSCRIPT

JIM LEHRER: Next, following Wall Street’s troubles, on to Main Street, with Margaret Warner.

MARGARET WARNER: And to explore the impact of all this turmoil on ordinary Americans and how they should respond, we’re joined by Jane Bryant Quinn, a best-selling author and columnist for Newsweek and Bloomberg.com, and Diane Swonk, chief economist at Mesirow Financial, a Chicago-based financial services firm.

Welcome to you both.

Diane Swonk, we’ve been talking about what’s going on in the markets, what’s going on in Washington, but let’s come down to ground level. How are ordinary Americans being affected by this right now?

DIANE SWONK, Chief Economist, Mesirow Financial: Well, what we’re already seeing is, because the markets have been in such disarray, things like mortgages are not only more expensive than they were a year ago, they’re more expensive than they were just a few months ago.

So it’s getting more and more difficult for the average consumer to go out there and buy a home out of foreclosure, which is a great deal. It’s getting harder for them to get an auto loan, harder for them to get a credit card.

In fact, their credit card is maybe on a shorter payback basis now, with a higher interest rate or a lower amount that they can charge on it.

All of that is crimping them at the very same time that their wages have been stagnating and oil prices have been eating up a larger portion of their discretionary budget.

So it really is a very hard time for U.S. consumers, where no matter what happens tonight — and I do welcome some kind of resolution in Congress with Ben Bernanke and Treasury Secretary Paulson — no matter what happens tonight, you can’t escape the fact that conditions are going to get worse before they get better during this — as we approach this holiday season for the U.S. consumer.

A credit bubble burst

Jane Bryant Quinn
Newsweek Magazine
We've had this tremendous sort of 20 years of building up a credit bubble, and it's now bursting, and it's splattering on all of us. And Wall Street sort of and the banks create the credit that is sort of the oil that makes our economic engine work.

MARGARET WARNER: Jane Quinn, do you agree that credit is at the nub of how Americans are feeling right now, in terms of impact, and that it's going to get worse before it gets better?

JANE BRYANT QUINN, Columnist, Newsweek: I do agree with that, I'm sorry to say. The engine that people, I think, don't understand that connects the failure of a place like Lehman Brothers to the fact that it's so much harder to get a mortgage, the engine is credit.

We've had this tremendous sort of 20 years of building up a credit bubble, and it's now bursting, and it's splattering on all of us. And Wall Street sort of and the banks create the credit that is sort of the oil that makes our economic engine work. And if you can't get oil in the system, then the system starts breaking down.

And so the fact that you may need a 20 percent down payment for a mortgage, you can't do a 5 percent down payment anymore, let alone zero down payment, this tracks directly back to the fact that credit is not being created the way it used to be in Wall Street anymore.

And the banking institutions, basically, if they get any money, they're keeping it themselves so that they can keep themselves whole. They are not pushing new credit out the door.

And until they get their problems solved, the American consumer is not going to get the kind of credit they used to have, either. And that means that we have to spend our own money, we have to save more money, we have to get out of debt ourselves.

But we are just not going to be able to borrow for some period of time the way we have been in the past.

Assumptions by ordinary Americans

Diane Swonk
Mesirow Financial
Moving down the food chain, into middle-market and smaller businesses, we're now seeing that credit conditions, their ability to get loans, is also being constrained, which is constraining growth.

MARGARET WARNER: And, Diane Swonk, if the banks aren't pushing money out the door the way they used to in the form of loans, are small businesses or big businesses, for that matter, already feeling the hit in a way that's affecting ordinary Americans?

DIANE SWONK: Well, there's no doubt that large corporations have been hit the hardest. And moving down the food chain, into middle-market and smaller businesses, we're now seeing that credit conditions, their ability to get loans, is also being constrained, which is constraining growth.

You remember, much of the employment growth in the last two decades has come from small business employment growth, not from large corporations. In fact, they've been downsizing, while small businesses have been providing the engine of growth for the U.S. economy. So this is really a very Main Street problem, as well.

I think it's also important to know that, if you cannot get loans to buy homes, not only out of foreclosure or existing homes, new homes that have not been sold, the vacant homes on the market, that's further downward pressure on home prices, which, again, feeds directly back into a vicious cycle for consumers who have to bear the burden of that on their balance sheet.

For most households, their home is their largest asset. And if that's now falling in value, that's cutting into not only their current consumption, but also their view of their future and their ability to retire.

MARGARET WARNER: Jane Bryant Quinn, we at the NewsHour have received just hundreds of hundreds of e-mails from people filled with anxiety about their situation. And at the nub of it is really the safety of their own investments.

So let's see if we can decode all that, first of all, in terms of where they are. What if they had accounts at Merrill Lynch or Lehman Brothers? And then, more broadly, in general, at either banks that are now under pressure or investment houses that are under pressure?

JANE BRYANT QUINN: I think there's a lot of free-floating anxiety out there that is too bad. They're scared about what they see on Wall Street, but their positions are a lot safer than they may realize.

First, Federal Deposit Insurance Corporation will pay. If you have any money in the bank up to $100,000, that is absolutely safe. You read problems with Washington Mutual, and people are going and taking their money out. That's just crazy. It is safe in that bank. The bank may merge. Even if the bank failed, your deposits are going to be safe with the FDIC.

If you have a brokerage account with Lehman or with Merrill Lynch, Lehman went bankrupt, but Barclays is apparently buying the whole brokerage arm. Your account's just going to be transferred to Barclays. That's going to be safe.

Your Merrill Lynch account is going into Bank of America. That's going to be safe.

If you have an insurance policy or an annuity with any one of the 71 insurance companies that come under the umbrella of AIG, those are all -- they're sound companies. They lost a little niche in their financial safety ratings because of the problems with the parent company, but they are still highly rated companies.

And people who are saying, "I'm going to give up my insurance, I'm going to cash it in, I'm going to buy insurance with another company," that's the wrong thing to do, because you are going to spend a lot of money to buy a new insurance policy, you're going lose a lot of money when you cash out your old one. You simply -- you're safer than you think when you sit down and look at these pieces.

Safe money market accounts

Diane Swonk
Mesirow Financial
Seven thousand banks went under during the Great Depression and they were uninsured accounts. Only five banks have gone under so far in this current crisis, and every one has gotten every penny out.

MARGARET WARNER: Now, Diane Swonk, what about money market accounts? They used to be considered absolutely good as gold, unglamorous, but very, very safe.

But then, earlier this week, the primary reserve fund announced that, in fact, some of its customers or its clients or owners, holders, may actually lose money. How safe -- one, why is that happening? And, two, how safe are most money market funds?

DIANE SWONK: Well, first of all, the last part first is most money market funds are very safe and they're getting safer, because many of the money market funds have been switching out of what had previously been thought of very safe corporate bonds and municipal bonds into the treasury market. So they're getting even safer as we speak, so that's the first thing is, to not panic, just because one of the primary funds -- I think the initial fund out there -- had some problems.

With that said, I think you have to remember that these are not FDIC-insured accounts. You know, Jane made the point earlier that, if you've got your money in a bank, you're perfectly safe.

I would even go so far -- it's really interesting is that Congress is considering being able to insure even larger accounts for small businesses and middle-market businesses that don't have interest-bearing checking accounts that just need a large cash flow for their payroll so that they can have more than $100,000 and not worry about it.

Also, we had the largest bank failure -- second-largest bank failure in history, IndyMac, and even depositors in that institution that had over $100,000 insured, some as much as $250,000, at the end of the day, once they went through IndyMac's assets, within a few weeks, they were fully reimbursed, all the money that they had in that bank, since the Great Depression, the things that we have changed in this economy to protect investors in insured deposits.

Now, money market accounts are not insured deposits, but insured deposits have worked extremely well. Seven thousand banks went under during the Great Depression and they were uninsured accounts. Only five banks have gone under so far in this current crisis, and every one has gotten every penny out. In money market accounts, most people will be just fine.

Diversifying investments

Jane Bryant Quinn
Newsweek Magazine
The market is way down, I know that, but this market is going to go back up. You know, the United States is too big to fail. The whole world is in the process of bailing us out right now, and this market is going to return.

MARGARET WARNER: Let me get back to Jane Quinn. Jane Quinn, we always hear in situations like this, "People shouldn't panic and they should sit tight," and, of course, they should be, quote, unquote, "diversified," in terms of what kind of investments they hold.

But does that maxim hold for everyone? What if someone is -- or families already living partly on their investment income? What if they are nearing retirement? Is there anything we should be doing right now?

JANE BRYANT QUINN: You know, it's very hard to be nearing retirement and facing a bear market like this. And this is, I would say, is one of the biggest problems, is people trying to figure out what to do with their investments.

But what happens or what should be happening now is that you say, you know, the market is way down, I know that, but this market is going to go back up. You know, the United States is too big to fail. The whole world is in the process of bailing us out right now, and this market is going to return.

And if you throw out all your stocks right now because you're afraid, then when the market turns around, you are going to have a lot less money there, which is what you need to grow in the future.

You need to think about this before you panic, before these bad things happen. Part of it, you should have some money in cash, you should have some money, maybe 30 percent, 40 percent of your money in bonds. We're talking about people thinking about -- toward retirement, and then the rest of your money would be in stock-owning mutual funds.

And if you have a program like this, when the stock market goes plunging down, I'll tell you, Margaret, I look at it and say, "If a winter coat is on sale for 30 percent off, I go down and buy the coat. If stocks are on sale for 30 percent off, I go down and buy the stocks." I don't wait for the price to come back up.

MARGARET WARNER: But, Diane Swonk -- and briefly from both of you here, because we're almost out of time -- but we're now at a moment when even treasuries aren't paying enough to keep pace with inflation.

Is there anywhere -- let's say your IRA, your 401(k), you're constantly investing in the market. But is there anywhere you could be assured that it's, one, safe and, two, will at least keep pace with inflation?

DIANE SWONK: Well, you can't be safe if you're investing. The whole point of investing is you're taking on risk to get a higher return than inflation. So I think that's the first rule out there, is you have to remember you're putting money on the line because you think you're investing in the future of the American economy.

And I think Jane made a really good point here, and that is that be diversified in mutual funds. I am not wise enough to pick my own stocks. I have someone help me pick stocks, and I am very diversified across the economy. So if one stock goes down, I have other ones offsetting it. In fact, some go up when one goes down.

I think it's very important to keep in mind here that what Jane said: The rest of the world is now with us. Last night, we had about $250 billion come in from the U.S. and the rest of the world to keep our market afloat. We're now all in the same boat globally.

Globalization means we're all in the same boat globally. And now we've got everyone in there with their oars in the water helping us to make it to the shoreline. That's a major turn in events to the positive side.

MARGARET WARNER: Jane Quinn, brief final word?

JANE BRYANT QUINN: And, Margaret, there are a couple of things that keep up with inflation. One is I Bonds, savings bonds that are linked to the inflation rate, and you can only invest up to $5,000 in those, but they're wonderful for smaller investors. And the other is TIPS, they call them, Treasury-Inflation Protected Securities. Both of them keep you even with the inflation rate and are safe.

MARGARET WARNER: All right, we have to leave it there, but thank you both very much.

DIANE SWONK: Thank you.