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Americans Fear Personal Investments Hit by Credit Crunch

September 30, 2008 at 6:25 PM EST
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A record decline in U.S. markets Monday spread panic to average Americans worried about their investments. Finance writers Jane Bryant Quinn of Newsweek and Brett Arends of the Wall Street Journal assess how the credit crisis will impact personal finances.
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MARGARET WARNER: The meltdown on Wall Street and the credit market crunch is causing ordinary Americans deep anxiety about their own financial security.

To help make sense of how to navigate the current financial turmoil, we turn to two writers: Brett Arends, personal finance columnist for the Wall Street Journal online; and Jane Bryant Quinn, she’s the best-selling author and columnist for Newsweek and Bloomberg.com.

Welcome to you both.

Jane Quinn, we spoke last week, the week that Lehman Brothers tanked and the government took over AIG. Has the situation gotten appreciably worse for ordinary Americans since then, in terms of the impact it’s having?

JANE BRYANT QUINN, columnist, Newsweek: Yes, it has. And you just have to look at what happened to the market yesterday. It came back up today, but people are suddenly aware that they face some terrible losses in their retirement plans, in their investments.

And I would say that the level of fear has ratcheted up considerably, and that’s not good for the economy. It’s not good for jobs.

So I think that what we’ve seen in the market in not passing this package and people suddenly looking at the edge of the cliff and say, “My gosh, this could be real trouble,” I think that’s a huge difference since we last talked, Margaret.

I think people are a little more comfortable then saying, “I don’t think this is going to affect me. This is a Wall Street thing.” I think they now see the extent to which it’s going to affect all of us.

MARGARET WARNER: And, Brett Arends, are you seeing that, say, in terms of credit — we heard the congressmen talking about small businesses not being able to get credit — is that worse than two weeks ago? Or are we just more aware of it?

BRETT ARENDS, Wall Street Journal: Well, I think it’s a combination of both. I think what’s really happened in the last couple of days is a loss of confidence, as well, in the ability of the political system to deal with this.

I mean, what happened on Monday was just a harbinger of what we might expect if this system — if this process collapsed and we were not able to get some kind of rescue package.

You know — I can tell people, I was actually — on Monday morning, I was working on a column. I was going to be advising people, you know, about buying the market and about investing long term.

And when the deal collapsed, I was so stunned, I mean, I can’t write that with any confidence until I am sure or feel confident that Washington is going to step in and actually do something to fix this problem.

Savings crucial in crisis turmoil

MARGARET WARNER: Meaning that, for now, you would not be advising people to follow the classic advice, which is buy now, because everything is cheap?

BRETT ARENDS: Listen, I am always -- I'm usually a guy who buys in a panic. I usually advise people to buy in a panic. I wasn't fazed by the 1998 crash, the financial crash in 2001, 2002, 2003.

But this is totally different, because if the credit system seizes up completely and our politicians can't fix it, and certain people, unfortunately, in the media play sort of political games and demagogic games with this, then we -- you know, you just have to go -- I mean, I've tried to describe this to people.

I've said, listen, look at the Jimmy Stewart movie, "It's a Wonderful Life." Look at the run on the bank and look at, you know, Jimmy Stewart standing up on the table at this building and loan and explaining to people that their money isn't held in the bank.

Now, imagine a run on the bank on a massive scale. Imagine not just Wall Street banks, but imagine every bank says, "Well, we can't pay you, because we can't get our money out of another institution across the road, because they can't get their money out of a third institution."

MARGARET WARNER: Now, let me get back...

BRETT ARENDS: Now, I'm assuming it won't get to that, because it -- but you look at this -- what was allowed to happen on Monday, and it really is very hard to have confidence.

MARGARET WARNER: Jane Quinn, a very scary picture. What can ordinary Americans do to weather this storm? What is the most important thing?

JANE BRYANT QUINN: I think one of the most important things -- and this is something that, you know, personal finance writers like me and like Brett tell people all the time -- and the first thing is that you need to have savings.

If you have some cash in the bank, something that can weather, carry you through times like this, that's a really important thing. And that's something people are taking a look at today.

I think I also have to say -- although I am -- I'm just as scared as Brett is that, in terms of what could happen here, with the irresponsibility we see all around us, downtown on Wall Street and with our politicians.

But nevertheless, I just don't believe that this is the end of America. I don't think it's the end of our corporations or the end of the fact that our stocks eventually will go up, all that sort of thing.

So I would say that people who are still investing for the long term -- that column Brett was trying to write the other day -- they still have to keep on making their regular contributions to it, because if you -- if you bail out now and hide, I don't think you're going to get back in at a time when you would like to get back in.

BRETT ARENDS: Don't jump out of the market at this point. Don't jump out of the market. I agree with Jane entirely. And if you are on a dollar-cost averaging plan, when you're putting in a bit each month, stick with that plan. Stick with that plan. And do not jump out of the market at this point.

Keeping money safe in long term

MARGARET WARNER: OK.

Jane, back to you. You said people should have savings, meaning cash. All right, where can you put it? Where is it safe?

I mean, we all know that the FDIC insures up to sort of $100,000 per person per bank, but all these banks are now consolidating, merging. I mean, do you have to keep moving your money around to a bank that hasn't been taken over by another bank you may have an account in?

JANE BRYANT QUINN: Well, you've got to keep it at that $100,000 level, unless they do go ahead and raise the limit, even if temporarily, to $250,000, which might give people a little more comfort.

But there's something you can do actually, though. If you have a big account at a bank, and it's in your name, and it's savings, and, say, your married. If you put your spouse's name on it, you know, you're insured for $100,000 and your spouse is insured for $100,000 on that account, so suddenly you have double the insurance.

If you've got two kids, you could add their names to the account. And each one of you has $100,000 worth of insurance.

So if you go to your bank and ask, "Is there a way," if you have a really big account there, "is there a way that I can bring all of this under insurance?" There are some ways you can do it, so I think you need to pay attention to that.

One other thing, Margaret, just in terms of the safety, you know, we all are used to the idea investing for long term, again, as we were talking, and saying you ought to be in stocks. But what is the long term?

I think that, if you have money you're going to need not just next week, but in the next four years, you know, that kind of money you should never have invested in stocks, because you don't know what's going to happen.

The whole idea that I'm not going to need it for two or three years so it's safe to put in the market is clearly wrong. I don't think you should be in the market unless you have money you are pretty sure you're not going to touch for 12 or 15 years.

If it's going to be one to four years, that should always be kept safe. And maybe one thing you should do, as you're looking at your finances now, is say, "OK, maybe I haven't had it allocated right, and I should have more money set aside in safe places," I should say, "OK, for the long term, I'll keep on putting it in stock-owning mutual funds and then sort of that money in the middle, put it in bond funds."

MARGARET WARNER: So, Brett, do you agree that you ought to take a look at your portfolios right now? And even if you're near retirement or in retirement, you should think about changing the allocation?

BRETT ARENDS: Oh, absolutely. I mean, one of the -- if a positive thing comes out of this it's that people actually pay attention to what's in their 401(k).

It's never the wrong time to do the right thing. People should be taking a look at their allocation, making sure that they're spread across a variety of mutual funds, of different asset classes, and different investment styles.

There's more options out there than there ever were before. You should think globally and not just U.S. stock market. And, of course, as you get older, the more money -- you should have more money in less volatile investments, including bonds, and less money in stocks. And if you're younger, of course, you have more money in stocks.

Time to retrench, not expand

MARGARET WARNER: Can I ask you both a quick question? Jane, a quick one to you. What if you were planning a major purchase this fall, new house, new car? I mean, should you go ahead or is now the time to retrench?

JANE BRYANT QUINN: Well, if you are the least bit unsure of your job -- and I think more people are going to discover they're unsure of their jobs -- this is a good time to retrench. It's a good time to pay off your debt.

I wouldn't mind putting off a car purchase for another year. I'd feel very comfortable doing that.

A house, of course, is another matter. A house is a lifestyle decision. You know, it's clearly not an investment decision anymore.

So if you've had a new baby, you need to move, if you're going to move to take a new job, and if, of course, you have enough for a down payment, because you need a pretty big down payment now to buy a house, it would be a good time to buy a house.

But I wouldn't try to do it for trading up reasons or investment reasons. That would be just nuts.

MARGARET WARNER: And, Brett, quickly, what is your view on that? How important is it right now to be paying off that credit card debt?

BRETT ARENDS: Oh, absolutely. Absolutely. Paying off a credit card is the simplest piece of financial advice you give anyone.

Carrying credit card debt is like walking up a down escalator. As long as you just keep walking, you're going to keep walking and walking and walking and get nowhere. You have to put your head down and run to the top of that escalator and get out of that debt trap.

In a time like this, the one thing you can control to some degree is your family budget. It's not just the big-ticket items, but take a look at recurring expenses and discretionary expenses. Really do try and economize, and find some savings, and put more cash aside.

I do think we could be in for some bumpy times, not just in the stock market, but also in the economy. And I do want people to be, you know, better prepared for that.

MARGARET WARNER: Brett and Jane Quinn, I'm sorry. We are totally out of time, but thank you both very much. And we'll definitely have you back. We need your advice. Thanks.