In this forum on personal finance, economics correspondent Paul Solman and finance professor Zvi Bodie tackle viewers' questions on the safest way to invest retirement savings, what to do about mortgage insurance and the smartest moves for new graduates seeking jobs.
PAUL SOLMAN: Hi! Welcome to Pocket Change, Paul Solman here,
economics correspondent for the NewsHour with Jim Lehrer. And with me as always,
though this is only the second time we've done it, but with his very hearty
chortle there, professor Zvi Bodie.
ZVI BODIE: Well, for us this is maybe the thousandth time!
PAUL SOLMAN: That's true, we've talked about these things
long and hard over many years. Professor Zvi Bodie, finance professor at Boston
University School of Management and many other places over the years.
Zvi Bodie Boston University
The first place to go if you want to learn about TIPS is a little-known Web site of the U.S. Treasury: treasurydirect.gov.
Investing in TIPS
PAUL SOLMAN: First question from Bill of Saint Louis, Mo. -- I'm guessing there's more than one Bill in Saint Louis but -- "Could
you please..." Oh my God, this is written for you, sir, "Could you please give
me more info on TIPS?" What does he mean, TIPS? Hot tips at the race track?
ZVI BODIE: Oh boy, do I have hot tips for him! TIPS stands
for Treasury Inflation Protected Securities. And I love TIPS!
PAUL SOLMAN: Yes, in fact Paul Samuelson, the first Nobel laureate in economics from the United States, one of the great eminent
economist of the 20th and now 21st century, well into his 90s, once said that
everything he ever knew about TIPS he learned from you. And that you never
stopped haranguing him to buy them!
ZVI BODIE: This is true, this is true. I tend to be a bit of
a one note singer. Anyhow. The first place to go if you want to learn about
TIPS is a little-known Web site of the U.S. Treasury: treasurydirect.gov. It's
actually a great Web site, if you get there. You have to find your way there. It
is not, for example, mentioned anywhere on the SEC Web site.
PAUL SOLMAN: Right. This is an issue that... This is
something that has bothered Zvi and me for years, which is the extent to which
the government is in the pocket of the investment industry and is afraid to
offend them, and therefore does not ever really tell you very much about the
safest investment alternative you have, and by the way the one with the least
The cheapest way in which to invest your money safely, which
is to say going to treasurydirect.gov and, there, giving them your bank routing
number, actually being able to buy Treasury bonds from the U.S. government that
are protected against inflation, in that when you get your money back at the
end. They have adjusted it for all the inflation that happened between the time
you bought it and when you redeem it.
ZVI BODIE: Correct. And not only that, but TIPS have
periodic payments. You get a so-called coupon payment or cash payment of the
interest on the principal. That too is inflation-adjusted every six months and
these are fully inflation-protected bonds.
PAUL SOLMAN: With the full faith and credit of the United
States government. We've... I've been pushing them for years ever since I
started the Business Desk. You've been pushing them ever since they've been
actually put out and they are still something that any reasonable investor
ought to be thinking about with respect to protecting her, or in this case
Bill, his financial future.
ZVI BODIE: We should tell people that if they participate in
an IRA, you know Individual Retirement Account, a 401K, any type of voluntary
retirement account, they should ask their employer, the benefits office, or the
mutual fund company that is managing if they have an inflation-protected
account or fund.
PAUL SOLMAN: And there are by the way mutual funds, Fidelity
has one called I think Fidelity Inflation Protected Securities FIPSX, Vanguard
has VIPSX. So you can even...
ZVI BODIE: The one that I belong to the College Retirement
Equities Fund has one.
SOLMAN: And that's the one you put me into 10, more than 10 years ago.
Zvi Bodie Boston University
What I could see happening is federal mortgage insurance taking the place of that private mortgage insurance.
Mortgage insurance reform
PAUL SOLMAN: Amanda from Lincoln, Neb., writes, "I got my
mortgage in August 2005. I did not have enough to put 20 percent down, so I
have been paying $200 in private mortgage insurance since then. Since private
mortgage insurance did not save lenders from mortgages going bad, has there
been any discussion about reform to this practice?"
ZVI BODIE: Not to my knowledge, there hasn't. In fact I
would imagine that there will be even stricter rules of that sort in the future
because the whole point is if a borrower cannot put down a large down payment
to protect the lender, the lender needs some other form of protection. And so
if anything, we're going to see an increase in this type of practice.
PAUL SOLMAN: But what happened was there were these very big
companies that provided mortgage insurance and then those companies suddenly
were tottering because...
ZVI BODIE: Oh yes, that is true. In fact, what I could see
happening is federal mortgage insurance taking the place of that private
mortgage insurance. But from the point of view of the mortgage borrower, the
need to buy mortgage insurance if they don't have a large enough down payment
-- that's going to increase in the future.
PAUL SOLMAN: Got it.
Paul Solman NewsHour with Jim Lehrer
We were in St. Louis recently talking to a group of kids who had dropped out of high school. And they were talking about the fact that what this really turns on is not your skills so much, but how you present yourself, and who you know.
Students entering the workforce
PAUL SOLMAN: David from Reedsville, Ga. "I'm an
economics teacher. Could you explain how the recession may affect college- and
non-college-bound high-school seniors as they enter the workforce now or after
ZVI BODIE: Oh sure. It's going to reduce their opportunities
and they face a tougher environment. So, they're going to have to make sure
that they have nicer resumes, they're going to have to differentiate themselves
from other potential employees. It's going to be a buyer's market as far as new
employees are concerned.
PAUL SOLMAN: And, of course, one of the things that they're
doing is trying to hide out in graduate school programs, right?
ZVI BODIE: You bet! There's been a surge in applications to
PAUL SOLMAN: BU School of Management?
ZVI BODIE: Among others.
PAUL SOLMAN: Yeah. It's unbelievable the numbers. I teach
some at Yale and there the graduate program's doubling the number of applicants
because people just don't want to be in the job market.
ZVI BODIE: Sure. Well here's one way that we economists look
at it. All of a sudden investing in human capital has become a much more
attractive investment as compared to investing in other forms of capital.
PAUL SOLMAN: I don't get it.
ZVI BODIE: When you go on for a graduate degree, when you
stay in school, you are investing in your own human capital. Now there are lots
of things you could invest in, right? Like stocks, bonds, and so relative to
those other investments, investing in your own human capital looks a hell of a
PAUL SOLMAN: And I would add with regard to non-college
bound high-school seniors that they are in really tough shape, and lots of them
by the way are going back to community college where there is also a surge in
applications, because if you haven't got a skill that you can sell -- that
skill, by the way, very often being the people you know, the skill at working
your connections -- but if you haven't got that, in this environment where you're
competing with all the other people who are out of work, you're at least as bad
off as you were year after year for decades now and in a smaller, you know a
tighter job market you're in worse shape than you were.
ZVI BODIE: Yeah, I agree with you there, Paul, completely.
It's going to be a tougher, let's call it... It's going to be a buyer's market
for employers and therefore anyone coming into the market, especially college graduates
who don't have a...especially high-school graduates going into the labor force
without some sort of higher degree - they'd better make a good impression.
PAUL SOLMAN: You know and I just... Parenthetically, we were
in St. Louis recently talking to a group of kids who had dropped out of high
school, were back in a sort of remedial school. And they were talking about the
fact that what this really turns on is not your skills so much, but how you
present yourself, and who you know.
ZVI BODIE: That is so important.
PAUL SOLMAN: And they don't know anybody because they only
know each other and they can't get fast-food jobs without networking and who do
they have to network with? So that's one of the... That's the main reason to
stay in school, because you meet a different class of people in college than
you met in high school!
Zvi this is the end of our installment of Pocket Change
here. Thanks very much we'll be back in the not too distant future.