In the first installment of Pocket Change, a regular forum on personal finance, NewsHour economics correspondent Paul Solman and finance professor Zvi Bodie tackle viewers' questions on credit unions, credit scores, and whether gold makes a good investment.
PAUL SOLMAN: Welcome to the very first edition ever of Pocket Change. I'm Paul Solman, Economics Correspondent for the NewsHour with Jim Lehrer. Next to me Zvi Bodie, professor of finance at Boston University, MIT, he's been at Harvard Business School, lots of places. Nice to have you!
ZVI BODIE: Good to be here, Paul.
Paul Solman The NewsHour with Jim Lehrer
Your money is safe, and why is your money safe? Because of something called NCUSIF. They call it the National Credit Union Share Insurance Fund.
Are credit unions safe?
PAUL SOLMAN: All right, so let's get right to our first question -- that's what we do here, we answer your questions about personal finance -- from B. Sweet from Hyde Park, New York. And the question itself is simple and sweet -- dare I say it -- "Are credit unions safe?" Professor Bodie?
ZVI BODIE: Yes, they are, and I know this because I checked it on really the source of most of the facts I know about our financial system, Wikipedia and Google.
PAUL SOLMAN: Now, are you mocking me? Are you mocking B. Sweet of Hyde Park, New York, here?
ZVI BODIE: No, I'm not. They're checked constantly by thousands, if not tens of thousands of readers.
PAUL SOLMAN: But I remember Stephen Colbert on Comedy Central showing how you could...you could manipulate Wikipedia. You know you could write in some nonsense and -- bang -- there we go, right up in the entry!
ZVI BODIE: Well, that of course is true, but I generally use some judgment when I read the facts on Wikipedia or any other source on the Internet. And you know as well as I that really the thing that distinguishes an expert from someone who is not an expert is -- hopefully at any rate -- the expert has the judgment, has the wealth or the depth of knowledge to be able to distinguish between facts and misleading statements.
PAUL SOLMAN: Yeah, you know it's funny. I'm a little afraid to admit this on the very first installment of Pocket Change, but when I get questions at the Business Desk, as I have been for well over a year now, I often go to the Internet to check at least my intuition as to the right answer, and I often go to Wikipedia.
I have to say Wikipedia with lots of footnotes has turned out to be remarkably accurate in my view, and the reason I happen to know the answer to this question about credit unions is by checking on the Internet and in a number of different places, bankrate.com and so forth, and here's the answer: Your money is safe, and why is your money safe? Because of something called NCUSIF. They call it the National Credit Union Share Insurance Fund, NCUSIF, which I'm reading here because I don't carry that in my head!
ZVI BODIE: I could never remember anything as long as that!
PAUL SOLMAN: And it's a U.S. government agency -- it's the equivalent of the FDIC, the Federal Deposit Insurance Corporation -- that I've memorized, I know what that stands for. And I'm assuming now, but people should look it up if you have money in a credit union, that the same government insurance applies -- that is up to $250,000 per individual account, up to $500,000 per joint account guaranteed.
Of course, people don't generally have that kind of money in credit unions. But here's my very strong guess and I'm going to ask if you agree, were there to be a run on credit unions, the federal government would insure the deposits much as it suddenly began to insure money market deposits when that run occurred.
ZVI BODIE: Right. Right. Now that's the kind of question, Paul, that really does call for a little expertise! And yes, my analysis agrees with yours on that score. I mean, we saw the federal government stepping in to insure money markets...
PAUL SOLMAN: Yeah, well, that's what I was saying, yeah. And I mean, money market funds for which there was no guarantee at all!
ZVI BODIE: Exactly, no explicit guarantee.
PAUL SOLMAN: And yet, I remember when I first put my money into a money market fund back in the '70s somebody said, "What would happen if Fidelity collapsed?" I put it into Fidelity and I said, "You know, I think the government will step in if we get to the point that money market funds collapse." That was in the late '70s.
ZVI BODIE: Right.
PAUL SOLMAN: And then...
ZVI BODIE: That's called "too big to fail."
PAUL SOLMAN: Right. Even then.
ZVI BODIE: Yes.
Zvi Bodie Boston University
We're going to see lots of "good banks" emerging in the weeks and months ahead as part of the solution that the Fed is working out to this financial crisis.
Getting a home loan
PAUL SOLMAN: Even then. Right. So let's move on to another question. Another question from Jason, who himself comes from Emmaus, Pennsylvania. "My job is going to transfer next year. I was a little worried about being able to buy a house with all this talk about frozen credit markets, etc. So I called my bank. They said I should have no trouble getting a standard loan and that nothing's really changed about home loans except that they don't give those odd loans anymore nor loans to people without credit history. So, where's the problem really?" Where's the problem for Jason?
ZVI BODIE: No problem for Jason, I would say, or at most a modest problem because we're going to see lots of "good banks" emerging in the weeks and months ahead as part of the solution that the Fed is working out to this financial crisis. So, there will be credit available to qualified borrowers like Jason.
PAUL SOLMAN: And in fact, even now -- this is anecdata now folks, I didn't even look this up on Wikipedia -- but the people I know for the most part, if they're credit worthy, can get loans now, and the loans are cheaper, right, because interest rates are down, mortgage rates are down.
Paul Solman The NewsHour with Jim Lehrer
There's no interest rate paid on it, you don't earn anything on gold, you're just sitting there in a defensive position basically.
Investing in gold
PAUL SOLMAN: Here's George from Glastonbury, Connecticut, right around Hartford. "How much of my investments should be in gold?" What percentage, Professor Bodie, of your investments are in gold?
ZVI BODIE: Well, it depends if you want to count my wedding ring and my wife's wedding ring.
PAUL SOLMAN: Well, I'm looking at your wedding ring right now -- it's sort of a flimsy thing here, I don't mean to cast aspersions on your marriage.
ZVI BODIE: But kind of nice. It's symmetric.
PAUL SOLMAN: It's symmetric, nice, but the fact is it cannot be classified as an investment.
ZVI BODIE: All right. Well then I would say zero is the fraction of my wealth that's invested in gold.
PAUL SOLMAN: And why is that? Is that because you're a fraidy-cat?
ZVI BODIE: It's because I don't think that the risk of investing in gold is justified by the expected return, even as part of a diversified portfolio.
PAUL SOLMAN: Now, there's one thing we have to confess about gold, which is of course there's no interest rate paid on it, you don't earn anything on gold, you're just sitting there in a defensive position basically. So, I myself own no gold except for my wedding ring.
But I have to say I've seriously considered it. And I've seriously considered it because I think there is at least some likelihood that the dollar will go down in value, it will inflate.
That is we will have too many dollars around because of all the money that the Federal Reserve is creating and so forth at the moment, and if that's the case, anything that is priced in dollars -- as gold is -- will go up in price as the dollar goes down in value, and therefore if you buy gold now, why, then you're protected against that inflationary risk. Don't you agree with that?
ZVI BODIE: Well I might have agreed with that, in fact, I would have agreed with that in part up until 1997. In 1997, the U.S. Treasury solved that problem for investors like you and me by issuing U.S. Treasury bonds that are inflation protected. They are the perfect inflation hedge or the almost perfect inflation hedge.
PAUL SOLMAN: And a quick confession, which is that Professor Bodie told me about this shortly after they were first issued. I put them in as the major investment in our pension portfolio and I thank Professor Bodie every day!
ZVI BODIE: Well we should mention their name - TIPS.
PAUL SOLMAN: I-Bonds! That is government bonds -- just government savings bonds. And you can buy them by going to treasury.gov online.
ZVI BODIE: Treasurydirect.com.
PAUL SOLMAN: Sorry, treasurydirect.gov.
Zvi Bodie Boston University
The program is just not smart enough to distinguish between sophisticated credit card users and unsophisticated credit card users.
Credit cards and credit scores
PAUL SOLMAN: Paula from Tigard, Oregon, writes, "The business advice columnist in the Oregonian -- the daily paper -- recently answered a question about canceling a credit card when the issuer changes the terms, ups the rate, I suppose. One of her comments was that it always negatively affects one's credit score to cancel a card." I've gotten this question before on the Business Desk.
"My question is: Is there the same kind of conflict of interest between the agencies that rate consumer creditworthiness and give you your FICO score -- I'm editorializing or interpolating here -- and credit card issuers that existed -- the same relationship, that is -- that existed between credit rating agencies and issuers of asset backed securities." So, that was Moody's and so forth that gave AAA ratings to these ultimately rotten mortgage-backed securities.
She continues, "If consumers can't cancel a card with onerous terms without damaging their credit score, the consumer appears to be in a no-win situation." True?
ZVI BODIE: True. True. It's a pretty naive software program that they have that says, you know, they've identified the number of credit cards that you've had in the past as a major factor in increasing the risk of the default. And they...the program is just not smart enough to distinguish between sophisticated credit card users and unsophisticated credit card users.
PAUL SOLMAN: Yeah, it's amazing. I mean we were talking about this with friends of ours in preparation for this very broadcast and one of them, producer Lee Koromvokis, was telling us that she's got 51 active credit cards even though she's canceled most of them. You know you go to the store, they say 20 percent off...
ZVI BODIE: She's sophisticated! She takes advantage of the period when the interest rate is very low!
PAUL SOLMAN: Yes.
ZVI BODIE: Which is typically the teaser period.
PAUL SOLMAN: Yes, but she found out that her credit card score is not as astronomically high as it would otherwise be because she has 51 credit cards!
ZVI BODIE: Exactly. That is the Catch-22.
PAUL SOLMAN: And by the way, the way this works, I've discovered doing research on it to answer questions on the Business Desk, is that if you cancel credit cards, your total credit amount -- you know that you can borrow up to, draw against -- goes down.
So, let's say from $50,000 to $20,000. Meanwhile, you've got $10,000 outstanding. Before it was only 20 percent of your total limit, now it's 50 percent. Right? You follow? Because it was 10 percent, $10,000 out of $50,000, 20 percent; now you're down to $20,000 because you canceled the cards and now it's...
ZVI BODIE: You have to remember that all of these programs that credit companies rely upon are based on naive consumers and sometimes if you're smart, you're too smart for your own good!
PAUL SOLMAN: Well, that's all the time we have for the first installment of Pocket Change. We'll be back. Professor Zvi Bodie, thank you very much!