Personal Finance Columnists Answered Your Questions on the Wall Street Crisis

KATHY KRISTOF: I think he's very wise. He's doing exactly what he should be doing. He's in his early forties, so he can be aggressive. If he's saving diligently now, he is, more than likely, really using the value of compound interest, which is an incredibly powerful force. And so he has the option or the opportunity to have a lot of money in savings by the time he's in his 60s.

And so, yeah, he can be more aggressive and I think the idea of sticking through bad times is exactly right, and in fact you invest more during bad times, because - when you have lots of time like that - because you're more than likely buying low - that's what everybody tells you - buy low, sell high. But it's really, really hard to do.

It's a great little adage, but when you're doing it, you're going the absolute opposite direction of everybody else, and that is very uncomfortable. You should know that most of the time, the less comfortable you are about your direction you're going with the markets, probably the more likely you are doing it right.

RAY SUAREZ: But will the Petes and the many other small investors like him just have to come to terms with the fact that there are some assets that have been revalued by this era in our economy - that certain things, in fact, were never worth what we paid for them, or will never live up to the expectations we had for them when we bought in?

KATHY KRISTOF: Well, certainly, if you were buying into the bubble, which is what real estate prices were, yeah that was a mania. Markets definitely do that - they do it on the upside, they do it on the downside - and no, I mean, you know, if you realistically look at what has gone on - to housing prices for instance - you had to know that can't possibly last.

Just looking around you as opposed to trying to make this into something complicated and economic, look around you and look at what some of the houses in your neighborhood sold for. Were they really worth that? Is that a rate that you would have paid, well probably not?

So are they going to come back to that spot again? Well, maybe, as inflation rises, but that's like a really, really slow period of time and it really only means that the cost of living has come up like that. So, no, these things are not going to come back to the mania levels, but they'll probably come back, eventually, to the reasonable levels that those of us that have reasonable budgets and reasonable expectations expect for them, and that's just fine.

RAY SUAREZ: Michelle, how about that? Are we - should we be ready for a period of revaluing a lot of the assets out there in the marketplace?

MICHELLE SINGLETARY: I think we should, and it's about time. We were all - and I mean "we" meaning the American people - have been in love with debt because that's how we've been buying all these assets - both individuals and corporations. And as history has shown - I mean, I have a master's degree in business law: I know how markets go. You know, they go up and they go down and these bubbles burst - they have to burst - because they're irrational.

There are some people holding on to homes right now, praying that it's going to go back, and they need to sell because they can't afford the house and they don't want to do a short sale, but you've got to get rid of it if you don't have that income coming in every month, and there's no way - you can cut until you're basically eating oodles of noodles every day - that you're going to be there for the house. You've got to let it go: Take the hit and learn the lesson.

RAY SUAREZ: Claire writes from Jacksonville, Florida: "I need help, as I don't know what to do about my 401(k). I have just over $13,000, and in recent months, have lost approximately $2500. I'm 66, retired, and have no other savings or pensions. I'm afraid to lose it." Who wants to jump in first?

MICHELLE SINGLETARY: Well, she shouldn't be in the market. If that's the only money that she has, and she's got to live off that, she should not be in the market. See, this is the other thing: You know, everybody wants to know what to do, but the problem is - and it's our government's fault - we push people into these investments, and people don't really know what they're doing. You should not invest a single penny that you cannot afford to lose.

Now, I know people are saying that, you know, we needed to invest for retirement, which is true. But it ought to be with money that you can afford to lose. I've got money in the market; if I lose every single dime, I'm not going to panic. Well, I'd be - I don't know if I should say - pissed. I'd be very, very angry, but I'm going to be okay. You know why? I don't have a lot of debt.

All I have is my mortgage. I'm not going to let my kids borrow for college. So, you know, I hate to tell this woman, but she's in trouble because she needs that money and if you need that money to live - pay your bills, to pay for medicine - you should not be in the market.

RAY SUAREZ: But, Kathy, where do you put it then, to make sure that it doesn't burn up with the chestnuts you've already lost in the fire?

KATHY KRISTOF: You know what, when you have such a limited amount of assets, you have to be extremely conservative about how you invest them. And as Michelle is saying, you know, this is a typical person who really should be in certificates or some kind of inflation-protected securities - you know, just fixed-income investments. The bad side about those fixed-income investments is, the upside is very limited.

RAY SUAREZ: We got several questions about credit unions including this one from Diane in Hawaii: "I've heard so much information about a good place to keep your money, as well as how certain institutions are affected by this financial turmoil, but I haven't heard anything about credit unions. How are they faring? Are they a good place to keep your money?" Kathy?

KATHY KRISTOF: Credit unions are very much like banks. They are insured by a similar thing to the FDIC but it's a credit union association. They - you know, I think you can feel equally comfortable with your credit union as your bank. You should always - not because you think you're going to lose your money in your bank or your credit union - but because if there is a failure, it's unsettling, you should always pay attention to how well your credit union is doing and keep abreast of the news and changes and policies and how they're handling things that would be troubling under any circumstances.

But you certainly don't need to be more concerned about the health of your credit union than you would be concerned about the health of your bank.

MICHELLE SINGLETARY: She should run for Congress.

KATHY KRISTOF: Don't you think? I love this girl.

MICHELLE SINGLETARY: You know, I mean, I've been feeling that way because at the core of the debate of why we need to pass the bailout is that, you know, the tightening of credit. And I have heard legislators - I can't tell you how many times I've heard say, well, you know, businesses need to borrow to make payroll. That's a problem if you are borrowing to make payroll. That is not a well-run business. I know that that's what businesses do now because we make credit so available.

But way back when, when people had sense, you didn't do that. You borrowed for maybe expansion, to buy equipment. And it's the same thing with individuals. I think it's good that the credit market is tightening.

There was a time where we made the standards a little looser because there was a lot of discrimination going. There were African Americans and Hispanic families who couldn't get loans because there was red-lining going on. And so some of those standards were lightened. I wouldn't say that they were thrown away but now, you know, we are a nation who loves debt and now we see what happens when you love that kind of bondage.

RAY SUAREZ: Pioquinto writes from El Segundo, California, "I'm against the bailout. I'm retired. I have a fixed-rate mortgage, pay off my credit card each month and have no other debts. I planned for retirement by putting five-years expenses in cash investments. How will failure to approve the bailout affect me? I feel the bailout punishes those folks who manage their finances well and reward those who do not." Kathy?

KATHY KRISTOF: He's dead-on right, absolutely, positively right and I'm very concerned about the effect of this bailout on inflation. I think that when you add this much debt to your national bills, you create something that's inherently inflationary and some of us are old enough to remember the late '70s and early '80s when inflation was such a problem that you could get a mortgage, but it was at 14 percent. The prime rate was at 21 and, in my opinion, that's a much better way to choke off an economy than having tight credit.

I personally think that the reason why we're so desperate about this bailout is because it's an election year and nobody wants to take responsibility for a bad economy when people are ready to vote.

RAY SUAREZ: Two questions on buying a home from the opposite ends of the country. Katie writes from Sacramento, "My fiancee and I have been saving for about two years and are currently working with a real estate agent to purchase our first home. We both feel that our jobs are secure and are going to make sure that we have enough money in the bank to sustain us for us to three months should one of us lose our job. Given all of these precautions we've taken, should we still wait to buy and, if so, how long?"

And Bill writes from the Bronx, "My wife and I and our three kids have been planning for some time to trade up to a bigger house as we've recently had our third child. I'm a firefighter, my wife is a teacher, both of us fairly senior in our positions and have zero concerns of losing our jobs but, still, are we crazy?"

Michelle, these two seem like they're in a pretty good position right now.

MICHELLE SINGLETARY: I think they are. I mean, I don't think they're crazy. They certainly sound like they've been prudent in how they handle their money, especially in having an emergency fund that is separate from, say, the down payment that you've been saving up.

I would say that if you're going to buy a house right now, be sure to have that emergency fund. Have as little to no debt if you can and then, I think you'll be fine buying a house.

And, listen, the banks are looking at your financials much harder than they have in the recent past, which is a good thing. So if you qualify for a loan and you get a good rate and you feel that that house is fairly priced now, then go for it. You know, the economy isn't going to just stop in its tracks despite what's been happening on the market. I mean, people are still going to buy groceries. People still are going to buy houses and just do it prudently. And if you have done all of your due diligence, it's a good time to buy a house.

RAY SUAREZ: But, Kathy, our letter-writer Katie seems to be a little concerned that if they move ahead and buy a house - and California's been a very hard-hit marketplace - that it might not be worth what they paid for it even in a year from now.

KATHY KRISTOF: Well, you know what? The only reason why you're going to care whether your house is worth what you paid for it a year from now is if for some reason you want to sell it. And you should never buy a house if you don't think you're going to hang onto it for at least five years. That's simply because the trading costs of buying a house are so steep that you're likely to lose money if you are trading that frequently.

But if you're buying a house because this is where you want to live for a long period of time, buying a house is half investment and half expenditure. And if you like the house and it makes your life more warm and wonderful then it's a great way to spend your money.

So stop looking at this as an investment alone because it's not and look at it as a lifestyle choice. If you're ready for that lifestyle choice, you can afford it, you buy it. Stop being silly about, you know, like whether it's going to appreciate. You only care when you're selling.

KATHY KRISTOF AND MICHELLE SINGLETARY: Yes!

MICHELLE SINGLETARY: Absolutely. Absolutely 100 percent. And people misunderstand the whole concept of home equity, which is what got us, part of the reason why we're in this mess. People were pulling out money like it was an ATM because they would say, well, I'm - I can't possibly let my money sit in this house. And I always tell people, if it was your money then you wouldn't have to borrow it.

You know, equity only matters if you sell. So what your paper worth is for your house is - it shouldn't matter. It's paper wealth. And, as we see now, that paper was very corrosive and so, you know, buy a house that you're comfortable with and don't look at it as an investment.

If it goes up in value, great. And, over time, houses do go up in value, generally speaking. But that's why you've got to cover all of these other bases: Get rid of your debt, have some savings, diversify your investment portfolio and live below your means!

And if you've been doing all of that, you'll be upset about what's going on, but you can get through this crisis.

RAY SUAREZ: Well, we've got a lot of questions from people who wanted to know whether the bailout or whatever they're calling it today, the rescue plan, is going to get at the root of the problem, sort of cure the particular ill we're suffering from right now and whether the people who got us here are being sufficiently spanked. What do you think?

KATHY KRISTOF: Oh my god. You're getting on my pet peeve. No, the bailout does not get at the problem. The reason why is the money is flowing in the wrong direction. If you give money to Wall Street, there is more money available to borrow, but you've done nothing to make the people who can borrow money, the citizens, in a better position to borrow it.

And so you don't solve the economic ills. You want to solve the problem that we have now? You go the other way and you start saying, okay, you know what? It's equally morally repugnant to have to pay off loans for people who have gone way past their means. But if you pay off their loans rather than giving the money to Wall Street, you actually put Joe Consumer in a better position and the banks still get their money that they can then lend.

So, yeah, I think the bailout does not solve anything and I'm horrified by the additional cost that the Senate has put into it in order to pander to people to get votes.

RAY SUAREZ: Michelle?

MICHELLE SINGLETARY: This bill is a confidence bill. That's what we should be calling it: a confidence bill. And I use that word very carefully because it's a con but it's also done to give confidence to those people in the markets. That's what it's - I mean, really, it's not going to fix anything right away but it will make people think we've done something. But all we've done is add more debt to our deficit and, long term, we're going to pay this bill two and three times over by less resources in our state governments and federal government.

I mean, not too long ago, we were told we don't have any money for some sort of healthcare plan so people could have healthcare coverage. Now we can come up with $700 billion in debt to bailout Wall Street?

But the fact of the matter is, it's probably going to go through and, you know, in a couple of years, we'll see how bad it is after everybody has already been elected.

RAY SUAREZ: How long will it take, do you think, to see whether this help does solidify the foundation stones that the economy rests on, whether the medicine really did anything to help with the disease?

MICHELLE SINGLETARY: You know, I don't think there is an answer to that. If you listen - and I watched the Senate [hearing] where the Treasury secretary and the Federal Reserve chairman were speaking and, in fact, I listened to it and watched it twice. They had no answers. They have no idea how they're going to buy it, these assets, these bad assets. They don't know how they're going to price them. They don't know how long they're going to hold onto them. So the answer is, we don't know.

RAY SUAREZ: Kathy, do you share that?

KATHY KRISTOF: Yeah, it's disturbing how much we don't know and it's disturbing how willing Congress is to pass a bill that saddles us with an enormous amount of debt when they have no answers of how this is going to go.

The reality is, I think that when this passes, the market will have an immediate jump and it will be, as Michelle is putting it, a relief jump. You know, it's like a psychological issue. And it's Wall Street that is relieved that it's passed because it allows all of these people on Wall Street, to, essentially, to keep the ball rolling.

Okay, you know, keep - if you keep the credit just going, regardless of whether it should be or not, well, then, you know, the economy keeps on clicking along. But I think what you do is you just forestall the damage. You push back the day of reckoning and I think, you know, as everybody who's got kids knows, if you let - if you spoil your kids and you let it go, you let it go, you let it go, when you finally have to address it, it's way, way, way worse than it would have been if you addressed it much earlier.

You know if your teenager goes crazy with their credit card, do you give them more cash or do you take away the card? You take away the card and I think that's what we're not doing and it's really disturbing.

MICHELLE SINGLETARY: But I don't think the American public - we're not ready for what it's going to take to make all of this right. And I think that's what finally the senators have thought and maybe the House of Representatives will finally say, you know, the people are not ready for this medicine right now. They don't want to see unemployment go up. They don't want to see credit taken back. They want to continue to buy cars and get a new car loan and they've already got debt on the old car loan. They're not ready to give that up yet.

And I think that's what they're facing. I mean, we're in a real - just a - I don't even know what to say; it's just so stunning how we got to this mess.