Expert Advice for Surviving the Economic Crisis

MARGARET WARNER: We got hundreds of e-mailed questions, more than half of them from people worrying about what all of this means for their own lives. So let's get right to it.

A viewer named Laurie in Alexandria, Va., wrote: "What does the Wall Street meltdown mean for the average person, either right now or in the future? What does it mean for the safety of our money in banks or for credit availability?" She says, "It's difficult to translate what we're hearing into either our own lives or the financial viability of our country." And Dick Sylla, why don't you go first.

RICHARD SYLLA: Well, I think I can reassure her that the banks are safe; they are federally insured and even if the banks happen to get into trouble and lose money or even go into bankruptcy, the government insures those deposits. We had IndyMac fail earlier this year and the FDIC stepped in and I think spent $7 billion to pay the depositors.

In terms of the other part of the question, credit availability, I believe that these crises tend to shock bankers as much as they shock all the rest of us. And one of the effects of that is that they're going to scrutinize loan applications much more carefully. So it's probably true that credit availability will be a little tighter down the road.

DIANE SWONK: Well, to echo that. This is Diane Swonk. I think that's exactly right. Dick pointed out very well that your money is safe in banks, but it is harder to get a mortgage loan today than it was a year ago. Thankfully, it's harder to get one than it was two or three years ago.

The pendulum has now swung very much in the other direction. In fact, some 63 percent of banks have now reported that it's at least somewhat harder to get a loan today, a consumer loan including credit cards and vehicle loans and mortgages, than it was just last month.

With that said, it still is possible to get a loan. It's hard to figure out what the right balance between, you know, how much we give consumers loans and how much banks are conservative and actually do some due diligence and look at whether or not someone can pay back that loan.

I think Dick is exactly right that there are some fears among bankers, but there's also some regulatory issues that bankers are facing where they're not able to give as many loans as they were in the past because the situation has fallen out as it has.

Many companies have now used their lines of credit that they had just as a backstop at banks, which has absorbed a lot of the ability of banks to lend elsewhere. The fact that banks can't sell their mortgages off their balance sheet into places like Fannie and Freddie - they're getting more ability to do that today than they did just a few weeks ago, but that also had curtailed the ability of banks to lend. We're starting to unwind out of some of that, but it's going to be not an overnight process.

The only thing I'll reassure people about that I think is very important, the fact that we're taking these loans and feeling this pain - exact opposite of what Japan did. Japan decided to put its head in the sand and ignore its problems and ended up in a more-than-decade-long period of economic malaise and turmoil, and particularly a credit crunch. We're now not in that situation here. So our situation will come out of it much sooner than Japan did.

MARGARET WARNER: Jane Quinn, what kind of a hit, then, are small businesses taking and likely to take if they want to expand, if they want to add jobs?

JANE BRYANT QUINN: This is going to be very difficult for small businesses as well as consumers because the banks simply don't have as much money to lend. The main - you know, credit is the oil in the machine. And we have a wonderful machine in America, but what makes it run is the fact that people can get credit, businesses can expand, you can buy - you can get a mortgage; you can trade up on your house; you can get a credit card.

And when all of this shrinks - and this is the core meaning of this for consumers - is that when you don't have this kind of access to credit, you can't build a business as fast, you can't hire people, you can't trade up on your house, other people can't buy your house.

The whole machine starts slowing down because the oil is seeping out of it. And you don't see it immediately; it seems as if it's happening far away on Wall Street, but you see it when you have a florist business and you want to hire a few more people and rent the shop next door and discover you can't do it because, all of a sudden, your bank is hoarding its money for itself so that it can stay solvent and won't face the kind of problems that you're seeing a lot of the insolvent banks facing.

So they're hoarding the money. They're not making loans to you and you're not seeing businesses expand as fast. And I think that this is going to get increasingly more of a problem over the next few months.

MARGARET WARNER: All right, well, Dick Sylla, back to you, we also had a lot of questions about people who had money in money-market funds, either in CDs or money-market deposits, whether they were being held by - whether Merrill Lynch or Lehman Brothers or simply indirectly or AIG. What does this mean for the safety and value of those?

RICHARD SYLLA: Well, I think all assets are under pressure, downward pressure, that there's certainly the mortgage-backed securities and the securities that were built on the mortgage-backed securities. Those have fallen in value and that is the main reason why some of these great institutions like Bear Stearns and Lehman Brothers and Fannie and Freddie and even AIG are in trouble.

Now, I'm a little surprised that it's going all the way down to money-market funds because the typical money-market fund buys very short-term stuff. You know, a government one would have Treasury bills and would not have any problems.

But other ones, by commercial paper, issued by companies, and it appears that one or two money-market funds have found that their $1 shares are really only worth 97 or 98 cents now because some of the - even short-term assets that are backing those shares have gone down in value.

The great majority of money funds are still $1 a share; they haven't broken the buck. And some companies have even put money into the money-market fund in order not to break a buck. So I think most of them are safe, but it is a little surprising and it shows how deep the crisis is that even one or two money-market funds have broken the buck.

JANE BRYANT QUINN: This is Jane Quinn. Let me just add to that. I think that we have all simply assumed that money-market funds were going to be safe because they have been for so long. And no consumer has ever before lost money in a money-market fund. The last one that failed was in '94, but that was an institutional fund.

So this is a very big deal and it's going to cause consumers to take a look and say, I've been keeping it in a money fund; I've been assuming everything is fine, but now we have the primary fund - it's the first money fund that was ever created, a huge money fund. And people are losing 3 cents on the dollar that we last saw. I don't know what it will be later this week.

And this is a shock. And if you don't have an awful lot of money, you now start saying to yourself, well, is an extra percentage point in a money fund worth it? Maybe I should be in an insured deposit. And that's a fair question for people to be asking themselves. Without question the majority of the industry is going to be just fine, but these are unusual times and we're finding surprising things.

Money funds that are associated with large commercial banks, large mutual-fund organizations, when they have gotten into trouble, their parents have bailed them out. But the primary fund was a privately held company. It's a huge company, but they clearly didn't have the money to bail them out.

I might add another word and that is about people concerned with their insurance policies with AIG. I've been checking on the ratings of those insurance policies this morning and what went broke is the holding company, not all of the AIG insurance companies. And all of the AIG insurance companies are still maintaining conservative ratings. So I would not worry about going in and trying to switch out my insurance. Believe you me, that costs you more than you want to do that.

It's very expensive to switch your insurance to another company and the AIG insurance companies all are maintaining good ratings.

RAY SUAREZ: Well, a lot of people wanted to know what the technical definition of a recession is. So, why don't we start, real basic.

Brian Bethune?

BRIAN BETHUNE: Sure, I could take a look at that.

Really, what a recession involves is a generalized decline in activity in the economy that is fairly broad-based, and lasts for some period of time. So, a temporary decline that only lasted, let's say, for two or three months would, technically, not be a recession.

But if there's a broad-based decline, meaning there are several major industries or sectors that are involved and that lasts for, you know, perhaps six or seven months, then at that point, that type of a downturn would be classified as a recession.

RAY SUAREZ: And how, Lisa Lynch, does that express itself in the job market? Whether it's a -- technically -- a recession, that is a contraction in absolute terms, or just a slowing in the rate of increase, how does it end up being manifested as people no longer employed?

LISA LYNCH: Well, actually, one of the challenges of determining when a recession happens is that typically what we see is that the labor market is what we call a lagging indicator of what is happening in the economy, overall.

So, as Brian described, we have this contraction, especially when it's broader-based across the economy -- what that contraction is, is not in employment, per se, but in how much we are producing in goods and services in the country.

So, you might imagine a situation that employers reduce the amount of product that they are producing, but they may not initially lay off workers, because they're waiting to see if this is something a month or two months in duration, or is this something longer.

And then as they see that this contraction in demand actually seems to be longer term, then they lay off workers.

So, typically what happens, if you track the unemployment rate, for example, you see that that rises -- and actually continues to rise -- even after, officially, the recession is over.

RAY SUAREZ: So, if joblessness is a lagging indicator, the seeds for today's job losses were really being sown, when? Last summer? Fall?

LISA LYNCH: May have been after August into the fall -- it's hard to tell.

Now, you can have fluctuations in employment numbers from month to month, and it's important to note that all of these employment data that are reported by the Bureau of Labor Statistics come from surveys.

And these surveys have sampling errors, just like when we hear polling statistics for Presidential election races, you know, margin plus or minus four percent.

We also have to note that with respect to the employment numbers, so that minus 63,000 that we saw in employment for the February jobs report is -- comes from a survey that has a sampling error that is large enough that it may have actually, we may in reality, have even been growing the economy or we could have been contracting unemployment even further than the number reported was.

RAY SUAREZ: Well, pursuant to what Lisa Lynch just said, Brian Bethune, people in my line of work are constantly being cautioned by economists, "Don't look at one month's numbers."

Okay, so if we look at the new numbers that came out last week, and look at the downward revisions in the numbers from the two previous months, are we working on a trend from which it's possible to make some observations about the state of the job market?

BRIAN BETHUNE: Well, yes. When you look at the numbers that we received last Friday, what we see now is that, with respect to the establishment survey -- which is basically the survey that the Bureau of Labor does on actual businesses -- that now has shown a decline in private employment for three consecutive months. And that totals a decline of 141,000.

The household survey, which is another survey which is used to gauge what's happening in the employment markets, actually had a cumulative decline of 654,000, which is again, another three-month decline.

So, both the household survey and the establishment survey have indicated that there have been declines in total employment, now, for three consecutive months.

So, that's a pretty strong indication that, you know, overall there's some issues that the economy, in terms of overall activity, is declining, because as Professor Lynch indicated, usually the employment numbers are a lagging indicator and when you start to see declines -- sequential declines -- over several months, that's an indication that some kind of process has already started which is bringing economic activity down.

And I would agree with Lisa Lynch that that probably started -- the whole thing started in, around the August, September, October period, and then has been sustained for long enough that we're seeing, now, this decline in overall employment.

RAY SUAREZ: Deb Wilkinson writes, from Portland, Oregon, "I was told that the method of calculating unemployment figures by the U.S. government had changed, that many people are not counted, and the actual unemployment rate for American citizens working in the U.S. is much higher than reported. Finally, I heard the government does not count the homeless in the unemployment figure, either, which is going up dramatically during this financial crisis."

Professor Lynch, is this all true?

LISA LYNCH: So, the unemployment rate is calculated from a survey that, about 70 percent of the respondents are contacted by telephone, and 30 percent are interviewed in person. That the BLS does, the Bureau of Labor Statistics does, every month. This is a survey of about 60,000 households across the United States.

It's a representative survey of households with addresses. So, your viewer is correct in raising concerns about how the homeless are, or are not, included in this survey. Anyone who is living in a shelter, in a hotel, in prison -- these are individuals that would be part of what we would call institutionalized, or not at a permanent address, population, and they are not included in the sampling that's used to calculate the unemployment rate.

Now, that's not necessarily a huge number, a huge problem if you're looking at changes, as opposed to an absolute level of the unemployment rate over time, unless you are concerned that there have been big changes in people losing their homes.

Now, this actually came up as an issue during Katrina, where we had a lot of people displaced because of the hurricane. And in that situation, the Bureau of Labor statistics actually took some extraordinary measures to track evacuees, and to follow what was happening with them. Because they, then, by living in a shelter, fell out of the usual definitions that were used to track what was happening to individuals in the labor market.

But the household survey is a sample, they do try to make adjustments for people that are not interviewed in the survey to come up with a national projection for the unemployment rate.

KWAME HOLMAN: Thanks for listening to this special edition of the Insider Forum. Until next time, I'm Kwame Holman.