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Week of 2.27.09
Transcript: Retirement at RiskBRANCACCIO: If you listen carefully, that's not just the collapse of the economy in the background...it's the rumbling of a demographic freight train that many of us are all aboard. The first of the babies born after World War II will turn 65 years of age in, get this, just two years. And what will these boomers have to retire on, besides the modest cash of social security? An unsettling question...given the turmoil in the markets...Let's now turn for some counsel to a pair of veterans in these matters Amy Domini is the Founder and CEO of Domini Investments, and is a pioneer in the field of socially responsible investing, and Dan Gross covers the economy as a senior editor and columnist at Newsweek magazine Amy, Dan, welcome. DOMINI: Thank you. GROSS: Good to be here. BRANCACCIO: So, Dan, what are we gonna do? We have this bubble of our population heading quickly toward retirement age. Next couple years. And most of them didn't save enough. And those that did, it's mostly gone away in the past year. It—how do you—how do we move forward from this position? GROSS: Well, look, we've been embarked on this experiment, really, with 401k's. Which is that people save for their own retirement. And they save for their own retirement primarily by investing in stocks. So, in many ways, this is a men—is an experiment, and we are in uncharted territory. Did we—part—that's part of the reason that it's so terrifying. Because we're not sure how this all ends. Will there be more government support for people in retirement if it turns out 401 k's aren't a good solution? Will people be working longer? Will the whole system have—sort of have to change? Will there be new products developed that offer—better guaranteed investment returns. BRANCACCIO: If it's your responsibility to take the money and do something good with it, you can benefit from the upside risk if it goes way up. DOMINI: Yeah. BRANCACCIO: But—what we're learning now is the downside risk was just awful. DOMINI: I mean, I could learn how to put out fires. But—you know, really, I would rather have a firefighter put out the fires. And I think the firefighter would rather have a portfolio manager manage the assets. Or somebody who really had a clue about retirement planning manage the assets. GROSS: In this environment, the professionals haven't done all that much better than the individuals. I mean, you look at some of the stocks that have been the worst performing, they've been the Blackstone Group. These guys, a private equity fund that went public, Fortress —hedge fund that went public. These guys know how to make money better than anybody else, you know, in the universe. And their stocks have been, you know, gone down 80, 90 percent. BRANCACCIO: Now, we have to move forward from this somehow. And I—even in recent years, not just this year, often the advice was, to people who had not saved enough for retirement, "Well, you know what, you're gonna have to work enough three years past what you thought might be your retirement age." I mean, what are we gonna do now? Tell people to work 'til they're 97? I mean, what—how do we—guarantee some sort of security for people in their old age? DOMINI: Yeah. Well walk into any Wal-Mart. They're already there. Greeting you. BRANCACCIO: As the greeters. Yeah. DOMINI: Greeting you. And—it—people will probably be working longer. I think we're gonna see a lot of—changes. The baby boom generation has always surprised everybody. You know, we were supposed to be high unemployment, living the simpler life than our parents, and all those things, because we were such a population rise—you—you know. And we've always generated a means to meet our own—and—desires. And—and I bet, during these next few years, we'll create new things that aren't there for meeting them. Cooperative living. It's a simple one on one. Or cooperative sharing of assets is a larger one. GROSS: Well, I also think we're gonna see—a greater reliance on the government. There's kind of two factors here. You know, after the wake of the Great Depression, the stock market crash, when there was no safety net, we got—a reasonably small safety net. We got social security. We got the FDIC. We are gonna get some more of that. I would guess that we are going to get national health care out of this crisis. New types of regulations. Which benefits everybody. And a second is that, as the baby boomers go through life—since they are such a large cohort, they tend to get what they want. I mean, it's no surprise that, in the last several years, we got a prescription drug benefit for Medicare. Because you can see who's starting, you know, increasing number of voters are gonna want those prescriptions that want to pay for it. So— BRANCACCIO: Large bunch of Americans, all of them with political power, each one of whom votes. GROSS: So, you know, I—I would think the—rather than privatizing social security and ending it, which was some of the talk five or six years ago, I think we're gonna be strengthening social security, and perhaps fortifying it if things go forward. So—yes, the baby boomers have done and will do extraordinary and unexpected things in the private sector. But their influence on the public sector is really substantial. And we've seen that, you know, over time. BRANCACCIO: You seem less worried now than you might have been about the general financial state than, maybe, a month or two ago. DOMINI: You know, there are any number of indicators that little pockets are turning around. You know, people spent more money in January than they spent in December, you know. Maybe because there were big sales. But if you're unemployed, if you have no money, you don't spend more money. GROSS: Well, I think—well—well, you know, one of the challenges is you never know what's gonna get you out of the economic ditch you're in. I mean, people always—back in 2000, 2001, when the Telecom and telecommunications sector went into the hole. And that had been the big engine of growth that was driving the market. Huge valuations. And all those CEOs said, "Oh, you know, our orders will be down for a quarter or two. But we'll be back in the second half." And, of course, that recovery never came. Because they had just gone through a bubble. And what got us out of that was, you know, cheap money, and—car sales, and ultimately real estate and credit. Now, if you take the long view, and if you believe that— BRANCACCIO: We have to take the long view. We have no choice right now, my friend. GROSS: And history is some guide to how this economy performs, there will be—something that drives growth in the future. And—and that is, you know, we're seeing the seeds of that now. Alterative energy, I think, is—an area that has a lot of potential for growth. I see a, kind of, an even bigger picture, which you might call the efficiency economy, the smart economy. We're talking about the government catalyzing some of these investments of, you know, weatherizing homes. New infrastructure. New fiber optics. School building. Making all the government buildings more energy efficient. That not only creates jobs, buys products and services now, and helps create a US industry for those types of things, but then lowers the cost of operating buildings, homes, schools, which—contributes to the productivity of the overall economy. BRANCACCIO: It's a real reminder that the economic stimulus package, passed by congress the other day, actually, if it works, if it works, I mean, it's very relevant to the future of people's actual retirement savings. Because it would, ultimately, one hopes, feed through. DOMINI: It—it's—it's a very good package. It—it's—it's gonna protect—not as many jobs as we would have liked, but it's gonna save a lot of jobs. It's gonna create some jobs. Well, another piece, that a little bit I think this administration needs to focus on, is when the great reforms of 1933 and '34 came along, they had—assistance for cooperative and local opportunities. We're not seeing those kinds of things. The Credit Union Association was also put into place. And credit union insurance, non-profit banking facilities, were put in place at that time. There's tremendous opportunity with this interest in local food, local business, shop at home. And—and I think it—a lack of support for that is noticeable in this stimulus bill. And is something that should be focused on next round. The other thing I'm really pretty deeply disappointed in is—I'm not seeing regulation yet. BRANCACCIO: What do you think, Dan? —I mean, like, you and I are both raring to, probably, cover the story of what are the new rules that will apply? And I'm still waiting for something to cover. GROSS: One of the things I find the most strange, is the—the lack of either embarrassment, humiliation, shame of Wall Street, the financial services industry, that thinks it should have some say as to how things go down from here. The administration itself, I still think is bending over a little too—backwards, to take into account the feelings and the needs of bankers. They've lost their right, by virtue of, having failed their shareholders, having failed their creditors, and having failed to such a degree that they need hundreds of billions of dollars, from the taxpayers, to just stabilize themselves. BRANCACCIO: But, of course, you've just come out with a new book, Dan, and listen to the title: Dumb Money, How Our Greatest Financial Minds Bankrupted the Nation you're calling this thing? GROSS: I am. BRANCACCIO: So you're—calling into question this notion of the special expertise. GROSS: Yeah, the—and, again, this is one of the bizarre, you know, they talk about, oh, if we cap the compensation at 500,000 we'll lose all these talented people. What—you know, this is, like, you know, the—the captain of the Exxon Valdez. I mean, this is functional equivalent of what they did. They destroyed their ships. And, in doing so, caused all sorts of collateral damage. BRANCACCIO: But—but, honestly, who are we gonna find to do this kind of work? Who—I mean, is this—are we bringing in some people from academia? I mean, they're not gonna use—public television hosts to fix this. DOMINI: Well, I don't think you need to have these super sized trillion dollar companies there. I think there's a lot of reason to have—a company that does insurance separated from a company that does securities trading, separated from a company that makes loans. And—and, by the way, let's talk about credit cards for a minute. I don't understand why credit card legislation hasn't come along—pretty quickly too. There's a great deal of abuse there. And it's another housing bubble waiting to—to bring us all down. BRANCACCIO: As we've reported on this program. And, actually, Amy—you see—when casting about for some points of light, you think that all bankers are not created equal. There are the—are community bankers who are—a different breed all together. DOMINI: I—well, I mean, you know, I had the conversation with the head of mortgage lending at Cambridge—Savings Bank a month ago. They had 455 mortgages, and 455 of them are performing. I mean, it—you—the—the community banks are doing just fine. It—it— BRANCACCIO: These are banks that know who their borrowers are. Who, you know, reinvest the money, generally in the area. But, actually, Dan, you've reported on banks like that, right? I mean, that—that exhibit these kind of qualities. GROSS: Yeah, I did an article last summer about Hudson City Bank Corp. It's about ten miles to the west of here in New Jersey. It only—it always took 20 percent down. It— BRANCACCIO: Twenty percent down if you want to buy a house. GROSS: It work—if you wanted—so they worked generally with well off people. They did all their own credit-ratings and appraisals. They did not securitize their debt. They held onto all their mortgages. And, when you lend like that, guess what, you're gonna make smarter decisions. So, as all these other banks have faltered, they have been spreading throughout Westchester County and into Fairfield County taking up market share. BRANCACCIO: Their loans didn't go bad. GROSS: Very few non-performing loans. Part of what happened, in these last several years, is we put lending on autopilot. We had this technology called securitization. Which was that you sold them off. And if you could sell off the risk then you could assume any risk because it didn't matter. You wouldn't be around to bear the consequences. DOMINI: That's right. BRANCACCIO: Well, I remember sitting in people's kitchens—in California, some of these people had gotten loans where they didn't have to document their income. They could make it up. Or— DOMINI: That's correct. BRANCACCIO: —hope for the best. And we worry about those people now. DOMINI: Liar's loans. Liar's loans. Well, and it was an entire structure that was built for the—middle man. For the—advancer of the funds. To spin through and create the revolving door. It wasn't set up to get people into their homes. It wasn't set up to somehow give Americans ownership or something. It—it was—really a very cynical system. You know, there is a whole network of community development financial institutions. They have not been forgotten by the stimulus package. They do have designated funds for it. It is an—important contributing factor to stabilizing certain neighborhoods. But we need thousands and thousands more of these kinds of institutions. BRANCACCIO: But—but if you get off of Wall Street, and I'm pointing— just about a mile in that direction. DOMINI: To Main Street there? BRANCACCIO:You get onto Main Street, there may be the seeds of innovation that could save capitalism. Within capitalism itself even now. DOMINI: Always has been. Yeah. I think that we're going to save a couple hundred thousand people here with retrofitting your house, and a couple hundred thousand people there with solar jobs, and a couple hundred thousand people there with high speed rails and things. But, really, the big growth to recovery is gonna be one brick at a time with one person at a time figuring out how to survive. And a great many of them will create real businesses. And that will be the end result of their figuring out how to survive. GROSS: And a similar thing is actually happening now with credit. Where it went from this, it was this mass produced thing, right? You just put some numbers in, and a factory basically spit out. And, you know, the way they talked about it, it was structured finance, it was a product. Now we're going back to a time where people are now having to examine, you know, they have to—it's sort of custom made. They have to look at the application, evaluate whether you can afford that credit— BRANCACCIO: You might have to put on a tie and go down to the bank? GROSS: Well, what's—what's happening is many institutions, who were built—set up to be kind of industrial strength providers of credit, say, "Well, we can't do that profitably, so we're gonna stop." Which is why lenders have just disappeared in certain markets. Or American Express has basically, you know, paying cus—certain customers to close out their accounts. Because they don't want to deal with managing that risk. This is—actually is not a bad time, I think, to be starting out as a lender, as a mortgage lender, or a provider of credit of some sort, if you start from a small base. If you're gonna do it carefully. Because of the competition in the market is not that great. There aren't 500,000 mortgage lenders out there today. BRANCACCIO: Maybe that's what all the boomers can do in their dotage, because their 401 k's have disappeared, is they can innovate and solve this financial crisis when they're 68 and 69 and 70 years old. DOMINI: Well, the baby boomers have always figured out how to get things their way. And there is—as we were reminded earlier, big political clout there that—that is real. But I—I also think baby boomers have—by and large, vastly expanded the definition of need. And—and—and, really and truly, probably could live a good deal more simply than—than most of us do. I mean, so we probably could get by on—on a lot less than our peak years. We've just come to expect that every year is more than the year before. And—and that may be a transition for us. But—but wouldn't surprise me if people also learned how to live on less. BRANCACCIO: You just sound so un-American. Living in a more austere way. Taking delight in your family and reading a simple book. DOMINI: Puritanical. It's back to the roots. BRANCACCIO: But, you know, but of course what is the paradox here? Is that, supposedly, to keep this economy driving forward somebody's gotta consume somewhere. DOMINI: Consumers really and truly do matter to this economy. But I don't think it—I don't think it changes the fact. The fact is consumption, I believe, is gonna come down and stay down. So, if consumption comes way down, that means government has to come around. There are only three customers in the world: there are people, businesses and government. If you're gonna protect this—economy, and people aren't gonna spend, then businesses sure aren't spending, then—then it's gotta be government. So—so what this administration has done is—exactly correct. And very logical. And it's too bad it builds up—a bigger national debt. But you do need to have that kind of money flowing through the economy. And it's not coming from anywhere else. BRANCACCIO: So, Dan, what are you telling people who are getting toward retirement? Feeling all this dread? Is there anything you can tell them? GROSS: Well, you know, we—I think we're falling out of love with stocks. And, you know, we've had this bull market, or seemed to be going on since 1982, and, again, essentially that you should be holding stocks 'til the day you die because they pre—pay dividends, and now the dividends were taxed less. So they're—we could be at this inflection point. There are two ways of looking at it. You know, the time when everybody has fallen out of love with something is actually the time to be getting in. So maybe this is a big buying in opportunity. And the second is maybe there are other things to be looking at. Municipal bonds have become very popular. You take their tax benefits, and you get seven, eight percent return. Which is pretty darn good. Amy and I were talking before about corporate bonds. Very big asset class. Individuals have a difficult time getting in there. But, in these days, you get a guaranteed return. Companies are having to pay a little more if they're—if they're gonna survive and make it through. It pays you quite well. So I think there's gonna be a shift in the—kind of, asset mix of what people are looking to and what their financial advisors are going to be—pointing them to. DOMINI: Yeah. I mean, I'd just like to make—a slight case for stocks. Which is that—you know, stocks, by and large, are not hitting new lows the way they were three months ago. So it's a narrower and narrower set that's driving the market down. If you look at the—figures for mutual funds, which are good proxy for retirement, and most people have their retirements in mutual funds—four trillion at year end in—money market. Three point nine trillion in equities. And that's around the world, not just US equities. So we've got a heck of a lot of money sitting on the sidelines just—waiting for it to be the right moment to go back into the marketplace. I mean, we have more money sitting on the sidelines than we have in the marketplace. So you've got a huge potential demand there, sitting, waiting to come in. And I don't think it's all gonna stay on the sidelines forever. Even if ten percent of it comes into the market, that's a tremendous new buying. BRANCACCIO: So—are you along for that ride, Dan, just before we go there? The—the notion that things were worse a few weeks ago, a couple months ago? GROSS: You know, that's part of who's so terrifying. Because it requires a leap of faith to say, okay, I'm looking at the GDP data, which is, of course, is backward looking, where the retail sales, and all the stuff that's—what happened in December was horrible. We know that with January and February were really bad. It requires you, while being sort of stressed out about your personal situation, processing all this negative data from the last few months, to say, okay, but now I'm gonna jump in this pool. DOMINI: Yeah. And—and why would you do that? You'd have some confidence that thinking people with intelligent plans are putting together a scenario within which recovery can be lasting. Now, that goes straight to Washington. And that—that's been my thesis. People have been washing—watching Washington a good deal more than they've been watching Wall Street for their answers. They've been scared. Now they're a little bit more comforted. BRANCACCIO: There's more of a plan for the future of America now than two months ago. That's what you're saying. DOMINI: Absolutely. BRANCACCIO: And that's gotta be, ultimately, something that gives you a little bit of comfort when it comes to investments. DOMINI: It's not freeform anymore. You—you have a sense of where it's going, and what the values are gonna be. BRANCACCIO: Well, Amy Domini, Domini Social Investments, occasional writer for HuffingtonPost.com, thank you. DOMINI: Thank you. BRANCACCIO: And Dan Gross, business columnist for Newsweek. Occasionally he writes for Slate. Thank you. GROSS: Thank you. BRANCACCIO: You can get even more practical on this thorny topic of retirement amid the economic crisis by coming to our website...is it time to make a change or stay the course? Before you start piling your money under your Seely Posturepedic... read the advice of now's online expert and...if you've got them, we want them: send in your questions. We're leaving you now with an earnest reminder. It's that time again. We can 't have these conversations and do our kind of journalism without financial help from you...please generously support this public television station so we can stay on the air. And that's it for NOW. From New York, I'm David Brancaccio. We'll see you again next week. |
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