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Subprime Contagion Halted by Fed Move?; Wal-Mart Shoppers Feeling Pinch

Aired August 18, 2007 - 13:00   ET


FREDRICKA WHITFIELD, CNN ANCHOR: YOUR MONEY is coming up next, but first, this check of Hurricane Dean's progress with Bonnie Schneider in hurricane headquarters -- Bonnie.
BONNIE SCHNEIDER, CNN METEOROLOGIST: Hi, Fred. We are tracking this Category 4 storm. And you can see, looking at our satellite perspective, a very, very large, powerful storm. But we also have a really unique perspective to show you, pictures just in from the space shuttle.

That's right, we can look down at Hurricane Dean from outer space. There's the eye, kind of in the bottom of your screen there. Wow. That is really, really an amazing picture of how massive this hurricane is when you look at it from outer space looking down at the Earth below.

Let's take a look at the track now and you'll see that the storm is teetering on Category 5 intensity. Right now the winds are at 150. But if they get over 155, we'll have a Category 5 storm on our hands.

We have a hurricane warning in effect for Jamaica as the storm gets closer to that Island -- Fredricka.

WHITFIELD: All right. Thanks so much, Bonnie.

And this just in to CNN. Michael Deaver, one of President Ronald Reagan's closest advisers, has died. A family statement says Deaver died of pancreatic cancer earlier today at his home in Bethesda, Maryland. He was 69.

We'll update your top stories at the top of the hour. Now time for YOUR MONEY.

ALI VELSHI, CNN ANCHOR: Welcome to YOUR MONEY, where we look at how the news of the week affects your wallet. I'm Ali Velshi.

CHRISTINE ROMANS, CNN ANCHOR: And I'm Christine Romans. Coming up on today's program, protecting your investment as the credit crisis shakes up Wall Street.

VELSHI: Really shakes it up. Landing a mortgage in this unforgiving loan market.

ROMANS: And why the latest news from Wal-Mart just might offer a clue to your financial well-being. VELSHI: Well, what a week it has been, another one. And on Friday, a rare move by the Federal Reserve to cut its discount rate on loans to banks. And that seemed to be taken, at least in the early stages, as good news for investors.

ROMANS: The move was in reaction to concerns about the subprime lending crisis, the impact those concerns have had on Wall Street. Stocks initially soared in the news but they haven't come close to last month's record highs.

VELSHI: Yes, remember, that was 14,000 on the Dow. That was the highest the Standard & Poor's 500, the S&P 500 had ever been. Now Christine and I ran the numbers on this, we looked at where your investments are, which is probably typically in 401(k)s, which are in mutual funds. I mean, that's how most Americans invest.

ROMANS: We ran the top 10 largest mutual funds and found that all of them are still up on the year. And most of them -- all but one, which is a bond fund, is up double digits over the past 52 weeks. So that's what all of this turmoil sort of means for you personally.

VELSHI: You may not have lost money if you're well-diversified.

ROMANS: That's right. That's right.

VELSHI: So what do you do about it, now? What do you make of these markets that are all over the place? Jim Awad is going to help break it down for us. He is the chairman of W.P. Stewart Asset Management here in New York. And he has seen markets go up and seen markets go down.

And you don't...


VELSHI: You don't really get all that freaked out about it.

AWAD: No. I mean, this is -- it's classic correction of a speculation. We've seen it many times in the past, most recently we saw it with the Internet stocks in 2000 and then they broke, but the economy did fine. And if you didn't own the Internet stocks, you did fine.

And I think that is what is going on here. You had the very low interest rates that Alan Greenspan kept in place for a long time, resulted in speculation in housing and in the financing of housing. And so what you did is a lot of mortgages were made that shouldn't have been made. And they were resold in risky packages and it wasn't transparent and opaque.

And so you had a lot of leverage and speculation in the financing of houses. And those speculations always end up getting corrected. And so that's what's happening. But what happened this past week is it started to spread to other parts of the financial system. And so the Fed got nervous that it was going to go from being a Wall Street event to a mainstream -- main street event. So that's why they came to the rescue.

ROMANS: OK. So coming to the rescue, they cut that discount rate. It's all kind of very technical, money market stuff.

VELSHI: Right. This isn't the interest rate that we all talk about.

ROMANS: Right. This isn't the Fed Funds rate.

AWAD: Right. No, this is very specific to banks. They didn't lower rates for the rest of us. What they did is all this -- the last five or six days they've been saying to banks, here's money, here's money, if you need money, here's money, don't be afraid to lend.

And then on Friday what they did is they lowered the rate that you have to pay for that money. So what they've been saying to banks all along is, take the money if you need it. And now they're saying to induce them a little bit further, we're going to lower the price that you have to pay for us to rent that money.

And so what they're trying to do is to get the financial system lending again so that the correction in housing and housing finance stays right there and doesn't spread to main street.

VELSHI: So that should mean that if they're trying to get the banks lending again, we've been talking recently and we're going to talk again on this show about how it's getting tougher for people to get mortgages, the rules are tightening up, sometimes the rates are tightening up. This should at least hold that steady.

AWAD: Well, it should allow it to be an orderly process. And frankly, the rules needed to get tougher on mortgages because they got too easy. And people were told they could buy with no money down, and they were sold a bill of goods in terms of teaser rates. And some people were talked into mortgages who shouldn't have had them because the mortgage people wanted to make money on them.

So what you're doing now is you're clearing the system, resetting risk, resetting the prices, so those who should and can afford mortgages can get them, and those who shouldn't won't be tempted to take them. So it's very logical, rational, it's painful, it's emotional. But what's going on is very rational in a capitalist system.

ROMANS: Now the Fed said this week that it saw the downside risk to the economy or to the financial markets increase appreciably.

AWAD: Well, yes.

ROMANS: What does that mean? Does that mean that some people are calling for a recession. Other people are saying, we will avoid a recession. Where are you?

AWAD: Well, the downside risk that increases when the Fed saw this credit seize-up spread from beyond housing to everything. That created a risk that if everybody stopped lending, then the economy would come to its knees. And it's basically trying to minimize the chances that that's going to happen.

Now what's on the Fed's side is you have got tremendous growth overseas. You know, China and India are great secular stories. Japan is in a turnaround. Europe is doing better. So I think what is going to come to the rescue, the U.S. will slow down but there's tremendous demand for U.S. goods and services overseas because other economies have become the engine of growth.

So corporations will need to hire people to satisfy that demand. So, yes, we'll have a slowdown here, I like to call it a mid-cycle slowdown. We may take the growth rate back down to 1 or 2 percent for a quarter or two, but that's not a recession. And we'll continue to create 75,000 or 100,000 jobs a month.

So what you're going to do here is take out the speculation where it existed but it's going to be -- the damage will be confined to the area of speculation. The broad economy will do fine, just like the broad economy did fine when you corrected the Internet speculation.

VELSHI: What does that do to my portfolio? If I'm looking to retire, I'm worried, I see 1,000 -- more than 1,000-point drop in one month in the Dow. I see the S&P down. I see the -- what am I supposed to do with my portfolio?

AWAD: Nothing. You do nothing. What you do is you stick to your asset allocation. You take a look at where your portfolio is now based on what your long-term goals set. Rebalance it through those allocations. The one thing I would say, there is a change in the market from momentum, easy money-type of stocks to high quality stocks.

There was too great an appetite for risk in the system and now risk is respected again. So higher quality stocks will do better. Big multinationals with exposure overseas will do better. In terms of domestic stocks, you want companies that dominate their markets.

So what I would say is, don't go in bottom fish in the financials and the materials and the stocks that were fueled by easy money. Stick with the more conservative stocks, but basically keep your long- term investment plan in place.

ROMANS: All right. Jim Awad...

VELSHI: Always makes me feel better.

ROMANS: I know, me too.

VELSHI: Talking to Jim always makes me feel like it's all going to be OK.

AWAD: Well, America usually over the long run is OK.

ROMANS: All right. W.P. Stewart Asset Management.

VELSHI: Jim, a real pleasure.

ROMANS: Thank you so much.

OK. Up next on YOUR MONEY, see what the latest numbers can tell you about your chances of buying or selling a home.


VELSHI: Well, this subprime mortgage meltdown has spilled over to the mainstream home lending market and now a prospective home buyers, even those who have stellar credit, are feeling the pinch.

ROMANS: The menu of loan products out there is shrinking and getting more expensive. C.D. Davies, CEO of LendingTree, is going to tell us what home buyers can do.

Welcome to the program.


ROMANS: So if I'm out there shopping for a mortgage right now and I'm reading the headlines about a subprime crisis that's spreading into the rest of the credit markets, what does it mean for me?

DAVIES: It means for you, as a potential borrower, first of all, I would say don't panic. There are a number of deals getting done still today. Without a doubt, the landscape has changed and your options are limited. But it's actually a very good time for prime borrowers to borrow money.

VELSHI: We've talked about prime. What determines prime now? Is it a credit score above 620 or 640 or is it something else? In other words, is there anything I need to be worried about slipping into nonprime because of something happening that I didn't plan for?

DAVIES: Oh, absolutely. There are probably three main things. One would be obviously your credit score. So anything right now above 700 would be considered prime. You need to be able to make more of a down payment than in the past few months, probably more in the 15 to 20 percent range. And you need to be able to document your income and your assets. So if you're in that box right now, it is actually a pretty good time to borrow.

ROMANS: OK. So a credit score above 700. You need a down payment of 15 to 20 percent. You need to document your income and assets. And then I'm going to be able to get a well-priced deal?

DAVIES: Exactly. Especially if you're under $417,000 right now. So that would be considered the conforming market and a prime borrower in the conforming market today will do quite well. It's almost as though the lending industry has gone back in time seven to 10 years.

VELSHI: Because these are the rules. This is the way it used to be. Christine was telling me about certainly in the area in which we live, if you want a jumbo loan, and most of the properties in this area are like that, the premium now even for people with good credit is going to be much higher than expected. DAVIES: It is. That's probably the most irrational part of the market. So even for prime borrowers today, that premium and rate used to be 25 basis points, you know, 25 percent of 1 percent. That's now looking like it's going to be a whole full percentage point. But, you know, in my opinion, that is the most irrational part of the market and probably the one that will come back the quickest.

ROMANS: Let's talk about refinancing, because there are frankly hundreds of thousands of families who are going to have mortgage payments that are rising because they got these exotic loans. Maybe their home value has declined, they took a home equity loan. Now they owe more than their house is even worth and they're trying to figure out a way how to get out of that. Is it going to be hard to refinance?

DAVIES: It's going to be more difficult, for sure. You know, what I would -- my recommendation for them is to shop around. It's more important than ever to shop lenders. Using a trusted adviser would be real important. You know, our business and other folks, it's very relevant right now to be able to use a trusted adviser to help you navigate through that marketplace.

It's very tough and people have probably made mistakes in the past and that's the reason they were in those exotic products to begin with.

VELSHI: Let's say I'm a prime borrower, I've got a mortgage and I've got a locked-in rate and everything is fine or maybe I've got an adjustable rate. If any of these happen to me, if my credit score goes below 700 or the value of the property I'm in starts to drop or my down payment was never 15 or 20 percent, it was lower than that, is anything going to happen to me if I've already got my mortgage?

DAVIES: Not if you already have your mortgage and your terms are set, you know, just based on how long those terms are set for. If you have an adjustable rate that's going to reset in a year, then you have rate issues. But as long as you're -- if you're in a 30-year fixed rate loan, you don't have any concerns there.

VELSHI: Unless I miss a payment?

DAVIES: Well, I mean, as long as you keep the loan. I mean, if you miss a payment, that's going to hurt your credit scores. And no matter what, that is never a good thing. It's probably more important now than ever. You know, if you missed those credit scores, and if you missed that payment, your credit scores will go down, which will cause your rates to go up. And in this environment, it may mean that you don't get financing.

VELSHI: C.D. Davies, what a good conversation, a very helpful conversation. Thank you for joining us.

DAVIES: You're welcome.

VELSHI: C.D. Davies is the CEO of LendingTree. Interesting stuff, because this is the -- these are the things people need to know. These are the things people are really worried about. Am I in danger, is this subprime crisis something that is going to hit me?

ROMANS: And this is what we get from years and years of easy lending and giving mortgages to people who really -- exotic mortgages to people who were going to get burned...


VELSHI: Yes. And...


VELSHI: ... into the market and where they were encouraged. We'll continue this discussion obviously. We're going to take a break now. Coming up after the break, what is Washington doing, or, depending on your perspective, not doing about bringing this mortgage and loan crisis under control and protecting your money? We're coming back with more. Stay with us.


ROMANS: So the White House keeps saying that the economy is thriving, that it is strong, that we shouldn't be too concerned about the mortgage mess we're seeing right now.

VELSHI: The treasury secretary says that, you know, it's OK, it might slow the economy down, but it is a problem. What does it really mean? And should the White House be saying more or doing more about this current mortgage crisis that we're in?

ROMANS: It's true, a lot of people have said this is the most foreseen crisis in modern history because the mortgage lending issue was something a lot of people were worried about. Joining us now is Greg Valliere. He is the chief strategist at the Stanford Washington Research Group.

Hi there, Greg.


ROMANS: Let me ask you first about the Fed coming in and lowering the discount rate. Is that sort of Washington responding and reacting and doing what it is supposed to do to help the markets?

VALLIERE: Better late than ever. I'm incredulous that it took them a couple of weeks to realize how serious this crisis is. But they get it. The markets I think were encouraged to see that. But there has got to be more.

VELSHI: Greg, we have -- and that's what we hear from our viewers. That's what we hear from people who e-mail in. Why isn't the government doing something? Why isn't Congress doing something? Why isn't the Fed doing more? Isn't this the markets?

VALLIERE: Not necessarily, Ali. I'm not sure I would go that far. But let me just say this. I'm not a Bush basher and maybe I had too much coffee today, but let me tell you, these guys seem to always be late to react to things, whether it's Katrina or post invasion Iraq and now this.

It took the Fed two weeks to realize how serious this is. Treasury Secretary Paulson just a week ago was saying, ah, there's no problem, everything is fine. You have to wonder about who is in charge in Washington if it takes them this long to realize how serious things are.

ROMANS: So who is in charge in Washington, I guess? And how serious are things?

VALLIERE: Well, you'd have to say things are quite serious. Obviously, the Fed has done the right thing. But you do make a good point on the markets. And while Washington can help, I think maybe they should lift the caps on what Freddie and Fannie can buy. The Fed has to do more. Washington can help, but I think this is going to be probably a market solution.

And what I would look for, for all of your viewers, it's really the market interest rates, it's the 10-year Treasury yield. I think that could get below 4.5 percent. Eventually, that's the safety net. That's what's going to keep housing from really falling off the cliff.

VELSHI: What's the trickle effect to me? What's the difference that I'm going to see if this starts to get better, if the government involved, if the Fed does more? Because we just talked to somebody who said it's going to be harder to get a mortgage, my credit rating has to be higher, my down payment has to be higher, I'm going to have more conditions. Am I going to feel the effect of this if the government does get involved?

VALLIERE: Sure. I think there is two things that I would look for, neither of them really great. The first is, I agree, it's going to be harder to sell a house because we still haven't solved the problem in the jumbo loan market. I don't think one move by the Fed is going to do the trick. It's going to be tougher to get loans if you try to sell or buy a house, number one.

Number two, there are lots of people out there like my mom who love high interest rates. But rates are coming down. I think the Treasury rates, as I said a second ago, will continue to fall and for the retirees who count on high interest rates, this is not a good story either.

VALLIERE: Hey, Greg, let's talk about folks who don't have a credit score of 700, they don't have 15 percent down on their house. They have a house that's worth less perhaps than their mortgage. They live in a place where they didn't make their property values go down. You know, we keep talking about how this is clearing out people who probably shouldn't have had loans in the first place.

There are probably a lot of honest Americans who are just trying to get a leg up and own a home because that was supposedly the dream. What happens to all of them? VALLIERE: I think the rental market gets a lot hotter over the next few months. I think people may have to rent. They may have to save more to put more money down. But people who are on the margin trying to buy a house, I think, are going to be shut out for a while. People trying to sell a house now are going to have to think, either I have got to cut my asking price by a lot or I've got to rent it.

ROMANS: Wow. Let me ask you one last question. The president, the Bush White House has touted record levels of home ownership as sort of a sign, a hallmark of the ownership society. Are we seeing the downside of record home ownership?

VALLIERE: I wouldn't say the downside. I would say, Christine, the bottom line, after a very, very volatile week for all of your viewers, is that the Fed will do the right thing. The Fed is going to step in. What's going to save this from becoming a real catastrophe is the fact that interest rates are going to be lowered by the Fed and lowered by the markets as well.

VELSHI: Greg, always great to talk to you. Thank you for being with us.

VALLIERE: You bet.

VELSHI: Greg Valliere is the chief strategist at Stanford Washington Research Group.

ROMANS: All right. Coming up on YOUR MONEY, we'll take a look at whether your desire to save a buck is fueling the Chinese product recall.

VELSHI: And shopping 'til you drop. See why Americans buy so much stuff that we don't need. YOUR MONEY coming right back.


SCHNEIDER: I'm CNN meteorologist Bonnie Schneider tracking Hurricane Dean, a powerful Category 4 storm that's working its way across the Caribbean, and bearing down on Jamaica, where a hurricane warning is in place. Take a look at these pictures just coming in from outer space. That's right, the space shuttle taking pictures of Hurricane Dean.

And you can see what a massive, intense storm it is. The track takes the storm across the Caribbean, possibly getting as strong as a Category 5 with maximum winds right now at 150, but by Monday we could see them climb up to 160. The storm will work its way across the Yucatan and into the western Gulf of Mexico.

That's a look at Hurricane Dean. Now back to YOUR MONEY.

VELSHI: Hit rewind and replay. Two massive recalls in two weeks has the toy industry giant Mattel on the defensive. Defects like magnets that can be swallowed by young children, toxic lead paint on toys, I mean, unbelievable the numbers, about 10 million toys recalled. ROMANS: And you know what? The company won't even rule out that there could be more recalls. CNN's Greg Hunter has more.


GREG HUNTER, CNN CORRESPONDENT (voice-over): Mattel launched a second massive recall of toys manufactured in China in as many weeks. This time the toy company took out full-page newspaper ads to reassure parents of its commitment to safety. But that didn't quell the consumer outrage.

SUZANNA SILVER, PARENT: We buy things for our children, toys, and then they come up with something like this. It's horrible.

HUNTER (on camera): Does this big newspaper ad make you want to trust them again?

SILVER: Of course not.

HUNTER: Over the last seven years, Mattel has recalled more than 15 million toys. The company says that's a small number considering it makes a half billion toys a year.

BRYAN STOCKTON, EXEC. V.P., MATTEL: We've had a history of trust. And when you look at the number of recalls, we think we make overwhelmingly safe products.

HUNTER: Mattel pledged to change procedures. It will now test every batch of toys it makes for lead and work with regulators to develop new safety standards for magnetic toys.

But one toy industry watchdog says, that's good, but too late.

JAMES SWARTZ, WATCH: Realistically, we're not going to get all these items back. Once they're out there in our homes, in our schools, there's no way to get them all back. So there need to be better controls in the first place to prevent this.

HUNTER: The Consumer Product Safety Commission, relied on to safeguard toys, is supposed to oversee the industry. However, the agency has been downsized, its staff cut by more than half in the past 25 years, with only 100 inspectors for all products for the entire country.

NANCY NORD, ACTING CHAIRWOMAN, CPSC: Our economy is so big, hundreds and hundreds of millions of toys and other products come into this country every day. And the notion that somehow we are going to pre-clear these hundreds of millions of products is naive.

HUNTER: Mattel says its 75-year history of making safe toys for children should speak for itself.

STOCKTON: We are upset and we feel we've disappointed some people. And, again, we want to continue to earn the trust of consumers and they will judge us over time by our actions.

HUNTER: Greg Hunter, CNN, New York.


ROMANS: While the latest big Chinese product recall is grabbing headlines this week, other recalls were under way, including some for products we think of as American.

VELSHI: Among them, Ford, flagging 3.6 million vehicles for a possible cruise control glitch. And Robert Bosch tools recalling 800,000 U.S. made Skil brand circular saws. Don't really want my circular saw malfunctioning. The company says they could get stuck in the on position.

ROMANS: We wondered if China is getting singled out here. And we're going to Ted Fishman about that. He is the author of "China Inc.: How the Rise of the Next Superpower Challenges American & the World."

You know, especially in China, you get some folks who say, well, this is just China-bashing. And in fact, the Chinese say that they shouldn't have to do anything differently if they don't want to, that their products are perfectly safe. What is really happening here? Have we outsourced our manufacturing to China and we are getting what we pay for or is this political?

TED FISHMAN, AUTHOR, "CHINA INC.": China wonders whether it has been singled out, but it didn't wonder whether it was singled out when it was singled out as the source to send manufacturing. And the reason the world sends manufacturing to China is to avoid some standard or other.

Labor standard, safety standard, environmental standard, legal standard. So when things come back here and they're not up to our standards, there should be maybe a little bit less surprise.

VELSHI: Come on, Ted! The reason we outsource things to China is because it's cheap.

FISHMAN: That's the labor standard. But it's cheap for all kind of reasons. It's cheap because you don't have to build environmentally compliant plants. It's cheap because you don't have to lawyer your companies the same way. It's cheap because it's a low- cost environment. And that's part of the legal.

Look, I buy a lot of Chinese stuff. I live in China often and I buy in the local environment. And for the most part, I feel safe. But I feel I have to be cautious. Some of the world's best goods are Chinese goods. My digital camera, which is foolproof and fail-proof is great.

But world class companies have standards where they can have one fault per million. The Chinese government says it's 99 percent safe. That's far below the world standard, because there are no watchdogs in China to mind the store.

ROMANS: So what is a parent supposed to do? I mean, I keep thinking of the retailers who are placing orders with the toy companies to put things on ships for the Christmas -- the holiday shopping season. And the parents are seeing a pretty steady dose of news about lead paint and magnets...

VELSHI: And those toys are made and probably on their way here already.

ROMANS: Right, right.

FISHMAN: Yes, they're made, they're ordered. They're not going to be made anywhere else. If you're going to buy them, they're going to come from these factories with these suppliers. One thing to do is check your appetites. And maybe that's what you're going to talk about in the next segment. Or think about other gifts, service gifts, gifts that are experiences. Those things are not made in China.

But in the long run, we are going to have to rely on our watchdog groups. If you go shopping in China, the watchdog group is yourself. And Chinese consumers kick tires, they turn things over. They're very, very careful.

In America, we don't do that as much. We rely on the groups that are working on our behalf. And I think that these recent episodes, you know, these tens of millions of products that are getting recalled are going to cause a lot of rocks to be turned over and a lot of products to be looked at that continue...


ROMANS: In this country we assume that something is good when it is on the...

VELSHI: We totally assume that things are safe. And you know, Christine, we talk about, what can you do, buying things locally, turning it over. I mean, how much can you replace the buying of everything we do in China? Not just toys, everything that we buy in China...


FISHMAN: It's not just us, you know, Ali. It's not just us, it's the companies that buy things from China. You know, the toy factory that Mattel bought its products from has 40,000 workers. It can't just go today or next week and find another factory of 40,000 workers to turn things out for it.

ROMANS: Well, does the free market work here, Ted? Does the free market work and sort of, because of this bad P.R. for these Chinese companies, because of all that has happened, if there's a blip in the production chain now because some parents are going to pull back, then do the Chinese companies get the message?

FISHMAN: It doesn't work perfectly. You know, what did Cain say, in the long run, we're all dead?

(LAUGHTER) FISHMAN: You know, there will be increasing scrutiny and quality from China will go up over time. But you heard the Mattel representative say, 15 million of their toys have been recalled. How many consumers of Mattel toys are there in the country under age 6, 15 million? That's one toy per child. It's too late for that.

ROMANS: You call it "China Inc." It's something I find fascinating is that this company, Mattel, made in profit over five years $2.3 billion. I mean, this is an awful lot of profit. Where along the way of a complicated global sourcing chain did something get through? Did that complex chain, which has been very profitable, turn around and bite it?

FISHMAN: You hit it on the head. Mattel deals with one company in China that's turning out these toys. But behind that company are dozens and dozens of company that supply it and have made their own fortunes along the way. Policing that long chain in the supply chain is very, very difficult.

VELSHI: Good to see you again. Thank you.

FISHMAN: Thanks so much. Glad to join you.

VELSHI: Ted Fishman is the author of "China Inc." Listen, you want to know -- keep up to date on everything that's going on. Go to You can log on there. And we're going to have all that information for you on

ROMANS: Up ahead on YOUR MONEY, find out what Wal-Mart's earnings forecast says about its customers and maybe about you.

Also, see why Americans buy what we don't need even in the midst of a credit crunch.


VELSHI: Well, Wal-Mart's CEO sounded an alarm over the health of the U.S. economy this week, saying the company's profits will be hurt because shoppers are stretching their paychecks to the limit.

ROMANS: That is right. That core paycheck-to-paycheck customer is spending less.


UNIDENTIFIED FEMALE: I'm retired. I know when I go to the food, you know how you need more money for everything. Right. It's like pressure now.

UNIDENTIFIED MALE: Everything has gone up. Fuel, cost of living, housing, taxes -- especially taxes.

ROMANS (voice-over): These Wal-Mart shoppers reflecting a view also held by the CEO of Wal-Mart, who said millions of his customers are stretched to the limit by gas prices and an increased cost of living. Wal-Mart's CEO, Lee Scott, said: "It is no secret that many customers are running out of money toward the end of the month."

One hundred and twenty-seven million people a week shop here or at Wal-Mart Sam's Club chain.

CHRISTIAN WELLER, CENTER FOR AMERICAN PROGRESS: This is a reflection of basically the middle class being maxed out after years of a very weak labor market, and borrowing to the gills, people just simply can no longer shop.

ROMANS: This grim view contrasts sharply with the president's recent assessment of a thriving economy.

GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: Our economy prospers when we trust the American people with their own paychecks.

ROMANS: Indeed corporate profits have been spectacular and productivity strong, but at least according to Wal-Mart, millions of Americans are having trouble stretching those paychecks.

Heather Boushey is studying what it costs for Americans to make ends meet.

HEATHER BOUSHEY, CENTER FOR ECONOMIC AND POLICY RESEARCH: Gas prices go up, or energy prices go up, that is going to take a larger chunk out of somebody's paycheck if they are at the low end. And those are the kinds of folks that are shopping at Wal-Mart, who are then going to have less money to be spending. Similarly with food, as we see food prices go up, that is going to take a bigger share out of a low-income family's paycheck.

ROMANS: And Wal-Mart's diagnosis of the economy is worth paying attention to because Wal-Mart is the largest private employer in the world and the largest retailer.


VELSHI: Well, with many on he consumers' paychecks stretched thinly, our next guest says shoppers need to distinguish between things they need and things they want.

ROMANS: Focusing on the needs and the wants, we don't do that very well around here. You know, Shira Boss joins us now, she is author of "Green With Envy: Why Keeping Up with the Joneses Is Keeping Us in Debt."

How hard is it for the American consumer to separate necessities with those indulgences?

SHIRA BOSS, AUTHOR, "GREEN WITH ENVY": It's pretty hard. I mean, we're Americans, we like to work hard. And we like to reward ourselves with our stuff. And there's really nothing wrong with that as long as we can afford it. But we've gotten ourselves in a situation, I mean, collectively we are spending more than we are bringing home in our paychecks.

VELSHI: It sounds so wrong, Shira, but we've built this system that allows for that, we've built a system where it's OK to have lots of debt.

BOSS: It changed -- there has been a change in the past, say, 20 years where we were given a lot of access to credit and credit cards and this home equity line of credit, a relatively new product, being able to tap the money in our homes. And we've used that really to support our lifestyle in a way we don't even realize it has happened.

So our heads have kind of gotten messed up in terms of -- you know, it used to be the old-fashioned way of saving money and then spending it. And now we've got it reversed. So we spend -- go ahead and spend the money and then we figure out how to earn it and pay it back and stress out over it.

ROMANS: We have a negative savings rate. We have a lot of people who have been spending, spending, spending, because of the money that they tapped out of their homes. And now we might not be able to get that home equity money anymore to spend on other things. Home Depot this week also said that the housing crunch, they're seeing it in their numbers as well.

Are people going to start paring back and finding out what are the real necessities? If you don't have the money and you can't get access to the credit, at some point that has to happen, right?

BOSS: We certainly should. We should have done it a long time before now. And the idea of being maxed out or not being able to afford something, even that has changed. Because what does it mean when you can't afford something?

VELSHI: You can usually get some more credit somewhere.

BOSS: Exactly. Like, what does that mean? So you know, it used to mean you didn't have the money in your pocket, and that is what it should mean. If you don't have the money in your pocket, you can't afford it and you shouldn't be spending it.

ROMANS: I'm sure there are psychiatrists and psychologists who have looked at this extensively. You know, what is it about us that makes us just keep spending on things we don't need, by the way.

BOSS: There actually -- and there's a little bit of differences in our brain chemistry individually. Some people feel the pain more of spending money.

ROMANS: That's me.


BOSS: And, you know, it takes longer to kind of hit home sometimes and we are in trouble. But what is going on behind the scenes, when we talk about the core customer of the Wal-Mart paycheck- to-paycheck, I don't know what people think that is, but 70 percent of us say we're living paycheck-to-paycheck.

VELSHI: This is exactly what I was thinking. That this time -- we seem to think this might be a low-income consumer, but everybody is living paycheck-to-paycheck. Somebody went into the newsroom yesterday and said, why don't you go out on the street and ask 10 people whether they can raise $10,000 to do something right now, they can get $10,000 out of a bank account to buy X. Most don't keep money sitting around anymore.

BOSS: Yes, I mean, so when you're already stretched, there is going to be a point where you have to cut back, which is why we're seeing so many bankruptcies.

VELSHI: Well, Shira, it's a good argument. I hope some folks...

ROMANS: What, don't buy it?

VELSHI: ... listen to it, including myself. No, I buy it. That's the problem. I buy everything that's for sale.

ROMANS: Does it hurt you to go and buy things like a big plasma TV?

VELSHI: No, no. As you know, I feel no pain from buying. You do feel the pain. I never have buyer's remorse about anything ever at all in life.


BOSS: Maybe you haven't blown your budget. When you're really...


VELSHI: Oh, I can blow the budget very quickly. But I just don't feel the pain. And that's the problem. I have a problem.

ROMANS: We're going to get you help, Ali.

VELSHI: We're going to have to get me some help on this.

ROMANS: We're going to get you help. All right. Thanks so much, Shira Boss. Thank you.

Long before everything from furniture to books was just a mouse click away, most Americans' first retail experience was a trip to the department store.

VELSHI: Well, I spoke with the CEO of Macy's, Terry Lundgren, and I wanted to know that with so many new shopping options, how does he keep customers coming to a department store, it is this week's "View from the Top."


TERRY LUNDGREN, CEO, MACY'S: When I started in this business, it seems like 100 years ago, I was told, are you sure you want to go into the department store business, because you know, isn't the catalog business going to replace that? Or isn't the big box business going to replace that? You know, then it went to the Internet and everything else. And so we've been around 150 years and we'll do, let's see, about $27 billion this year in our company. So consumers are definitely shopping here and with a great deal of anticipation about what's new and what's next. So what we have to continue to do is to find what's new and what's next.

VELSHI: You seem to cater a lot to female clientele.

LUNDGREN: That's correct.

VELSHI: Guys don't come to department stores much?

LUNDGREN: No. About 30 percent of our customers are men. But it's the other 70 percent are women. And that's probably not a statistic that's different for other stores that are selling fashion.

VELSHI: Do you find that is -- is it the same customer on the dot-com side?

LUNDGREN: I'll give you an example of this because people have said to me, aren't you worried about opening, you're going to chase your customers out of the store, in the dot-com? And I said, no. I said, I'm worried about not having because if I don't have, they are going to go to somebody else dot-com.

VELSHI: Somebody else's dot-com.


ROMANS: Coming up next on YOUR MONEY, we'll get back to what this week's turbulence on Wall Street means for you.


VELSHI: What do you do when you make a mistake?

ROMANS: You say, I'm sorry.


ROMANS: And buy flowers immediately.

VELSHI: And if you said something that was wrong or did something that was wrong?

WESTHOVEN: And you don't do it again.

VELSHI: You make a correction.


VELSHI: Jennifer Westhoven joins us now. We've been talking about corrections.

ROMANS: And the serious Ali segue. We never know where it's going to go.

VELSHI: We've been talking about corrections on this market.

WESTHOVEN: That's right. So is that what the stock market is doing right now? Big question. It's part of how much should you be worrying about this big slide? Is it the alarm bell for some kind of a global recession or is it just this kind of correction?

Because if it is, that's a 10 percent pullback that can often happen after a big rally. And so that's what bulls are hoping for, that this is just something normal, that it's healthy. Of course, since the Dow's peak last month when it ever so briefly topped the 14,000 mark, it's now down about 10 percent.

And that's the deal for stocks around the world actually. That if this correction theory is right, maybe, just maybe this market mayhem is nearly over.

VELSHI: Why? What has 10 percent got to do with anything? They call 10 percent call 10 percent a correction, 20 percent a bear market just because they're round numbers?

WESTHOVEN: No -- well, it's just statistics when they look at these historically, that can often happen. And when it happens it doesn't necessarily mean the start of a bear market, which is more like 25 to 30 percent drop.

ROMANS: I have a feeling it's rooted deeply in technical analysis in the Fibonacci retracement, but we'll talk about that some other time.


ROMANS: But no, with 10 percent, that can be seen as healthy, right? It can seem as a way to refresh a bull market, to pull it back. Although when it is down 10 percent, you don't know if it's going down 20 percent. I mean, you don't know when you're in it. So that is tough.

One thing we've been talking about in this whole thing, too, is that it's the professionals who have been really, really hurt by this pullback. We looked at the top 10 mutual funds -- most widely-held funds, most of them are up nicely.

VELSHI: For a one-year return, all but one, which is a bond fund, are up more than 10 percent over a year.

ROMANS: So that could mean that it's the big people who are selling mortgages and working in the bonds markets who have something to worry about, the rest of us, maybe our 401(k)s are still OK.

WESTHOVEN: They do have something to worry about. Because this could be sign of more pink slips to come. Bear Stearns it is going to lay off about 250 people at its mortgage division. And there are a lot more jobs at risk here. A lot of the financial firms and hedge funds have built up these big mortgage trading divisions. They have a lot of new products in this area. It has been a big money-maker. And that is why the Wall Street bonuses might also be smaller this time around.

ROMANS: Oh no!

VELSHI: And that is going to affect my property values in New York.


ROMANS: But maybe I'll be able to buy property in New York if you don't have these guys with big checks, and women with big checks out there buying up all of the apartments.

WESTHOVEN: Hold your schadenfreude, I mean, I think that even though that sounds like, well, that's the rich, they can -- oh, their bonus wasn't that great. Their bonuses are so huge in terms of their salary, that can have a big effect on the entire real estate market.

We know housing is -- I mean, do you really want it to get that much worse? I mean, you can talk about -- New York City's finances can really depend on the industry.

VELSHI: Right. And if you take some of the property value increases in the Northeast out of the equation, the national averages look a lot worse than they actually are because we've seen properties in this part of the country actually hold up.

WESTHOVEN: It sure does.

VELSHI: And all the mortgage fault (ph).

WESTHOVEN: Here's my financial word of the week...



ROMANS: That's a financial word?

VELSHI: That's not a financial word.

WESTHOVEN: It is in this case. Right? It sounds like dark and mysterious, right? It has turned into big fat zeros for many of these big banks. What we're talking about here is mortgages that went to people with "no income, no jobs or assets," N-I-N-J-A.

VELSHI: No income, no job, or assets.


ROMANS: That sounds like -- I don't know.

VELSHI: That's ominous.

WESTHOVEN: What one earth would a bank be doing giving someone with none of that a mortgage? And yet it happened a lot over the past five years. The banks were thinking, hey, if this person falls through on their loan, we'll take back the house, we'll sell it for more.

VELSHI: Right. Because the property would increase so much that it wouldn't matter, doesn't matter who you are.

WESTHOVEN: Exactly. That worked really well on the way up. Now that the housing market has collapsed in many places and prices are not doing that anymore, those are big zeros. The banks have these houses on their hands, it's big trouble. And guess what? Guess what happened with all those people who didn't have any income? There are some reports that studies show they lied. They made up incomes so they could get bigger houses.

VELSHI: Yes. So now those ninja loans aren't going to be around. They'll change it and they'll become mutant ninjas.

ROMANS: Oh, geez. Well, you know when you first study markets and the economies and stuff, you know, one of the -- sort of the first things you ever read about it is the tulip craze in Holland. And when you hear stories like that about how we were writing mortgages for some of these folks, it almost sounds like it couldn't have possibly happened. But it did.

VELSHI: What does she mean by the tulip craze?

WESTHOVEN: Oh come on.

VELSHI: I'm going to look it up right now. Can we call for a break right now and do this? I'm going to take a break. We're going to take a break. We're coming up next -- we're coming back in just a moment. We're going to tell you what can happen when you turn after- work fun into a full-fledged career.

But first, I'm looking up the tulip craze.


VELSHI: You know, sometimes you can over-think something. I mean, I heard ninja and I thought it was a ninja. And then I found out that that was no income, no job...

ROMANS: ... no assets.

VELSHI: No assets. So when you talked about tulips, I was searching the recesses of my brain for something that had the acronym T-U-L-I-P...

ROMANS: Well, were talking about...

VELSHI: ... thinking it was some technical financial thing.

ROMANS: But it is a technical financial thing. It's the technical craziness of the Netherlands...

VELSHI: This is like in the 17th Century.

ROMANS: Right. In the 17th Century, people were like trading one house for one little tulip bulb. It seemed like a good thing to do at the time.

VELSHI: Right, or a bunch of tulips for like an entire estate because the craze was about the tulip, the value -- the fake value that we could put into...


ROMANS: But it is the textbook example of when people are completely irrational and a market is -- in hindsight looks absolutely overvalued. It is the one thing that whenever something looks a little bubbly, they say, oh, God, got any tulips around there? So anyway...


VELSHI: Now we have the answer.

ROMANS: A little inside Wall Street baseball. OK. You probably heard the saying, find a career that you love so you will never have to work a single day.

VELSHI: Sort of like us. One former attorney is making a living with her passion for taking pictures.


VELSHI (voice-over): Rosanne Pennella is living her picture perfect life. She traded her stint as an attorney in 1996 for a career with a different focus.

ROSANNE PENNELLA, TRAVEL PHOTOGRAPHER: Practicing law was not something I really enjoyed. So when I started to really think about what I wanted to do, the driving force in my life was always travel. I had always been interested in photography.

At that time I thought about being a travel photographer. I've photographed all over the world. I've been in all seven continents at this point. The kind of images I like to capture tend to be ones that capture a sense of place and I'm really interested in capturing people.

VELSHI: Pennella's work has appeared in a number of travel books and magazines, including Nikon's "Legends Behind the Lens." And sharing knowledge about how to take these pictures is something she finds equally rewarding.

PENNELLA: Teaching, for me, feels like something that's a very natural outgrowth of talking about a passion that I have. To do something you love allows you to step out and be really much more fundamentally who you are in the world.

And so, in that context, I think the way I am as a person in general has also changed because I'm much more happy in my life.


VELSHI: That has got to be my kind of gig, you know? Taking pictures, traveling around. I've got to start thinking about my next career.

ROMANS: But it is such great advice, that you have got to do something you love. And then you're not really working a day in your life.

VELSHI: I love working with you.

ROMANS: Me, too. Working with -- work...

VELSHI: Spending this...

ROMANS: Still work.

VELSHI: Spending this hour. And spending it with you. Thank you for joining us for this edition of YOUR MONEY. You can catch Christine later today at 6:00 p.m. Eastern on "LOU DOBBS THIS WEEK."

ROMANS: And you can see Ali every weekday morning on "AMERICAN MORNING." And we'll see you back here next week.

VELSHI: Saturday at 1:00 and Sunday at 3:00. See you then. Have a great week.