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Your Money
How the News of the Week Affects Your Wallet
Aired January 26, 2008 - 13:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
FREDRICKA WHITFIELD, CNN ANCHOR: All right now in the news, voting continues at this hour in South Carolina's Democratic presidential primary. A record turnout is expected. About six hours are left until the polls clothes.
And one day after avalanches killed two people in California's San Gabriel Mountains, a missing snowboarder has been found safe. A week of rain and snow is blamed for a series of avalanches and mudslides in California. Forecasters say more rain is on the way tonight.
We are awaiting autopsy results from Chicago following the discovery of a decomposed body on the city's southwest side. There is no word yet on whether the body is that of Stacy Peterson. She has been missing for quite a while now. And she is the wife of a former police sergeant.
An American woman has been kidnapped in Afghanistan. The State Department says the woman and her driver were abducted by a gunman on the outskirts of Kandahar. The woman works for a relief agency based in the Philippines.
And he is accused in what may be the biggest case of bank fraud ever committed by a single person. Futures trader, Jerome Kerviel, is being questioned by police in Paris. A French bank says the 31-year- old used fraudulent transactions to steal more than $7 billion. We will update the top stories at the bottom of the hour.
Now, time for YOUR MONEY.
CHRISTINE ROMANS, CNN CORRESPONDENT: Hello, welcome to YOUR MONEY where we look at how the news of the week affects your wallet. And what a week.
I'm Christine Romans. Ali Velshi is traveling coast to coast on the CNN Election Express. He will join us in a moment from Texas. But up ahead, find out if the presidential candidates are any smarter than you are about pulling us out of an economic emergency. Also ahead, housing prices aren't even close to bottoming out, so says Merrill Lynch. We will tell you how far and how long the housing pain could go on.
Plus, financial kung fu to protect your 401k when Wall Street is on a roller coaster. And it is.
We begin with a stark admission from the Federal Reserve this week that the economy is in trouble. A rare, emergency, rate cut. The first since the terror attacks of September 11th and the largest, most dramatic cut in history. The Federal Reserve explained its actions with a foreboding list of challenges: a weakening of the economic outlook, increasing downside risks to growth, a deepening of the housing contraction, softening in labor markets.
Meanwhile, the White House and Congress want to put checks in the mail to millions of Americans.
(BEGIN VIDEO CLIP)
GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: The incentive of this package will lead to higher consumer spending and increased business investment this year.
(END VIDEO CLIP)
ROMANS: Who gets the most money? Individuals earning less than $75,000 a year and couples earning less than 150 grand. And what about that wild stock market? Near bear market territory.
Ali Velshi joins us now from Monahans, Texas. Ali, you spent the weekend on the CNN Election Express far, far away from Wall Street and Washington. Weigh in here, what are people saying about the Fed and about that check that we hear will be in the mail?
ALI VELSHI, CNN CORRESPONDENT: Well, first of all, Christine, I miss you. You should come on the road with me. This has been a fantastic, fantastic week just to talk to people, not be looking at analyst reports and not be looking necessarily at how the market is reacting to things, but just talking to people.
We planned this out before we knew there was going to be this emergency Fed rate cut. We planned it out before we knew that the markets would tumble on Tuesday like we haven't seen in years. People are concerned about the economy.
By far, it is the number one concern of people we talked to in Myrtle Beach, in Atlanta, in Birmingham, Alabama, in Memphis, in Little Rock, now in west Texas and on to California, New Mexico and Arkansas - Arizona and California. It is the number one concern.
They are not just talking about the market. They are talking about jobs. They are talking about costs of living. They're talking about energy prices. They are talking about the fact that their eggs, their milk, their bread prices have gone up.
And I've got to say there is a lot of skepticism about this rebate plan, about the stimulus plan. There are real pros and cons in the minds of the people across the south. But there are real concerns. They are not sure what it is. And they want the candidates to listen to their concerns and address them specifically, not address all sorts of things about strategy and history. They want to know what these candidates will do for them if they are elected. They certainly want to know if there is more coming from the Fed and what the federal government is prepared to do if this stimulus plan doesn't work. ROMANS: Interesting. All right Ali, now some time from some perspective from here in the studio. Lakshman Achuthan is the managing director of the Economic Cycle Research Institute. Shawn Tully is the senior writer at "Fortune" magazine. Of course Ali is going to be with us there in front of a truck factory in Texas.
But Lakshman let me ask you first, are we going to hit a recession? Does this blunt a recession, what the Fed has done this week with the stimulus check in the mail. And are we just postponing kind of the pain further out? Some people say it is like an aspirin. The headache is going to go away in the near term, but we still have some big issues.
LAKSHMAN ACHUTHAN, ECONOMIC CYCLE RESEARCH INST: Well I think the answer to all of those is maybe to yes. You've got three big questions there. Think of the U.S. economy as a large, stone pillar. It has taken all kinds of hits, a hurricane, housing cries, oil shocks. It hasn't toppled over.
Now, we are having some cyclical vulnerability joining all of these negatives shocks. And we are starting to have this pillar tip over. This stimulus, like the Fed cutting rates, or the stimulus package that they're talking about, is an attempt to just push back a little at the top of that and to right the economy again, to abort a recessionary downturn that is starting right now.
I think it is beginning right now. If they wait very long, timing is of the essence, if they wait very long, this comes crashing down. Nothing can stop it.
ROMANS: I want to ask Shawn real quick. I mean you are such a pessimist on this whole stimulus thing. It's like come on, an election year and all the politicians are getting involved and messing with a $13 trillion economy with a $150 billion package. Does it work?
SHAWN TULLY, SENIOR WRITER, FORTUNE MAGAZINE: No, because you take money out of one taxpayer's pocket and put it in the pocket of another taxpayer, or you borrow it and you have to pay it back through higher taxes in the future. You don't really do any good.
The justification of this plan is that the people who get the checks are going to spend the money. That is going to temporarily jump-start the economy. It is not going to happen because most of the checks are going to people who are relatively well off. They can get up to $2,100, these checks are big, that's for sure. If you have three kids and you make $100,000 a year, you get $1,200 for the husband and wife and $300 per child.
ROMANS: Right.
TULLY: However, those people aren't going to spend because people spend when they are very have confident that their future incomes are very stable or are rising.
ROMANS: That's some big research. TULLY: Right. And for example in 2001 we were in a recession. We had rebates. People did not spend the money. We have the same problems now because the tax cuts that were put in by the Bush administration are probably going to be rescinded. People are looking at a less stable economy at lower incomes by a higher taxes, especially in those categories I was just talking about. And the people who really might have spent this money were the people on food stamps and welfare, aren't getting a big chunk of it.
ROMANS: Velshi, jump in here.
VELSHI: Shawn could be with me here in west Texas or in Arkansas or in Tennessee. That's kind of the stuff I have been hearing. In fact we spoke to someone, I don't know if we've got that clip we can run, but I spoke to a gentleman in Arkansas who was saying exactly that, what happens with this money? You get a few hundred bucks. How do you spend it? If you are paying off your credit, it doesn't necessarily help. It doesn't stimulate the economy.
And if you do spend it, how far does that go to stimulating the economy. How far does it go to start jobs going? Because in the end, people are resilient. They understand that markets go up and down. They understand that housing prices go up and down. They are a little concerned about their energy and grocery costs. But Shawn and Lak, do you know what they're worried about right now? The one thing that has given most people the alarm about the future? Jobs. If they start losing jobs, then you know what? The rest of the stuff is a little less concerning. That's the problem.
ACHUTHAN: Ali, keying off of that, OK look, this is why this is really important and it's not a fool's errand or window dressing to have some stimulus that consumers spend some money right now. Even if it's temporary, even if you're borrowing from the future because if we go into a recession, you haven't seen anything yet.
You are going to get months on end of job losses. You are going to lose millions of jobs. So two year point, if jobs are the issue, you need to abort the recessionary downturn that is underway. And I think people don't understand what a recession is. You drop -- the sales fall, then production falls, then employment falls, then income falls and that hits sales again.
If you don't abort that process, you are going to get a recession. So a little bit of spending here, an extra VCR that no one thought would be bought will actually bump up production, break that recessionary circle temporarily. We will have a recession eventually, but it will break it for now.
ROMANS: Didn't we do that in 2000, 2001 to try to beat the bubble from the NASDAQ and we got ourselves in trouble?
ACHUTHAN: They were late.
TULLY: But the problem is, they are going to be late this time too. Because right now in the next several months, that's the biggest threat of a recession. These checks aren't even going to be written until sometime between May.
ROMANS: And last time in 2001, the last checks, I believe, didn't hit mailboxes until September.
ACHUTHAN: That is a failure. Why should it wait that long? I think that we should demand this gets done quicker. If there is an agreement on this on policy issues, then it should be done now. Why do we have to wait six months?
VELSHI: I have a question for you guys. There are two ways if you need to get money into people's pockets that you can do this. One seems very obvious. And by the way in an election cycle, overly obvious. And that is sending checks to people. What about cutting taxes? That's what people have been asking me. Why don't they cut taxes? Is that the kind of thing you are expecting we might hear in the next few weeks?
TULLY: Well we certainly are hearing it from the Republican candidates. They're almost universally in favor of major tax cuts. It is very interesting because we have a major divide here in political philosophy. The Democrats clearly want to rescind the Bush tax cuts, increase marginal tax rates, increase capital gains taxes and taxes on dividends. That's one of the reasons why I don't think a lot of people are going to be spending this money.
ACHUTHAN: Well and also, how this gets done, the ultimate thing that you need to have done and maybe checks are the answer. You have to say the check is in the mail to someone who will spend it tomorrow. It may be lower income people. This is what's really needed. This is the proverbial stitch in time saves nine. If you go into a recession, the kind of money you are going to spend to mitigate that recession pales in comparison to what this bill is proposing.
ROMANS: We've got to leave it there, guys. There's so much to talk about. Lakshman Achuthan, thank you so much. Shawn Tully of "Fortune," thank you. Ali, we will get back to you in just a minute. But up next on YOUR MONEY, the presidential candidates say they have the way to save the economy. Well their plans to help you and just how realistic they might be and what's going to go into effect, next.
ROMANS: Welcome back to your financial security watch and YOUR MONEY. Ali Velshi, my co-anchor spent the whole week traveling across the country asking people about the economy, the issues that are facing them and about candidates on the campaign trail. Hi, Ali.
VELSHI: Hey Christine, we are on the CNN Election Express. It's a 45-foot bus, the kind which rock stars and NASCAR drivers use. I've always wanted to ride in one of these things and it's a mobile bureau. We can produce entire shows out of this thing. We can even broadcast live from it. But when you pull in anywhere, people see it and they come and talk to us.
So, 4:00 this morning local time, we are pulling out of Abilene, Texas and we're going to a truck stop, because that's where you have to refuel a big bus like this. And a gentleman comes up to us, 75- years-old. We weren't looking for anybody. He just came up to talk to us while I was eating my corn dog.
And he said, this is a bailout. He says why do we do this? I have suffered in my life. I have lost everything. I have lost my house. I came back. I worked. There were no bailouts for anybody back then. Why are we doing this? Tell me why the government is doing this? It's an interesting question I have heard a bit about while I have been down here in the south.
ROMANS: That's a really interesting point. Folks are trying to figure out how they are going to spend their stimulus check or how the lower Fed interest rates are going to help them in their own pocket. At the same time, wondering how we are going to pay for it and whether it is pushing off concerns further out. The presidential contenders on the stump touting their plans for reviving the economy. The economy, Ali, as you know there in your travels, it's the number one issue for voters in the race for the White House. The candidates, they all have very different ideas. Rebate checks, assistance for distressed homeowners, a permanent tax cut.
Keeping a close watch on all of this, who supports what is Eleanor Clift, a contributing editor at "Newsweek." We are going to bring her in here for this discussion with Ali. Eleanor, thanks for joining us.
ELEANOR CLIFT, CONTRIBUTING EDITOR, NEWSWEEK: Glad to be with you.
ROMANS: We have an ideological difference here too between what the Democrats want to do to help the economy and what the Republicans want to do to help the economy. Is that being reflected in what we are hearing on the campaign trail?
CLIFT: Well first I want to point out that Ali has a better bus than any of the candidates campaigning across Florida and South Carolina. Nice going.
Yes, there is an ideological divide. Republicans for the most part like to rely on market forces. Now the president of course has stepped in with his support for $150 billion stimulus plan.
So they are all going to support that. They are chiding the president, though, for not pushing to make the tax cuts that he put through when he was first in office, not to make them permanent.
On the Democratic side, there is more of a reliance on government intervention. In fact, John Edwards was the first out with a program as early as December when administration figures were still seeing the economy is strong, not to worry. So the Democrats are out front on this. They are actually more in tune with what the government, the Congress, the Democrats, the Republicans, the president alike, what is actually going to happen apparently.
ROMANS: They were talking about bipartisanship in Washington, rare bipartisanship. A lot of congratulations about getting this done. At least now there might be some hurdles in the Senate, but moving it forward from here. And the Democrats had to give some things up. They had to give up incentive unemployment benefits, they had to give up food stamps. But they got more people included. The Republicans had to give up for now, the president had to give up for now, an extension of those tax cuts. These may be fights that come back, don't you think?
CLIFT: Absolutely. But I think for now, with the president having approval ratings in the 30s and the Congress even lower than that, historic lows, I think there was an impulse to show the country that they could actually accomplish something.
I don't know that this necessarily restores faith in government but if they weren't able to do something in the face of what to many people looks like an impending collapse of the economy, I think that the psychological damage would have spun its way through consumer spending and consumer confidence and all of that. So I think this package has as much to do with psychology as it has to do with actual dollars in people's pockets.
VELSHI: Or Eleanor, it may have something to do with something else. You've covered a lot of campaigns. It is January of an election jeer year. It is tough economic times. Wouldn't it be political suicide for anybody to say, I don't think we should send you a $600 check in the mail? Even if it's the wrong thing to do - we talk about this bipartisanship, unprecedented bipartisanship. Who could be on the wrong side of this? Who could sit there and face the wrath of people who are otherwise going to get themselves a nice, big check.
CLIFT: Right. This is feel your pain time. If the Congress and president didn't act, it be would the equivalent of checking their watch during a debate, which is what the first President Bush so famously did and helped cost him the election.
People want to know that the government cares. Government intervention may only be a Band-Aid. Actually it may cushion what could otherwise be a much harder landing as the economy does go down. Whatever it is, I think that the elected officials understand that the public is about ready to storm the gates of Washington. And this was a way to show that government can act, that government cares, that somebody is looking out for the average voter.
ROMANS: All right Eleanor Clift, contributing editor to "Newsweek," thank you so much for joining us.
CLIFT: Thank you.
ROMANS: Coming up after the break, why one woman says the stimulus package will help the fast food industry. More with Ali right after this.
(COMMERCIAL BREAK)
ROMANS: A huge week about news for YOUR MONEY. The Fed cuts interest rates, the stock market goes crazy, the government wants to give you a big check in the mail and our Ali Velshi has been traveling on a bus across the south making sense of it all talking to people all week. Hi, Ali.
VELSHI: Christine, we are on the CNN Election Express. It's a big, 45-foot coach. We are driving across America and we're talking to people about the economy and politics. And what a week it has been for the economy and for politics. You talked about that Fed rate cut. You talked about the massive drops on the stock market this weekend and the massive upswing. It's been busy.
One woman told us that these rebates, this government stimulus program, these rebates are going to directly affect your business. She owns a Sonic Burger restaurant in Arkansas. Listen to what she told me.
(BEGIN VIDEO CLIP)
CHRISTINE BAGEANT, CARLISLE, ARKANSAS: It would definitely help us. It would definitely because I am a small business owner. That's who is getting hurt the most right now. We are struggling to pay bills month to month just like everybody else.
(END VIDEO CLIP)
VELSHI: Now I am here with Mayor David Cutbirth of Monahans, Texas, the town that we are in. Mayor, thanks for joining us. We've been asking people about the economy. We've been asking people what they're thinking about it. What's going on in this part of west Texas? What are the concerns about the economy here?
DAVID CUTBIRTH, MAYOR, MONAHANS: Well right now, the economy is certainly on an upswing because of the oil and gas industry out here. So we have got a good economy and as long as the energy prices stay above $50, $60 a barrel for oil, the economy out here is good.
VELSHI: As we have been driving west in Texas, we have been seeing refineries. We have been seeing those derricks working, getting oil out of the ground. But what do you think of the stimulus program? What do you think of this thing that was announced where people are going to get money back? What's the reaction you're hearing to it?
CUTBIRTH: Most reaction I hear is good. It's good to get a little bit of money back. And if they get it back to us by May, then it will kick in and hopefully we can keep or the Congress and the president working together can keep the country from going into a recession, which is very important.
VELSHI: What do you hear? Do you think people think we are in a recession right now? Do you feel differences in the economy or is this a little bit insulated because of the fact that energy is a big part of the economy around here?
CUTBIRTH: Around here is a little bit insulated. The energy prices drive the economy out here. It is not boom time out here. But it is extremely busy out here.
VELSHI: What are you hearing from people about the election, about politics and what the candidates have been saying? Is there some sense of people - people across the country seem very, very engaged in this particular election. Are people around here happy with what they are hearing in the campaign so far?
CUTBIRTH: I think it's really fantastic the way both campaigns, Republican and Democrat, have both been going. We get to listen to a lot of ideas. And all of the debates that they have done have really been good. Rural Texas, most people out here will vote at the Democratic primary. Some of those people might actually vote for a Republican when you come to November. But, they are real interested. There is a lot of interest in the presidential election this year.
VELISH: And of course Christine, this is one of those Super Tuesday states that we are going through. So there is a lot of attention from the candidates to these states. Mayor David Cutbirth, thank you for joining us. Christine, back to you.
ROMANS: Ali, I'm wondering, what are people on the trail telling you they are going to do with that check when they get it, or whether they are going to take advantage of lower interest rates if they should trickle down? Are people going to pay down debt? Are they going to go shopping? Are they thinking about refinancing? Do people have plans for that money or are they still trying to figure out when they're going to get it?
VELSHI: It's interesting that you mention that, Christine, because people have been telling me that they think that it is going to be used to pay off debts. The debt level that people are carrying is so high that they want to pay that off. Remember, if you are paying 10 or 15 or 20 percent debt, your return on that investment by paying that debt off is going to be a lot more than investing it in the stock market, at least for the moment. Although that may not be a good long-term strategy, that's the problem. If people take the checks and just pay off their loans, it's excellent for them, that's a good thing to do. It's not particularly excellent for the economy.
ROMANS: The Fed chairman, as we reported last week, he pointed out for people, it might be better to pay off debt. For the economy, it is better to spend it. If you're going to spend it, he says spend it on domestically-made products so that it stays in the U.S. economy.
All right Ali, thanks. We're coming back to you in just a minute. But up next, much more on financial security watch. To refinance or not to refinance? Some surprising advice about whether now is the time to buy a home if you're not already in the housing market. Our own Gerri Willis will answer these questions. And a way to stop worrying about your 401K right now. Stop worrying. We have some good advice for you. You're watching YOUR MONEY, next.
(COMMERCIAL BREAK)
WHITFIELD: Hello, I'm Fredricka Whitfield in Atlanta. Here are the top stories right now. It's been one hot race and now Democrats in South Carolina are having their say. The candidates making last ditch pitches as voters head to the polls. CNN's Ballot Bowl is back and that kicks off in 30 minutes from now. Southern California avalanches are now blamed for two deaths and with more storms on the way, some people are leaving their homes. Areas ravaged by last year's wild fires are especially susceptible to landslides now.
An autopsy on a decomposed body found by train tracks in Chicago could shed lights on the case of Stacy Peterson. Peterson has been missing since October. Her husband is a suspect in her disappearance.
And dramatic pictures, minor injuries and still no word on what caused the fire at the Monte Carlo resort and casino in Las Vegas. Guests are being housed in other hotels for now. Coming up at the top of the hour, CNN's Ballot Bowl. Now, back to more of YOUR MONEY.
ROMANS: Welcome back. Your financial security watch continues. The U.S. maker of Thomas the Tank Engine has agreed to a $30 million lawsuit settlement for its part in a massive toy recall last year. RC2 this week reached a deal to end a class action suit triggered by its Chinese made Thomas and Friends wooden railway product. They were named last June in the first recall prompted by, remember, last year. RC2 will give cash refunds and replacement toys to plaintiffs and improve its quality control system.
Also this week, a new round of buyouts at Ford for its 54,000 hourly U.S. workers. The company saw 30,000 workers leave in a similar move back in 2006. Ford is struggling to break three straight years of losses. Now, Ford warns it expects the losing streak to continue this year. Ford lost it's long-held number two status in the U.S. to Toyota just last year.
And get this. Own a home? Merrill Lynch expects the housing mess to just get worse. Merrill forecasts a 15 percent drop in house prices this year followed by another 10 percent in 2009 and Merrill predicts the slide will continue into 2010.
Speaking of housing, if you have got a mortgage, particularly one you are none to happy with, you would think now might be a pretty good time to refinance, right? As we mentioned, the Fed dropped the key rate by .75 of a percentage point in an emergency rate cut this week.
Our personal finance editor and "OPEN HOUSE" host Gerri Willis joins us now to look at some options for your mortgage loan. I've been asking people about this and they say if you have got good credit and you are going to stay in your home, it might be time to refinance.
GERRI WILLIS, CNN ANCHOR: Well the good news here is that some of this rate cut is actually filtering through to homeowners. You are seeing a 30-year fixed rate now of 5.4 percent. That's pretty luscious. I think it's worth taking a look.
But it's not as easy as it used to be. You said you have to have better credit. That's absolutely true. One mortgage broker we spoke to said that you need a credit score of 720 now, compared to 660. He says that of the people who walk into his office, it used to be that eight in 10 were eligible for a refi. Now, it is three in 10. You've also got to have more equity in your home, as much as 20 percent. But look, these numbers, they vary across the country. They are different everywhere. It depends on how big your mortgage is. So check out the details. It's definitely worth checking out.
ROMANS: All right Ali, I want to ask you something here. Earlier in the program we had Lakshman Achuthan and Shawn Tully and I asked them just after the segment was over, I said listen guys, the big question is is now the time to buy a house if you already sold your other house? You are not in the housing market. And they both I am going to tell you emphatically said no, no, it is not the time. There is going to be a lot more down side. What do you hear on the bus trail, if you will, about whether people are getting more confident about housing?
VELSHI: Well, here is the thing. I mean Gerri will tell you, these numbers that came out for the year, for 2007, the biggest decline in home sales the first times I think since the Medieval Times that there's been a drop in the price of an existing home and the median price of an existing home in the U.S.
People are very concerned about that. The question is, at some point, when are we going to know what the bottom is? We have had some forecasts that the whole of 2008 is going to be as bad as 2007. This is what people are uncertain about. If we think we are the bottom, what a fantastic time to buy a house. But how are you going to know when that is the case? You see that trend moving up and you get into it?
WILLIS: They said a 6 percent drop December over December. That's from the National Association of Realtors. Now with their numbers, you never know. It can be about who's buying houses. And it's probably the low end of the market right now.
So that can skew things. But I'm telling you, the numbers are ugly, u-g-l-y. No way around it. I tend to agree with these guys. You might want to start the search now, but I'm telling you, I think prices will continue to go down, particularly in those markets that have been go go, on the coast, east west coast. Florida may not be done yet.
But it's time to start putting out the feelers. I know people who have gone out and bought foreclosures. They have contacted realtors who kind of specialize in that right now. There are lots of people specializing in that right now. And they're getting really good deals. I mean, you can't precisely time this. This is exactly like trying to -- similar to trying to time the stock market. You can't do it.
VELSHI: Gerri, let me ask you this. Most folks that I have been meeting across the country are smart enough to know that we journalists are not experts at particularly anything. So they haven't been doing a lot of asking, they've been doing a lot of telling.
But there is one question they're asking me and I'm going to ask it to you. Why, if you have good credit and you can get a 30 year mortgage for 5.49 percent and somebody told me earlier this week they got 5.2 percent, why is anybody in this country with good credit in an adjustable rate mortgage right now?
WILLIS: Because they were trying to buy a home that was too expensive for them or they had bad credit.
WILLIS: No, but we've seen these low rates for a while. If you have good credit, shouldn't you have been refinancing over the last few months? Shouldn't you be doing it right now?
VELSHI: It all sounds great, Ali, but the reality is a lot of people couldn't afford to actually get into a 30-year fixed rate loan because they had bought a house that was too expensive. So even refinancing into a loan, they are forced to refi into that adjustable rate mortgage. I feel your pain. I hear from people all the time who say, don't bail these people out, it is all their fault.
ROMANS: Well if that person is your neighbor and that housing price is going down, your housing price might be going down as well too. All right Gerri Willis, thanks so much. Ali Velshi on the road. He had a corndog for breakfast, we'll get more about that. That's the newsflash of the morning.
Up next, you do not, I repeat, you do not have to panic about your 401K. The reason why is next.
(COMMERCIAL BREAK)
ROMANS: You're forgiven if you're a bit queasy about your retirement portfolio. Obsessively checking the losses in your 401K this week? Don't panic just yet.
Walter Updegrave is here. He's senior editor at "Money" magazine and our resident 401k guru. You know if we take the advice and we diversify and we're in the right kind of category, the right kind of allocation for our age, big declines like this shouldn't really freak us out that much.
WATER UPDEGRAVE, SENIOR EDITOR, MONEY MAGAZINE: Right. You have got many years for a lot of people until they retire. So you don't have to worry about what's going on over the next couple of months. And even after you retire -- when you are 65, you are probably going to spend maybe 30, in some cases longer, in retirement. So you still have a lot of time. So as long as you have a plan and you are not trying to react to all these little fears and every little wiggle up and down in the market, you will be fine.
ROMANS: Walter, I want to look quickly at what these two plans. If you are just approaching retirement, say you are in your 60s, this is what your portfolio should look like. An appropriate retirement allocation, pre-retirement allocation, about half stocks, right?
UPDEGRAVE: Right about half stocks and half bonds if you are at retirement. And the reason for this is you still need the stocks portion to give you some long-term growth because you are going to be drawing money. Prices are still going to be going up. So you want to keep your purchasing power in line with inflation. So you need that. The bonds will provide some balance during these kinds of periods where the market is going down.
ROMANS: In the beginning of your career, you have to load up on stocks.
UPDEGRAVE: In the beginning of your career, you really want that growth because you are putting away money and you've got to get this maximum amount, build your nest egg as large as you can get it. And you really need to return to stocks to do that that.
ROMANS: In between is the hard part and when you're reacting to something like this when you think, your initial reaction is "I've got to get some money out of stocks." But other people are saying, "I've got to get more money into stocks. They're cheaper now."
UPDEGRAVE: Well, you can have this sort of endless debate. Is now a good time to get into stocks? Is now a bad time to get into stocks?
As we just saw, some of the segments here, nobody really knows what is going to happen. Is the stimulus package going to work, are we going into a recession, if so, how will that affect the market? So I think that the best thing to do is just to set a stocks/bonds allocation. And kind of let it ride, don't try to fool around with what's going on in the market. Just keep putting that money away, of course.
VELSHI: Walter, I know, I just love listening to this part of what you say because this is the thing. The fear is not for people who have 40 years left to work. It's those that have less than 10 or five and they're worried about it.
And I love that you say people have to be in stocks. One of the things that Christine and I always hear and I bet you do to, is people say, what stocks? There are some industries in categories that do well in a recession. If you are going to have 50 percent of your portfolio in stocks at the age of 60, you still have to have a lot of stocks. You've got to keep that diversified. It's got to be in mutual funds or some great basket of stocks.
UPDEGRAVE: Well ideally, you want to have a very diversified portfolio, something that kind of basically mirrors the stock market. Unless you feel you have some special insight into what sector is going to do well and what sector is going to beat the others? I don't think most people have that sort of insight. So I think you just want to keep it very broad.
And I think, Ali, you bring up a very important point. For people who are really just on the verge of going into retirement, there are two things. One is the value of their portfolio, which they want to naturally -- they don't want it to go down too much. So that's why you have limited exposure to stocks.
But also, you have to keep in mind the spending. So if you are in a period early in retirement where the market is going down for a few years, you can get into a real crunch because you have two things going on: a market loss and also the portfolio is going down because of spending. So you have to be very careful there. You also want to keep an eye on the spending part. And if you have several years where the market goes down, you may want to sort of pull your horns in a little bit on the spending.
ROMANS: All right Walter Updegrave, thank you so much for joining us. Do not panic. If you follow his advice the rest of the year, this is a walk in the park, a piece of cake. Thanks, Ali. We will talk to you in a minute.
Coming up next on "YOUR MONEY," why your morning cup of coffee might cost you a lot less money. Jennifer Westhoven is here with that story next.
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JOAN, LITTLE ROCK, ARKANSAS: Every week my food prices are going up. My suppliers are now charging an additional delivery charge to make up for fuel costs.
VELSHI: And your dairy, your wheat, your bread, things like that are costing you more?
JOAN: Oh, yeah. We were talking the other day about three years ago, I was paying $20 for 30 dozen eggs. They now cost me $52.99.
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VELSHI: That is the story we are hearing across America. People are concerned about the prices they are paying for things, from fuel to food. I am Ali Velshi and I am traveling across the country with the CNN Election Express. This is a special financial security watch edition of YOUR MONEY. Christine Romans is with me. She is in New York. Christine, you should be on the road with me. We're getting some great stories out here, but I miss being with you in there.
ROMANS: I know, I miss you too. It's really fun to kind of sit next to you, but it's fun to see your fashion choices out there on the road, Ali, in west Texas.
We are here in the studio with Jennifer Westhoven to talk a little bit about Ali has been talking about this hour and that is the stimulus package. What it's going to look like, who is going to get it, how are we going to spend it and will it work?
JENNIFER WESTHOVEN, CNN CORRESPONDENT: Yes and I think one of the things so many people you know, you are hearing all about this, when is that check coming?
The package may have been approved by the politicians, but you might have to wait until summer to get your check. The IRS of course right now focused squarely on tax returns. It has got to reprogram its computer systems to handle the change and the alternative minimum tax. So taxpayers are already have to wait longer to file their taxes. It's stalling the whole system. So these checks may not be in the mail until May or June at the earlier. And with 100 million checks to print, it could even be late summer.
And of course the plan's supporters have even agreed that speed is crucial, getting the cash into the hands of Americans so that they might spend it pretty soon. And I think a big question of course is right, is this really going to work? What if people save this money? Then it doesn't really help the economy. And what if they go out and spend it at Wal-Mart? So many of those products are made in China.
ROMANS: Even Ben Bernanke, the Fed Chief, and we reported this last week. He said, some people should pay down the debt. Others if you're going to spend it, spend it domestically to help the domestic economy. I guess helping Wal-Mart would help American manufacturers but the foreign production.
WESTHOVEN: But in some ways you can see really how that money would end up not really doing the best job that it could do.
ROMANS: How about a cup of coffee, a cheaper cup of coffee?
WESTHOVEN: That could really work. And that takes us to the chain that taught Americans today, $4 or more for a cup of coffee is now trying out a $1 cup. Starbucks is experimenting with an eight ounce cup of coffee that sells for just a $1 plus free refills. They are only trying this out right now in their hometown Seattle market and I've got to tell you, the chain does not want to talk about this much. They're not giving out any of the details.
But Starbucks is under intensifying competition from the likes of McDonald's and Dunkin' Donuts. McDonald's is starting to put coffee bars in and baristas at many stores this year. And Starbucks has said that its customers are clearly feeling the pinch. They are seeing a slowdown in traffic. I love that they're seeing competition on the low-end coming from McDonald's and Dunkin' Donuts. There's also talk that for a lot of coffee purists, they are finding other things on the high end that Starbucks isn't fancy enough for them anymore.
ROMANS: Oh, interesting. Jennifer Westhoven, see you again next weekend. Thanks, Jen.
The stimulus package is meant in part to boost business. But not every country has the ability to do that for their people, especially in the developing world. And that's exactly mission of one organization we want to tell you about. With your participation, KIVA provides loans to people in these countries in hope of helping their businesses thrive.
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ROMANS (voice-over): Miyanaga, Kenya, it's about as far as you can get from a major stock exchange. That hasn't stopped Metrine Wandera and her cereal business from investors.
DAN BEEVE, KIVA LENDER: About a year ago we lent $25 to Metrine in Kenya to expand her cereal business.
ROMAN: Dan Beeve is a project manager for a manufacturing company in Chicago. He found Wandera through KIVA, a nonprofit helping people in developing countries. Here's the way it works. Loans are offered interest free to people with a business plan and a dream in the most impoverished countries. Loans as small as $25 or $100 can change the course of a life.
Wandera needed just $150 to increase her product line and raise profit. Her earnings send her children to school.
JEFFREY SACHS, UNITED NATIONS ADVISER: These modest investments help people to get on the first rung of the ladder of economic development.
ROMANS: Dr. Jeffrey Sachs is a United Nations adviser and a leader in the fight against poverty.
SACHS: If microfinances combined with investments in community infrastructure, such as safe water and the clinic, the school and the road, the combination is very powerful and it can help lift a whole village out of poverty.
ROMANS: Many lenders share their wealth again and again.
BEEVE: When a loan is repaid to us, we reinvest it and reloan it to another borrower.
ROMANS: KIVA warned lenders that they may lose their money but very few have. The loan default race is less than 1 percent. While lenders don't make a profit, the emotional return is impossible to quantify.
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ROMANS: For more information, visit, www.kiva.org.
There are three things happening next week, three things that could make a difference to your wallet. We will tell you what they are right after this.
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ROMANS: So much coming up in the week ahead that could affect your wallet. Carrie Lee is here to tell us what we need to pay attention to. Carrie, the State of the Union address, the president is expected to talk a lot about the economy. We're going to hear more about stimulus, fed rate cuts and what they are going to do to avert a recession.
CARRIE LEE, CNN CORRESPONDENT: Exactly. Well let's talk about the State of the Union address because that comes first, 9 p.m. Eastern time on Monday night and the economy is going to be front and center.
It is on a lot of people's minds. Of course we know that now, last week, President Bush said that our economy is strong, dynamic, and resilient. And he is talking about increasing consumer spending with these tax rebates everyone has been talking about this. I think at this point though there are more questions than answers. We have talked about people getting $600, $1,200. Where is this money going to come from? How effective will it be? We saw a similar plan in 2001. A lot of people say results were mixed so I'm wondering whether he's going to go into more detail on this plan.
ROMANS: And if the economy is strong, resilient and underlying strength, we're just looking to boost an economy with underlying strength. It's a wonder, I guess, someone has asked if it's an election year is why we're pushing ahead with this plan.
LEE: Right, is it contradictory? Is this sort of a feel-good measure? How effective will it be? How is it going to tie into say, tax refunds? That's what was on 2001. It wasn't free money people were getting, it was basically an advancement on the refund checks that we would have gotten anyway.
ROMANS: Let's talk about the FOMC. That's the Federal Open Market Committee. That is the Fed. The Fed cut interest rates in the emergency rate cut this week. They will meet again. What are we expecting there?
LEE: That's right Tuesday and Wednesday, they will announce their latest decision on interest rates. We will see if we get another rate cut on Wednesday, January 30th. A lot of people are expecting that the fed will cut rates again. Some people Christine, are expecting even another half point.
The question for Ben Bernanke and team or the concern are, some would say, are they being too reactive? Are they being too influenced by the falling stock market? Some people say it's too little, too late. They should have done this a long time ago. And then of course the challenge for the Fed, if they keep cutting rates and the economy doesn't pick up, if prices stay high we're in a stagflation situation, that's a tough situation to get out of.
ROMANS: That's a tough situation. There are serious concerns continuing among economists about that. We will find out about the job situation next week as well. Carrie Lee, thank you so much.
OK now we breathe and figure out where all of this stands. Bottom line what it means for you, a look at who wins and who loses with interest rates cut by.75 of a percentage point.
First, the good news. The rate cut works in your favor if you have good credit and a secure job. It means you may be able to get better rate on car loans and mortgages. However, the Fed cut rate won't do much if you are saddled with bad credit. Don't expect relief if you're carrying credit card debt or are falling behind in your mortgages, two huge problems weighing on the economy. And the big loser here could be those with money tied into safer money market funds and savings accounts. You can expect lower rates of return on the money on the sidelines. Ali bottom line, the rate cut and rebate checks help a little. But many Americans may still be in big trouble. They have got some serious choices ahead of them.
VELSHI: If there are people who have credit cards by the way that move with the prime rate and when the Fed cuts rates, as you know, Christine, when the Fed cut rates on Tuesday, it dropped the prime rate by exactly that same amount.
So there is some relief for people with credit card rates. I am going to be in Chicago, by the way, for what the Fed does this coming week.
But the question around here is who does benefit exactly? There are people who have lost jobs. There are people whose home values as we've discussed are much lower than they were a year ago. There are people whose interest rates are a lot higher. Those are the three things that are coming together to effect people's mood about the environment.
I'd like to sort of say the stock market, it's got to do with your time horizon. If you are 20 or 30-years-old, don't lose any sleep over this sort of thing. If you are 50 or 60 or older, you do want to consult with some expertise, whether it is on the Web or talk to people you know or talk to an investment advisor about what it is you should be doing because you can't get out of the stock market. You can't abandon the stock market. There are places you make money, even in tough times, right?
ROMANS: That's absolutely right. Ali Velshi, tank you so much, Ali. I can't wait to see you from Chicago next week. Of course it's a bond market, that's why you'll be there for the Fed meeting. But it's great to see you in the south. Can't wait to hear all about your exotic breakfast along the way. You really did have a corn dog for breakfast?
VELSHI: You know, it was one of those, you are on the road, you grab food when you can. And I started the trip having protein bars for breakfast. I was really healthy, really good about it this morning. It was a corn dog with a side of beef jerky.
ROMANS: Nice. Ooh, that sounds disgusting. All right Ali Velshi, thanks so much. Thanks for joining us for this edition of YOUR MONEY. You can see Ali every weekday morning on "AMERICAN MORNING" or wherever the CNN Election Express bus stop happens to be. And I'll be seeing you later today on 6 p.m. Eastern for "LOU DOBBS THIS WEEK." We'll see you back here next week, Saturday at 1, Sunday at 3. See you then. CNN's Ballot Bowl with the best political team in television, that starts right now.
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