Return to Transcripts main page

Open House

America's Financial Crisis; Presidential Candidates' Tax Plans and What They Could Mean to Your Bottom Line; Healthy School Lunches for Less

Aired September 20, 2008 - 09:30   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

GERRI WILLIS, CNN HOST: Hello, I'm Gerri Willis and this is OPEN HOUSE, the show that saves you money.
Coming up, a quick stop on the campaign trail, the candidates' tax plans and what each could mean to your bottom line.

Plus, healthy school lunches for less this year as kids go back to school this fall.

But first, bailouts, buyouts, mergers and meltdowns, it's been a historic week for issue No. 1, America's economy. Bank of America set to buy Merrill Lynch, the demise of Lehman Brothers, the government bailout of insurance giant AIG and all sorts of talk of bank mergers and acquisitions. Wall Street dealing with a crisis some say not seen since the Great Depression. We're going to give you some very important advice, so grab a pen and paper.

First though, we want to break it all down for you. Walter Updegrave is senior editor for "Money" magazine, Mike Santoli is an associate editor for "Baron's" and Katie Benner is from "Fortune" magazine.

Welcome all, great to see you on a really turbulent week. Mike, let's start with you. AIG, biggest insurer on the planet. What would have happened if that company would have gone out of business?

MIKE SANTOLI, ASSOCIATE EDITOR, BARRON'S: Well, I think that the Federal Reserve and the Treasury Department decided they didn't even want to know what would happen if it went out of business. So, we didn't know if it could have had an orderly liquidation, if they could have unwound all these very, very complicated, interrelated securities relationships that they've entered into.

But, I do think there was going to be an even greater crisis of confidence if AIG was allowed to flounder and essentially everyone would know that these billions and even notionally trillions of dollars worth of derivatives were going to be coming on the market. So, with Lehman Brothers already being unwound, I don't think the authorities wanted to see what was going to happen.

WILLIS: Could get ugly, obviously. Katie, Lehman Brothers, Mike mentioned it. That company allowed to flounder -- why?

KATE BENNER, FORTUNE MAGAZINE: Well, I think that at the end of the day, the Federal Reserve also wanted to send a message which was we can't keep on helping Wall Street investment banks that took on a lot of risk, that made mistakes, and that are looking for a bailout.

You know, after Bear Stearns I think the industry got more comfortable and they thought somebody will help us, we have more time. And when it came down to it, they ran out of time. And the Federal Reserve said, OK, it's time to know what happens if one of these banks does go out of business. Lehman seemed like a safe choice, it wasn't as tied to the economy as Bear Stearns.

WILLIS: Well, I'll tell you who's running out of time, are homeowners who are tired of the housing prices going down. Was it the housing crisis that caused this whole mess -- Walter.

WALTER UPDEGRAVE, SR. EDITOR, MONEY: Well, I think that was the root cause and it's been going on for years. I mean, I think it all started when we decided to have Fannie and Freddie essentially give out below market rate money because it had this implicit guarantee we were assured for years it's just implicit, nobody is going to have to use it and that's what fueled the whole engine, I think.

And so, then you had these home values just going up, up, up and then when it all burst, you have all the credit securities that were tied to them, the people who owned the houses and so it really was the start of the mess we're in.

WILLIS: Start of the mess. Katie, recession, do we have to go into recession now?

BENNER: I mean, I think that people are trying to avoid the "R" word because of the election coming up. We have only a few weeks really before we choose our next president, so nobody wants to admit whether or not we are in a recession. But whether or not we are technically in a recession, we're going to see tax basis shrink, we're going to see civil servants laid off, we're going to see state budgets shrink and that will affect people all across America. If that's not a recession, well then, I don't know what is.

WILLIS: Boy, I'm looking for good news here, Mike. Any chance that this housing meltdown could correct itself any time soon?

SANTOLI: Well, I think it could stabilize. I mean, basically, the housing stock of the country is basically the collateral, the most important piece of collateral that all these other credit instruments are based off of. If it simply quits going down in value month after month, then these institutions don't have to keep taking rounds of losses.

That really is the spiral that we've been in for awhile, so if the housing market does stabilize, you saw mortgage applications actually surge in the most recent week, after the Fannie and Freddie takeover, rates came down. So, that's a very early glimmer that maybe we could be working through some of this inventory, but it's too early to say for sure.

WILLIS: Well, we need more than a glimmer, we need a glow. You know what really gets to me, though, is the taxpayer is on the hook for all this. Katie, what are we talking about here at the end of the day in terms of how much money taxpayers might be paying?

BENNER: That is such a difficult question because if you add it all up, we're up to like $900 billion gazillion, whatever it is, but at the same time, the problem is is that these companies have borrowed money from the government and they're using as collateral bad assets, things they own that nobody really knows the real value of.

WILLIS: Right.

BENNER: So, the big question is, will AIG be able to pay back this loan? Will so and so -- you know, who will pay back and how?

WILLIS: Still, though, Mike, I mean, when you look back at the RTC, my understanding is that ultimately the RTC made a little money.

SANTOLI: Right.

WILLIS: Could that happen this time?

SANTOLI: It could, yes. In other words, the government takes control and trust of all these bad assets and over time slowly works its way out. You know, it's been said before, but the Federal Reserve the one bank that does not need to recognize the current market value of what it owns.

All the other banks are taking losses because they have to reflect what the market says they're worth. The Federal Reserve, or a trust could essentially patiently wait until value is realized out of these things. It's not easy, it's not complicated, it takes capital to actually do that, but it's theoretically possible.

WILLIS: It takes capital for everything. OK, well, Walter, Mike, Katie, don't move, we're going to take a quick break, but we'll be right back with more roundtable and some very important tips about how you should handle your finances right now. We're all over issue No. 1, America's economy, right here on CNN.

(COMMERCIAL BREAK)

WILLIS: Back with us once again: Walter Updegrave, senior editor for "Money," Mike Santoli, associated editor at "Barron's," and Katie Benner from "Fortune."

Welcome back, guys. OK, let's get to my pocketbook and consumers' money, that's what we're really here to talk about. Mike, as you probably know, people are pulling their money out of mutual funds, in fact, they'll probably pull more money out this month than any previous month, that's a very big deal. So, what do you make of that? What do you tell your mom about her stocks? What should she do?

SANTOLI: It's a two-pronged answer. One is, if this decline, we're down about 25 percent of so from the ultimate highs of about a year ago, if it was actually cutting into your nest egg, your retirement plans, in other words, the amount of money you have right now is not going to carry you over, maybe you don't have the risk appetite to be so heavily in stocks, then maybe you'll want to divert it elsewhere.

But, I will say, typically, on a timing basis, it doesn't pay to begin panicking after the market's gone down 25 percent. You want to say people panic and pull their money out before you have a recovery.

WILLIS: Yeah, absolutely. But you're sort of locking in that low price, right, Walter?

UPDEGRAVE: Well, you're, I mean, you don't know what the future's going to hold, you don't know when this -- you know, how far down we're going to go, but I think what you want to do is have some sort of a mix of stocks and bonds that is appropriate for your risk level. If you're very close to retirement, it's probably something around 50/50.

Now, you may lose some money in the stock portion, but if you have a reasonable withdrawal rate, you're not pulling it out at some ridiculous rate, you have plenty of time for that to recover, and so I don't think the people should be radically changing their, their investment mix because you really -- I mean, the whole idea of having an allocation like this is because you don't know what the future will hold.

WILLIS: Let's talk about money markets for just a moment because we did have a problem with the money market fund this week. Katie, tell us what folks should be thinking about their money markets.

BENNER: First of all, money markets funds have been very, very safe investments. So, it's true, they're one buck does not pay out a dollar...

WILLIS: Breaking the buck is essentially...

BENNER: Breaking the buck. Essentially, when people put money into a money market fund, for every dollar they put in they they'll get a dollar out and they'll have a little -- the interest will be a little bit interest better. And that's essentially it. And that's why people use them, they're like cash. So, for a fund not to be able to pay that dollar is catastrophic for the fund.

So, if you are worried, and it's reasonable, I understand why people are worried because of this event, there's nothing wrong with calling your investment adviser, with getting call the person who runs your fund and getting in touch with the person who sold you the product, finding out as much as you can what is in this, what do you own, what am I exposed to?

WILLIS: And of course you could pick one that is based on treasuries, rather than something riskier.

Let's talk about 401(k)s, though, Walter. What should I be doing with my 401(k), right now to stay safe?

UPDEGRAVE: Well, I think it depends on where you are in your career. If you're very young, I don't see any reason for somebody making any big changes at all. I mean, if somebody is 30, 40 years old, they've got 25 years ahead of them. I mean, if you go back to the last real huge meltdown we had, 1929 and you look at what happened if somebody bought the trough there, 30, 40 years later, even a shorter period of time, 20 years later, they did extremely well. So, I don't think that younger people really don't need to do much of anything. If anything, they have to prevent themselves from overreacting.

If you're closer to retirement, then it really kind of comes down to, you know, setting something that makes sense. You don't want to be -- you still need some stocks and -- but you don't want to have these big swings because the problem is if you go into retirement and you have a big kind of downturn, if you retired a year ago, then you have these problems, because you're starting to pull money out, and you don't have enough capital even when the market recovers to recoup your losses. It's the combination of pulling money out and the losses, that's when you have to be careful.

WILLIS: All right, I have to ask a question, though, about AIG because they had all kinds of products that were sold to consumers, both auto policies, annuities, all kinds of things. What should those people be doing, anything at all -- Mike?

SANTOLI: Well, not really much especially now that you have government backing, but the insurance subsidiaries, the ones that actually wrote those policies were never much in danger. I mean, obviously, you never know in a catastrophic, you know, zero value scenario, but really the state regulators, it's one thing they do for insurers is they make sure the capital is set aside to make good on these policies. So, it seems as if everything's OK, understandably, call volume has become huge. You mentioned my mother before, she has an AIG annuity, she asked me about it, seems like it's OK.

WILLIS: All right, guys, Mike, Walter, Katie, thanks so much for helping us out today. Great job. I know you were answering questions for lots of folks out there.

The turmoil in the financial markets is enough to make anybody's stomach turn, but there are ways you can protect your money. If you're looking for a guaranteed return these days, one of the best things you can do is pay off your high interest debt and that's likely to be your credit card.

Now, if you have a mutual fund or a 401(k), don't pull your money out when the market is hitting lows. Instead, make sure your portfolio is diversified. That's how you can protect your nest egg from the market's wild swing. Make sure you have a good mix of stocks, both domestic and international, bonds and money market funds. To see what your asset allocation should be, go to CNNMoney.com, click on the retirement tab which has a tool to help you determine the right amount of stocks and bonds for your portfolio.

There's a lot of uncertainty about the safety of the banking industry, right now. Make sure your bank is a member of the FDIC. If it is, your money will still be there if the intuition goes out of business. Just make sure you're within the limits of coverage, that's $100,000 for individual accounts, $200,000 for joint accounts and $250,000 for retirement accounts. Keep in mind, the same protections exist for credit unions.

And there is good news, here. The federal government is standing behind the companies that most impact regular consumer finances like AIG, Fannie and Freddie. And while these are volatile times, financial experts say that the drastic steps the government is taking to shore up the U.S. financial system could be the beginning of a turnaround.

Still ahead on OPEN HOUSE, a closer look at the candidates' tax plans and what they could mean for you next year.

And skip the pizza and chicken nuggets, healthy school lunches that will keep parents and kids smiling. We are the show that saves you money.

(BEGIN VIDEOTAPE)

WILLIS (voice over): Nashville, Tennessee, Musicville USA. You might wear out your dancing shoes, but you won't wear out your wallet. You can catch free concerts by the city's emerging jazz and country stars, everywhere from bars to Nashville's public parks. Be sure to stop by the Frist Center for the Visual Arts. Formally the National Post Office, this modern art space is free to members and offers free tours and event to the public.

And for a taste of Tennessee history, head to the Jack Daniels distillery. You can explore the nation's oldest distillery at absolutely no cost. Sorry, though, no free samples.

That's your "Local Lowdown."

(END VIDEOTAPE)

(COMMERCIAL BREAK)

WILLIS: From the economy to energy to healthcare, the big issues in the presidential election all affect your bottom line. Now, one issue that's going to affect us all sooner rather than later, taxes. CNNMoney.com's senior writer, Jeanne Sahadi joins me now to break down the tax planes.

Jeanne, lots of claims from the candidates on the campaign trail. Let's start with how they treat the Bush tax cuts, big point of contention. Let's start with McCain.

JEANNE SAHADI, SR. WRITER, CNNMONEY.COM: McCain wants to extend them for everyone. Senator Obama wants to extend them for most people. He wants to raise them for people -- couples making more than $250,000, singles making more than $200,000. You know, McCain camp says he's going to raise taxes, period. He's going to raise taxes on some people.

WILLIS: How about that AMT?

SAHADI: The AMT, Senator McCain wants to permanently protect the middleclass from it. Right now, Congress does it every year and it's always a big question.

WILLIS: And you said he put in place like a super patch on the AMT?

SAHADI: It's kind of a super patch, that's right.

WILLIS: All right, well, let's really dig down here and look at some comparisons. Let's kind of go bracket by bracket, get a sense of how these two candidates differ when you really look at these brackets. Let's start with the low-income numbers here and take a look at what this will be like for individual taxpayers.

SAHADI: OK. Broadly speaking, under McCain, everyone's going to get some kind of tax cut on average and I should say thee numbers reflect the average for whole groups, so some people may not get any tax cut, but a majority of people will.

WILLIS: We're dealing with a lot of general a letters here, but you have to. But you can see the trend, here. You know, tax cuts really across the board in these income ranges.

SAHADI: The majority of people earn in these income ranges so they're going to see very possibly lower taxes relative to where the law would have been, you know, if nothing else were done. That means the Bush tax cuts would expire. Most of the candidates want -- I mean, most of the cuts both canneds want to extend, so that's a positive.

WILLIS: So, where most people are here, the tax cuts are bigger as you're showing us bigger, as you're showing us right here, under the Obama plan?

SAHADI: For the people in lower and middle income groups, they're larger under the Obama plan. Under McCain, the higher income you are, the bigger the tax break you get. But, the tax breaks across the board under the McCain plan.

WILLIS: All right, let's move on now, just a little more upscale here and start looking at the numbers as you progress.

SAHADI: Right. You know you'll see, if we show the numbers again, that at the $227,000 level and up, that's where Senator Obama's plan starts to add to someone's tax bill. Up until then, everyone is seeing a tax break. So, it's really those top two groups in our table that get hit with a tax increase and a pretty big decrease under McCain.

WILLIS: All right, let's look at the Obama plan for just a second, more in detail. I mean, we kind of gloss through it a little bit. We want to get a better sense. We understand McCain wants to keep in place the tax cuts. What's the heart of Obama's plan for taxes?

SAHADI: He wants to change the distribution of tax burdens. He wants to make it easier on low and middle income folks. He wants the wealthier folks to pay more into the system and he does it a couple of ways. He raises the top two rates on their income, so what's 31 and 35 percent today -- or 33 and 35 percent, goes to 36 and 39.6 under Obama.

He wants to increase the capital gains tax on those folks from 15 percent today to 20 percent. And he wants to impose a surtax or an extra tax on income over $250,000 for people paying into the Social Security system. But, he doesn't want that to go into effect, it's not a formal proposal, he doesn't want it to go into effect for 10 years. This table reflects all of his tax suggestions. So, that's why you can't...

WILLIS: The reality is that not all of these suggestions would actually become law even in the best case scenarios. Jeanne Sahadi, thanks so much for helping us out today.

SAHADI: Thank you.

WILLIS: Up next, school lunches, kid friendly, nutritious and on a budget, we'll show you how, next.

(COMMERCIAL BREAK)

WILLIS: It's that time of year that every kid dreads, back to school. Studies show childhood obesity, it's on the rise with the economy's sluggish, money is tight, too. Here with tips you need to make sure your child is eating healthy and that you don't break the bank in the process is Heather Bauer. She is a registered dietician and contributor to "Cooking Light."

All right, Heather, let's start with just some guidelines out there. You know, folks are really trying to do the right thing, save money but also provide healthy lunches for their kids. What do you do?

HEATHER BAUER, CONTRIBUTOR, COOKING LIGHT: Well, think about all the different food groups. You have five food groups. You have whole grains, fruits and vegetables, protein, dairy. Put three of those food groups into your kids lunch and it will definitely be balanced.

WILLIS: OK, so this sounds healthy and like maybe a little bit boring. So, I guess we have to ratchet up the excitement just a little bit.

BAUER: You want to make it fun. Which is why you want to take advantage of doing things like using leftovers because you can actually get very creative with some of the meals we will talk about today.

WILLIS: OK, all right, we've got great ideas for that. Let's start, though, when you are putting this whole thing together, one of the things you have to think about is what is this kid going to drink with lunch. What do you suggestion?

BAUER: Exactly. With drinks we have lots of different options, here. We have, water, which is the best option, but only is it free, but you can freeze it overnight and it can double as an ice pack, which is really smart. It can keep your kids foods safe, too, which is wonderful.

We also have orange juice. You want to look for orange juice which is fortified with calcium and vitamin D, but you can use four ounces to mix it with water, so that it only saves money, but it's also less calories.

WILLIS: Water down the orange juice. Now, you've got one of these things you were talking about before. A lunch that is disassembled.

BAUER: Exactly. I mean, I always like to tell me clients, take advantage of your leftovers. Use a protein that you use one night, reuse it the next and you can enter them into cookinglight.com and you get tons of different recopies that come up.

Chicken fajitas is a great example. You've got chicken, you've got peppers, you've got salsa, you've got a whole grain tortilla and that's a great way to mix in all the good ingredients and it is for fun for kinds, it's also healthy.

WILLIS: I'm doing this with my fingers.

BAUER: And it's under $2, by the way, which is great.

WILLIS: All right, tell me about your special PBJ. I like that.

BAUER: Well, this is a great fun take on your traditional peanut butter and jelly sandwich. It's basically just whole grain waffles with peanut for protein and some banana, which is a great fruit, so you're mixing it altogether and it's also under $2, which is great.

WILLIS: All right, I love that. And what do we got going on here?

BAUER: This is another great recipe from cookinglight.com. It's actually a chicken pineapple pita, which is really wonderful and it's got chicken...

WILLIS: I don't know. I'm looking at the whole wheat and I'm think how am I going to get this kid to eat this?

BAUER: Well, what you could do is you could serve it like this or but you could also do individual compartments, again, and have them put it together.

WILLIS: Because they like doing that.

BAUER: They like to build. It's fun.

WILLIS: OK, and of course, you have some fabulous vegetables cut up.

BAUER: Exactly, fruits and veggies.

WILLIS: Kids do eat that, but the edamami. I love this, but I'm wondering... BAUER: Kids love it. You know what, you can keep with the shell, these are deshelled, but if you have them shelled, it's fun for kids to eat and pull apart, it's kind of interactive. Also with dips, dips are fantastic. And they're very, very cheap, this would be $1 per serving. You've got carrots and celery and ranch, you could do hummus, you've got strawberries, here. Also with strawberries you could serve with a little bit of low-fat yogurt dip, that's another way to make it fun. And grapes, simply freeze them, and that could be fun for kids.

WILLIS: Freeze fruit. OK, I think you've got to say these are better solutions than possibly some of the prepackaged stuff that's not only expensive, it's not healthy.

BAUER: It is not healthy. I think a lot of parents fall into that trap because it's quick and easy and eat them. But, you want to ask yourself, would I eat this myself? That's really the best question to ask.

WILLIS: I see things I would eat here myself. Heather, thank you so much for your help, today, appreciate it.

BAUER: Thanks for having me.

WILLIS: You can hear more about the impact of this week's news on your money on YOUR MONEY with Christine Romans and Ali Velshi, SATURDAYS at 1:00 p.m. Eastern and Sundays at 3:00, right here on CNN.

As always, we thank you for spending part of your Saturday with us. OPEN HOUSE will be back next week right here on CNN. And you can catch us on "Headline News" every Saturday Sunday at 3:30 p.m. Eastern Time.

Don't go anywhere, your top stories are next in the CNN NEWSROOM. Have a great weekend.