FARAI CHIDEYA, host:
From NPR News, this is NEWS & NOTES. I'm Farai Chideya.
Where we live, how much we pay for the basics and the luxuries, and how well our retirement savings plans are doing - well, they're all linked to the economic big picture. So, what is it? You've heard about the credit crunch, you've heard about the housing crisis, and just recently, the Dow, the leading stock market indicator, took a 360-point nosedive. Overall, the economy took a beating for most of this last fiscal quarter. Now the economy may be looking up a bit and the price of money for banks could go down.
To put the pieces together, we've got author and economist, Julianne Malveaux. She's also president of Bennett College.
Dr. JULIANNE MALVEAUX (Economist; President, Bennett College): Thanks, Farai, how are you?
CHIDEYA: I'm doing great. What about the stock market, how's it doing?
Dr. MALVEAUX: Well the stock market isn't doing badly. I mean, if you look at today, stocks have been climbing this day, this morning. And certainly, we expect that they will stay relatively steady. Of course, the stock gains are being driven by just a couple of stock, Microsoft among those.
And we have something to worry about in the case of Merrill Lynch. Not clear what's going to happen to the African-American CEO at Merrill, Stan O'Neal, but people are expecting his resignation to come - could come any time from now, or he may ride out the storm. But the board is not showing much confidence in him. As Merrill has taken a really big hit with the housing crisis, and he pretty much was proposing a merger between Merrill Lynch and Wachovia. That didn't go down well with people at Merrill Lynch.
CHIDEYA: So there's some shakeups at the top. What about the interest rate? That's something that the Federal Reserve uses to sort of guide companies and banks in particular. What's the state of play there?
Dr. MALVEAUX: Well the Federal Reserve's Open-Market Committee is going to start meeting tomorrow. And they will have a - a two-day meeting that they have, and during that meeting, we expect - many people expect that they'll probably lower the interest rate by about half a point, just as they did in September - making money cheaper, making, theoretically, the cost of lending cheaper, credit card interest rates, although they never get translated, but they should, cheaper.
It's a real issue, though. They're going to meet tomorrow and then they'll meet again in December, six weeks from then - December 11th. And there are many who hope that they will do a double cut - to cut half a point now and cut half a point in December.
Ben Bernanke has been very, very cautious, though. And it really is going to depend on whether or not how markets respond to the cuts. The - many believe that the increase in the stock market right now is in anticipation of a double cut. So the stock market - and we talked about many times, Farai, it's - there is not a sign to this, it's a lot of expectations, a lot of guessing. There is some evaluation that's driving some of the stock increases and some of the stock fluctuations, but as much psychology as it is economics.
And so, if we see a rate cut on Wednesday - they'll announce it on Wednesday - if we see a rate cut on Wednesday, we can expect to see some relative strength certainly in the stock market, which does not necessarily translate to economic strength.
The last minutes of the Federal Open Market Committee meeting showed that growth was at about 3 percent - a little over 3 percent, which is considered healthy, but that's been uneven growth. And there are a number of cautionaries in the last Open Market Committee meeting about aspects of the economy that are not doing well. The dollar is weak. It's been weak against the Euro. And although it caught up in today's trading, by and large, we've seen a weakness in the dollar that we have not expected to see.
And our challenge always is that we look at the stuff from day to day, and we really want to look at the long-term fundamentals of the stock market especially as it affects individuals. You're not materially better off or worse off personally, as Farai Chideya, if the stock market goes down 200 points, it goes up 200 points in a day.
The real issue is what it looks like at the end of the quarter and the end of the year and the end of five years, especially given your age and when you might expect to retire.
CHIDEYA: Well, Julianne, we're going to talk about retirement in a second, but I want to back up and talk a little bit more about this whole idea of cutting rates. And you know, it's something where I think most people certainly - me, I don't go around saying, okay, what's the Fed going to do every second of the day?
(Soundbite of laughter)
CHIDEYA: But there was already a rate cut. Did that not do what the Federal Reserve wanted it to do? Is that why it's contemplating doing more?
Dr. MALVEAUX: Well we stay - we were steady for a very long time and you never want to do a large rate cut of a point or a point and a half. You really want to - and Bernanke's philosophy has been to move very cautiously. So cutting by half a point to see what happens and then perhaps cutting by another half - what we know is that because of the housing crisis, because of a number of other things, the economy is not as strong as is might be.
People are basically - I won't say taking money out of the economy, but you can almost say that. People are borrowing much as they might. We don't want individuals to, but when companies borrow, and they use it for investment, that generates jobs and other things. So by making money cheaper, Bernanke is sort of signaling, hey, company X, hey, you know, American Express, or hey, Oracle, we want you to borrow money so that you can invest it. And that's sending a sign of economic confidence. The first rate cut in September sent the signal, kind of, but not strongly enough. And people haven't responded. The second rate cut might do it.
CHIDEYA: Let's move back to the idea of investing - retirement and investing. There was a recent report by the AARP and it said that almost half of all African-American seniors would live in poverty if it weren't for Social Security.
Now, a lot of people say, okay, we'll try to get a little bit of a pension, a little bit of the 401k. There are these set plants. It sounds like most people don't have a lot of back up. Explain a little bit about that.
Dr. MALVEAUX: They don't. For a long time, people relied on Social Security as the only way of retirement. Many companies had pension plans. We know now that probably a third of African-Americans - just over half of white - maybe 51 percent, maybe 28 percent of Latinos - I'm rounding here - have worked for companies that provide pension plans. But so - you have - what we call retirement is a three-legged stool. If you're retired you got to look at three streams of income - one is your Social Security; two is your private pension or 401K; and three is your personal savings.
People have relied on Social Security. If they work for a company that might do a retirement match or something, Farai, they did rely on that, but that was less than half of all Americans. And then the third source of retirement income is personal savings, and that's where Americans, African-American and majority of Americans fall down, is in this issue of personal savings. The savings rate in the United States is extraordinarily low. It may now be around 2 percent so people are not putting their money away.
CHIDEYA: Why is that? Do you have any crystal ball into people's minds?
Dr. MALVEAUX: Well, if you look at people at the bottom, they will tell you that they don't have it to put away. They probably have relatively poor financial habits. You know, the tended is pay yourself first, 10 percent for your savings, 10 percent for your ties and 10 percent for charity, is kind of a mantra that many money managers use. But if you make ten or eleven dollars an hour and you feel like every penny is being sucked up for, you know, necessities you really aren't doing the saving that you might need to do.
The other reason that people tend not to save, Farai, is that people always think they're going to do better than they did this year. So when you ask most people - most people are relative optimists. You make 30 grand this year, you think, okay, next year I'll be making 33 and I'll put that away - and it never happens that way.
You've got to be more disciplined or work backwards with your savings. When you get a check, you got to lop it off first. Pay yourself first is the mantra that is often used but too few people, especially those who are low and moderate income, don't save. And when you look at low income you can almost sometimes understand it because people really are just making ends meet.
CHIDEYA: Well, there's a little bit of question in my mind about how the psychology of spending plays out in different communities because there is that woman, (unintelligible) McCarthy, who was a washer women saved up well over $100,000 to give to education. So that's a case where someone…
Dr. MALVEAUX: A hundred and sixty thousand to be exact.
CHIDEYA: Yeah. She had…
Dr. MALVEAUX: It was a really beautiful story.
CHIDEYA: She had no money…
Dr. MALVEAUX: And she made no money. Yeah.
CHIDEYA: And she saved it. There's a lot of pressure on people when you look at advertising, when you look at family saying I want this, I want that. Kids are experts at it, but they're not the only ones. From a more personal perspective, how do you deal with this pressure to spend as opposed to save, and should people be saving as you examine these issues?
Dr. MALVEAUX: Well, Farai, I always say with some humor that shopping is America's default emotion. You know, you feel good you shop; you feel bad you shop. You know, I mean, you - listen to people. Oh, I feel so great I'm going to go out and buy something new; oh, I feel so horrible I'm going to go buy something to cheer me up. You know, you get a new job you have to buy new clothes for your new job. You know, you lose your job you have to go buy casual clothes.
And you're constantly being barraged with images of buy, buy, buy. We judge people by what they have on. You know, sisters, you got a new guy in your life you got to go get new clothes for the new man. You leave him you got to get rid of those clothes because they remind you of that other man.
And it seems like every emotion you could possible have is connected to shopping. You know, some of our card companies make a mint, you know, graduation cards, Mother's Day cards, Halloween cards, everything that we celebrate is connected to consumption. And I think that people have to just be very, very deliberate in unpacking that, and saying why am I buying this, do I really need this.
One of the techniques I personally do is I don't shop during lent at all because I just take myself all the way down to zero. And it reminds me that you don't have to have everything that you have an impulse that you want right this minute.
CHIDEYA: So when it comes to this question of saving for the long-term, say, that you decide that you're going to cut back on some, you know, clothes here or hair there, greeting cards, and you save up an extra $200 a month, will that make a significant difference over time in your retirement?
Dr. MALVEAUX: Oh, absolutely. Two hundred dollars a month is twenty-four hundred dollars a year. If it's invested at a reasonable rate, in return it's going to double every seven years. And so depending on your age - think about it, if you're 30 years old and that twenty-four hundred dollars, and you keep doing that you'll end up with - I don't want to give a number - but it's, you know, in the six figures by saving $200 a month.
And then if that six figures, say, it's - I don't know what the number is but let's say it's $300,000, $500,000, if that's invested at again a reasonable rate or return of about 7 percent - call it five if you want to be safe - that $500,000 is going to turn into twenty-five thousand a year or $2,000 a month for your retirement, which is on top of your Social Security.
CHIDEYA: And it sounds - and just briefly here - that African-Americans are very vulnerable given that there's a reliance on Social Security and not in very many other forms compared to other races.
Dr. MALVEAUX: We are extremely vulnerable. We do have a big gap in our savings rate. We are very responsive, however, when money companies target us. We tend to be very responsive to the targeting especially people who are - middle and upper income will tend to response in terms of savings and investment.
The biggest challenge, I think, generationally is that young people do believe that they have a quote, "right" to certain kinds of consumer goods - you know, cell phones, iPods, you just - a very long list, that these things are seen as necessities and not luxuries. And so if you see those things as necessities, you feel like you must buy them. But we have to do a better job of educating young people about financial literacy and catching them early…
CHIDEYA: Julianne, we're going to have to leave it there. Thank you so much.
Dr. MALVEAUX: Thank you.
CHIDEYA: Author and economist Julianne Malveaux is president of Bennett College, and spoke to us from WFDD studios in Greensboro, North Carolina.
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