[Farai Chideya:] From NPR News, this is NEWS & NOTES. I'm Farai Chideya. Overdraft protection on debit cards sounds like a good thing. But when plastic replaces cold, hard cash, those fees and overdraft charges can add up fast. It's costing Americans around $2 billion a year, and that is no small change. For more, we've got Bill Spriggs, professor and chair of economics at Howard University. And we're in D.C. together. Thanks for coming on.
[Dr. Bill Spriggs:] Yeah. Good to see you in person.
[Farai Chideya:] I know. Likewise. So what was the initial purpose of overdraft protection?
[Dr. Bill Spriggs:] Well it was to avoid the embarrassment of going to buy something as simple as a soda and getting rejected and having the clerk look at you in a funny way. So the banks honor your card even though there isn't enough money in the account. However, what most people don't realize is that is just like bouncing a check. So it's a huge fee and then because it's not a check, it's not unusual for people to go and maybe fill up the tank that's another $30 fee and then maybe go around the corner, and that's another fee. People are using their cards now maybe to find a place some money.
[Farai Chideya:] And so if you're not aware of what's going on, you can rack up, what, a couple of hundred dollars in fees before you know it?
[Dr. Bill Spriggs:] Very easily because they're doing it for each transaction. So their treating that as if you bounced four or five checks, not as if there was one incident.
[Farai Chideya:] So who charges these fees? Is it the bank, the store, both?
[Dr. Bill Spriggs:] Well, the bank is charging it. The store is not in the same position as it would be in with the bounced checks. So from the store's perspective, you're good. But from the bank's perspective, they are punishing you the same way they would if you wrote a bounced check.
[Farai Chideya:] The obvious wisdom is, okay, check your bank balance regularly, but any other wisdom in order to avoid these charges?
[Dr. Bill Spriggs:] Well, sometimes people can do it without understanding all of the ramifications. There are still some cards where you can have a hold put on place if, for instance, you go to fill up a gas tank. The gas stations some gas stations will still do this but put a lock for, say, 50 or $60 assuming that you're going to fill up the tank, come inside, get a coffee, get donuts, pick up the newspaper, and then leave. So you may have had $40 in your checking account, and you figured, I'm just putting $15 of gas in so I should be okay. But that $40 hole means that when you then go to get the coffee and the donut, now you just bounced your account.
[Farai Chideya:] Wow. Now, is there any discussion of regulating these fees?
[Dr. Bill Spriggs:] Well, Congresswoman Carolyn Maloney I used to work for her by the way has a piece of legislation to at least warn you and let you say, okay, if I'm going to run into this problem, I'd rather have the charge denied or you might have the $6 in your pocket. You're just used to pulling out that card as opposed to pulling out the $6. So at least if you had the warning and you knew about it. And when you look at it, this is really more onerous than payday loans because you're being charged a huge fee for a very small amount of money in many instances.
[Farai Chideya:] Let me turn to another big issue. The U.S., Britain, Canada, France, Germany, Italy and Japan are the countries that make up the majority of the world's economic might. And so they get together as the G7 last week, they did in Washington. The U.S. housing market seems to be on their radar.
[Dr. Bill Spriggs:] It's making them very nervous because a lot of banks and some countries began using the U.S. mortgage market as an alternative to hold U.S. treasury notes. Many people got used to the paper that Fannie Mae and Freddie Mac with U.S. mortgages assuming these are pretty sure bets. They weren't as familiar with mortgages that included subprimes. So now that those are going south, they're very nervous. And in the U.S., the problem is the dollar has already started to fall, meaning these countries who are trading partners don't like a falling dollar because that makes U.S. exports much more competitive and makes their exports much less competitive. So they're very upset about that and then these pressures on people wanting to get rid of paper that they're holding in U.S. mortgages is going to put even more pressure to lower the dollar. So they're very nervous.
[Farai Chideya:] So it sounds like, in a way, you would think that a country would be happy that their currency would be strong and others would be weak, but that's not necessarily the case here.
[Dr. Bill Spriggs:] Not in this case. I mean, everyone knew that the dollar was overvalued because we want such a huge trade deficit and we have a current account deficit. We owe the world tons of money. And when you're in that position then you're going to have a weak currency. It's really remarkable that the dollar has held up this long. But, yeah, they have been benefitting in Europe because the dollar was very strong and their products were very competitive to the U.S. when we had that strong dollar.
[Farai Chideya:] Now, what does the U.S. need to do to boost its economic image overseas and, of course, image is in everything? Is it a question of marketing the U.S. to the world? Or is it a question of structural changes like how we carry debt? What would make things different?
[Dr. Bill Spriggs:] Well, the nervousness now is that people will totally back away from the dollar and not want to invest in the U.S. because this lack of credibility on the mortgage market is making them nervous about other U.S. investments. So that's why you hear this big talk about if the U.S. is still strong and sound and this is a good place to invest. But it's a little bit more than marketing that's going to have to get people confident about our practices in loaning money. And so we'll have to wait and see whether the world gets too nervous about this.
[Farai Chideya:] What about the housing market? Just judging from what's been going on recently, have we seen the worst or are things going to continue to pop up in terms of mortgage defaults and all that?
[Dr. Bill Spriggs:] They're going to get worse because the bulk of the loans were made in 2006 and they have these 2-year adjustable rates. So 2008 is when they will adjust. And so we're going to see a much worse market in 2008. That's why everybody is nervous.
[Farai Chideya:] Well, Bill, let's move on to the stock market. Last Friday marked the 20th anniversary of what's called Black Monday. In 1987, the Dow Jones' industrial average dipped a whopping 504 points. But I want you to put this in context. Was this bigger, not just in numerical terms, but impact on the stock market crash of 1927?
[Dr. Bill Spriggs:] Well the one of '27 ended up unraveling our whole financial system. The Federal Reserve, at the time well, the Central Bank didn't exist in the same way. But the government didn't know how to respond. And it wasn't clear that they responded correctly. They seemed to want to restrict credit after that. So we learned a lot of lessons from that crash, as a result to that when this crash took place in '08. a lot of liquidity was pumped into the market. The Federal Reserve made sure that money was quite available to bail people out and keep the market functioning.
[Farai Chideya:] So you used the word liquidity. That means that the government makes sure there's money available?
[Dr. Bill Spriggs:] That there's money available, because when people lose a lot of money, the money has just disappeared. And so if they don't pump money back into the system, then there's no way to loan money and there's no way for companies to continue to function. So this was a big lesson learned form the crash of the in the '20s. In the '80s, we avoided that and we've avoided that crash of the '80s in the future because we don't let the computers won the trading in the same way they did in the '80s. And in the 80's, the computers have gotten ahead of us, they were making automatic trades. And once the market started to fall, they had kicked in with all these trades that took place faster than the market could absorb.
[Farai Chideya:] So these computers were set to say, sell, sell, sell, is that correct?
[Dr. Bill Spriggs:] They were set to say, sell, sell, sell, and many firms were doing what was an investment maneuver to protect themselves, a kind of insurance. They would bet the market would also fall so they could make money in case the market fell to ensure themselves against that happening. And so some of the sell orders were because now people are actually making money on the market going down.
[Farai Chideya:] So when you think about markets falling, someone always has to make some money. When markets fell in '87, when you had this recent bauble, are there any people who were in position to actually make a little cash?
[Dr. Bill Spriggs:] The folks who are betting that the market is going to fall actually make money. There are various ways that investors do that. They buy short, which means that they actually borrowthe stocks. And then when the price falls, they buy it back at a lower price. And then you can take options as a way to bet that the market may be falling. So, yeah, there are people who make money either way.
[Farai Chideya:] And what about the international picture? We just talked a bit about the G7. When the U.S. stock market has trouble, who is affected abroad?
[Dr. Bill Spriggs:] A lot of people are affected abroad because the fear of the U.S. going into a recession affects their economy. So you look at the exports from Asia, most of them come to the United States. So if we go on to a slow down, that means a slow down for them. And our major trading partners in Europe get nervous because we will stop buying things that they make as well. So everyone gets nervous when the U.S. goes into a recession.
[Farai Chideya:] When you think about people, the baby boomers, the first boomer and I kind of put that in air quotes just went in and tapped into Social Security because there's a whole spectrum of people of different ages. But there's no question that the baby boom generation is going to really tax Social Security. A lot of people have their investment accounts for their retirement. When the stock market takes a dip, should people panic? What should people do?
[Dr. Bill Spriggs:] They need to hold it for the long run. Even if you have bought back in '87 when the market taint, at this point, you would be way ahead of where you were then. So you have to think the long run. If you're about to retire, that's when you understand the market volatility can really hit you because in '87, it would have been a whole two or three percentage point differences just on the issue of one day whether you bought or sold around that Black Friday. So it's a big concern if you're going to retire in the short run. But if you're in your 40s or in your 30s, then you should be thinking long run.
[Farai Chideya:] And when you think about this whole issue of how people have hidden stocks, I guess, that they don't follow on the day-to-day but that are in mutual funds, what do people really need to know? How much do they need to know?
[Dr. Bill Spriggs:] Well, trying to beat the market by getting in and out of your mutual fund is not really a wise thing to do if you have the long run ahead of you if you are in your 30s and 40s. If you're in your 60s and you're going to retire soon, then you do need to worry about it because these fluctuations hurt you and you're not going to make the money back within a short amount of time. When the market went down at 2001, it didn't come back until just recently. So anybody who's going to retire between 2001 and 2002 or 2003, they ended up being quite short.
[Farai Chideya:] Well, Bill, thanks so much.
[Dr. Bill Spriggs:] Okay. Thank you.
[Farai Chideya:] Bill Spriggs is a professor and chair of conomics at Howard University, and he spoke with me from NPR HQ in Washington, D.C.