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CNN IN THE MONEY

New York Stock Exchange Modernizing; Thomas Friedman Discusses His Book "The Earth is Flat" and Globalization

Aired April 23, 2005 - 13:00   ET

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


FREDRICKA WHITFIELD, CNN CORRESPONDENT: The U.S. military said it has arrested six men in connection with Thursday's crash of a civilian helicopter in Iraq. Insurgents posted video online, claiming to show the helicopter being shot down. Ten people died in the crash and one survivor was shot dead.
In other insurgent violence, 11 Iraqis have been killed today. Most died in several bombings around Iraq.

The U.S. Army has reportedly cleared Lt. General Ricardo Sanchez in the Abu Ghraib scandal. He was commander of U.S. forces in Iraq during the time many Iraqi detainees were abused. The investigation is also said to clear three other top officers. The Abu Ghraib scandal erupted about a year ago when explicit photographs were splashed around the world. They showed prisoners, many stripped naked and posed in sexually humiliating positions with U.S. troops looking on.

Benedict XVI held his first public audience since becoming pope, meeting today with the media. A half million pilgrims are expected to pack St. Peter's Square tomorrow for his inauguration. Many of the pilgrims are expected to be from his native Germany.

A funeral service today for 13-year-old Florida teen Sarah Michelle Lunde. Police say a convicted sex offender who once dated the girl's mother told them he choked the child. Sarah body was found in a pond near her home. Florida is now considering a bill mandating longer prison sentences for sex offenders.

I'm Fredricka Whitfield at the CNN Center in Atlanta. More news at the bottom of the hour. IN THE MONEY begins right now.

JACK CAFFERTY, CNN ANCHOR, IN THE MONEY: Welcome to the program. I'm Jack Cafferty. Coming up on today's edition of IN THE MONEY, how to scare a bull. A batch of mixed economic news put Wall Street on a bit of a roller coaster ride this week. We're going to see if it's a glitch or a return to the lean years.

Plus that old-time religion, from the Vatican to middle America and the world of Islam, conservatives playing a bigger role in faith. We'll try to find out what it means.

People are starving in China for the jobs we have in America. We'll talk with "New York Times" op ed columnist Tom Friedman about his new book "The World Is Flat." Find out how globalization is changing all our lives. Joining me today, a couple of IN THE MONEY veterans, CNN correspondent Susan Lisovicz and "Fortune" magazine Editor-at-Large Andy Serwer. Well, who'd have thunk it? The New York Stock Exchange parked its old covered wagon by the side of the road this week and actually took a look at an internal combustion engine. They're merging with Archipelago. They're actually going to step into the 21st century with electronic trading. Big, big story on Wall Street, but what does it mean to you and me?

ANDREW SERWER, EDITOR AT LARGE, "FORTUNE" MAGAZINE: First of all, there's two things going on. They're going to go public ultimately with this, which is a very good thing because we're going to get transparency. You won't see outrageous pay packages like Dick Grasso. On the other hand I think they're giving an inch Jack with this electronic trading thing. There's this little device called the trade- through law. It's very complicated. But basically those specialists are going to be around for quite a while, not quite ready to say goodbye to them yet.

SUSAN LISOVICZ, CNN CORRESPONDENT: Well, it's one of the biggest changes in the New York Stock Exchange's 212-year history. So that means that there are going to be changes for you and me. How so? Well, first of all you're going to have more choices. You can go through electronically, via Archipelago or you can continue to go through a floor broker. You'll have more product selection, right, because it's not only stocks. You'll have bonds and because it's Archipelago, you actually even have NASDAQ stocks and even derivatives like options, for instance. OK. You also have extended hours. Even if the New York Stock Exchange doesn't change the opening bell from 9:30, Archipelago opens at 4:00 a.m. And you'll have faster trading.

SERWER: Terrific, I can link up in the middle of the night.

CAFFERTY: So you can lose money before breakfast now.

LISOVICZ: In this market that would be the case. There are a lot of profound changes. It's not a done deal. But I don't think the NYSE --

SERWER: Those guys are (INAUDIBLE) Don't think that they're giving away the store.

LISOVICZ: The specialists, no. They were complaining about that Archipelago is getting too good of a deal so there might be some changes.

SERWER: They're always complaining.

CAFFERTY: They also have some of those specialists in trouble here lately. We have a few of them indicted.

LISOVICZ: Just a week ago, 15 of them.

CAFFERTY: I'm sure it's coincidental. I know the Archipelago deal's been in the works for a long time, but interesting timing on the announcement. LISOVICZ: Since January -- but they had to do it. My final words would be, look for more deals, NASDAQ and overseas. You're going to see more of this consolidation.

CAFFERTY: All right. Thanks Susan. The stock market has been on a wild ride, the last few days especially. The Consumer Price Index is up. There are hints of inflation. Housing starts are down, Oil has been in the headlines for a long time. Yet every morning, you still manage to cough up $3.50 for that grande skim latte with extra foam. So what's wrong with you?

SERWER: Nothing.

CAFFERTY: And with the economy and the stock market for that matter? Here to talk a little bit about this with us this morning or this afternoon is Ken Goldstein from the Conference Board and Ned Riley, who's the chairman, chief investment officer at Riley Asset Management and old buddy of mine from the days of CNNfn. Ned, let's start with you. Nice to have you with us.

NED RILEY, RILEY ASSET MANAGEMENT: Thank you Jack. Good to be here.

CAFFERTY: Should I be buying stocks? I just mentioned interest rates. We've got a little inflation in the pipeline. The growth of corporate profits is beginning to slow. There are signs the economy overall is slowing, the business cycle is getting a little long in the tooth. Should I be out there buying stocks?

RILEY: I would be Jack and it's just for those reasons that I'd buy it, because in the past, when you're at a peak in the market, you don't worry about those things. Nobody worries about interest rates or inflation. Now everybody's concerned. I think that's the reason the market's doing what it's doing lately. But when you look at it, the psychology is still miserable out there. We've got the highest short interest we've had in 10-year Treasuries. We got a high short interest on the New York Stock Exchange. We have CEOs that are very guarded about the second half of the year. We just have what I consider to be a great psychological environment and I don't think interest rates are going above 5 percent on the 10-year and I think the Fed has got to realize right now that this economy is slowing down. There is pessimism out there and the fact that people are worried about interest rates going higher is clearly altering the way consumers are spending right now.

LISOVICZ: OK, so that's a good summary Ned. Good to see you, but my question is for Ken now. Because the negative pessimism is always an overreaction, right in the markets. So why don't you, sort of the doctor of economics, put it in perspective for us? For instance, with consumer prices. There was a very strong reaction to that where you start seeing not only price increases in energy, but along the line, medical, airfares, clothing and the like.

KEN GOLDSTEIN, ECONOMIST: Especially transportation. It's not just the price of filling up the gallon of gasoline into the car. It's the price of the car itself. But look: one of the concerns as you just heard that CEOs are a little bit cautious, one of the concerns was that the price of their costs were rising and that they wouldn't be able to pass along. I think what the CPI is showing us is that indeed, they're able, at least to some extent to pass it along. So I think part of this indeed is not just a change in psychology but a change to overreact to things. And come back to your story about moving more into electronic trading. If you take the human being out and all you've got is electronic trading, does that increase the overreaction?

SERWER: Ned, I want to go back to you for a minute and talk about the markets. What the heck is going on out there? This past week has just been -- I've got whiplash here. You've got five out of six days down over 100 points and you got a 200 to the up side. Is this uncertainty? What's going on?

RILEY: Yeah. I think it's a combination of uncertainty and the players that are in the market. Obviously, we all know the money flows are going to the hedge funds right now. That trillion dollars plus that they're managing, they leverage up an awful lot. They're playing in commodities. They're playing in oil. They're playing in the S&P futures and the bottom line is, the average guy sitting on the sidelines as you said is getting whipsawed.

I really believe that once these guys realize that the slowing economy is going to bring energy prices down, we do have an oversupply in my judgment of crude oil, and the bottom line is basically that interest rates are going to go the other way. Look what's happening to interest rates in the 10-year Treasury. We didn't get back to the peak level we had a year ago at 4.89 on the 10-year Treasury. We got up to a 4.70. Now we're back down to a 4.25. Bottom line is I think the bond market's calling it correctly. Inflation will quiet down the second half of the year. The economy will grow but very slowly. Payrolls will be slow.

The one point I want to make about inflation here is that companies that are complaining about passing on costs -- auto industry and a lot of the others -- are not competitive on a worldwide basis. The bottom line is, wages and salaries are the key component of inflation, 65 to 70 percent of companies' costs. If those aren't growing at 5, 6, 7 percent, which they had in the past in inflationary periods, I think we're going to have a low inflation weight for quite a period of time.

CAFFERTY: All right. Let's go back to Ken Goldstein and get some reaction to what Ned is saying. He was talking about the Fed earlier. They've been on this measured pace of raising interest rates, 25 basis points at a time. There are signs of inflation in the pipeline. Whether they are long lasting or not remains to be seen. Confidence in the American economy overseas -- and it is a global ball game these days -- is to a degree driven by the amount of inflation in this or any other economy when you ask Brazil and Venezuela about stuff like that. Can the Fed afford not to be raising interest rates? If there is a slow-down coming, there are few bullets in the gun because rates start out at a low level. The last recession on 9/11 dictated that they drive rates to the lowest levels we've seen in half a century. Don't they have to keep raising rates here? But give them a little room in the event that some trouble develops and also to be alert against inflation?

GOLDSTEIN: That's exactly what they're going to do because the economy is not slowing down. The economy -- we just came out yesterday with a Coincident Economic Index telling us that through March, this is an economy that continues to expand moderately and that the road ahead will be choppy, but it's a road up. We're talking about an economy that's growing by at least 3, 3.5, perhaps even 4 percent rate of growth. That's not slowing down. In that kind of an environment, the Fed will indeed keep moving along and the consumer gets it. Consumer confidence edged lower for the last three months, but that the level of confidence remains strong and that's probably going to continue, unless the bottom falls out of the labor market. One more point. This is a $12 trillion economy. It doesn't change on a dime. Yet the stock market indeed changed twice on a dime in less than a week.

LISOVICZ: I know, I had whiplash covering it. That's for sure. That's what I want to ask Ned about. Ken is talking about a choppy road ahead. That's an understatement. If the NYSE for instance goes electronic, fully electronic, one of the things that really could be hurt is sort of the protection of these swings, these really wild swings with single stocks. We all know what happens at the NYSE affects trading all around the world. Do you think that would be compromised? That's one of the things that specialists have always said, that they really help the liquidity and they protect some of the volatility that you see in the market.

RILEY: I would say, Susan, quite a while ago the specialists did provide an awful lot of liquidity. The specialists today are also cognizant of the fact that they want to make money too and they don't want to get caught in the whipsaw situation either. I'm not sure liquidity is going to be much different with electronic trading. We look at the NASDAQ and we have a lot of volatility there. But the bottom line is the markets are still very orderly. We're trading 1.5 billion to 2 billion shares a day and when you go back to the old specialist system, 100 million shares was a big day 20 years ago. Bottom line is, I don't have a problem with the whipsaw effect. I do have a problem with the players that are causing the whipsaw and the fact that they are not transparent in what they're doing. And I do think that they've caused a lot of problems in commodities -- oil, steel and the rest of them -- and we look at the open interest in the futures in oil right now and my gosh. These guys are really, really just kind of churned us around in circles because the fundamentals in my judgment portray a lower oil price in the next two years.

CAFFERTY: We're out of time. A quick question for you, Ned as we wrap up. Where do you see the S&P 500 at the end of the year?

RILEY: I think the S&P 500 is going to be up somewhere between 10 and 12 percent. I am glad you asked me Jack, because the psychology out there doesn't really call for a long-term returns on equities of being above 6, 7 percent. I like that environment and I think that's a good time to buy.

CAFFERTY: Ken Goldstein, short-term interest rates by the end of the year? GOLDSTEIN: At least .5 higher than they are now.

CAFFERTY: All right gentlemen, appreciate it. Thanks very much, Ken Goldstein, economist with the Conference Board. Ned Riley is the chairman and chief investment officer of his own firm, Riley Asset Management. Thanks fellows very much.

When we come back, around the world, conservative thought is playing a bigger role in religion. We'll look at what's behind the shift.

Also ahead, you've got to know when to hold them. Do new bankruptcy laws make it riskier to play with those plastic cards you're carrying in your wallet? We'll see how it's affecting one big credit card company.

And the job market that's as big as the great outdoors. We'll talk with op ed columnist for the "New York Times" Thomas Friedman about the breakdown of global barriers and what it means to all of our jobs.

(COMMERCIAL BREAK)

CAFFERTY: The Vatican's confirmation this week of Pope Benedict XVI puts a conservative in charge of the world's one billion plus Catholics. A lot of them were hoping for a lighter hand on the steering wheel, particularly here in America. But they're seeing just one example of a trend that's running through many of the world's major faiths, the growing visibility of religious conservatives, some stretching all the way to the fundamentalist end of the spectrum.

For a look at what's happening in the world's religions, we're joined now by Margaret Steinfels, who's the co-director of the Fordham University Center on Religion and Culture right here in New York City. Ms. Steinfels, it's nice to have you with us.

MARGARET STEINFELS, FORDHAM UNIVERSITY: Hello. How are you?

CAFFERTY: What is pushing this conservative trend in the world's great religions? As far as the new pope in the Catholic Church is concerned, I suppose it's not unexpected given that he was a disciple of John Paul II, who was one of the most conservative popes in recent memory. So that perhaps is just a continuation of what was already in place, but fundamentalist Islam, the Christian conservatives in American politics. What's driving this?

STEINFELS: I think different things are driving different religious groups. Islam has had a couple of hundred years of this fundamentalist instinct building up in it and Saudi Arabia and Wahabis are one source of it. In the United States, Protestants, mainstream denominations have seen dwindling numbers of members, while more conservative evangelical groups have been growing. And there are various theories about why that is so. Some people argue that the more conservative religious groups have higher demands that they put on people and that people think that that is more appropriate as religious behavior. But you can look at the Episcopalians, for example, who have become more liberal and in fact seem to have diminishing numbers while evangelical and Pentecostal groups have increasing numbers.

LISOVICZ: Do you see Margaret, though, in the big picture, that all of these religions have something in common, that there is a repugnance to whatever it is -- materialism, pornography, materialism. Are these factors in this turn to conservatism?

STEINFELS: Again, I'd argue that different countries, different cultures, different religions may be reacting to very different stimulus. In the United States, I certainly think that we have to look back to 1973 and Roe V. Wade which allowed -- legalized abortion basically throughout a pregnancy and that took a while for people to fully grasp what that meant. But I think it has been a very critical and important event in stimulating religious objections to it and encouraging the growth of certain kinds of religious impulses in religions that had otherwise been not terribly conservative and I think Catholicism is one example.

SERWER: Margaret, we've seen various religions, fundamentalist groups and various religions resorting to violence. Certainly Islam, we've seen radical groups in Israel. We've seen radical Hindu groups resorting to violence. What do you think the chances are of a radical fundamentalist Christian group resorting to violence?

STEINFELS: There has been a certain degree of violence. The murder of several doctors and people associated with abortion clinics might be taken to be a turn to violence. Certain kinds of right-wing militias seem to have or claim, at least, a kind of religious warrant for what they do. I guess I am inclined and I certainly hope in the United States, that that is not likely to happen. But who knows.

CAFFERTY: What are the implications for the way politics tends to cross-breed with the kinds of trends we're talking about? The most recent presidential election in this country was, according to a lot of the exit polls, driven by values and morals and the seeming thirst among the voting populace for a return to the "good old days," pre-Roe V. Wade, perhaps. But it's become increasingly a political spectacle which is played on by the politicians.

STEINFELS: And that's certainly the case. I think, of course, the exit polls were somewhat confusing in that when people were asked about moral values, they weren't specifically asked about which moral values they voted on. So there are some people, of course, who object to the war in Iraq, and could reasonably claim that it violates their moral values while others, of course, could claim that Mr. Kerry's position on abortion violated theirs.

SERWER: Interesting and topical stuff. We're going to have to leave it at that. Margaret Steinfels, the co-director of the Fordham Center on Religion and Culture, thank you for coming on the program.

STEINFELS: Thank you.

SERWER: Coming up after the break, broken broker. Now that President Bush has signed off on tougher bankruptcy rules, we'll check the stock in one of the big credit card companies.

Also ahead they make it there and you feel it here. Find out when we speak with Thomas Friedman, author of "The World Is Flat."

(COMMERCIAL BREAK)

LISOVICZ: Now let's take a look at the week's top stories in our "Money Minute." The real estate sector may finally be slowing down. The government reported housing starts plunged by 17.6 percent in March. That was the biggest monthly decline in 14 years. Mortgage applications also fell by 1.6 percent last week but prices of homes in the hottest markets still show no sign of easing off.

Speaking of hot, Internet search firm Google posted some smoking earnings this week. Google said it earned $1.29 in the first quarter. That was much better than investors had been expecting. Google said surging ad revenues had a lot to do with the earnings jump. In fact, Google now sells more advertising than most major newspapers, including the "New York Times" and the "Washington Post."

Good news for this year's college grads. The National Association of Colleges and Employers says they'll be getting better starting salaries than the students who graduated last year. It also says more employers are hiring this year than last year. Chemical engineering grads are expected to get the biggest starting salaries, averaging more than $54,000 a year.

SERWER: President Bush signed a new tougher anti-bankruptcy bill into law this week. It makes it a lot harder to use bankruptcy to get out from under credit card debt. The measure was pushed for by the credit card companies, of course. And the granddaddy of them all is MBNA. MBNA shares are still trading near 52-week lows. But the question is, will this new law really help their bottom line? That makes MBNA our stock of the week. Just this past Thursday, the stock plunged on a day when the market surged 16 percent, down to $19. A couple of things going on. First of all, they're laying off 1,000 people. That is not so healthy. And the second thing that's going on, was there's something called high payment volumes. I had to write it down. And what that means is that people are paying back their credit card debt faster than the company wants.

LISOVICZ: Good for consumers.

SERWER: That's a good thing because they see rates rising. That's not good for the company, is it?

LISOVICZ: No, it isn't, but you have to applaud consumers getting some of the monkey off their back. But one of the other things they're doing is that they're also going into home equity loans so they're bypassing them altogether, the credit cards, to get rid of their debt. And that's also hurting them. But one of the things about MBNA, it's really not about their rates so much. It's about their perks because they're really tied to sports leagues and professional organizations, these affinity groups. That's one of the things that they've really been known for and they're going to really have to focus on getting new customers and those high quality customers that all of the banks are trying to get.

CAFFERTY: The perception out there is that this bankruptcy legislation really is nothing more than a freebie for the credit card companies courtesy of Uncle Sam, that it's going to make it tougher on the small guy to get out from under debts but it's going to be a gift because now, if you owe a bunch of money on your credit cards, you can't just walk into court and say I can't pay this and automatically get it excused. Why is MBNA only selling for about 11 times earnings? It's cheap stock.

SERWER: I think there are two things going on. First of all, this bankruptcy bill is going to help them a little bit, but not so much. The two bigger factors are number one, saturation. This is what you alluded to Susan. I mean everyone and their uncle and their uncle's chimpanzee is getting 12 credit card solicitations in the mail every single day. You can be bankrupt and still get them. So that's number one. And then number two, I alluded to this, higher interest rates. Those two things are really making business very difficult for this company. It grew like crazy over the past 15 years. But there are only so many credit cards this company can sell.

LISOVICZ: Right, and the bankruptcy bill, it's going to take awhile one would think for the benefits to filter down.

CAFFERTY: So do you buy the stock?

SERWER: I would be a little wary.

LISOVICZ: It's pretty cheap right now, very close to its 52-week low.

SERWER: Anyway, the credit card's in the mail.

Coming up on IN THE MONEY, hello Bangalore. The job market isn't local anymore. It's global. See how far away is getting closer than ever when we talk with Tom Friedman, author of "The World Is Flat."

Plus, mystic pizza: no, they're not mind readers, but even the local pizza joint might have your number in 2010. Stick around for our "Fun Site of the Week."

(COMMERCIAL BREAK)

WHITFIELD: Hello, I'm Fredericka Whitfield in Atlanta. "Now in the News:" the U.S. military says it has arrested six men in connection with Thursday's crash of a civilian helicopter in Iraq. Insurgents posted video online they claim showed the helicopter being shot down. Ten people died in the crash, and one survivor was shot dead.

And more violence today in Iraq. A roadside bomb killed nine Iraqi Army troops and wounded nearly two dozen others earlier today. The attack took place near the Abu Ghraib prison on the western outskirts of Baghdad. A new development in the Abu Ghraib prison scandal: senior Pentagon officials tell CNN the Army has cleared Lieutenant General Ricardo Sanchez and three top officers of leadership failures. Sanchez is the former commander of U.S. forces in Iraq. The scandal involved allegations of torture and abuse of detainees by American military police and intelligence troops. Photos of the alleged abuses caused an uproar around the world.

Well, that finger found in chili, police say likely did not happen. Now, Wendy's restaurants hopes to lure back San Jose area customers with free Frosties. Wendy's says its Bay Area stores suffered to the tune of $2.5 million after Anna Ayala made the claim. She has been accused of attempted grand larceny.

And in the world of pro football, it's the day when dreams come true. The 2005 draft is under way. The San Francisco 49ers got first choice, and there he is. Utah's Alex Smith joins the team. It marks the fifth straight year a quarterback has been the top draft pick.

I'll have all the day's news at the top of the hour. Now back to more of IN THE MONEY at CNN.

LISOVICZ: For years now, we've been hearing that technology is making the world smaller. Our next guest says it's also helping to make it flatter. Thomas Friedman is an op-ed columnist for the "New York Times" who's just written a new book entitled "The World is Flat." It's been praised as an easy read on a tough subject, a look at how technology and globalization have changed the world we live in for better and for worse. Thomas Friedman joins us from Washington, D.C. to talk more about his book. Welcome.

THOMAS FRIEDMAN, "NY TIMES" OP-ED COLUMNIST: Great to be with you guys.

LISOVICZ: OK, so the world is flat, meaning, that we've become much smaller? Is that basically it?

FRIEDMAN: Well, not just smaller, but we've also created a kind of global economic platform -- a combination of the Internet and the falling of the Berlin Wall and new software which connects everyone's software to everyone else's software -- that has basically created a playing field that more people around the world can plug-and-play than ever before. And the creation of this playing field happened to coincide with three billion people who had been out of the game before -- namely India, China, and the former Soviet Empire -- walking onto the playing field. When do they arrive? Just when it's been flattened, when their kids can now plug-and-play, compete and collaborate with ours, more directly than ever before.

SERWER: Tom, you hear resistance to globalization like this, when you talk about outsourcing and those sorts of issues. I take it you see this trend as being somewhat inextrable (SIC). What should U.S. policymakers be doing about this? I mean, should we be resisting it? Should we be embracing it?

FRIEDMAN: Well, you know, let's -- it has upsides and downsides. Let's look at the up side first of all. The fact is, the United States is the biggest recipient of outsourcing in the world. "Fortune" magazine just did a study of this, only the stuff that foreign countries outsource to us is not low-end call-center jobs. It's things like marketing, legal services, advertising, accounting, design work. Go up and down the East or West Coast from Seattle to San Diego, from Boston to Miami, you'll see huge service centers that are really the magnets for outsourcing work from all over the world. These are high-end jobs. So, we put up walls to that, we will be the ones to suffer first and most.

The downside of it, though, is that if you're not one of those knowledge workers, if you are in the lower end of the spectrum, your job could be outsourced the other way, and the challenge for government is really to get more people up to skill, into the knowledge fields, so they can get the best end of the outsourcing and leave behind the worst.

CAFFERTY: Tom, Jack Cafferty. The United States has been the top world economic power for what, over 100 years now, I suppose, running. What are the implications of globalization technology, outsourcing, the kinds of these things we're talking about, in terms of this country's dominance as a world economic power?

FRIEDMAN: Well, I think the way to best express it, Jack, is that, you know, 35 years ago, if you had a choice of being born a B plus student in Indianapolis, or a genius in Bangalore, India, you'd rather be a B plus student in Indianapolis, because your life opportunities, as an American, even as a B plus student, would be so much greater than even a genius born in the heart of India.

Well, when the world goes flat and that genius born in India can now plug-and play, and compete and collaborate as though they were next door, being a B plus student in Indianapolis won't quite cut it anymore, and the challenge really is that.

CAFFERTY: Take that one step further and apply it to the shortcomings of the American public education system, in light of the increased global competition.

FRIEDMAN: Well, we had a remarkable thing happen here, Jack, about a month ago. Bill Gates, the country's, really, leading modern- age industrialist stood before the governors of the United States, the 50 governors at the Governors Conference, looked them in the eye, and said, American high school education is obsolete. Our high schools aren't producing the kind of engineers and scientists that a cutting- edge company like Microsoft needs to move ahead, and that's why it's going abroad in some areas.

Now, that speech, I think -- it got about five minutes of air time, somewhere between Michael Jackson and Terri Schiavo.

CAFFERTY: Yeah, right.

FRIEDMAN: You may have accidentally caught it.

LISOVICZ: If you were maybe watching C-SPAN in the middle of the night, perhaps.

FRIEDMAN: That's right.

CAFFERTY: You might've caught it.

LISOVICZ: You know, historically, I'm just wondering, Tom, because you've looked at previous eras. Is there any parallel, for instance, where you have one superpower, one enormous power that is, in fact, compromised when you have this flattening?

FRIEDMAN: Well, I'm not sure we've really ever seen anything like this before. It's really a good question. All this happened really fast, and it happened so fast, it really took me by surprise, which is why the first chapter of the book is called "While You Were Sleeping," because it really happened, really, under the cover almost of 9/11, the dot com bust, and Enron.

But I've woken up, and I certainly tell my girls, girls, when I grew up, my parents used to tell me, Tom, finish your dinner, people in China and India are starving. And, what I say is, girls, finish your homework because people in China and India are starving for your jobs, and in a flat world, they can have them. This book is really a how-to guide, both, I hope, for the country and for parents, of how to think about that challenge.

SERWER: Can't this country heal itself? I mean, how alarmist is your book? How alarmed should we be, in terms of this country being able to cope with these problems?

FRIEDMAN: It's a very good question, and I have a chapter called "The Quiet Crisis." It comes from a speech by Shirley Ann Jackson, who's the president of Rensselaer Polytechnic, one of the best technical colleges in the country. She basically describes a situation where many engineers and scientists who have been at the cutting edge for us all these years, were inspired to go into science and engineering by President Kennedy and the moon shot. But that generation is really dying off or retiring. Now, we never really filled them in, in the numbers we needed, so what we did was, we imported engineers and scientists from India and from China, primarily.

Well, what happens -- what's happened in the last couple of years is two things. One, 9/11 came along, so we're now telling a lot of these foreign engineers, no, stay home, we don't want the first-round intellectual draft choices of the world to come here anymore if you once transited Riyadh Airport in Saudi Arabia.

And, at the same time, when the world goes flat, you can now innovate without having to emigrate. So you can stay home in India or China. You can stay home, wear a sari, eat curry, live in an extended family, watch Bollywood movies, and you don't have to come and live in Indianapolis or Minneapolis. Because of that, some of them are staying home, too. So, we're in a quiet crisis. It's not going to change our standard of living today or tomorrow, but if we don't start filling in this gap with home grown engineers from our own schools, this will turn into a real crisis. It's a quiet crisis now, but as Paul Romer, the economist at Stanford so rightly says, a crisis is a terrible thing to waste.

LISOVICZ: Tom, you talked about a quiet crisis. When we come back, we're going be talking to you about U.S. security. I know you have some thoughts about that. We have to take a break but we'll continue this conversation on the other side.

Up next, we'll get Tom Friedman's take on the war in Iraq, where it's headed, and whether U.S. troops could be coming home sooner rather than later.

Plus, the deadline for Israel to pull out of Gaza, fast- approaching. We'll find out whether the chances for peace in that part of the world are getting any better. Stick around.

(COMMERCIAL BREAK)

SERWER: A lot of people have a lot of opinions on what's going on in the Middle East. We're talking with someone who's paid to give his. Thomas Friedman is a "New York Times" op-ed columnist and author of "The World is Flat," and he's been nice enough to stick around a little longer on IN THE MONEY.

Welcome back, Tom.

FRIEDMAN: Great to be with you guys.

SERWER: What I'm interested in is, how is your flattening concept linked to our war with radical Islam?

FRIEDMAN: Well, you know, one of the things that happens when the world goes flat is that you get your humiliation fiberoptically. You get it at 56k right in the face. That is, you can see just where the caravan is, and just how far behind you are, and I think that's one of the reasons for this radical response of al Qaeda and others we've seen. These are organizations, I believe -- have believed since 9/11 -- that are born of a deep sense of humiliation, a sense that they really are behind the world, and are lashing out.

So, the flattening of the world, both stimulates, partially, this kind of response, and it affects it in another way as well. Unfortunately, the flat world is a friend of both al Qaeda and IBM. It makes it easier for IBM to find customers and workers and knowledge and spread its products and ideas around the world. But, it also makes it a lot easier for the Osama bin Ladens as well. Osama bin Laden understands global supply chain very, very well, and he's basically turned al Qaeda into a suicide supply chain.

LISOVICZ: Right, but he's been quiet, thank the lord, in the United States since September 11, 2001. You wrote an interesting, disturbing column about that recently, that, while everyone's happy that there hasn't been another attack that you think that something else is afoot.

FRIEDMAN: Well, basically, what I was arguing is that, what is the primary objective of the terrorists we're fighting in the Middle East -- these jihadists, Islamo-fascists, Baathists, whatever you want to call them -- their real, primary objective is to defeat America in the heart of their world, because, by defeating us in Iraq, if they can put us on the run in Iraq, that will have a huge resonance. Not only in Iraq, but all across their world. It would shake every Arab regime and empower the religious fundamentalists and Baathists everywhere.

If, on the other hand, we defeat them in the heart of their world, that's a huge strategic defeat for them. And I believe two things: one is they will not go down quietly, and if it is perceived by them that they are losing in Iraq, and they're losing to Iraqis, basically repudiating them, that's when I think they might be most tempted to throw a Hail Mary pass, unleash some kind of active terrorism in the United States that would be so high-profile, so loud, that it would disguise the strategic defeat they've suffered in the heart of their world. That was my argument.

CAFFERTY: The other piece of that theory is that -- should there be peace in the Middle East between Israel and the Palestinians, that, too, would come symbolically as a stunning defeat to many in the Arab world. And yet, you mentioned in your column, I think it was last week, that you're optimistic that eventually, this is going to happen. With the passing of Arafat, with Israel's bold steps toward withdrawing from some of the settlement areas like Gaza and places like that, that it looks pretty good there. What are the implications, not just for Israelis and Palestinians, but for this world, kind of, situation we're talking about here?

FRIEDMAN: Well, you know, Jack, one of the reasons the Middle East has been so relatively quiet, vis-a-vis the United States, of late, is the fact that Israelis and Palestinians are working together better than ever. Oh, it's not perfect. But compared to the last three years of Intifada, this is a veritable honeymoon, and that creates a lot more space and a much better environment for America to get its message across in that part of the world.

What I also warned is that, if this Gaza withdrawal comes off, if Ariel Sharon is successful in uprooting the Jewish settlements in Gaza, and Abu Mazen is successful in uprooting the terrorist structure within his own camp and actually can sustain a cease-fire with Israel, again, the bad guys in both communities, the real, sort of religious nationalists, violent fanatic minorities, they will not go down quietly. This would be a huge defeat for both of them. In Israel, you know, the nationalist fanatics, when they faced this kind of moment before, assassinated the Israeli prime minister, let's not forget, Yitzhak Rabin. And, they've threatened to do the same to Sharon. Ditto on the Palestinian side, so this is a neighborhood that, the closer you get to that elusive goal, you're going to have to -- the last five yards before this touchdown, boy, they are going to be brutal.

SERWER: So Tom, looking ahead, long-term, big-picture, are you an optimist, flattening war with radical Islam? Where do you see things the next five years?

FRIEDMAN: Well, I'm a Minnesota boy. I'm a born optimist. I grew up in the age of Hubert Humphrey and Walter Mondale, so -- what can you do. You can't take Minnesota out of the boy. I'm going to root for the good guys, there, but I have no illusions. You know, I think what's exciting about the flattening of the world is that we're connecting all the knowledge pools in the world together. The innovation that could spring from that could be amazing. The next great breakthrough in bio science could come from a 15-year-old in North Dakota, or North Bucharest, who downloads the human genome.

But, the scary part is also the next great breakthrough in terrorism could come the same way. I hope the balance is going to be on the right side. I think it can be. We're going to have to shape this right.

LISOVICZ: Thomas Friedman, the Pulitzer Prize-winning columnist for the "New York Times" and author of the new book, "The World is Flat: A Brief History of the 21st Century," thank you for joining us.

FRIEDMAN: Great to be with you guys. Thank you.

LISOVICZ: Coming up, give me a cheese and mushroom, and skip the waiver: see how you might end up ordering pizza in 2010 on our "Fun Site of the Week."

And, whether you want pizza or world peace, write and tell us what's floating your boat these days. The address is InTheMoney@CNN.com.

But, first, this week's "Money and Family."

Thinking of sprucing up your home by adding a deck or putting in another bathroom? Well, before you start hiring for the project here's some quick tips for finding the right person for the right job, ask around. Try getting recommendations from family, friends, and co- workers. A good referral is a good first step.

Know who you're dealing with. Make sure any contractor you hire is licensed and insured. You can check with the Better Business Bureau or Home Builders Association to see if any complaints have been filed.

Don't rush into signing a contract. Read it thoroughly. And the lowest bid may not be the best bid. Remember, you should always get a copy of the signed contract before any work on your home begins.

And finally, don't hire a contractor who wants to be paid up front. One-third of the total cost is a common down payment. Don't make the last payment until the work is complete. That way you can be sure the project is done to your satisfaction. Good luck.

I'm Susan Lisovicz from Money and Family.

(COMMERCIAL BREAK)

CAFFERTY: Well, my dear friend the Web master Allen Wastler is not with us today. A much-deserved day off for that man. But that doesn't mean we don't have the fun side of the week for you. We do indeed. This one takes a stab at what the might be like ordering a pizza five years from now.

(BEGIN VIDEOTAPE)

UNIDENTIFIED MALE: Well, I'd like to order a couple of your double meat special pizzas.

UNIDENTIFIED FEMALE: Sure thing. There'll be a new $20 charge for those, sir.

UNIDENTIFIED MALE: What do you mean?

UNIDENTIFIED FEMALE: Sir, the system shows me that your medical records indicate that you have high blood pressure and extremely high cholesterol. Luckily, we have an new agreement with your national healthcare provider that allows us to sell you double meat pies, as long as you agree to waive off future claims of liability.

UNIDENTIFIED MALE: What?

UNIDENTIFIED FEMALE: Do you agree, sir? You can sign the form when we deliver, but there is a charge for processing. The total is $67 even.

UNIDENTIFIED MALE: $67?

UNIDENTIFIED FEMALE: That includes the delivery surcharge of $15 to cover the added risk to our driver of traveling through an orange zone.

UNIDENTIFIED MALE: I live in an orange zone.

UNIDENTIFIED FEMALE: Now you do. Looks, there was another robbery on Montrose yesterday. You could save $48 if you ordered our sprout submarine combo, and picked it up yourself -- comes with tofu sticks. Those are very tasty, sir. Good value too.

UNIDENTIFIED MALE: But I want double meat.

UNIDENTIFIED FEMALE: Well, I'm sure you can afford the $67.

(END VIDEOTAPE)

SERWER: I think I would take a baseball bat to the phone a long time ago before I got to that point.

CAFFERTY: Quit eating pizza.

LISOVICZ: That is funny and sad...

SERWER: And scary.

LISOVICZ: ... at the same time.

CAFFERTY: All right. Coming up next on IN THE MONEY, as we continue, it's time to hear from you as we read some of your e-mails from the past week. And you can send us an e-mail right now, if you choose. We're at InTheMoney@CNN.com. Back post-haste.

(COMMERCIAL BREAK)

CAFFERTY: It is time now boys and girls, to read your answers to our "Question of the Week" about whether high gas prices will affect your summer vacation plans.

T.R. wrote us this -- "I still plan to travel by car and do a lot of camping and sightseeing, but high gas prices will prevent me from going to restaurants, museums, and amusement parks. Higher gas prices are affecting my spending right here at home."

Lloyd wrote, "My vacation plans aren't going to change at all, because I expect the price of gas to come down like it always does eventually. People need to be more optimistic."

And Dave in Florida weighs in with this, "I only wish I could change my plans due to gas prices. But because of our economic situation overall, I've been on an unwanted permanent vacation from work for quite a while."

Next week's "E-mail Question of the Week is as Follows." What story do you think the news media hasn't been covering enough in the last few months?

Besides the pope, Terri Schiavo, and Michael Jackson, I mean.

LISOVICZ: Could we weigh in that?

CAFFERTY: No. Send your answers to InTheMoney@CNN.com. And you should visit our show page at Money.com/InTheMoney which is where you'll find the address of our "Fun Site of the Week," which is the ACLU Web site about what it's -- it' like to order pizza five years from now. It's pretty funny actually.

Thank you for joining us for this week edition of IN THE MONEY, appreciate it. My thanks to CNN correspondent Susan Lisovicz, "Fortune" magazine Editor-at-Large Andy Serwer.

Join us tomorrow, 3:00 Eastern, when we'll look at the new study that says being overweight may not be as much of a health threat as we thought. Don't eat another rice until you see our report, tomorrow at 3:00. Until then enjoy the rest of your Saturday.

TO ORDER A VIDEO OF THIS TRANSCRIPT, PLEASE CALL 800-CNN-NEWS OR USE OUR SECURE ONLINE ORDER FORM LOCATED AT www.fdch.com


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