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CNN IN THE MONEY

Holiday Spending Might be Hurting American Economy; Wal-Mart Sales Might Fall; U.S. Adequately Not Funding Veterans' Programs

Aired December 3, 2006 - 15:00   ET

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


JACK CAFFERTY, HOST: Washington's all gung-ho about sends Americans to war, but it doesn't stomach so well the bill for helping veterans when they come home. Your holiday spending spree isn't helping Uncle Sam, in fact it's digging us deeper into the hole. We'll explain. Top executives tweaking their stock options in order to rip off the shareholders. This is IN THE MONEY.
Joining me today, Jennifer Westhoven, Stephanie Elam. If there's one person the entire world, perhaps, you don't want to be, I would think might be the Iraqi prime minister, Nouri al Maliki.

Right before the summit meeting with President Bush, a memo comes out of the White House saying we don't have any confidence in this guy. And at home, while he's at the meeting with Bush, Moqtada al Sadr, who's the real power in Iraq, says I'm going to pull my people out of the government and cause all of the problems I can if you go forward with the meeting with the president. So, Nouri al Maliki's got a tough row to hoe, as they say.

JENNIFER WESTHOVEN, CNN CORRESPONDENT: He's got a though row to how and he said to the president, you know, I'm frustrated I'm not getting tools that I need to protect the Iraqi people and the answer that he got was, we'll speed things up, but we're not sure when, there's no timetable. I don't think he really got any answers in terms of him getting tools, whatever it is that he wants.

STEPHANIE ELAM, CNN CORRESPONDENT: And you're looking at two hours of meeting and nothing really coming out of it. Everyone's coming back, so what really happened? You talked, but what's really the meat of this? And we're not getting information about that either. So, it seemed like a far-traveled meeting for not a lot out of it.

CAFFERTY: Another triumph of, what is it -- form over substance. Gee, why am I surprised?

President Bush wound up his trip to Iraq this week by brushing off calls for a U.S. pullout. This, as the administration gets ready to ask Congress for a big check to fund the war. The cost of fighting in Iraq and Afghanistan also includes helping veterans once they come back to the United States. And according to a new study when you factor in those costs the price tag of the war goes through the ceiling. Linda Bilmes is a co-author of that study, and a former assistant secretary of commerce. She's now a lecturer of public finance at Harvard University's Kennedy School of Government.

Linda, it's nice to have you with us. Welcome.

LINDA BILMES, HARVARD UNIVERSITY: Thank you, Jack.

CAFFERTY: Can we get a number on this? Is it possible to get your arms around the dollars involved and help -- we've got a million kids go to war in Iraq as we've rotated troops in and out of there, how much is it costing the taxpayers? The part of the bill we don't hear about.

BILMES: That's right, Jack. Even if we pulled out tomorrow the budgetary cost, the cost to the taxpayers is well over a trillion dollars.

CAFFERTY: A trillion?

BILMES: That's right. And the reason is that even after we pull out, we still have to pay $125 billion to take care of veterans and we have to replace all of the military equipment that's being used up.

ELAM: Linda, I was curious, because originally the Bush administration was saying we were looking at $60 billion for this. And obviously when you factor in all of the taking care of vets, also you need the weapons, do you think the Bush administration really knew it was going to be more than that and they were downplaying the numbers or do you think they really just got sidelined here?

BILMES: Well, I think it's interesting that everyone in the administration said that this was going to cost $60 billion and the only person who deferred from that was Larry Lindsey, the economic adviser. He said it might cost over $100 billion and he was actually fired for saying that.

WESTHOVEN: Linda, I think you said $125 billion is the tab for the health care for vets, is that right?

BILMES: That's right. That's right.

WESTHOVEN: Why is there -- I mean, that's huge, right? Compared to what they were talking about early in the day. Why were so they so far off the mark just in terms of the health care bill? I mean, this is something that we know every time we go to war, we're going to have to take care of our veterans?

BILMES: Well, I think what's happened here is that the number of veterans who are coming home and who are claiming medical care and disability benefits is much, much higher than we anticipated. And we've already had over 200,000 veterans who've come home from Iraq and sought medical care from the V.A. We've had another 150,000 who have come back and sought counseling services from the V.A. and we expect that at least 50 percent of those who have served will claim for disability benefits at a minimum because that's how many claimed in the first Gulf War.

CAFFERTY: Can you compare the war in Iraq with the other military conflicts we've been involved? And I'm thinking in terms of, for example, in Vietnam, we lost 58,000 soldiers. We've lost almost 3,000 in Iraq. And yet the number of wounded soldiers, as a percentage of the overall force, the people who come back with devastating injuries seems to be much higher than perhaps it was in some of the earlier conflicts.

BILMES: Well, that's right, Jack. In the -- in the Vietnam War, there were three soldiers wounded for every one killed. In Iraq, there are eight soldiers wounded who come back seriously wounded for every one killed. Now, obviously the improvements in body armor are a good thing, but it does mean that there is a large cost to taking care of our wounded veterans and this is what we had not anticipated and what the Veterans' Administration has been overwhelmed with.

ELAM: It seems to be that I'm focusing more on the economy when I look at this, but it seems to me that all of this money that has been transported out could have been used somewhere else here in the United States. Where else do you think this money could have been more usefully played?

BILMES: Well, I mean, a lot of the money that has been used here has ended up in the hands of, for example, a Nepali contractors that doesn't have much use in the United States. But I think the bigger question is, where has the money gone? If you look at the Defense Department's own audit reports and its own inspector general reports, they say, not my words, that there are tens of billions of dollars that are simply missing. They have a financial statement that has never received a clean opinion and they are very concerned internally about the fact they actually don't know where all of the money has gone.

WESTHOVEN: That is one of the driving reasons that you think you to come out with the kind of research that says, you know, good or bad we're trying to take a look at the estimate for the total cost of the war in Iraq because it seems like you can get those kinds of numbers straight from the federal government?

BILMES: That is one of the reasons. I think the other reason that is every time one of our congressmen votes to add more money for the war, they're making an implicit cost-benefit analysis. They're saying the benefit we're getting is worth the cost. So, we need to have an accurate look at what the cost actually is.

CAFFERTY: How do you reconcile the kinds of numbers you're throwing around? Tens of billions of dollars that have simply fallen through cracks? And yet I get e-mails on THE SITUATION ROOM, here on CNN in the afternoon, from military families that are on of food stamps. We have a long history in this country of not taking care of the veterans once the fighting is over. What does that say about our national mind-set and what can we possibly do to begin to address the welfare of these wives and children of the soldiers who are fighting and dying over there and who have to live at poverty level or in some cases even below, in this country?

BILMES: Jack, I could not agree with you more. This is a national disgrace. It's a national scandal. We are sending 18, 19- year-old kids over to Iraq and when they come back we're not processing their claims. The number of backlogged claims, that is soldiers who have fought, who have come back, who have claimed, they're backlogged at Veterans Administration now, has risen from 400,000 to 600,000 and we expect it to reach a million claims by next year. It's absolutely outrageous that these kids then come home and face this paperwork trial.

CAFFERTY: And yet the checks are cut Halliburton on time, I assume.

BILMES: I'm sure they are.

CAFFERTY: Yeah. Linda, you're right, it's a national disgrace. I couldn't agree more. Thank you for putting a little light on it here IN THE MONEY today, I appreciate it.

BILMES: Thank you very much, Jack.

CAFFERTY: Linda Bilmes, lecturer of public finance, Kennedy School of Government, Harvard University.

When we come back on this program, if you want to shop like a patriot, go buy a flag. We'll hear why holiday spending might, in fact, be hurting the American economy. Now, that's in direct conflict to what we've been told since we were old enough to buy some baseball cards.

Plus, easy money: See if Ford's employee buyout's big enough to keep the company rolling -- 30,000 hourly employees leaving the company. And spotting the next big corporate scandal: The latest scam may not measure up to the misdeeds of Adelphia or Enron, but it's all cheating just the same. We'll take a look.

(COMMERCIAL BREAK)

CAFFERTY: Black Friday marks the beginning of the holiday shopping season when stores, hopefully, go into the black and you and I go into the red because we're helping stores go into the black. As a consolation prize, though, all of that spending we began last week supposedly helps the economy. That's the conventional wisdom. Not so fast.

Former U.S. Commerce Secretary Pete Peterson is here to tell us why that argument is bogus, perhaps as much as those flying reindeer. He's the senior chairman and co-founder of the Blackstone Group, which is a private investment banking firm and knows of which he speaks.

What about this idea it's our patriotic duty to rush out to the mall and go deeply in debt during the month of December because two- thirds of the economy in this country is consumer-driven?

PETE PETERSON, CHAIRMAN, THE BLACKSTONE GROUP: It's our patriotic duty, as I understand it, to put a country in even more debt that it all is now. We currently have a so-called current account deficit, animated by the trade deficit, of nearly seven percent of the GDP. And when I was Richard Nixon's economic adviser we would have had heart palpitations at that idea.

CAFFERTY: But, the GDP, in fairness, is much larger than it was during Nixon's time.

PETERSON: Well, but as a percentage of the GDP.

CAFFERTY: Right.

PETERSON: It's twice as large as it's ever been. Now, we can't continue borrowing seven percent or eight percent of the GDP for very many years without looking like a third world country. This country, therefore, has to fundamentally save more. And we can save more in two ways. No. 1, we can save more by getting rid of these deficits and we can save more by personally saving more. Are we doing that? We now have a negative savings rate. We're now spending more than we earn.

CAFFERTY: And of course the example of the savings rate is right there in Washington, D.C., for all of us. I mean, to suggest that the onus is on the individual to save more when the government of this country throws money away in quantities that boggle the imagination is a bit unrealistic, I think, no?

PETERSON: And particularly when we're totally ignoring the fact that we've got 78 million boomers who begin retiring in two years and all of those promises we made are totally unfunded.

CAFFERTY: Promises, translation is unfunded liabilities, right?

PETERSON: Unfunded liabilities.

CAFFERTY: And somebody said that it's between 45 and 50 trillion dollars?

PETERSON: I call the Social Security Trust Fund an oxymoron. It shouldn't and be trusted and it's not fund.

CAFFERTY: Yeah. It's not funded, right?

PETERSON: And the $50 trillion is equal to the entire net worth of this country. So the idea that the solution to our problems is to consume more, which means save less, when we already have a negative savings rate, when we have debt service at the consumer level that's higher than it's been in decades, eludes me. The whole concept eludes me.

CAFFERTY: Tell me, in your mind, what it says about the current Republican administration. They have -- they have made previous Democratic administrations, who were the ones associated with wasteful spending, look like pikers when it comes to spending money. This administration we have now has spent money like it's never been spent before.

PETERSON: Yeah, we're spending something like 45 percent more then...

CAFFERTY: Forty-five percent.

PETERSON: ...the growth. The growth rate is 45 percent higher than it was in the Democratic administration. We used to have something called pay as you go rules. They got rid of those. We use to have something called pending caps, we got rid of those. And we call ourselves a party of fiscal conservatism. I just don't get it at all.

CAFFERTY: Talk to me about china for a few minutes. They own us, they've got their hands around our throat when you talk about debt and the amount of investment instruments in the hands of Beijing.

PETERSON: Well, China's the other side of us. We have a seven percent current account deficit. They have a nine percent of the GDP surplus. We consume about 70 percent of the GDP. When I last checked they were 40 percent or a little more hand that. So, they're saving much too much and consuming too little, and we are saving far too little and consuming too much.

CAFFERTY: And what happens if they call notes that they own?

PETERSON: That will be a Black Friday, I believe.

CAFFERTY: A real black Friday.

PETERSON: And what people worry about is how long can you continue running these current account deficits? And the biggest debate, in my business, is the debate between the hard landing guys, like Paul Volcker and probably Bob Ruben who anticipate that, at some point, confidence falls off, the dollar plunges, interest rates go up and the soft landing guys, but it's a landing. This is no takeoff we're talking about.

CAFFERTY: And we've seen a sharp decline in the dollar in the last week, 10 days.

PETERSON: Yeah, last week, I don't know, seven, eight percent.

CAFFERTY: Yeah, I mean, that's a little scary.

PETERSON: But unfortunately, a lot of our imports, you know, are from Asia, particularly the high-volume goods. And China won't -- won't adjust their exchange rate and the other Asians follow China.

CAFFERTY: Well, if I was China or you were China, would you adjust their exchange rate? They're owning this country a little bit at a time.

PETERSON: Well, I've talked to their ambassador and their officials and from their standpoint, they have to supply something like 20, 25 million jobs a year. These exports the U.S., are not a typical financial investment, they're a political investment for stability at home. So, they're going to continue doing that. But at some point they've got to start stimulating their own demand and quit counting on us.

CAFFERTY: Yeah, and that's not going to happen perhaps until they've exhausted...

PETERSON: It's going to take real time.

CAFFERTY: ...what we can contribute I got no time. What's to be done? What do we do about this?

PETERSON: Well, I think we've got to get our deficits under control and that requires doing something about entitlements. We can't keep running way from Social Security and in particular, Medicare, which is a much bigger problem than Social Security.

Secondly, this country has to save more. And Jack, I've arrived at a conclusion, and as a Republican it may shock you, I chaired a little committee for the White House and Congress on our saving in this country. And the view was that our tax incentives don't work very well because the people that save, anyway, use the tax incentives and you don't get much net increase. The conclusion of the group was, we're going to have to move toward mandatory saving which is what Singapore, Chile, Australia are doing because we've become I consumption-borrowing-obsessed country.

CAFFERTY: Maybe some mandatory saving in Washington, D.C., at some point.

PETERSON: That's right.

CAFFERTY: Mr. Peterson, it's a pleasure. Thank you.

PETERSON: Nice to see you, Jack.

CAFFERTY: Good to have you with us. Pete Peterson, chairman of The Blackstone Group, former secretary of commerce.

Here's a look at what to expect next week in our "Look Ahead." Tuesday we get the third quarter Productivity Report, it's a measure of how efficient our workers are, and it seems as a major factor judging the real rate of inflation, in this country.

Friday, of course, the big one, the November Jobs Report. The unemployment rate at a five-year low of 4.4 percent. Everybody watches the jobs number next Friday.

Coming up on IN THE MONEY after the break, as you continue to watch this, the soft sell. We'll look at how a Wal-Mart's numbers from Black Friday have been playing on Wall Street.

Also ahead, corporate America's bad books. The latest scandal wasn't easy to uncover as the stuff that Tyco's Dennis Kozlowski pulled off, but it's a crime nevertheless, and a big one. See if tighter regulations are going to cut down on corporate scandals or just crackdown on yesterday's trends.

And living by their wits, find out how America's poorest people are getting by. They're doing it with an economy you probably don't know much about. Stick around.

(COMMERCIAL BREAK) WESTHOVEN: All right, the stock market had a mixed week, too, filled with some big stories. Susan Lisovicz joins us from the New York Stock Exchange with this week's "Street Talk."

Susan this, this week started off with that ugly sell-off on Monday, you know, things got a little bit better, but it looks like the mood got darker. What happened?

SUSAN LISOVICZ, CNN NEWS CORRESPONDENT: Well, basically, Jennifer, investors were looking for an excuse to sell after record after record that we saw with the Dow Industrials and Wal-Mart gave it to them on a silver platter because Monday followed the important Black Friday weekend and Wall-Mart then came through with a bombshell on Monday saying that its November sales which, of course, includes Black Friday and the weekend, would probably fall for the first time in 10 years.

Some of the problems for Wal-Mart, most likely isolated like trying to get into fashionable clothing, but retail and Wal-Mart -- Wal-Mart's such a big, important part of U.S. retail that it sent trepidations, you know, through the financial sector just because, you know, it just does not bode well for holiday spending if Wal-Mart's just not doing well.

WESTHOVEN: And what about the dollar, are traders talking about that?

LISOVICZ: Traders are talking about it. It's been decling for some time. But you know, the dollar is a double-edged sword, Jennifer, because it's not bad for all people or all companies. For instance if you are an IBM or a Mattel or Caterpillar and you're selling your goods in Europe you have a more competive price because the dollar is cheaper. If you're investing in mutual funds in Europe your investments are going up. Conversely, if the dollar really goes into a freefall all those foreign investors who invest in our stock market or bond market going say you know what, we're going to get a better rate of return elsewhere and we're pulling out. And that could create a vicious circle because then that would spook American investors. So we haven't got to that point yet, really not much of a factor, so far.

WESTHOVEN: And Detroit, making a lot of headlines this week. We had four with the big buyouts there and General Motors. Talk a little bit about what the story was.

LISOVICZ: Well, they're similar problems. Right? I mean, they both face enormous problems. Both GM and Ford, they have to slash costs and they have to make cars that people want to buy. Kerkorian saw himself as a white knight, billionaire investor up until a few days ago he was the largest individual shareholder at GM, but he couldn't convince management at GM to go into a three-way alliance with Nissan and Renault. He pulled out.

Ford, meanwhile is making progress in its attempt to slash costs. It announced that 38,000 workers have decided to take one form of buyout package or another. That's basically what it was hoping for, but it still has to make cars that consumers want to buy and you know, you will recall that Toyota surpassed Ford over the summer for the first time, beating it in U.S. sales and, so, Ford still has a lot of problems and challenges as well.

WESTHOVEN: All right, and Susan, you're down there, right? At the New York Stock Exchange, one time, I know from when I worked there, right? There's always some concern about some kind of an attack. Well, now the Homeland Security Department is talking about the threat of a cyber attack. Is anyone there taking that seriously?

LISOVICZ: Well, you know, I was talking to the folks at the New York Stock Exchange and, of course, they take security very seriously.

WESTHOVEN: Of course.

LISOVICZ: I mean, that we all understand, but this particular one they were not aware of it until, basically, they were hearing it from the media. So, it's something that -- I think it was being scribed as an inspirational attack. OK? So, somebody wants to make an attack, but there was -- I don't think it was something that was really much more serious than that, and so it's something that people are always looking out for, but no, I don't think it got beyond the talking stage.

WESTHOVEN: All right. Susan, thank you so much.

Coming up on IN THE MONEY. The street sweeper. Elliot Spitzer fought Wall Street corruption as New York's attorney general. We'll hear about some guys who proved you don't need to be an ambitious politician to track down a financial scandal.

And also ahead, under the radar. America's poor taking care of business by cutting Uncle Sam out of the deal. Find out about the country's hidden economy.

And two gifts in one. We'll hear about holiday presents that can teach a kid to be financially savvy.

(NEWSBREAK)

CAFFERTY: If you're looking to track down the next big corporate scandal, forget about studying the financial section of the newspaper. Turns out the real dirt is in an academic journal that you've probably never heard of and the detectives are accounting professors, and folks like that from college campuses, who could teach the SEC a thing or two.

"Fortune" magazine editor-at-large, Justin Fox, has been writing about the latest scams and the guys who sniffed them out. He's an ol' buddy of ours here on IN THE MONEY.

Hello, Justin. Nice to see you.

JUSTIN FOX, EDITOR-AT-LARGE, "FORTUNE": Hi, Jack, great to be back. CAFFERTY: Don't we taxpayers pay a lot of money for federal agencies that are supposed to police the investment community and the corporate bigwigs who are back dating options and stuff? Why is it that some guy on a college campus figured it out, and the government's going huh, what happened?

FOX: I just think this is what finance professes do. They troll around in the data looking for interesting patterns, and they found this interesting pattern. For about 10 years they didn't know quite what to make of it, but then in the last couple of years they figured, hey, maybe CEOS are lying about when they got their stock options. And then immediately they called the SEC. Sent their papers to the SEC. This one professor, Eric Lee, at the University of Iowa, and the SEC got cracking as soon as they got Eric's paper.

ELAM: It's good to know they can get active, right when they need to.

FOX: Exactly.

ELAM: That's good to know. That's important, Justin.

So, here's the thing that kills me. In 1999 you have Tyco, you go to 2001, Enron, 2002, WorldCom, and that's the same year Sarbanes- Oxley was enacted. So to me it seems like a huge amount of arrogance on the side of these executives to think that they can continue to get away with the stuff and not get caught. Why do you think they keep doing it?

FOX: Most of this stuff actually happened before 2002. That's -- it's all being uncovered for the first time now. But almost all of it disappeared after 2002, because some changes in the rules from Sarbanes-Oxley, the legislation that came after all of those scandals made it much harder to get away with this.

WESTHOVEN: What made them think they could? I mean I hate to say it, were they looking around, well, everybody else is doing it? These are millions of millions of dollars.

FOX: First of all, this is my favorite corporate scandal so far because, first of all, shareholders are get their money back. Nobody's getting fired, except for the guilty people. It's not like Enron where all of these totally innocent people who worked for the company lost their jobs, too.

And it was discovered by finance professor, which is hilarious, too. I think what was happening with the CEOs is this quirk in the accounting that made stock options free. They would get these options grants, grants to buy stock at a certain price, and it would never show up as an expense in the earnings statement. That changed last year.

But I think because they were reported as free, I think a lot them just didn't think it was a big deal to sort of lie about when they got them. CAFFERTY: Oh, come on. Come on. CEOs backdating stock options, and they're going, there's nothing wrong with this. I mean, just intrinsically there's something wrong with it.

FOX: I would say with the most egregious back dating cases, like the guy down in Namibia, who was trying to escape extradition.

CAFFERTY: Right.

FOX: I would say, in those cases they knew they were lying and knew they were doing something wrong. But I think there is this vast gray area of companies that were really sloppy about this stuff. But they're not the ones getting prosecuted.

Yeah, I would agree with you the guys who are getting in big trouble, for the most part, knew they were lying. And should be getting in big trouble.

CAFFERTY: What's the next big weasel deal on the horizon, do we know yet?

FOX: The one fascinating thing is with this stock option stuff, there's a pattern of companies -- even the ones that don't overtly break the law with back dating -- finding ways to make sure options are granted on an especially good day. Like right before you're going to announce some really good news. Why don't you get an options grant the day before? Initially that's what accounting and finance professors assumed was going on everywhere.

And so, there's that whole area out there. And the SEC is sort of torn about whether to prosecutor, whether to do anything about it. There's a lot of companies who were guilty, if it is in fact a crime, and no one's quite sure of dodgy, but not obviously illegal moves around when they give out their options to their CEOs and other employees.

WESTHOVEN: Is that spring loading? What's spring loading?

FOX: Spring loading is you give it out right before good news. Bullet dodging is you wait, you know you've got some bad news and you wait until right after the bad news to grant the option. And one way to avoid all of this that I think a lot of companies will move toward is just grant options the same time every year, right after your earnings report.

WESTHOVEN: Yes.

ELAM: Yes. I think that would be a good plan there. I like the idea of how the finance professors thought they were getting lucky at first. That was nice. That's good stuff.

Thanks so much, Justin.

FOX: Thanks for having me.

ELAM: Justin Fox, editor-at-large at "Fortune" magazine. There is a lot more to come here on IN THE MONEY. Up next -- street smart. See how the urban poor create a system to replace an American economy that often doesn't work for them. We'll hear about the biggest market you've never seen.

And later, Santa Claus isn't coming. Kids need to learn that solid finances don't just show up with a bow on top. Stick around for the tips on gifts that come with a lesson attached. Be right back.

(COMMERCIAL BREAK)

WESTHOVEN: You won't find these merchants in the phone book. Wall Street doesn't follow their earnings, and the Better Business Bureau will not be taking any consumer complaints. I'm talking about the underground economy. This, off the books trade of goods and services may account for $500 billion a year by some estimates. Joining us now is Sudhir Venkatesh, author of "Off The Books: The Underground Economy of the Urban Poor."

First, thank you so much for joining us.

Tell us a little bit, if you will, about your work in "Freak-a- nomics". When you were living and working in a poor black neighborhood on the south side of Chicago, and how you really became to be known as someone who wants to understand what's go on in the inner city?

SUDHIR VENKATESH, AUTHOR, "OFF THE BOOKS": The work in "Freak-a- nomics" I did with Steven Leavitt, an economist. And we've managed to get books of a street gang and we kind of tried to understand how it organized itself as a business. What its expenditures were, what its earnings were, how much they spend on weapons in order to shed light on a segment of society most people don't know about.

WESTHOVEN: How did you build that kind of trust? Because you were living and working there, you know, on a day-to-day basis. You were really a stranger coming in and talking about gang members, drug dealers?

VENKATESH: Yeah. I was -- I grew up in the suburb in California, in Irvine. So Chicago was new to me. A big city was new to me. I spent about a decade just living with families in housing developments, in poor neighborhoods, and spending a lot of time not asking questions and just observing in order to gain their trust.

WESTHOVEN: Your third book, "The Underground Economy", you talk about how surprising it is and how widespread this economy really is. Can you give us some examples of what you mean? A lot of people hear that, and they think of just criminal activity.

VENKATESH: Yeah, that's what tends to make the news is the drug dealing or the theft. But in a poor community, and the south side of Chicago where I work, where you have 40 percent unemployment rate, almost every family on the block is going to be making money off the books. Some sell food out of their homes, some prepare taxes for others, for money under the table. Some are security guards for the local businesses. Some just are watch-outs on the corner.

There's a lot of different ways in which people make money, a lot of carpenters, musicians, artists, who are there, who are working under the table because they can get jobs. It's really a matter of survival for most of these folks.

WESTHOVEN: Yes, at the same time, if you're making your money off the books, if something goes wrong, if someone doesn't pay you, you can't exactly call the cops, or go to small claims court. How do people resolve their conflicts in that situation?

VENKATESH: That's right, just like in any economy you have both the goods and the services being exchanged, but if something goes wrong, you usually go to small claims court, or you can call the police. Those folks use each other. There's always third party arbiters, maybe it's a local clergy, maybe it's a block club president, who will settle a pricing dispute or enforce a contract.

But it's usually turning to each other so they have both regulation as well as the commercial end of it, coming up at the same time. It's really a creative process you see on the ground.

WESTHOVEN: Well, and that was something to me that was just really eye-opening when I was reading your research. That people are really kind of together in ways that you might not expect to address the problems that are going on in their community. And in a way, you say, it's really a great example of people being democratic.

VENKATESH: One of most surprising things for to watch was that when the underground economy in the south side of Chicago started to really take shape and started to overtake the neighborhood, the folks had to find a way to solve problems. So they created a community court, in which they elected spokespersons to be a jury of sorts. So if you and I have a pricing dispute, we take it to this court and we let the block club president, or the clergy member, or store owner come and they'll settle the dispute.

It's almost like an alternative system of law. But it was very democratic. They elected folks, and they respected the opinion of the third-party folks. Whereas we have these ideas of the underground as being kind of outside the American ideals of justice and democracy, in fact, they embody the democratic spirit pretty forcefully.

WESTHOVEN: Yeah, you know, you're right. When you say it really refutes the notion that many people have, that people who are living in the projects, you know, are ignorant or dependent.

Well, thank you. I really wanted to thank you for joining us. And also I think for really setting an example for going out there and really reporting this.

VENKATESH: Thank you.

WESTHOVEN: Coming up next on IN THE MONEY, how to make a kid's allowance work harder. We'll tell you about some toys and other gifts that teach lessons in using cash the smart way. And it's time to hear from you as we read e-mails from the past week. Send us an e-mail right now to inthemoney@cnn.com.

(COMMERCIAL BREAK)

CAFFERTY: A lot of parents getting ready to go out and buy junior another expensive toy for Christmas. If you really want to show your kids that you love them, don't buy them any presents. Yeah, that will work.

You might want to consider other things as well, though. CNN Money.com's Jeanne Sahadi is here now. She's in for Alan Wastler this week. She's got some information on five gifts that will make your children rich. Pay attention, because if the kids get rich they can support you. This is a good thing.

JEANNE SAHADI, CNN MONEY.COM: It's the whole point really.

CAFFERTY: Right?

SAHADI: You've been giving them gifts for years, you've just gone broke. "Money" magazine, in its December issue, came up with five great ideas. It's an easy way to teach your kids about money.

First three are fun. For kids between 4 and 8, a great book called "Alexander, Who Used To Be Rich, Last Sunday." I don't know if you can see that in the camera.

It's about a kid who gets a dollar from his grandparents one week, splurges all week, has nothing left over to save for his favorite walkie-talkie is completely despondent.

CAFFERTY: OK.

SAHADI: Kids don't want to listen to you talk about money, they will relate to Alexander.

For kids who are little bit older, there is a board game called "Payday". You get a 31-day period to earn money, spend it, gamble it, invest it. The point of the game, whoever has the most at the end wins, just like on Wall Street.

CAFFERTY: Just when you're an adult, you know.

(LAUGHTER)

SAHADI: That's right. And the third one is a video game for teenagers. It's a SIMS game, called "Open For Business". It teaches them about entrepreneurship. They can open a business, market it, learn how to turn a profit, hire people, fire people.

CAFFERTY: How do you get kids turned on to this kind of stuff?

SAHADI: I don't know. I was so bad with money when I was younger. If you have children, you should really be interested in this. The last two, are less direct gifts. One is a Roth IRA. If your child has a part-time job.

CAFFERTY: Those are great.

SAHADI: They are really great. It let's them get an early start on the nest egg. If you don't want him to invest his income, you can match the income and invest it for him.

CAFFERTY: It's tax free, right?

SAHADI: It is tax free.

CAFFERTY: Forever.

SAHADI: That's correct. Chances he's not going to wait 50 years to make a withdrawal, though. The advantage of a Roth is he can take the money out for first-time home purchase, as a down payment up to $10,000. It's got other purposes not just retirement. Don't bill it as retirement. He doesn't know what that is.

Second a 529 college savings plan, good for grand parents to give their kids also parents. Again, tax advantage. Your contributions may be deductible, depending on the state you live in. It will not count as an asset in financial aid formulas, so very good if you need to apply for any financial aid. And you can take the withdrawals out tax free for college.

WESTHOVEN: You've got to be quite a kid, though -- quite an egghead to appreciate that in your stocking.

SAHADI: You need to insert some hard cold cash for the child, or at least an I-Tune, or gift card.

ELAM: Or something else, because that's gong to be a lot. Especially if a dollar's going that far, taking him through the week.

(LAUGHTER)

SAHADI: This is written a few years ago, it is pre-historic times, compared to the kids today, but the principles are the same.

WESTHOVEN: Yes.

CAFFERTY: It's nice to have you back with us, Jeanne Sahadi.

SAHADI: Thank you.

CAFFERTY: I'm not sure, based on the segment that we really need Wastler anymore.

SAHADI: Oh, you do. Oh, no, you so do.

(LAUGHTER)

(CROSS TALK) ELAM: He says it when he's not here, though. You notice that?

SAHADI: Is that right?

(LAUGHTER)

ELAM: All right, shopping for a car and can be a stressful experience and an expensive one if the dealership have their way. And many of the people that end up paying the most are often the ones that can afford it the least. Valerie Morris has the story of a man who is leveling the playing field.

(BEGIN VIDEOTAPE)

ROBERT CHAMBERS, FOUNDER, BONNIE CLAC: They could afford the car and it would be less expensive and so then we --

VALERIE MORRIS, CNN FINANCIAL CORRESPONDENT, IN THE MONEY (voice over): After a career in the computer industry, Robert Chambers decided to try his hand at selling cars after being recruited by a friend. Yet there was a part of the job that didn't sit well with him.

CHAMBERS: The more time I spent in the car business, the more I learned about how low-income individuals really waste an awful lot of their very hard-earned money in the car-buying process. That wasn't enjoyable watching that.

MORRIS: So Chambers left the New Hampshire car lot five years ago and started up a nonprofit called Bonnie CLAC, the foundation offers advice and financial support to lower-income individuals, allowing them to buy a brand new car without getting gouged in the process.

CHAMBERS: We guarantee the loan, so they get a very low interest rate. We teach them the skills to be able to budget. If they can't make a car payment, we won't guarantee the loan.

Jackie went through our program and graduated into a brand new car. You can see on the faces of these kids what a difference it made in their lives. It is very, very rewarding. They're so proud of their cars because they worked very hard for it, to earn it. And they -- most have never owned a new car in their entire lives.

It's hard to get, sometimes, full-time work if you can get to where work is. We see many clients that go on and get better-paying jobs within months of receiving their new car, because they can focus on the job, they can focus on their life, they can focus on their family, and not have to focus on an old dilapidated car that's falling apart.

MORRIS: Valerie Morris, CNN.

(END VIDEOTAPE)

ELAM: We'll be back with more IN THE MONEY.

(COMMERCIAL BREAK)

CAFFERTY: Time for Jennifer's favorite part of the program, which is when we read your answers to our question of the week. This week it's about whether the hassles of air travel will keep you home this holiday season.

They're starting to test those X-ray machines in Phoenix. If you step in front of one of those they can see -- everything.

B.J. from Westland, Michigan writes: "They absolutely did. I once had to go on a business trip on the Wednesday before Thanksgiving and it was horrid. I would never travel for pleasure during the holidays. If people want to seem me, they have to come here."

I'm with you.

Peggy in St. Louis, Missouri says: "I'm haven't been on a plane since 1998, and I'm sure things are worse now. I get claustrophobic just thinking about the crowds and cramped seating. We sometimes visit my son in Virginia, but we go by car, even if it takes two days."

Carol in Murray, Kentucky: "Yes, I avoid flying over the holidays because at 70-years old I'm too old to stand in a security line for two hours with my bare feet on a cold floor. If there ever was an industry that deserved to go bankrupt, it's the airlines."

(LAUGHTER)

ELAM: Ouch!

CAFFERTY: Harsh. Time now for next week's e-mail question of the week, which his as follows. Write this down, and get busy with your responses. What will it take to get Americans to save more money? Send your answers to inthemoney@cnn.com. You should also visit our show page at cnn.com/inthemoney.

On that note, we thank you for joining us for this week's edition of the program. Nice to have you with us. My thanks to Headline News Correspondent Jennifer Westhoven and CNN Correspondent Stephanie Elam.

Hope to see you back here next week; 1 o'clock Saturdays, Sundays at 3, Eastern Standard Time. Until the next time enjoy the rest of your weekend.

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

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