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Housing Market Outlook for 2008; Get a Grip on Debt; Price of Oil and the Threat of Recession

Aired December 29, 2007 - 13:00   ET


HILLARY CLINTON, (D) PRESIDENTIAL CANDIDATE: Thank you so much. I want to thank North Scott Junior High and principle Dave Griddle.
ISHA SESAY, CNN ANCHOR: We're going to breakaway from those scenes in Eldridge, Iowa, where Senator Hillary Clinton is addressing those voters with five days to go before the Iowa caucuses. Presidential hopefuls on the campaign trail trying to get that last- minute campaigning in there. You can follow Senator Clinton's event live on We have that and much more on that Web site.

We'll have an update of your top stories at the bottom of the hour. Now, it's time for YOUR MONEY.

ALI VELSHI, CNN HOST: Welcome to a special edition of YOUR MONEY, financial security watch. I'm Ali Velshi.


Coming up on today's program, after a year that shook the housing market to its very foundation, we'll check the out look for 2008.

VELSHI: Plus, getting a grip on debt in the year ahead before it gets a grip on you.

ROMANS: And that uncomfortable link between the price of oil and the threat of recession.

VELSHI: Recession as we wrap up the year, that's the big question on everyone's mind. Are we headed for a recession? Former Fed chairman Alan Greenspan says it's increasingly probable global investment banks Morgan Stanley and Merrill Lynch agree. Goldman Sachs and the Economic Cycle Research Institute say they don't see a recession on the horizon but they see an economic down turn.

ROMANS: A vigorous debate on this subject and on this special edition of YOUR MONEY, we'll be checking in with some of the best and brightest minds in the field who sort out what this means for you right now. To help us understand the broader economic picture, that's the subject of the debate we go to CNN's Greg Hunter.

Hello, Greg.

GREG HUNTER, CNN CORRESPONDENT: Christine, hello Ali, how you doing? You guys doing all right?

VELSHI: We're all right. You often change that around for us. You talked to people who have negative views on what's going on.

HUNTER: Let's sum up the regular guy's view on whether or not we'll have a recession coming up. Let's just call it mortgages, financials and cars, OK.

First of all, when is the last time you heard people describe the housing market as a melt down? That's what happens to a nuclear reactor before it blows sky high. About two and a half months ago I talked to Yale economist Robert Schiller (ph) who says we are in the first inning of a nine-inning baseball game.

Let's say we're in the second inning, he says prices may decline by as much as 50 percent in some parts of the country and experts believe this won't be over until 2009. I'm talking about people like Bill Gross and he has a better description of the housing market.

He has written in past articles that the housing market will grind lower until 2009. Some people say it will be 2011, and there is some historical precedents for that. Because Robert Schiller says, "Hey listen most housing lost eight to ten years. This is the biggest housing boom in history. He says the biggest housing debacle, the biggest housing bust in history, as well, not just in America."

But this was a worldwide phenomenon. That has never happened before. The recent meltdown in sub prime mortgage market triggered $60 billion in investment losses at banks and brokerages. Wait a minute; I just went on the FDIC Web site, $60 billion. Let's put that in context. Do you know how much the FDIC has?

VELSHI: The Federal Deposit Insurance Agency that insures the banks.

HUNTER: I found this yesterday, $50 billion they have in their coughers. Now, if we're not in recession yet, we've had $60 billion in losses and it's not over yet. You have to wonder about the question a couple years down the road.

Finally, autos, car sales way down. They're down 3 percent in November alone and remember that mortgage debacle, the home equity extraction game. That's just about over. You know what people are doing they are buying stocks and they were going to Hawaii and they're buying SUVs and writing them off on their taxes. A great idea.

But you know what, that little game is over and that is going to affect car prices. Hey, listen, I hope I'm all wet about this and I'm all wrong but people ought to spend less on their credit cards in the New Years and saving more money. If I'm wrong, you end up with less debt and more money and what's wrong with that?

VELSHI: Great kickoff to the show, Greg, because we're speaking about all these things. Your homes, your market investments and your debt. That is a big deal. We want to be talking about whether you're wrong or you're right, Greg, one other thing we want to help our viewers with, how do you prepare for an uncertain 2008. That's the only thing we know, it's uncertain. ROMANS: All right. Greg Hunter says duh, we're already in a recession or we're definitely going to have one. Is that how we sum it up Greg?

HUNTER: Either we're there, it's not just me. People who work for George Sorros, Jim Rogers, he says, listen if you took a look at the inflation numbers the way they used to do them and count them against GDP, we're already in recession. I just did a story about the cost of a Thanksgiving dinner at Thanksgiving time, up 11 percent.

Take a look at gasoline prices and how much it costs for you to insure your family and how much it costs you to send your kid to school. None of that counts in the core inflation but in the real world where people stick the nozzle in the tank and say, wow, it just cost me $45, 50 bucks to fill up my SUV. That's a lot of money.

I'm telling you, they don't count the numbers right. If you did the numbers, we'd already be in a recession. But listen just based on mortgages, housing, financials, banks and mortgages, you need to protect yourself.


VELSHI: Dr. Doom Hunter.

ROMANS: He says he is a regular guy on the recession. Thanks so much, Greg.


Greg's right on a lot of fronts. 2007 was a wild year for your money particularly on the markets. The Dow achieved 13,000 and 14,000 for the first time this year and the Dow, I mean; we hit these records 30 --

ROMANS: Over and over again, 34 times we hit record highs in the Dow Jones Industrial Average in 2007. But you know it didn't come very easily. The market saw more than 20 swings of larger than 2 percent in a session. That's remarkable. Usually you get far fewer than 20 swings like that.

VELSHI: Our next guest says expects more volatility in 2008 and not more milestones on the market. Jim Awad, is a portfolio manager with WP Stewart Asset Management, a good friend of ours. Jim, thank you for being here.


ROMANS: Such a great year last year. People are just going crazy over how the markets have come down from the October peaks, but that puts it in perspective. We hit 13,000, 14,000, 34 record highs and now what?

AWAD: We're ending the year with modest gains or modest losses, depending on what you own and I think 2008 is going to be much like 2007. Lots of volatility. The markets will be reacting to some good news, some bad news and, really, I think its two different stock markets and two different economies. What I mean by that, the housing problem is real. It's here, it will take time to work our way through it and you're in a recession or semi-depression in housing, in housing related finance and you can't accelerate that and it will just take time.

On the other hand, what the pessimists are missing is the growth abroad especially China, India, Asia, even Europe is growing nicely. Japan has turned around. With the dollar low that is creating tremendous demand for the exports and the improvement in the trade balance is basically offsetting the negative drag from housing. So they do trade each other off.

VELSHI: If you take a very high world view of the whole thing, you can do well. If you're very concentrated on your immediate situation, it might not look as good. You make money for clients, you invest their money. People come and say, Jim, it's a crazy world.

AWAD: Invest in large cap companies that can benefit from the growth overseas and that are insulated from the problems here in the United States. Companies like GE and United Technologies and Automatic Data Processing and all of which play to the growth that is going on abroad and are somewhat insulated, not completely, but somewhat insulated from the housing and credit issues that we have domestically. So these companies sell attractive evaluations and they'll get you through this tough period.

ROMANS: Let's play the devil's advocate on the global growth story. That's something we have been talking about all year and helping the bottom line of all these big multi national companies, but Steven Roach wrote an interesting piece this week about how the United States is the consumer market 9 1/2 trillion dollars a year, India $650 billion and seems to have tapped out and China about $1 trillion a year.

He says it is mathematically impossible for those other countries to make up for the demand of the American economy. Are we putting too much hope on global growth when we look at what is going wrong in the domestic economy?

AWAD: It depends how bad the U.S. economy gets. As you look at it now the likelihood is we'll flirt with recession but avoid one. If we flirt with it, we will have modest growth, 1 percent growth or so. If we slip into recession, most people talk about a modest recession. In that scenario, the worldwide economies will slow down but continue to grow. If for some reason you went into a credit contraction and a downward spiral in the U.S., we're still the most powerful economy in the world.


AWAD: But most people are not forecasting that and neither am I and what you have to say is that this growth story overseas is secular. A lot of the trade is among Asian countries between Asia and Europe and it is not all to the U.S. as it used to be. So I think the odds are greater now than ever that the rest of the world can grow through U.S. recession but it's not foolproof.

ROMANS: Bottom line, you got $10,000 in risk capital for 2008, you put it in the stocks, and you put in those stocks that you mentioned to us?

AWAD: I would wait until you get through the holiday season. Looks like you might have a seasonal bounce at the end of the year and usually give that back in January and I would put it to work in January, February and March and I think those kinds of stocks will give risk adjusted returns for '08.

VELSHI: Jim thanks very much and have a Happy New Year.

AWAD: And we speak to you next year.

ROMANS: All right. Coming up on YOUR MONEY, getting ahead of the 2008 housing market. We'll help you do just that, straight ahead.


VELSHI: Well, welcome back to YOUR MONEY. For those of you just joining us, we're calling our show financial security watch a special edition of YOUR MONEY. I might have thought that was a little extreme until we heard a few minutes ago from Greg Hunter, CNN's Greg Hunter who I sometimes call Dr. Doom who said we could be in this housing mess until, I wouldn't have been surprised if he said 8, 9, 10, he said 11. Some people think 2011 might be how far this thing goes.

ROMANS: This is your biggest asset, folks. When you have the price of your biggest asset going down or foreclosures on your street, this means a lot to the local housing market. Nicholas Retsinas is the director of the Joint Center for Housing Studies at Harvard University and Gerri Willis is the host of CNN's "OPEN HOUSE."

They both join us now to kind of sort it out, 2009, 2010, 2011, is it a recession, is it a crash for housing?

GERRI WILLIS, CNN PERSONAL FINANCE EDITOR: On October 5th, 2010, I don't know. My job is to tell people how to get prepared for the eventualities, what do you think will happen? The market will continue downward next year. It is still going to be negative. You have to make sure you build equity, if you can.

ROMANS: That sounds so old-fashioned to be building equity in your home.

WILLIS: That's something you have to think about right now because everything is a raid against you. The economy could turn south and we could go into recession and you have to make sure you have savings on hand. This is the time to go out and get a home equity line of credit, one that doesn't cost you any money in case you lose your job. You want cash to call on.

VELSHI: Nick, your concern is you think it has more to do with credit than it has to do with property values. That is what will determine whether we stay out of a recession. NICOLAS RETSINAS, HARVARD UNIVERSITY: It's a little bit of a Rubrics cube. The housing market slowdown along with the sub prime implosion. It has pretty much choked off credit and credit is the lifeline of the housing market. Unless we find a way to get this choke hold released this housing down turn will be with us for a while.

WILLIS: I know there are a lot of negative numbers out here, but we're starting to see really negative sentiment among home builders and that is good. If those folks stopped building next year and they would slow down this would improve inventory and make things better.

ROMANS: What do you think about the fundamentals I guess of building homes next year and home sales, what do you think is going to happen?

RETSINAS: We do have too many homes, Gerri is right. The fundamental problem is oversupply. We built more homes than we need and investors stopped finding people they could find to buy. We have to work through this inventory. We need credit to get through the inventory and this will have an impact and hard to say what will happen in the long term, but in the near term we are likely to see more bad news.

ROMANS: Nick there is a lot of finger pointing about who is at fault here? Did we go after homes that we couldn't afford and were we sold a bill of goods of homes we couldn't afford and also some blame going around in Washington? We talked for so much about financial invasion and ownership society that maybe we neglected to see some of the signs that there was a bubble in the making.

RETSINAS: It was too good to be true and it turned out too good to be true. You're absolutely right. So suffocated with our house and financial, we have layered risk to use the financial term and somehow we thought layering risk was eliminating risk and it turned out it was not. We just moved it around and once the inevitable drop off in prices and appreciation came everything started to unravel.

WILLIS: You know, Hillary Clinton actually had something interesting to say on your point, Nick, just this past week. She said that the risk was shifted from folks who had information to the folks who didn't have information.

VELSHI: When we see market bubbles. Gerri, I want to ask you this, when somebody has money. Stock in Cleveland, Detroit, Phoenix ...


VELSHI: Is 2008 the time if you had some money to go buy a house?

WILLIS: Maybe the third quarter.

VELSHI: Really?

WILLIS: Maybe. Look, OK, the smartest people I know in the universe who has the best database. I don't have a million dollar database but some folks do. The total drop from peak to trough, that's what you want to know, not necessarily calendar year information, 15 percent. That's what the drop is on the median. You know if you live in one of these markets where it is go, go, go way up. Do you really expect to hold on to all the gains you got in stock in California? That's just crazy; it's not going to happen. For them, 15 percent is not a lot.

ROMANS: If you're a buyer to live in your house for 20 years it is different, if you are a buyer to live for a couple years.

RETSINAS: Perspective is important unless we forget, in the first five years of this decades prices on the two coasts doubled, increased 100 percent. Certainly lots of room for give back in the days ahead. But, again, finding that sort of moment. The big unknown here is, will the economy continue to net new jobs? If it does, we can probably find our way through that and if we unleash this credit choke hold by 2009, we'll start to come around. But if we start losing jobs in the broader economy, this could spiral down in a very bad way.

ROMANS: Your prediction Nick is that a recession is plausible, not certain but plausible.

RETSINAS: Not really. We did a study of past housing cycles in which there were ten down turns in the past 60 years and eight out of ten were correlate would a recession. If history rhymes, we're probably in line with recession, but so far we keep producing jobs and so far the rest of the global economy seems to be doing OK.

ROMANS: All right. Nick Retsina, Harvard, thank you so much. And Gerri Willis, thank you.

WILLIS: My pleasure.

VELSHI: All right. Coming up after the break, managing your post-holiday hang over, we are talking your financial hangover. We have some simple steps to sobering up in the New Year. Stay with us.


VELSHI: We think back to 2008, you are going to think about credit and we talk about a credit crunch and a credit crisis and we talk about how bad this is. But in fact, some people say that tightening of credit standards, a tightening of lending standards is a good thing.

ROMANS: Getting back to some normalcy in one sense. We want to talk about how to dig out of debt and use the right kind of revolving credit and not rely on it too much. Carmine is the author of "Generation Debt." She is going to help us sort revolving consumer debt is growing at a pace of 8 percent a year.

VELSHI: You have a credit card and you pay off and then you have access to that credit again.

CARMEN WONG ULRICH, AUTHOR, "GENERATION DEBT:" You have debt and you're not paying it off every month. So, it's actually really big numbers. 8.3 percent a year it's going up, went up $6.4 billion in October and it is not every American that has credit card debt obviously, it is 48.7 million Americans carry revolving credit card debt.

VELSHI: You make payments every month, but you are not --

WONG ULRICH: You're carrying a balance on it. That's part of the problem, actually, this number is growing and growing more people are using credit cards for basic spending like gas and that's becoming more of a problem as the foreclosure and the credit crises comes along.

Those million plus people that are set up for foreclosure, even after what happened with the Fed, that's a couple hundred thousand people that are not. We're talking over a million people are going to be hit with foreclosure, how are they going to pay their bills? More and more credit cards.

ROMANS: Even if you're not hit with foreclosure and your wage is going up 1 percent and food prices are going up 4.5 percent and gas prices are up some 30 percent year over year, it has to come from somewhere.

WONG ULRICH: The basic cost of living right now is really blown up, especially if you compare back in the '70s the discretionary income and we're getting squeezed more and more and not so much that the Americans are out spending on electronics and fun things, of course, there is more of that but more and more of our pay check is going towards basic needs.

ROMANS: Get it together for us for 2008 then. If somebody is listening to this and they realize this is them that we're talking about, how do you manage this and get control of it? You can make money by digging yourself out of debt in 2008.

WONG ULRICH: Absolutely. After the holidays we find that 28 percent of Americans are carrying a holiday balance from shopping. Hunker down and really resist all of those post-holiday sales.

VELSHI: Which may be bigger this year than most because the shopping season wasn't as healthy.

WONG ULRICH: Everyone's in-boxes are flooded with sales. Really resist that and shut down that wall and stop spending right now and assess the damage and pull together and see where you went wrong. And do what you can to put more money towards your credit cards and pay it off as soon as possible.

ROMANS: Get a plan and get free online management. Free online management, financial management, and its there.

WONG ULRICH: I'm a big fan, just like anything else whether it's dieting, go with a community to get some support because a lot of people feel like they're alone when it comes to debt.

ROMANS: They're not.

WONG ULRICH: You're not alone kind of battling with that. Go online, online community banking sites places where you can go management your money and there's a group of community that give use tips on how to save money and support when you need to be reining in your spending.

ROMANS: Recession proof our debts situation for me. What do we do in 2008 if we think the economy will slow, whether or not it is in a recession, if it is going to slow?

WONG ULRICH: What you want to do is, even if you have no credit card debt, pre-emptives strike against it. Here is a great time to manage your money and look at where your spending is going and look at your taxes, as we heard with the AMT, we're not going to get hit with that this year. Great time to get your deductions taken care of.

And reassess your investments because you want to make money off of your money. Don't have a lot of cash sitting in a savings or checking account that is not earning anything. Go shopping for a good savings or checking account that will earn you some interest.

ROMANS: All right. Carmen Wong Ulrich, "Generation Debt" is the book, thank you so much for joining us.

WONG ULRICH: Thank you for having me.

ROMANS: All right. Coming up, the race for the White House and why the winner could affect your financials.


SESAY: Hello, everyone. Now in the news another day of chaos in Pakistan. About 40 people have died in violence that followed the assassination of Benazir Bhutto. Bhutto supporters insist that she died from gunshot wounds not from a skull fracture, as the government claims.

The San Francisco Zoo did not reopen today. Officials have postponed the reopening until Thursday. The zoo closed after an escaped tiger killed a visitor on Christmas Day. Officials promised when the zoo does reopen, it will be safe.

The winter storm that delayed holiday travelers from the Great Lakes to New England is heading out to sea. The storm forced airlines to cancel hundreds of flights yesterday and most airports are operating normally today.

We're live on the campaign trail in Iowa at the top of the hour, now back to YOUR MONEY.

ROMANS: One of the toughest tests for any politician is trying to figure out what issues will resonate with voters.

VELSHI: Terrorism and the war in Iraq jump to the top of the heap in recent elections, but as we head to 2008, the economy is, once again, on the forefront.

ROMANS: Joining us now is CNN senior political analyst Bill Schneider.

VELSHI: Bill, the numbers are showing that most people are more worried about the economy than Iraq than even health care.

BILL SCHNEIDER, CNN SENIOR POLITICAL ANALYST: Yes, that's right. The economy has moved into the number one position. It's been happening over the last few months, but right now, according to our latest poll in December, the economy; more people cite the economy as their top concern than the war in Iraq. Although, of course, Iraq is still a very large concern.

This is a little new because we really haven't had an economy- dominated election since 1992, which was a very bad election for the president and his party. Well, the economy is bad and you know the old saying in politics, when the is economy is bad, the economy is the issue and right now most Americans think the economy is in recession.

VELSHI: That's a very strange discussion, we had this, Christine and I talked about this a lot. An official definition for a recession, we're definitely not there officially. Some people think we might or might not, but Americans definitely think we do.

SCHNEIDER: That's been a shift in the last couple months. Right now 57 percent of Americans believe the economy is in recession. They don't know anything about the official figures and they know what they see, they know what they feel and they feel pretty bad about the economy.

ROMANS: Bill, do they vote on that and say when the pollsters call, yeah, I feel real bad about the economy and I think we're in a recession but does it determine who they they'll vote for?

SCHNEIDER: When the economy is bad, the economy is the issue. Right now people feel the economy is bad. Pocketbook voting its it's been called. A huge crises like 9/11 that overwhelms pocketbook issues and in that case the recession following 9/11 people understood what caused it and they were more transfixed by the terrorism issue. But in any other circumstance, that's not extraordinary, people vote the economy, they vote their pocketbooks.

ROMANS: So, if they're worried about the economy, is there a particular candidate right now that they favor on economic issues?

SCHNEIDER: There is one in each party interestingly and they're both doing pretty well. Hillary Clinton in the Democratic Party she's rated best on the economy and other domestic issues from one reason because people remember her husband as having done a good job when he was president in the '90s managing the economy, pulling it out of the last recession of the early 1990s. Fixing the economy that was so bad under the first President Bush.

In the Republican Party, right now that's the issue that's driving Mitt Romney support. He's a former corporate executive, he has a lot of management experience and managed the Salt Lake City Winter Olympics and people think a lot of expertise when it comes to economic management.

ROMANS: All right. Bill Schneider, thank you very much. Our senior political analysis, Bill Schneider with what it all means. Politics, the economy, recession.

VELSHI: The decisions you have to make in 2008. You're going to have to decide who wins the presidential election and you might want to do that by determining what it means for your wallet.

ROMANS: Joining us now to sort it out about this is Greg Valliere, chief strategist at the Stanford Washington Research Group. Greg, is there a candidate that is going to win the election? Your prediction on our financial security prediction show.

GREG VALLIERE, STANFORD WASHINGTON RESEARCH GROUP: I think Hillary Clinton is still the favorite. She's had a slump in late '07. But I just have to ask the question, who's going to beat her? I don't think that anyone will and I think that she will mean a lot to your viewers in terms of their pocketbooks.

ROMANS: Like what?

VALLIERE: Taxes. In a word. I think there's a very good chance that she will increase taxes on the rich. It all depends, of course, on how you want to define the rich, wealthy, but I think anybody making over $200,000 a year, maybe even a little under that is going to have to worry about higher taxes in '09. Not '08, but '09 and the big story is capital gains.

ROMANS: That is going to mean a lot for investors that are positioning for 2008. It is going to mean a lot if you want to take some big gains. It means you'll have to pay attention to your portfolio next year and maybe reposition, right?

VALLIERE: I think so, Christine. You know for sure you're going to get a 15 percent cap gains rate and 15 percent dividend tax, and 35 percent top rate in '08. In '09 if the capital gains rate goes to 20 or 25, if that threat is out there during '08 people who had long-held gains and people who owned their same house for a long time, family- owned businesses, I think people will have to think, do I want to cash out at 15 percent or do I want to take a chance of cashing out at 20 or 25 percent.

VELSHI: Greg, if you look at the numbers that Bill Schneider was just talking about, it seems evident that the trend is there, the economy will continue to be the foremost issue for American voters when we still have several months to go. Are these candidates articulating their views? Is it something that somebody ask go get information based on how it affects the economy and them specifically?

VALLIERE: It's still a long way away to make that leap of judgment to say there are specific things you can do. The people in the markets are worried about trade protectionism and a long list of things that people on Wall Street worry about. I think for individuals, though, we still have a long time to go, but I'm telling all of our clients as I just said to Christine, you have to start thinking about your investment mix because of the possible change in the capital gains rate.

ROMANS: Let me ask you about the mortgage crisis and could we have done something to prevent it? The push to financial invasion above all else and the ownership society, maybe we're seeing the down side of that. Is there some blame to be laid in Washington and do we have any lessons from 2008 from it?

VALLIERE: You can be sure there will be blame in Washington in a year divisible by two. If anything is not going well, people will point fingers and I think this is a classic example of how the Democrats have all the stars in alignment for them. So many stories that are breaking in their favor, including this one. And I think they will say that Alan Greenspan and the Bush administration didn't do enough. They didn't regulate enough. They let this get out of control.

ROMANS: Recession 2008. We heard plausible, we have heard no, we have heard absolutely, we heard we're already in it and doesn't matter anyway because if you're in housing or the auto industry or manufacturing, you're already feeling it anyways. What do you think?

VALLIERE: Here's my way of weaseling out of this answer. Here's my spin, Christine, I think statistically we may not be in one, but it is going to feel like one. In so many areas like housing, job insecurity, it is going to feel like one. I do think by summer the impact of much lower interest rates will start turning this around.

VELSHI: Oh, wow, summer, that's about the earliest prediction we had. Greg, the good thing, we talk to you a lot. We'll keep you up to speed on your predictions and what is going on.

ROMANS: All right. Greg Valliere thanks Greg.

VELSHI: Coming up next on YOUR MONEY, how much could you be paying for gas next year? We have somebody with very specific views on that. Stay with us.

ROMANS: Put on a sweater, he says.


VELSHI: All right. A gallon of gas costs you 30 percent more than it did this same time last year.

ROMANS: And home heating oil up about 26 percent from a year earlier. You're feeling that this winter as you start to heat your home. Our next guest says higher oil prices are absolutely adding to the mortgage crises and refining capacity. What he calls petropolitics. I love that phrase, are two forces to watch in the year ahead.

VELSHI: Peter Beutel is the president of the Energy Risk Management from Cameron Hanover, Peter good to see you again on the show. Thank you for being with us. What do you think in 2008 grim or hopeful when it comes to energy prices?

PETER BEUTEL, PRESIDENT, CAMERON HANOVER: Well, what's grim for the rest of the economy could, in fact, be very hopeful for oil? A recession actually is the one factor that could bring oil prices down and not just down a little, but significantly.

VELSHI: Because it affects demand. People have less money to buy stuff so they buy less and wear sweaters.

BEUTEL: Absolutely, all of these factors. If you have less money to spend you're going to find ways to car pool to telecommute to wear a sweater, whatever it may be. You're going to figure it out. If people don't have jobs, as painful as that is, they're not driving to work, that cuts demand and it brings down, down prices. What we've seen in the past is when we have had oil prices triple or quadruple and in this case they've been up by a factor of ten in eight years, nine years.

When you see that, you have the price come back down during a recession and it doesn't go right back up when the economy gets strong again. That's one of the things that help the '90s so much is that we had low oil prices pretty much for the entire decade.

ROMANS: How are oil prices bleeding consumers dry at this point? We just showed a statistic about lipstick. You can go without lipstick, well, Ali ...

VELSHI: You can't go without anything you buy has to get to the store somehow.

ROMANS: All kinds of things you can't live without, food prices are going up because it costs more to ship them.

VELSHI: And store them and make them.

BEUTEL: This is the problem. Every single thing in American business has an energy input cost. Take food. It costs money, it costs energy to plant it, to water, harvest it, distribute it, ship it, refrigerate it, to get to the store. All of these things cost and each element of cost is passed along.

But even without taking those additional costs, just looking straight up at jet fuel, heating oil, diesel and gasoline and natural gas, the American consumer has spent $1.3 trillion more in the first seven years of the 21st century than he and she paid in the last seven years of the 20th century. You know, people talk about raising taxes by a few hundred billion or $40 billion or $100 billion, this is a tax that has cost the American consumers $1.3 trillion over seven years.

ROMANS: It figures into the mortgage crises you say, how?

BEUTEL: Well, if you don't have the money. I mean, if you're spending money at the pump. If you're spending $3,000 or $3,500 rather than $1,000, you may not notice the money going away, but when it comes time to write that mortgage check you're looking at it and saying, wait a minute, where did my money go? This is happening to a lot of people in the middle class, the working class. Those under 25 and those over 65.

VELSHI: Can we do anything but talk about it, Peter? Going into 2008 if we don't know where oil prices or gas prices are going, what do I do?

BEUTEL: Well there are so many things we could do. Out of those people that commute by car to work, 80 percent of them drive alone. Now, if we were to car pool, find one other person we can tolerate every other week, just every second Friday, that would actually cut gasoline demand by 5 percent or at least the part that's going to work.

If we could call our neighbors when we go to the store, the supermarket and say, look, I'm going, can I pick you up fresh fruit, vegetables or meat and you do the same for me. Maybe going every five days we're going every ten days. That could effectively cut our shopping driving 50 percent.

So, there's so many things we can do. When it comes to heating, insulate everything. Put the plastic wrap around the house. Make sure that you're not losing it around the joints of say the door. Also, a sweater is no longer a fashion statement. It's an investment.

ROMANS: All right, Peter Beutel from Cameron Hanover. Thank you, Peter.

VELSHI: Now taking time off work can take you in directions you would never expect as former graphic designer Jim Sisto found out.


VELSHI (voice over): This production of "Joseph and the Amazing Technicolor Dream Coat" does not look different. That's exactly how Jim Sisto likes it.

JIM SISTO, ARTISTIC DIRECTOR, FAMILY RESIDENCES: The thing about this group that is most amazing to me is their drive to exceed and to do well despite any obstacle that life or god or whoever throws at them.

VELSHI: And what you might find really amazing is that every one in this production is developmentally or physically challenged.

SISTO: The participants who are in our program are people with physical disabilities, people with mental health issues and people with developmental disabilities.

VELSHI: Sisto is the artistic director for Family Residences and Essential Enterprises, it is an organization that houses and teaches more than 3,000 mentally challenged adults in Long Island. Sisto took what he thought was a short detour from graphic design in 1989 when he took a job at the center and tested out a theater program. The result surprised everyone.

SISTO: My biggest surprise with this program was the apparent change that came over so many people so quickly. People who could be aggressive stopped being aggressive because they knew if they, you know, if they did cross over that line that they were no longer able to do this, this thing that they loved so much. People were able to manage their symptoms for the first time in their life.


ROMANS: All right, coming up next on YOUR MONEY, our two cents. Ali and I on this whole recession question.


VELSHI: We've heard from everybody else on what will happen next year. Is there going to be a recession in 2008? Is there going to be a recession in 2008? Before you say anything, remember a number of investment banks thinking so and you have Goldman Sachs thinking not. But everybody thinks it will slow done, but will we have a recession?

ROMANS: My prediction is if it doesn't matter if we have an overall recession because 57 percent of the people polled by CNN say we're already in one and in some parts of the country we are already in a recession. If you're in the manufacturing sector or a job selling mortgage products to the financial industry or in any one of these areas that have already been really hurt, it already feels that way. In a way it's academic.

VELSHI: It doesn't matter ...

ROMANS: Having the discussion is telling us that there is something funky going on.

VELSHI: I think we don't get into a recession by definition, but, you're right, if you think things are tough and you stop spending money, that is when we get into a problem.

ROMANS: Housing prices.

VELSHI: I think, again, no crystal ball here; I think we start to bottom out at the end of 2008. Fall of 2008 is when it starts to bottom out.

ROMANS: I think that the bubble was so big and when, just like Nick was saying on both coasts who had doubling in housing prices, I think that's pretty incredible. A lot of error to come out of there. I don't think we've seen bottom.

VELSHI: We heard some people say up to 2011. Gas prices, oil prices, we'll still see high gas prices because we still have refinery problems. Gas around 3 bucks a gallon but oil comes down to 80.

ROMANS: Really?

I think they stay high enough that the green theme continues next year. I mean I have an uncle who put geothermal heating in his house. In seven to ten years I could recoup an investment on green energy and maybe now is the time to look at it. I think if oil prices stay where they are or down from where they are, you'll have more people talking about solar, wind, consumers, things that they can do at home. Geothermal to try to weather that huge, 30 percent spike in heating oil. It's been incredible.

VELSHI: We'll keep an eye on all of that for you. Thank you for being with us. Coming up, forget what the economic experts have to say and what we have to say.

ROMANS: Forget us.

VELSHI: We have a psychic who will tell you about your money in 2008.

ROMANS: Clairvoyant.


ROMANS: OK, we spent the show talking to experts getting their predictions for 2008.

VELSHI: Ines Ferre took us in a different direction. She's joining us now; she consulted someone else for 2008.

ROMANS: We don't have a crystal ball, but she talked to somebody who does.

INES FERRE, CNN CORRESPONDENT: That's right. You guys were interviewing all these economists and stuff and I thought, why not interview a psychic about this. Denise Young says she's a clairvoyant. I asked her to look into the future and tell us what her economic predictions were for 2008.


DENISE YOUNG, CLAIRVOYANT, WWW.DZIGNS.NET: I do feel like we're heading into a recession and I was getting, picking up stock market crash, which could happen between April and August. I don't get oil going over $100 a barrel. I feel, though, it is going to be pretty close to it and gasoline, I do get, it could reach definitely up to $4 a gallon. With the housing market, I do feel certain areas will be affected; Michigan, Midwest and the Florida area will have trouble with the market.


FERRE: And I should add that by stock market crash, she said that she saw markets falling at couple hundred points. Now, Denise Young had plenty of more predictions for 2008, but not just all about Wall Street, you guys. She also had some nice predictions about Hollywood, as well.


YOUNG: Britney Spears, she will have a better year and Paris Hilton, I still kind of get some trouble around her. Christine Romans, I feel like she's going to, something new with her job, better position. I do feel that there is marriage around Ali, the thing is, if it doesn't happen in 2008, the engagement, well, Lindsay Lohan she gets into some trouble but I see her settling down a little bit, as well.


ROMANS: Lindsey Lohan and Ali Velshi.

FERRE: She also saw you moving from your home.

ROMANS: Oh, really, to a bigger home, maybe.

FERRE: You're going to be married, Ali.

VELSHI: My goodness, me. I better get working on this. My goodness.

FERRE: Are you working on it? Anyways, I couldn't resist asking -- we're embarrassing Ali here. I couldn't resist asking her about me, what she saw for me in the future.


YOUNG: I'm going to say this to you, I feel like you will host "Saturday Night Live."


ROMANS: Call the agent!

FERRE: That's right. Lauren Michaels, watch out.

VELSHI: Very good. I thought she was going out on a limb with the Paris Hilton and Britney Spears stuff. Britney Spears going to have a better year.

ROMANS: The clairvoyant doesn't have a financial market certifications, she's just looking straight into her crystal ball.

FERRE: She said, I actually don't know anything about stocks, the markets, nothing. This is just what I'm seeing.

ROMANS: A new job and a new house.

VELSHI: We should figure this out because over the past couple years the clairvoyance might have done just as well as the market analysts.

ROMANS: The monkeys who throw the darts.

VELSHI: Who beat the investors?

FERRE: Thank you guys.

VELSHI: Thank you for joining us for the special financial security watch edition of YOUR MONEY. And thank you for joining us by the way through out the entire year. You can catch Christine later today at 6:00 p.m. Eastern on "Lou Dobbs this Week."

ROMANS: And you can see Ali every weekday morning on "American Morning." We'll see you back here next week.

VELSHI: Saturday at 1:00 and Sunday at 3:00. Have a Happy New Year.

ROMANS: Happy New Year.