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YOUR MONEY

Will it Matter to Your Investments If McCain or Obama Wins in November?; General Motors and Its Stand on Alternative-Fuel Vehicles; Federal Reserve Leaving Interest Rate Unchanged

Aired June 28, 2008 - 13:00   ET

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


(COMMERCIAL BREAK)
FREDRICKA WHITFIELD, CNN ANCHOR: Courting the Latino vote. Within the past two hours, presidential rivals John McCain and Barack Obama, both spoke at a conference of Latino-elected officials in Washington. Latino voters could help determine which nominee wins the White House.

And more than a thousand wildfires are burning in California. The largest is near the tourist area of Big Sur, 16 homes have been destroyed and 500 others are being threatened. Firefighters believe that lightning just may have caused most of the blazes.

And violent storms swept across the Great Plains. One uprooted tree crushed a car, killing two people in Council Bluffs, Iowa. The strong winds knocked out power to thousands of homes. You can see the damage there.

And President Bush is again calling Zimbabwe's presidential election a sham. He says he will push the United Nations for more sanctions against Robert Mugabe's government, the longtime leader ignored the world by going ahead with yesterday's runoff election and even though the opposition leader had pulled out because of violence and intimidation.

And we'll update you with the top stories at the bottom of the hour. Now time for YOUR MONEY.

ALI VELSHI, CNN HOST: Welcome to YOUR MONEY, where we look at how the news of the week affects your bottom line. I'm Ali Velshi.

Well, both presidential candidates tackle issue number one, the economy this week on the campaign trail. Now, stocks took a beating on Wall Street. On Thursday, the Dow dropped to its lowest level in 21 months. We're going to look into Washington and we're going to talk about whether it matters to your investment who actually wins the White House in November.

Oil prices up again, new record highs. General Motors' stock was hit hard. Dropping to its lowest level since the early '70s and that furthered concerns over the health of the U.S. auto industry. We're going to take a look at where the automakers stand when it comes to alternative-fuel vehicles and how soon you may actually have a chance to buy one. And the Federal Reserve decided to leave its key short-term interest rate unchanged after slashing interest rates for nine straight months. But for Americans looking to buy a home, mortgage rates have actually crept up. U.S. home prices have posted record declines and new home sales in May hovered near historical lows. Our panel is going to discuss what this means for home buyers, sellers, and owners.

But first, the summer driving season is in full swing with gas prices hovering around all-time highs as of Friday morning the national average hit $4.07 a gallon and that's forcing many Americans to make a change in their lifestyle.

Allan Chernoff joins us now with more. Hi, Allan.

ALLAN CHERNOFF, CNN SENIOR CORRESPONDENT: Hi, Ali. Traveling in the privacy and comfort of your own car just doesn't have the same appeal it used to. Many people are leaving their cars in the garage. Taking the train or they're sharing a ride.

(BEGIN VIDEOTAPE)

CHERNOFF (voice over): Jen Castania parks near her home and shares a 40-minute drive with co-worker Cesly Robinson (ph) to their office in Denver, Connecticut. With gas prices so high, carpooling is a big money saver for both of them.

UNIDENTIFIED FEMALE: My gosh, like 60, 70 budges.

UNIDENTIFIED FEMALE: My god.

UNIDENTIFIED FEMALE: I know.

CHERNOFF: Rich Levy, a pharmaceutical executive doesn't have to worry too much about gas. He's got six vehicles sitting in his driveway including a motor scooter. Even so, he still takes the train whenever possible.

RICH LEVY, COMMUTER: I think it's ridiculous. I think it's not only the monetary but it's the principle of it as well.

CHERNOFF: Rich and Jen and Cesly reflect what's happening around the country as gas prices soar, Americans are driving less. For six months in a row, motorists have been curbing their driving. Logging nearly 30 billion fewer miles between November and April, the latest month on record. Then during the same period a year earlier, when gas prices were averaging well below $3 a gallon.

The expensive gas is the primary motivator for Americans to drive less. But there are other reasons as well. They're trying to avoid traffic, high tolls, and they say, they want to be more environmentally conscience.

MARY PETERS, U.S. SECRETARY OF TRANSPORTATION: We all are much more conscience about the environmental effects and much more conscience about energy and our resources of energy today. (END VIDEOTAPE)

CHERNOFF: Four dollar gas seems to have sparked something in our psyche of our car-loving nation. If gas prices keep rising or even remain at their sky-high levels and then this trend away from driving may just have begun -- Ali.

VELSHI: All right, Allan, did you really have to sort of fish for that information out of people that they think that it's the right thing to do? Or were people sort of volunteering that they think it's time to save money and do better for the environment?

CHERNOFF: Ali, a lot of people are doing this. The numbers are down significantly. People are definitely feeling the pain, even people who can afford these higher prices just like Rich Levy.

VELSHI: Allan Chernoff, thank you very much on that. Allan Chernoff riding the rails as it were to tell us how drivers are coping with these higher price.

Now less driving here in the United States will translate into lower gas prices it is a subject of much debate. Jeff Rubin is the chief economist of CIBC World Market Center. An expert on oil prices, he followed very closely. Thanks for being with us, Jeff.

I think that we need to understand this. If we conserve and if we drive less and if demand for gasoline in the United States goes down is that going to fundamentally bring the price gasoline down and the price of oil?

JEFF RUBIN, CHIEF ECONOMIST, CIBC WORLD MARKETS: Absolutely not. Because what Americans don't understand is that Americans are not driving the oil bus. While the U.S. consumes more oil than anybody else, U.S. oil consumption is not growing in three to four years and this is probably the most -- this economy will ever consume. But for every one American who's going to hit the exit lane and get off of the road there's ten people champing at the bit in Brazil, in India, in Russia and China to get on the roads.

VELSHI: And we're not just talking anecdotally you're talking about the car in India which is $2,500.

RUBIN: That's either a miracle or a nightmare depending on our point of view. And for millions in Asia that's a miracle because it gives them access to all of the benefits of driving a car. But at the same time you give them a straw. And they start sucking. And the more they suck through that straw the less that we can because oil supply and gasoline supply is not growing.

VELSHI: Take that analogy a little further. When you finish your drink and you know you put the straw a little deeper and you suck a little harder, because there's more oil deeper down in harder to get places than we've had in the past but oil prices have to be high to sustain that kind of that --

RUBIN: That's right. But every year we're losing about 4 million barrels a day of easy-flowing, light-air sweet crude and replacing that with Canadian oil sands or Venezuela oil sands.

VELSHI: Which is heavy.

RUBIN: An extremely problematic and it requires enormous energy and take Canadian oil sands. I mean that may be the solution to America's oil needs but if it is the lightings go out here because we'll cannibalize so much natural gas in producing Canadian oil sands that we won't be able to export natural gas to the United States and what will happen to all those gas fire-generating station?

VELSHI: And a natural gas is the one energy commodity that is relatively plentiful right now on this continent. But we need to figure out ways that are going to be sustainable. So what's the big answer? I mean you mention in a recent report that you think that gasoline prices in the United States will hit $7 a gallon --

RUBIN: By 2010. And I think that we're going to see in the next three to four years is 10 million Americans hitting on the exit lane. We're going to become more and more European. Not just in terms of people leaving the road, people staying on the road and driving less and driving very, very different vehicles.

VELSHI: Tell me something about the work you've done on studying how this will affect property values. You think these are two unrelated matters.

RUBIN: Well, that's very interesting because you can't just impose Europe on America. People have to have a public transit choice but what people are going to start doing is they won't be able to afford to commute 30 miles a day to work. People are going to be moving from the suburbs to the inner cities. And real estate values are going to reflect that. Falling values in the suburbs, rising values in the city, as rising urban density becomes the counterpoint of the last 30 years of suburban sprawl.

VELSHI: Now that creates a problem for people who can only afford to live in the city or close to work because then you'll see places that look like Manhattan or that look like San Francisco where the prices just get really, really high? Those inner cities.

RUBIN: But right what about in L.A. where there is no public transit and that is why we only look at 57 million American drives who do have a European alternative. Access to public transit and 10 million of those will come off of the road but if you don't have access to public transit and then gas will be $10 a gallon and you don't have any choice.

VELSHI: What's any -- any good consequences of the price of oil --

RUBIN: Great consequences. Who would have thought that $130, $140 oil would breathe new life into the rust belt. Chinese steel exports to the U.S., down 20 percent, U.S. Steel production, up 10 percent. Because the transport costs now of moving iron ore to China and steel back to the United States outweighs any labor costs advantage. So for Pittsburgh this is great news. For Detroit who buys steel, not so great. Because whether you're buying steel from Pittsburgh or Shanghai your costs just gone up.

VELSHI: We've talked a lot about the dollar; we've talked about how the Fed didn't cut rates for the first time in several sessions. What's the relationship in your opinion between our having a low dollar and these prices being high?

RUBIN: A head thing. If we were to denominate west Texas intermediate in a global currency basket reflecting trade weights with the United States, that WGI would probably be about $115 or 118 and we'd still be having this conversation.

VELSHI: OK so we shouldn't get too carried away it being the low dollar in your opinion.

RUBIN: No, that's a head fake as is speculation, not to say that there isn't speculation in the oil market but that's putting the cart before the horse.

VELSHI: Jeff, good to talk to you. Jeff Rubin is the chief economist with CIBC World Market. And he is talking about the Canadian oil sands. I just came back from there. And in a week we'll have a very detailed special on the oil sands and the impact that it could have on what you pay for energy and on the environment.

Well, coming up next on YOUR MONEY alternative-fuel vehicles that could one day reduce our dependents on oil. We will have to see most of them on the road first. But find out if you're in the market for one next.

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SEN. JOHN MCCAIN, (R) PRESIDENTIAL CANDIDATE: I further propose we inspire the ingenuity and resolve of the American people by offering a $300 million prize for the development of the battery package that has the size, capacity, cost and power to leapfrog the commercially available plug-in or hybrid or electric cars.

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VELSHI: That was Senator John McCain earlier this week challenging our nation to develop a battery that could reduce our dependence on gasoline. That technology might be a long way off but Peter Valdes from CNNMONEY.com and Mike Quincy from "Consumer Reports are here to tell us about alternative cars that are available right now and what we can expect to see in the near future.

Gentlemen, good to have you both here. We've been talking about this for years. And I remember when we first started talking about the Prius and the Honda Civic hybrid it was really -- it was an outlier for people who really wanted to take a step out there to show how green they were and they were paying a hefty premium for it. We did after the calculations. It really didn't make economic sense all those years ago. Now it is reality and there is a lineup. There's a waiting list to get the sort of most popular one in the crowd. The Toyota Prius.

PETER VALDES-DAPENA, CNNMONEY.COM: yes, and actually not that long ago. Really a few months ago, Toyota had finally caught up in production. You could more or less go to a dealer and buy a Prius like you buy a Camry or any other Toyota car and all of a sudden now right back there, right back there to people going on waiting list, waiting for months. Going to Ebay to buy them used.

VELSHI: Unbelievable.

VALDES-DAPENA: It's incredible.

VELSHI: This is the gold standard at the moment the Prius.

VALDES-DAPENA: I think so. For someone shopping for a hybrid car I think that the Prius is really the one who makes the most sense. Best in mileage and second of all there is no sacrifice or loss of storage space, no loss of interior room. You have to say it pretty much has package.

VELSHI: What do you think about the, Mike?

MIKE QUINCY, "CONSUMER REPORTS: "Consumer Reports," gives a thumbs-up to the Prius, It is an honest four-five adult-size passenger vehicle, 45 miles per hour gallon over in our tests. Combined highway and city. I mean it's a real car. It's extraordinarily popular. I think the status car of the whole country.

If you have a Prius -- It's a funny looking thing and now I think it looks beautiful because the folks in there are laughing at the rest of us. Honda came out with the Civic before the Prius? One the earlier ones out there and that's still a pretty mainstay in the -- in the -- the Honda insight actual leaves the first. That was that really tiny roller skate on wheel, bale. And then quickly followed with the Civic and the Prius.

VELSHI: And what do you think about the Civic, Peter?

VALDES-DAPENA: Again, an excellent vehicle. A little easier to find know that the Prius. The one downside is it is not as roomy. And the battery pack unlike the Prius does take up some trunk space, some practicality issues but still an excellent car.

VELSHI: But again if you drive these hybrids work better for people who work in a city environment. A stop-and-go environment. If you are doing the long distance you wouldn't get the same saving as you would if driving because it gains some energy from the stopping and starting.

QUINCY: It's not quite as dramatic but they are still really fuel-efficient on the highways because you can still go along a very low load on the electric power that's only stored up with a regenerative braking system and things like that. VELSHI: In the city, I was -- a number now in New York City, in the taxis and I was in a Ford Escape the other day and the driver was sort of showing me how it shows him how much energy he's saving at any given time. And it's not biggest of SUVs. But if you want an SUV, that's one that's available to you. What do you think of this, Peter?

VALDES-DAPENA: I think it's pretty good. The Ford Escape isn't -- to be honest with you, the Ford Escape not necessary a great SUV. It's pretty good. It's decent and when you put the hybrid package in there it certainly brings up a level because you're getting SUV functionality and space with the fuel economy of a small- to midsize car.

In that one and I don't know what you feel about them, Mike. I tend to recommend that people wait for the 2009 model year. Because one thing it doesn't have right now is the electronic stability control which I think is a really crucial safety feature. They are going to bring that out in '09. I tend to recommend people wait for the '09 model year but overall I think it's pretty good.

VELSHI: But even this one is rarely in stock in what we have seen with the major auto companies. People who are looking for full- size SUVs and pick-up trucks sort of leaving that and in fact earlier I mentioned that Ford was scrapping its new re-design of its F150. It's actually just delaying the re-design of its F150 but a lot of that is influenced by the fact that people are moving into -- into somewhat more fuel-efficient choice.

Let me talk about the idea of hydrogen-powered cars. It's a technology I've been excited by for a long time. Is there any reality to this? Are we ever going it see hydrogen-fueled cars? Where the only emission is water?

VALDES-DAPENA: Certainly, possibly, we could some day. The big stumbling block right now with that is where do you go to fuel the thing up? You've got have that infrastructure and it's very different from gasoline. We were talking about a highly compressed gas. Which do very different and you've got to wait -- until got some kind of infrastructure for that. And we don't have that right now.

And then the fuel cells are expensive and stuff like that. There are some less expensive twists in hydrogen-fuel cells. Some companies like BMW and Mazda that have produced cars that simply burn hydrogen like you burn gasoline as a combustible. And then the problem where do I go to fill up?

VELSHI: Right. You have to have little home tips and things like that. What's your thought on it?

QUINCY: It's on the horizon. And people are looking for a silver bullet. Really what this is going to be is silver buckshot. There is going to be all types of alternatives out there, whether it's plug- ins, whether it's electric, whether it's fuel cells. All of this is a good step in the right direction but he's absolutely right. If you're an automaker are young go to say we're going to wait until the stations are up and if you are an energy source company well we will not going to build a station until the cars are build.

VELSHI: I think up to the McDonald's to put hydrogen pumps on all their lots. The plug-in hybrids, the plug in electric cars, are that going to be something that we see soon?

VALDES-DAPENA: I think that's something that's closer to fruition. There are two types. A lot of people understand this. Really two types of plug-in hybrids that people are talking about. For example, General Motors has both types on its plan and if everything goes well, in 2010, they are going to introduce two different plugs in hybrids that are very different from one another.

One is the View plug-in SUV. And basically that's like a Ford Escape hybrid. It's a hybrid car that runs on both gasoline and electricity, power the wheels. But you can also plug it in overnight. So when you get up in the morning you can drive about ten miles before it starts reverting back to regular hybrid operation.

The other is and I am sure that people have heard about, this the Chevy Volt. And that is a completely kind of different thing. That isn't really even a hybrid. It's what's called a range-extended electric vehicle. It's a vehicle that's going to -- it's an electric car that can run up to 40 miles on one charge. If you start to run low on gas there's a small three-cylinder gasoline motor on board that will fire up but all it will do is act as a generator. Like a backyard generator that will recharge those batteries so that you can keep going and really the holy grail. It removes the one concern people have about electric cars which is

VELSHI: I'm going to run out of charge.

VALDES-DAPENA: And then it could take six hours to recharge.

VELSHI: Peter Valdes thank you very much, of CNNMONEY.com and Michael Quincy of "Consumer Reports."

Coming up after the break Americans are getting slammed at gas pump. But one states governor is ready to send residents some much- needed cash. Poppy Harlow fills us in on the details coming up next.

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VELSHI: OK, let's look at some of the week's top stories. CNNMONEY.com Poppy Harlow is in this week for Jennifer Westhoven. Poppy what is going on?

POPPY HARLOW, CNNMONEY.COM CORRESPONDENT: Countrywide Financial the mortgage lender in the spotlight this week. The lawsuits against the country's biggest mortgage lender are piling up. Three states, Washington, Illinois, and California have all filed separate legal action against Countrywide. The company is accused of tricking borrowers into taking on risky home loans they didn't completely understand. Countrywide is often blamed for giving momentum to the housing crises here in the U.S. because of its aggressive lending practices, Ali. VELSHI: Now being taken over by Bank of America and Bank of America's laying people off as a result of this. But boy you remember just over a year ago when Countrywide was coming out and there were people concerned about whether this was becoming a crisis and they were saying, no, things don't look that bad and then they started to reveal how bad they were. So it's a story we'll follow closely.

HARLOW: Of course the CEO and Manzullo (ph) certainly taking the heat for that one.

Well some other news here, nearly 20 years after one of the worst environmental disasters in U.S. history, the Supreme Court this week reduced punitive damages owed as a result of the Exxon Valdez oil spill. The ruling could save Exxon more than $2 billion.

And a 13-year-old case in which the plaintiffs claim 20 percent of those eligible for damages have already died. Exxon was originally hit with $5 billion in punitive damages. Now the figure had already been slashed in half to $2.5 billion. And the Supreme Court ruled that punitive damages should not exceed the actual damages which are just over $500 million. The case now moves onto a lower court. Exxon has already paid out more than $3 billion in cost-related to the accident, which spilled millions of gallons of oil off of the coast of Alaska way back in 1989.

VELSHI: Millions of oil of gallons going on up there. In fact I just came back from northern Alberta as you know where the oil sands are. Alberta makes so much money off those oil sands that they send a check back to every one their residents because the budget -- the problem of the budget is overflowing and the same thing's happening in Alaska.

HARLOW: If you are in Alaska you might be getting a nice check from the government soon. Speaking of Alaska, how would you like to get a $1,200 government check for every one in your family to help you deal with higher gas and electricity prices perhaps? Well the state's Republican Governor Sarah Palen is on pace to become quite popular. And if her new proposal is approved.

The governor says every man, woman and child should get $1,200 because the state's budget is overflowing with oil money. Alaska has the nation's second biggest oil reserves right after taxes. And the price of crude as you well know is through the roof. The governor has also proposed dropping the eight cent a gallon estate tax saying Alaska no longer needs that money. So good news out there.

VELSHI: A nice problem to have.

HARLOW: A nice problem.

VELSHI: Poppy, good to see you and of course you'll be covering all of this stuff in the energy fix that you do and of course if you want anymore details on any of the things that we discuss with respect to energy go to CNNMONEY.com and Poppy's stuff will be all there.

Well coming up next. Wall Street and Washington, we will tell you whether the stock market would fare better under a president John McCain or a president Barack Obama. You'll want to see this stay with us.

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WHITFIELD: Hello, I'm Fredricka Whitfield in Atlanta. Courting votes within the past two hours, presidential rivals, John McCain and Barack Obama met separately with Latino leaders in Washington. Hispanics represent the largest minority in the United States.

And President Bush is again calling for Zimbabwe presidential election a sham. The longtime leader ignored the world by going ahead with yesterday's runoff election even though the opposition leader had pulled out because of violence and intimidation.

And forget about taking the Pacific Coast Highway here in the Big Sur. A 12-mile stretch is closed as fire crews try to contain a huge wildfire there. It has burned nearly 42 square miles and 16 homes in one week alone.

And U.S. Olympic swim trials are expected to begin as scheduled tomorrow at the Qwest Center in Omaha, Nebraska. Huge chunks of the building were ripped off yesterday during a violent storm. Well, power is still out in thousands of homes. But they say the trials will continue anyway.

And once again, sandbags proved they are no match for the mighty Mississippi. A wall of sandbags hurriedly built yesterday around Windfield, Missouri, has failed. And rescuers say they have evacuated all but four families from that town.

Well, coming up at the top of the hour "SPECIAL INVESTIGATIONS UNIT, Busted: Mortgage Meltdown." Now back to more of YOUR MONEY.

VELSHI: A rough days in the stock market. On Thursday the Dow lost more than 350 points. One of its biggest losses of the year. All- time high, oil prices this week, a weak financial sector and that means the economy and the markets might be in for more pain.

Meanwhile, the two presidential candidates continue to duke it out over the economy. Which one would be better for investors? Mike Santoli is the senior editor of "Baron's Weekly." He joins us now. And you noticed, Mike that we said for investors. Because it's very tough to say who is better for the economy.

MIKE SANTOLI, SENIOR EDITOR, "BARONS WEEKLY:" Sure.

VELSHI: There are a lot of variables there and the economy means a lot of things so for the markets a lot of people sort of thing automatically that Republicans do better for the markets.

SANTOLI: It's not really necessarily true. A lot of it is happenstance in terms of when Republicans are in power. Has been a good time for the economy, for the general investing backdrop?

I think that most people on Wall Street in the investment business have a general tendency to prefer Republican policies mostly the Republican tax policies.

VELSHI: And I was going to say taxes are one part of that and the general view to deregulation, or less regulation that comes in with Republicans. But the numbers, S&P looked at them over the last 15 years or so it. And it showed in fact a lot of variance. It showed that there were times where Democrats did very well. Those markets do tend to like one group controlling the White House. One party controlling the White House the other one controlling Congress. Why is that?

SANTOLI: If there is one takeaway. The government at a cross road, gridlock is good for the markets because they tend to stay out of the economy. They tend not to get a lot done in the way of public policy. And I think Wall Street, investors, general preference is exactly that. They'd rather not have to think about government policy implications.

VELSHI: All right, now in reality, the numbers we're showing you, one of those screens on there. The other one is how the stock market does. I think we can show you that under two different types of administrations. Mixed where the Congresses of one party and the White Houses of another. These are often dependent on what happened prior to this party coming in. So you see over the last 25 years, the market's done a little better under Republican president and a Republican Congress. But those returns aren't fantastic but we don't know what happened before that.

SANTOLI: You don't know what happened before that. You really don't know really what the contingent variable is, obviously. You know, a lot of people thought when Bill Clinton was first elected it was going disastrous. He had a tax increase right off of the bat but the fact the market, like the general investing backdrop, like the fact that you had this tech boom, like the fact that the budget was under control, the budget deficit.

So it's really very difficult to predict the specific implication and also I point out Democrats in the White House, the Republican Congress, defines the late '90s which happen to be the best five-year period for the markets.

VELSHI: Do we then -- do the old rules sort of apply? Is a Democratic Congress likely to impose higher wages and have bigger taxes than a Republican Congress, not going to do that? I mean, or are things a little fuzzy?

SANTOLI: I actually think it's really difficult to generalize on that right now because simply there's not a lot of room in the budget for the government to go out and start ramping up domestic spending in many ways to stimulate the economy as Democrats traditionally would have been expected to do and also I think either party in power in Congress, or in the White House is going to attack this middle-class, sort of tax crises on the way. The alternative minimum tax, which is capturing a lot more people, it was intended for the wealthy.

I think that both sides want to do something about that. If there is one specific difference, it is that Obama is saying, he will take back some of the Bush tax cuts specifically on capital gains and dividends.

VELSHI: All right, now one of the things that Baron's does very nicely and I enjoy reading it but it's worth it if you're an investor for this is that you will probably at some point in the next several months lay out what industries, what stocks, what perform better under these different scenarios.

SANTOLI: Sure.

VELSHI: So there are some things, because of their emphasis that will do better under certain presidential candidates or not maybe in terms of energy or health care.

SANTOLI: yes, one would think -- there is a possibility that one get nervous in the sector simply because Obama wins because he thinks that he can get this windfall profit tax in play. I'm sort of dubious as to whether that will happen no matter what. Health care is an obvious place to look. New mandates for health insurance.

I will point out that the HMO sector has been incredibly weak recently. So it seems like the market is almost embracing what might happen and plus the business hasn't been great recently either. Defense and aerospace I do think would get a little bit of a bump under McCain.

VELSHI: Very quickly, you talked about windfall profit's tax. A tax on excess profit or whatever the case may be on oil companies.

SANTOLI: Sure.

VELSHI: It is not typically done in America. It tends to be fairly anti-market.

SANTOLI: Very anti-market. I do think it's very much a campaign idea as opposed to a policy idea.

VELSHI: Mike, good to see you as always. Thank you very much. Mike Santoli the senior editor at Baron's.

Well coming up, rising prices, growing concerns. We'll tell you how the cost of fuel could be under mining the value of your home.

And later, $6.50 for a gallon of milk. Some Americans are already paying that price. We'll tell you where and why. Stay with us.

(COMMERCIAL BREAK)

VELSHI: So what does the housing picture look like right now? One word, bleak. New home constructions off more than 30 percent compared to the same time last year, mortgage applications fell almost 10 percent last week and for good measure. A Harvard study found that the credit crunch, combined with unusually high foreclosures, have left the country in the worst housing downturn since World War II. Well, is this as bad as it gets? We turn to Greg Hunter for the answers on that. Greg, what do you think? GREG HUNTER, CNN CORRESPONDENT: Well, we had the biggest housing boom in history. Globally, bar none. And what some people are saying we will have the biggest bust. Not even close. Now according to Yale economics professor, Robert Chillar, the typical housing downturn the last eight to ten years, last October I asked Chillar if the housing crises are a nine-inning baseball game. His answer, just like that.

First, where are we now, top of the second? Maybe. Think of each inning as a year and according to Siler we have a long way to go. We could end up in extra innings. The latest case report showed home prices hits the declines -- record declines with a 15 percent drop in one year. Now take a good look at this chart and don't be intimidated by all of the colors. It's quite simple and looks at that in broad terms.

You're looking at future of all sorts of adjustable rate mortgages. Why does that matter? These are mortgages that are due to reset which results in higher mortgage payments for millions of Americans. Take a look at left side of the chart. Those are mostly subprime mortgages you've been hearing about. Now they are all resetting with higher payments in masse into next year and beyond. Now look at the rest of the mortgages that are resetting. We're talking prime; we're talking payment option arms.

VELSHI: These are not necessarily subprime. These are for people who have good credit in many cases?

HUNTER: That's right. They are resetting all the way through 2011 with higher payments. Some call this a mortgage reset tsunami. And if you look on the right side of that chart, and this is scary, the drop off in resets doesn't really happen until 2012.

Now, with declining home pricings hitting records good luck on refinancing. Right now millions of people owe more on their homes than what they could sell them for. We've seen more than a million foreclosures so far with some prediction of 2 million foreclosures to come in the not so distant future. Are we at the bottom? Ali, I wouldn't be catching that falling knife.

VELSHI: You know the other week when you were on after that, there were some blogs that were saying you're too grim and I don't do enough to cheer things up around.

HUNTER: Hey, you may not like what I have to say but I am never lie to you.

VELSHI: Let's bring if a panel to continue this discussion. Brad Inman is the publisher of Inman News. An independent source for real estate news. And Nicolas Retsinas who is the director of Harvard University's Joint Center for housing study. Two guests that we've had before, very much -- they know a great deal about this.

Gents, you've both heard what Greg Hunter has to say. He thinks the combination of these resetting higher mortgages and the situation that we're in with the housing prices suggest that we're not going anywhere fast in terms of recovery. Let's start with you, Brad. Do you agree with that?

BRAD INMAN, PUBLISHER, INMAN NEWS: yes, we're in en masse and it's hard to see a bottom right now, the only thing I would say we've got some news yesterday about the decline in home prices in California falling almost 30 percent in one year. So unlike prior downturns, it's usually like an ocean liner that comes to port very slowly. This is like a jumbo jet that's come down very quickly. So the price acceleration declines are so fast that we've seen this 30, 40 percent decline. Which means we're reaching a more affordable level for the 3 or 4 million home buyers who are out there.

VELSHI: Who've been holding on because they think -- I don't want to buy into a falling market or catch a falling knife. You're thinking that people just might move in because the home is a good value?

INMAN: Well there, is opportunity. The challenge for home buyers right now is how much further will it fall? You buy today and if it falls another 20 percent you feel like you got a bad deal. But the intensity of the decline means that we're reaching affordability for income which is one reason we got into this mess and we used extreme mortgages to make up the affordability gap which is what really, really caused the problem that we're facing today.

VELSHI: Nick, do you agree that view?

NICOLAS RETSINAS, JOINT CTR. FOR HOUSING STUDIES HARVARD UNIV: Well, certainly more reasons to be pessimistic than optimistic. As a report we issued earlier this week as said, this is unchartered territory. We've had similar times of falloffs and starts and sales but not with the kind of national price declines. Brad's right, we're starting to reach levels of the affordability but now we're running into a wall called willingness to pay. People might think it's affordable but they're very nervous about buying because they're afraid it's going to be worth tomorrow than it is today.

HUNTER: And on top of that, one thing that I've been harping about here on the show is that you know this home equity line of credit that's north of $600 billion. That's really not home equity. That's debt on top of debt and when you add to the housing industry along with all of those resets and I just don't see how we get out of that.

The good news, the good news is for young people, young people out there are going to get a shot at getting a nice affordable house at a -- maybe a high interest rate but they'll pay a lot less than what they're paying now in the future. The question is, where's the bottom end? And unless you are Barbara Corkin (ph) or Donald Trump I wouldn't be trying to hold on to that, trying to catch that knife.

VELSHI: But that bottom is somewhere and we've never been good at guessing that. Nick, your argument is that you don't know how long we'll scrape along that bottom but between people getting into the market who couldn't afford houses before and an aging population there is going to be demand for homes. RETSINAS: yes, I think it'll vary. This is an awfully big country so it's hard to make -- it's hard to make guesstimates that are applied to the whole country. For example here in the northeast, they didn't have the overbuilding that they had in the southwest. So whenever we reach the bottom and troll along the bottom, probably before the southwest. You look the at the Midwest that's got some structure economic problems.

Until we figure out what that economy's going to be a really long road to recovery. Ultimately, we continue to be a growing population. Ultimately we form more households and they need a place to live. So if we can get through this there will be recovery but it's going to be a while.

VELSHI: Brad you know I had Jeff Rubin from CIBC, he's the chief economist over there at CIBC World Markets and earlier on he said he continues to think these gas prices will remain high and go higher and he said that is really going to hit that area of housing that has been most affordable now. Those places with the longest commutes.

RETSINAS: yes, absolutely. If you look at the exurbs way out of city. They also represent the longest commutes. People are willing to make those long commutes previously to find affordable housing. So they're going to get hit doubly hard now. Because not only do you have a decline in prices, increase in foreclosures, lots of listings but now the commutes are very, very expensive.

So the urban areas actually are benefiting the most from all of this. The price declines are less. You know the issue gas prices aren't as great and there's a lot of affordable you know inner-city urban condominiums that are on the market right now. But out in the suburb the suburbs are getting hit the hardest. Particularly the exurb areas in the far-flung areas that have a large commute.

HUNTER: You don't want to end up buying into America's next ghetto. If you buy into a subdivision that's way out like you are talking about and all of a sudden the house down the street ends up with broken windows and people at night you know firing up crack pipes hey you've got a problem. That's going to be a real problem.

INMAN: its one reason one of the initiatives by the government that Congress is considering is what kind of aid can they give these communities to take care of this incredible supply of abandoned housing as a result of foreclosures? And it represents our next you know, what we used to call an urban problem, our suburban floor that's an interesting point.

VELSHI: Nick, we've almost stopped talking about the government's role in all of this. Almost like we have thrown our hands up. It took so long to acknowledge there was a problem and then they took so long to figure out a potential remedies for the problem. Is there even a role left for government now in these housing crises?

RETSINAS: Well, it's getting late. I mean you could contrast the role of the government in the housing market with the role of the Fed in the broader economy. VELSHI: Right.

RETSINAS: And the Fed's been very aggressive, very nimble, sometimes subject to criticism. The government role to date has been recommending voluntary modifications which seem to affect very few people. And even now as they debate some possible legislation, it just gets later and later. This whole market is spiraling in a bad way and it is going to be a limit to what extent government can change that.

VELSHI: All right, gentlemen, always a great conversation with you. Thank you very much. Nicolas Retsinas is the director of the Joint Center of Housing Studies at Harvard University. Brad Inman is the publisher of Inman News and our own Greg Hunter always an expert and as he said you may not agree but he won't leave you out. I hope you are thinking that we are bringing you a good bunch of views on this thing.

Coming up, if you think prices have gone up at your local grocer and unless you are paying $7.00 for a half gallon of orange juice or $8 for a box of cereal you have something to be thankful for. Hear from some Americans who are really getting squeezed coming up next.

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VELSHI: Based on scenery alone, Hawaii could be the best place to live in the country. But look at a little closer you will find that living in paradise comes at a price, $6.50 for a gallon of milk, $5.50 on a loaf of bread. Chris Lawrence reports on how rising fuel prices are affecting Hawaii's bottom line.

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CHRIS LAWRENCE, CNN CORRESPONDENT (voice over): Sun, surf, sand -- Hawaii is blessed with a natural beauty. But there's a price for this paradise, $7.19, that's what it costs to buy a half gallon of orange juice here. Or it'll get you one pack of American cheese slices. You'll need almost eight bucks for a box of cereal. And well over that for a jar of peanut butter.

SUSAN OHAMADA, LIVES IN HAWAII: I just spent for half gallon of milk $4.29.

LAWRENCE: Susan Ohamada is going broke shopping for a family of four.

OHAMADA: Kleenex, I bought Kleenex for $2.99, $3 for our Kleenex and that was the sale price.

LAWRENCE: Most of Hawaii's food shifted from the mainland, so it's generally more expensive. But the high cost of fuel has forced shippers to tack on huge surcharges which are passed along to the grocery store.

What can Hawaiians do to have affordable food?

PROF. IRA ROHTER, UNIVERSITY OF HAWAII: You grow your own food. You may have noticed we can grow our own need Hawaii.

LAWRENCE: Professor Ira Rohter says good land is available on the island. But others say it's expensive. And you can't afford to grow celery and carrots on land that is $80,000 an acre. And since most farmers on are on short-term leases there's no real incentive to invest in technologies that improves production. Some shoppers have adapted only buying what's in season.

CORRINE TANTOG, SHOPPER: I eat nutritious. So that kind of helps.

LAWRENCE: Right now a head of lettuce is $2 per pound. Tomatoes are more than $6 a pound. A gallon of regular milk is $6.50 and forget the organic kind, it's nearly nine bucks.

DAVE OHAMADA, LIVES IN HAWAII: It's amazing how fuel has influenced everything. The prices of everything going up. It's just ridiculous.

LAWRENCE: Even a loaf of bread is $5.50. And not the fancy, multi oat grain either. Old-fashion white bread. And at this rate they're going to be some families priced rate out of paradise.

Chris Lawrence, CNN, Honolulu.

(END VIDEO CLIP)

VELSHI: All right, coming up next blow off some steam. We'll hear what you have to say about high energy prices.

But first this week's "Right on your Money."

(BEGIN VIDEOTAPE)

VELSHI (voice over): Going green and saving green now go hand in hand. With fuel prices rising, mass transit isn't only a way to pinch some pennies it's also a great way to reduce your carbon footprint.

HOWARD GOULD, ECO-ENTREPRENEUR: I think that the idea of using mass transit is probably the number one thing that most people, our commuters need to think about it. And that could be you know taking a train, trains are actually not that bad for the environment. Or now we're actually putting in busses that run on hydro. Or think about getting a hybrid car.

VELSHI: Another way to save and stay green this summer? Power down.

GOULD: The fact is that power's still running through tubes when they're still there.

(END VIDEOTAPE)

VELSHI: You could save up to $50 on your yearly electric bill just by unplugging appliances. Like your computer, microwave and cell phone chargers when they're not in use and that's this week's "Right on your Money."

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VELSHI: OK, let's have a look and see what you have had to say this week about rising oil and gas prices. Andy in California writes, "Ali why do you have these oil experts on who pretend there is no such thing as a climate crises? We have to stop burning fossil fuel more than we have to get the price of gasoline down. Every time you have someone on who says drill more oil you should have an expert on climate to tell your viewers what the disastrous consequences would be of such policies."

Well, Andy, I've got to tell you, I agree with you. I think we actually people on here who make that point. One of our experts Stephen Leeb likes to say the worst thing that could happen is oil going back to $100 a barrel and gas going down to $3.50 a gallon because it won't force us to change our ways. I think you for the email.

And Ted from Gainesville, Florida says, "Thanks for your excellent program. Although we need a comprehensive energy policy, what is being done to prevent the speculation on oil? It has been becoming more evident that oil traders are driving the price up by 25- 50 percent, like what happened with Enron. Someone needs to close loopholes that allow people to greedily drive up prices."

And from Anchorage, Alaska, Steve writes, "With gas stations limiting credit and debit card purchases at the pumps to just $75. I'm curious how much time wasted productivity and additionally fuel is being lost by people not completely filling up their tanks each time and thus making significantly more trips to the gas station each year."

I have to think that figure must be in the billions of dollars. You're probably right about that. That's a good point.

We want it hear what you've got to say about this week's show. Send us an e-mail at YOURMONEY@CNN.com. We do go through all of them so let us know what you think.

Thank you for joining us for this edition of YOUR MONEY. We'll see you back here next week, Saturday at 1:00 and Sunday at 3:00.

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