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Your Money
Oil Prices; Candidate Wish Lists; Michigan: Battleground State
Aired September 14, 2008 - 15:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
FREDRICKA WHITFIELD, CNN CENTER: YOUR MONEY in a moment, but first these headlines. I'm Fredricka Whitfield. Ike now a tropical depression is racing through the Midwest, dumping heavy rain on Illinois, Indiana and Michigan. Flash flood warnings are posted there, and in parts of Missouri.
And in eastern Texas, where Ike came ashore as a Category 2 hurricane devastation, there. Debris and power lines litter the streets. Rescue crews continue to search for people who may have been trapped. They have made almost 2,000 rescues in the area, so far.
Houston officials are imposing a week-long curfew to keep people off the roads at night. They say without traffic lights, debris is everywhere, and conditions are just too dangerous. The curfew lasts from 9:00 at night until 6:00 in the morning. Galveston, where the storm made landfall, is also under a curfew.
Oil prices fell below $100 a barrel today in a special early trading session. Traders betting hurricane Ike did not cause major damage told the refineries along the Texas coast. Well, consumers are not getting any relief at the pump. Gas prices shot up an average of 12 cents in the past two days to more than $3.79 a gallon.
I'm Fredricka Whitfield. YOUR MONEY begins right now.
CHRISTINE ROMANS, CNN NEWS ANCHOR: Welcome to YOUR MONEY where we look at how the news of the week affects your bottom line. I'm Christine Romans. Ali Velshi is on assignment covering Hurricane Ike.
Coming up on today's program, just how much will you pay in taxes next year? It depends on who wins the White House. We'll break down exactly what the candidates' tax plans mean for you.
And we'll head to a crucial battleground state to find out if economic issues may tip to the Republicans for the first time in 20 years in the upcoming presidential election.
Plus, we'll get inside tips on how to protect your job even during company layoffs. Important stuff.
But first, a slump in demand has been driving down the price of a barrel of crude over the past couple of weeks, and as a result, a gallon of gas, but prices climbed at the end of the week because of concerns over a monster storm, Hurricane Ike. Almost three months remain in the 2008 hurricane season. Are we one big storm away from prices climbing back skyward?
Let's sort this out with Stephen Leeb of Leeb Capital Management and Linda Rafield, senor oil analyst with Platt.
Thank you for joining us. Huge storm, another one on the heels of Gustav and this season looks like it's active and we're seeing concerns about the infrastructure there, both for chemicals and refineries and also for -- is this just going to happen over and over again?
STEPHEN LEEB, LEEB CAPITAL MGMT: Well, I don't think anyone really can predict the weather. I mean, so we really can't say if there's another storm after Ike, but I think one thing you want to distinguish is what happens to oil prices and what happens to gasoline prices. I mean, I think when the damage assessments are in we'll probably find that refineries were much more effective than were oil platforms. I mean, we still have to do a bit of work before we actually find that out
ROMANS: Sure, of course.
LEEB: But that would be really bad news for U.S. motorists because it would mean gasoline price also go up out of proportion to what happens to oil prices.
ROMANS: We've already had this thing, they call it demand destruction, we've had the higher prices have already started to tamp down demand a little bit globally for these products though, right?
LINDA RAFIELD, SR OIL ANALYST, PLATTS: We've seen market revisions by the energy administration. The latest revisions for June showed us on track for the biggest decline in oil petroleum demand growth since 1980.
ROMANS: So in 28 years we haven't seen demand dry up for these products.
LEEB: But what's important, Linda, is that you're talking the developed world and you're really talking the U.S.
RAFIELED: Correct.
LEEB: The last time we saw these kinds of declines, Christine, in the U.S. in the developed world, was, as Linda pointed out, 1980, but that was also a time in which the developing countries were just a little pin prick.
ROMANS: That's right.
LEEB: Today developing countries basically are bigger consumers or as big consumers of oil as are the developed countries, and so despite this massive decline that you've seen in the developed world, overall growth in demand for oil continues to climb, and that's remarkable and that's -- really just changes the dynamics, it turns the dynamics on its head.
ROMANS: The dynamics in terms of weather are this. We know that September is a hurricane month. We know that next year there could be hurricanes again and we know that it doesn't destroy the amount of oil. We don't lose that oil forever, it's delayed on the market or the demand is just delayed. Right?
LEEB: Right, that's absolutely true. And the same thing with refineries. They're not destroyed, they basically delay the processing of oil.
ROMANS: So, it's a temporary effect.
LEEB: Yes, it is. Yes, it is.
ROMANS: But when we're talking about permanent effects, we're about the big geopolitical things that really can be a problem overall for -- like the situation in Georgia.
LEEB: Exactly, Russia going into Georgia and Russia really, basically, in a sense has dominion over Europe now, because they control so much of Europe's energy and that's a very, very frightening situation and it's one that the next president, whomever he may be, is really going to have to address.
ROMANS: Linda, when we're talking about hurricanes as a temporary effect in the marketplace and we're talking about politics and international instability, where do we sit, where is the balance of that right now? Because, we have incredible demand that's come down, as you point out, but the growth of emerging markets as consumers and presumably that growth is only going to continue, and then you also have some hot spots around the world.
RAFIELED: Well, you still have to worry about Nigeria. You have over a million barrels a day of light sweet crude off of the market because of ongoing violence in the Niger delta. You have to worry about Russia, as you said. You also have to worry about Iran and the ongoing standoff between Iran and western nations over its plutonium enrichment program and as we just said, you have tremendous demand growth still in India, China and the Middle Eastern countries.
ROMANS: So, what does that mean for your forecast for where crude oil goes? I mean, if we're seeing this demand and destruction, do we see crude oil go down to $80, do we see it go below, do we see it go back up well above the hundreds? What do you think?
RAFIELED: Well you have to sort of get some sort of sense of what the damage will be from Ike. We don't know that yet, we won't know that probably until the end of next week. Probably the market is in a bottoming process. We have seen a tremendous pullback over the last two months.
ROMANS: That's right.
RAFIELED: I don't think you're going to revisity $70 a barrel, but I don't also think you're going back to $147 a barrel, which is the all- time high that we saw in July.
LEEB: I don't really disagree. I think you will get back to $150 and even much higher oil prices, but not next year. I think we may actually, Christine, have a year in which oil sort of just backs and fills. But after 2009 I'm really, really worried. ROMANS: OK, Stephen Leeb, we have to leave it there. Thank you so much. Linda Rafield, senior oil analyst at Platts. Thanks both for joining us.
Storms and geopolitical tensions aren't the only factors moving the price of oil. Excessive speculation by investors has come into play. A new report says more regulation could help and could be a real energy fix, others aren't so sure. Poppy Harlow of CNNmoney.com has a look at the speculation on speculators -- Poppy.
POPPY HARLOW, CNNMONEY.COM: Hi there, Christine. Well, there's a big difference between the people that bet on the price of oil. The fist thing you need to know, there are two types of those people who invest in commodities like oil. The first, businesses like airlines that need to buy oil now and in the future and therefore they need to hedge their bets. The commodities markets were created for this type of investor.
The second type includes pension funds and others who hope to make money, but they don't need or want the oil. Now, a report on speculation this week from the agency that regulates commodities trading, the CFTC, could not conclude speculation was driving up oil prices. However, a separate report being touted by Senate Democrats says the speculators have taken over.
While many say supply and demand is driving prices higher, others believe it's movement in the U.S. dollar that's to blame. The report point to the amount of cash that has flown into indexes that track commodity prices. Take a look at these numbers. In 2003, there was $13 billion in these indexes, by July of this year, that number surged above $300 billion. During that period of time, prices climbed 200 percent.
Now, the report says more regulation is need to chase what's called speculative investors out of the market, but Christine, a lot of people say if you do that, we're just going to have the traders going overseas to less tightly regulated markets -- Christine.
ROMANS: Poppy Harlow. Thank you, Poppy.
Up next, promises, promises, everything from tax cuts to a second stimulus plans, find out if big talk in Washington and on the campaign trail can translate into more cash in your pocket.
(COMMERCIAL BREAK)
ROMANS: A lot of good ideas on the campaign trail, but how realistic are they and how are they going to pay for them >
(BEGIN VIDEOTAPE)
JOHN MCCAIN (R), PRESIDENTIAL CANDIDATE: Taxes low.
BARACK OBAMA (D), PRESIDENTIAL CANDIDATE: Cut taxes.
MCCAIN: Energy independence. OBAMA: Energy independent.
MCCAIN: My health care plan.
OBAMA: Energy My plan will lower your premiums.
ROMANS (voice over): It wouldn't be a campaign without promises, promises you and I would inevitably pay for.
MAYA MACGUINEAS, CMTE FOR RESPONSIBLE FEDERAL BUDGET: What they're talking about would cost a good deal of money and right now we're not paying the bills for even what we're already spending.
ROMANS: Maya MacGuineas works for a budget watchdog and has tallied the cost of Obama's and McCain's representative plans.
MACGUINEAS: None of the policies the candidates are talking about come for free. And the most expensive items for both of the candidates are tax policy.
ROMANS: She says McCain's tax plan would cost a whopping $417 to $485 billion. Obama's, $360 billion. Obama's promise of health coverage for everyone, $65 billion a year, and McCain's pledge to end pork barrel spending...
MCCAIN: Every single pork barrel earmark bill that comes across my desk as president I will veto it...
ROMANS: Would save $35 billion a year, a drop in the bucket according to Washington policy analyst, Daniel Clifton.
DANIEL CLIFTON, STRATEGAS RESEARCH PARTNERS: That does not get anywhere close to offsetting the cost of his proposals...
ROMANS: He says the candidates are talking about new promises that they cannot possibly pay for.
CLIFTON: I think that the media has really given the candidates a pass by knowing that a lot of the proposals are unrealistic.
ROMANS: Both campaigns promise to close tax loopholes, slash unnecessary spending and cut health care costs. Promises seemingly repeated every four years.
MACGUINEAS: Neither Senator Obama or Senator McCain could get into office and possibly pass all of the ideas that they have.
ROMANS: So, consider these platforms more of a "wish list" than a "to do list."
(END VIDEOTAPE)
ROMANS: And the president can't do it alone. It takes Congress, too, don't forget. We spoke to both campaigns, the Obama camp says it can find ways to pay for any new spending. Obama does not promise to balance the budget. Repairing the middle class and healthcare for everyone is more important, they say.
And McCain's economic adviser calls their plan a vision for where McCain wants to lead the country. McCain has committed to balancing the budget, but the No. 1 priority, they say, is getting this economy growing again, first.
One big promise for both campaigns, tax cuts for most Americans, so what could you expect your taxes to look like as soon as next year? Jeanne Sahadi, senior writer at CNNmoney.com joins us.
We don't get a free pass around here. You know Daniel Clifton in that piece said that the media was giving these guys a free pass. We know that some of these programs are going to be extraordinarily expensive. Taxes is a big one they keep talking about, because there are people who vote solely on tax issues, will my tax bill go up or down depending on who's president and also about how to pay for them. But first of all, the taxes, the tax plans.
JEANNE SAHADI, SR WRITER, CNNMONEY.COM: Right, those candidates want to install a lot of tax cuts for everyone. The allegations from the McCain camp about the Obama camp is he's just going to raise taxes, that's not true. According to his proposals he really just wants to raise taxes on couples making more than $250,000 and singles making more than $200,000 and he would keeps some of the Bush tax cuts in place for them, what he would raise are the top two income tax rates. Now they're 33 and 35 percent, he wants to raise them to 36 to 39.6 percent where they were in 2001.
He also want to raise their capital gains rate from 15 percent to 20 percent.
ROMANS: And so that's Obama.
SAHADI: That's Obama. Senator McCain says I want to extend the Bush tax cuts for everyone, and they're said to expire the end of 2010 and he also has come up with a couple of other tax cuts like doubling the dependent exemption, although it's not doubling it, but that's too technical. He wants to increase it for people, Senator Obama says no that's not going to help 100 million Americans. If you look just at that particular tax cut, that's true, but in general, Senator McCain's tax proposal will help everyone across the board somewhat, although the difference between the two candidates is, the high income folks under McCain's plan do better in terms of tax savings than under Obama's plan, their tax bill tends to go up and under Senator Obama's plan, low and middle income households tend to do much better.
ROMANS: Let's take look then at the average tax bill and how it would change under different circumstances. The Tax Policy Center has crunched these numbers. And when you look at all of them, it looks to me like an awful lot of people are going to get a lower tax bill under either scenario unless you're super rich and then I don't know, there's not a loft sympathy, really.
SAHADI: Yeah, your bill would go up about $700,000 according to Tax Policy Center if you make more than $2.9 million, but for the three people out there for whom that's relevant they're not going to swing the vote one way or the other. Here is the deal, those numbers are not -- they're really hypothetical numbers. What they assume is that every one of the tax proposals the candidates put forth are in effect.
One thing Senator Obama wants to do is raise the payroll tax that high income people pay in to Social Security, it's for people making more than $250,000. And he says that's not going to go into effect for 10 years. But that table, those numbers reflect it as if it were in effect, so I don't want people to take the numbers too literally. This is not 2009 your tax bill, but it gives you a sense of the direction their tax proposals would take us in.
ROMANS: Let's put it up again, because I want to look at them again. OK, $161,000 to $227,000, see you would see your tax bill under McCain drop by some six grand and under Obama almost $3,000. The next bracket up there, under McCain, a $15,000, wow, less tax bill, but under Obama goes up by just under $1,000, and then for the folks who make $2.9 million, wow, that's a big difference right there.
SAHADI: Right, that's for folks who are making that $250,000 range, I mean, $1,000 is not big an increase as you might have expected. One of the things, too, Senator McCain has said he wants to phase out the alternative minimum tax, which is what's supposed to be a wealth tax, but starting to hit more middle and upper middle income folks.
So, what he wants to is he wants to put in a permanent protection for them. Right now Congress does it year-by-year and it's always a big fight and even though everyone says they want to do it, it's kind of a hassle the way they do it. Senator McCain wants to put it in permanently and ultimately, it may phase the tax out, but not while he's in office even if it's two terms. So, people will still continue to pay the alternative minimum tax, but it won't hit the middle class.
ROMANS: Quickly, both of these plans are expensive, aren't they?
SAHADI: They're both expensive. The campaigns want us to compare it to current policy, which assumes the tax cuts will be extended. They look much better comparing it that way. Senator McCain still comes up a couple of trillion dollars short in terms of revenue. Senator Obama's plan would actually raise an additional $600 billion, but that doesn't count their healthcare plans. Senator Obama's healthcare plan is more expensive than Senator McCain's, so it's expensive.
ROMANS: Jeanne Sahadi, thank you so much. It's expensive and it's our money, one way or the other,, it's our money.
Up next on YOUR MONEY, what state has the heightest jobless rate and hasn't voted for a Republican candidate in 20 years? Here's a clue, it's a battleground state. And senators McCain and Obama there are running neck-and-neck.
(COMMERCIAL BREAK)
ROMANS: Eight-and-a-half percent, that's the unemployment rate in Michigan, the highest in the country. Factory towns across the southeastern part of the state have been hit hard by plant shutdowns and layoffs of about half a million workers. Michigan is a battleground state in the upcoming election, and the economy undoubtedly issue No. 1 for voters there.
I'm joined by two journalists with the "Detroit Free Press," political reporter, Kathleen Gray and business and automotive editor, Jamie Butters to talk about just what we can expect, there.
Let's talk first about what these two candidates have to deal with in the state. I'll start with you first, Jamie, a lot of layoffs, a lot of factory closures. This is a state that has been really hit hard by the economy over the past more than just a few years, but maybe the past decade or so.
JAMIE BUTTERS, DETROIT FREE PRESS: That's right, Christine. The '90s were really good to Detroit and to Michigan, a lot of profits from the big SUVs and pickup trucks, a lot of overtime, a lot of profit sharing bonus checks for UAW members, bonuses for the white collar workers, that's all gone. It's been pretty painful here since 2003 and especially since 2005, a glut of housing, prices are down, expectations of future income or job security of benefits going into the future, it's all, I don't mean to make it sound so bleak, but it's not good.
ROMANS: Kathleen, let's talk about what that not good means for the two candidates, there. I mean, you've got polls showing them essentially neck-and-neck. The most recent CNN "Time" magazine Opinion Research Poll showing, gosh, 49 Obama, 45 McCain, that is very, very tight in a state that hasn't voted for a Republican since George Bush, in 1988.
KATHLEEN GRAY, DETROIT FREE PRESS: That's true. Michigan is very, very tight. At the last poll that we did that was before the convention, had Obama up by seven, but that certainly shrunk since then, and people are anxious. People are very anxious. They're worried about gas prices. Everybody knows somebody who's either been laid off or taken a buy-out and so everybody is worried about whether they're going to continue to have a job, whether their family is going to continue to have a job. They want to hear from the candidates about what they're going to be doing for them and helping them with the economy.
ROMANS: Let me ask you, Kathleen, about the union side of this. Union, in general, backing Obama, but governor Palin's husband is a union member, and some of the unions in Michigan, union members tend to have more conservative views on the other side. How is that playing out there?
GRAY: Well, the first place that McCain came after the convention with his new running mate was Macomb County, the birthplace of the Reagan Democrats. And they went crazy, they just loved Sarah Palin, they loved McCain. It was the biggest crowd that I've seen for McCain in Michigan since this whole campaign began, and that's the areas that they're going to be targeting.
The unions are fighting back. The unions are strongly behind Obama, they're doing mailings. I think that they'll probably be on TV to back Obama, but there's other issues, the race issue is kind of a subtle undercurrent that the unions know that they have to deal with, and they've been sending out mailings, trying to dispel some of the more consistent rumors about Obama, and working with their members to work them through that.
ROMANS: You call that a subtle undercurrent. I mean, on the big, grand scheme of all the things, Kathleen, that people are talking about in the race in Michigan, I mean, is that a very small part of the criteria or what?
GRAY: I don't think it's all that small.
ROMANS: Really?
GRAY: In our poll, a full two-thirds of the people said there was something about Obama that made them uncomfortable, and sometimes it's subtle, sometimes it's more overt, that people won't vote for Obama because he's a black man, and I have heard that from some of the people who have responded in our polls, and the union folks have said that they've heard that from some of their members, too, so sometimes it's overt, sometimes it's more subtle.
ROMANS: Jamie, let me ask you about NAFTA, North American Free Trade Agreement. This is someplace where these two candidates on the surface seem to be very, very different. And I can't imagine that in Michigan, NAFTA is greeted with open arms by some folks. It is in states like Michigan where you hear a lot of people talk about the destruction of jobs it's brought. McCain says he's an unabashed free trader and stood up and said some of these jobs just aren't going to come back. Is that an advantage for Obama?
BUTTERS: Well, it certainly makes the split between the traditional labor Democrats, who are opposed to international trade, free trade, NAFTA, not just NAFTA, though, it's more broadly, it's China and Japan, Korea, India, those are seen as the big threats, but at the same time, you have a lot of retirees. It's not just the investment community or the salaried and the management people, but you have a lot of retirees who frankly need General Motors and Ford, to a lesser extent, Chrysler, to succeed overseas. And while GM and Ford are losing tens of billions, if not tens of billions of dollars, here at home, they're making money everywhere else. They need that in order to fund their pensions, to fund their retirements and to invest in the future.
ROMANS: Let me ask you just very quickly about the flats where it seemed earlier in the campaign and the primaries that Obama was saying he would renegotiate NAFTA, but then his advisers who were reported to have been saying, behind the scenes, there's just a little political rhetoric got a little hot.
BUTTERS: That seemed to be the case to me, Kathleen, would you agree?
GRAY: Well he has since said that, you know, he's for free trade, but for fair trade, and I think that he said that he will renegotiate, but I don't think it's as strong as he wants that.
ROMANS: All right, Kathleen Gray, we have to leave it there. Jamie Butters, thanks to both of you for joining us. And we'll be closely watching the state of Michigan, fascinating stuff going on there and just less than two months to go.
Coming up, it's America's next crisis out of control government spending, and the bill is coming due sooner than you think. Can either candidate save the country from a financial catastrophe before it's too late? Find out next.
(COMMERCIAL BREAK)
FREDRICKA WHITFIELD, CNN ANCHOR, NEWSROOM: Hello, I'm Fredricka Whitfield. Now in the news, Ike, now a tropical depression, is racing through the Midwest, dumping heavy rain on Illinois, Indiana and Michigan. Flash flood warnings are posted there and in parts of Missouri.
In eastern Texas, where Ike came ashore as a Category two hurricane, devastation. Debris and power lines litter the streets and rescue crews continue to search for people who may have been trapped. They've also made almost 2,000 rescues so far.
Houston officials are imposing a week-long curfew to keep people off the roads at night because traffic lights are out and debris is everywhere. Conditions are simply too dangerous. The curfews last from 9:00 at night until 6:00 in the morning. Galveston, where the storm made landfall, is also under a curfew.
And that freighter that rode out Hurricane Ike in the Gulf of Mexico is now up and running on its own power. The ship's damaged fuel pump was repaired late yesterday. The crew of 22 made it safely through the storm. The ship is now heading for a Gulf Coast port.
I'm Fredricka Whitfield. Now back to more of "YOUR MONEY."
CHRISTINE ROMANS, CNN HOST, YOUR MONEY: How's this for living beyond your means? The Congressional Budget Office estimates our federal budget deficit will hit $407 billion for the fiscal year that wraps up the end of the month. Allan Chernoff joins us now with more -- Allan.
ALLAN CHERNOFF, CNN SENIOR CORRESPONDENT: Christine, the numbers are simply astounding. The fact is our federal budget deficit has grown at a rate of three quarters of a million dollars every minute.
(BEGIN VIDEOTAPE)
CHERNOFF (voice-over): The surge in Iraq may be effective, but it's expensive. Pentagon spending in Iraq jumped $20 billion this fiscal year. That could buy a year's worth of gas for every person in Los Angeles County. Add the war in Afghanistan and spending on military operations has almost doubled in the past four years, according to the Congressional Budget Office. At the same time, spending at home on Medicare, Medicaid and Social Security is soaring, up a combined $60 billion this year.
STEVE ELLIS, TAXPAYERS FOR COMMON SENSE ACTION: It is up to the American public to share their outrage, to tell Congress, to tell the administration, you need to get it together and you need to get the fiscal house in order. Otherwise, we're going to be crushed under a huge budget debt in the future.
CHERNOFF: The debt is already crushing. Our nation is borrowing so much money that interest payments alone this year totaled $450 billion, almost enough to buy a year's worth of gas for every American adult.
ELLIS: That's just money we're throwing away. I mean, we're not getting any benefit to this country out of that.
CHERNOFF: President Bush in 2004 predicted just the opposite.
GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: I propose a plan detailed budget that shows this cut in the deficit in half by five years.
CHERNOFF: The slumping economy has caused even bigger government expenses, unemployment benefits, bank bailouts and lower tax revenues. Given those numbers the only thing that's cheap in Washington is talk.
SEN. JUDD GREGG (R), NEW HAMPSHIRE: So this is a failure, these numbers reflect a failure. They're not good, and we need to get back to some fiscal discipline around here.
SEN. KENT CONRAD (D), NORTH DAKOTA: We have a housing crisis and energy crisis, a health care crisis, and a fiscal crisis. That is more than a trifecta. That is a combination of mismanagement that will take years to undo.
(END VIDEOTAPE)
CHERNOFF: Consider this, we can look forward to footing the bill for the Fannie Mae/Freddie Mac bailout. Already the Treasury Department has set aside a cool $200 billion. The fact is, until the economy picks up, the situation is only going to get worse. During this report, Christine, our deficit grew by $1.5 million.
ROMANS: And it's all our money. What are the candidates saying about it? Do they have the solutions?
CHERNOFF: Well, you look at some of their suggestions and you might say maybe not. I mean, of course, they're saying they do but on the revenue side, well, John McCain wants to cut corporate taxes. Corporate taxes, revenues actually declined by more than 14 percent during this fiscal year and this, of course, would lead to even fewer taxes collected. So in the short term, that would hurt. Barack Obama, well, as you know, he wants to cut taxes for most Americans. So again, revenue-wise, we're talking less.
ROMANS: OK. So what about the spending side?
CHERNOFF: Spending side? Well, we mentioned the war in Iraq, it is pretty expensive. We all know John McCain is very committed to that. He also wants to expand our presence in Afghanistan.
Senator Obama wants to do just the same. He wants to expand in Afghanistan, and, of course, he has lots of domestic plans in mind... ROMANS: Right.
CHERNOFF: ... economic stimulus, money to prevent foreclosures, national health insurance, it all costs money.
ROMANS: I'm sure of that. All right. Allan Chernoff, thank you very much, Allan.
ROMANS: Coming up, the United States government just became the nation's largest mortgage lender with your money. You heard me right. Why the Fannie Mae and Freddie Mac bailout matters even if you don't own a home.
(COMMERCIAL BREAK)
ROMANS: Rates on 30-year mortgages fell this week, after federal officials took over troubled mortgage giants Fannie Mae and Freddie Mac, and that was part of the plan. Last week's bail-out put Fannie and Freddie into conservatorship which the government will run temporarily. In addition, the U.S. Treasury will buy mortgage-backed securities owned by Fannie Mae and Freddie Mac. The goal is to get Fannie and Freddie some much needed cash.
The government may also loan the two mortgage giants up to $200 billion in capital if needed. That's your money, that's my money, that's taxpayer money. Together, Fannie and Freddie own or guarantee more than one half of all U.S. mortgages valued at about $5 trillion.
So let's find out if this was a good move. I'm joined by Peter Schiff, president of Euro Pacific Capital, and Dan Gross, senior editor at "Newsweek."
Gentlemen, thank you for joining us.
Peter, you think this was a blunder of colossal proportions.
PETER SCHIFF, PRESIDENT, EURO PACIFIC CAPITAL: It was a terrible idea. It's another example of the government cure being worse than the government disease.
You know, it was the government that created the housing bubble. It was both the actions of the Federal Reserve and Fannie and Freddie. And now that Fannie and Freddie have gone bankrupt, it was just something that I've actually been predicting for years.
ROMANS: That's right.
SCHIFF: The government should have taken the opportunity to simply allow them to fail and to tell all the holders around the world and the United States, $5.5 trillion of mortgages guaranteed by Freddie and Fannie that they're on their own.
ROMANS: But, Dan, allowing them to fail would have been worse for the housing market and the U.S. economy?
DAN GROSS, SENIOR EDITOR, "NEWSWEEK": Well, not just for the U.S. economy and the housing market but for international reputation. For years, we have been telling people our central bankers when they go to Davos, when they go to the G-8 and they're rubbing shoulders with their counterparts in China and the Persian Gulf, we've effectively been telling people these bonds are pretty much as good as government bonds. No problem. You buy them, no worries. And we have exported hundreds of billions of dollars of these. In fact, these have been among our...
ROMANS: Right.
SCHIFF: Try (ph) trillion.
GROSS: ... most lucrative and biggest exports. So the central bank of China has hundreds of billions of dollars of these on their assets. So we can't just say to our biggest trading partners, our diplomatic rivals, you know, Henry Paulson would get tarred and feathered the next time he shows up at one of this conference. We can't -- we could not literally...
SCHIFF: But --
GROSS: ... we could not let that happen.
SCHIFF: But you know, the problem is, though, this doesn't do anything about the reason that Fannie and Freddie went bankrupt because of the huge losses. The houses are not worth anywhere near what people borrowed to buy them. So there's hundreds of billions of dollars of losses probably in excess of $1 trillion worth of losses that are still there.
But all the government has done instead -- instead of the people who bought the mortgages suffering the losses, every American taxpayer, every American citizen is going to suffer those losses instead, because there's either going to have to be massive tax hikes to pay for these defaults or more likely tremendous printing of money. We're going to have massive inflation and if people think the cost of food and energy is high now, wait until they see how much things cost in a few years after all these mortgages fail.
GROSS: Well, I hope Peter is wrong, if only because we live in the same neighborhood down the suburbs. So if his house is going down 30 percent --
(CROSSTALK)
SCHIFF: Yes, except I rent so it doesn't matter to me.
ROMANS: He puts his money where his mouth is I guess, huh?
GROSS: But the -- you know, the larger issue is that, you know, this will not stop housing prices from falling. But I think we may -- you know, it's unquantifiable what the cost will be to the taxpayer. The Fannie Mae and the default rates on those Fannie Mae mortgages are actually somewhat lower than the nation at large.
SCHIFF: Just wait a few years. GROSS: So there is some hope that, you know, if things kind of muddle along, that these losses will not be realized and that the government will not necessarily have to make do on hundreds of billions of dollars to bet (ph) along.
(CROSSTALK)
SCHIFF: Well, that means -- yes, your point was right. The government is trying to maintain bubble home pries, but they can't do it. Home prices need to collapse and the whole irony of this is theoretically, Fannie and Freddie are there to make housing more affordable. But now, their mission is to keep housing prices from falling. Well, that makes houses less affordable.
The best way to solve this problem is to let housing prices collapse to the point where Americans can actually afford to buy them and where lenders will lend, because right now, nobody would lend because nobody could pay back the loan.
ROMANS: Is there an irony here that it's the Bush administration that's had to step in and do this when it was the Bush administration eight years ago that was saying, you know, we need to get government out of the markets, we need to get government out of trade? We need to have pre-trade. We need to have --
SCHIFF: Well, the problem is government never got out of the markets. We have this problem because of government interference. We had the government, the Federal Reserve setting interest rates instead of the free market...
ROMANS: Right.
SCHIFF: ... so they set them too low. And we had the housing bubble and we had Freddie and Fannie with this implied government guarantee that let people buy these mortgages even though people couldn't pay the mortgage.
(CROSSTALK)
GROSS: One of the other ironies --
ROMANS: I think Paulson likes having to do this and didn't like to be in this position.
GROSS: Well, you know, he was the CEO of Goldman Sachs where he liked doing big deals and advising.
ROMANS: Right.
GROSS: And now, he's really having a chance to do that without having to deal with too many of the consequences. One of the real ironies is that, you know, the whole ownership society agenda, which Bush and his colleagues have been pushing, you know, people own assets, that's good for the economy. Well, one of the big places they focused on was homeownership.
ROMANS: And Democrats really pushed homeownership, too, that's why they were --
(CROSSTALK)
GROSS: Everybody puts -- and they touted every month the numbers came out, it set a record rate. It was at 66 percent, then at the height of the bubble, 69 percent. They said, you know, African-Americans have record high ownership rate. But when you buy something with no money down, as I think 45 percent of the purchases in 2007, that's not ownership society. That's a debtorship or borrower society...
(CROSSTALK)
ROMANS: And that's (INAUDIBLE) record defaults and record foreclosures.
GROSS: ... and now under the warnings. So the homeownership rate is now back to where it was in 2001.
ROMANS: We have to leave it there, gentlemen. We could talk about this. I mean, this is fascinating stuff and I think a lot of people need to realize that, you know, we talk about the bailout of Fannie and Freddie, it is your money. It is our money and now we are the biggest, the nation's biggest mortgage lender, I think, if we can safely say, since it is our money that's doing it.
Peter Schiff --
SCHIFF: We're co-signing every mortgage.
ROMANS: There we go. Peter Schiff, president of Euro Pacific Capital, and Dan Gross, senior editor of "Newsweek," thanks, guys.
Coming up next on YOUR MONEY, the economy is weak, companies are laying off workers with more job losses to come. Here is what you need to know to keep your job and prosper while the pink slips fly.
(COMMERCIAL BREAK)
ROMANS: More than 600,000 jobs have been eliminated since the beginning of the year, 84,000 just last month. If you think layoffs are coming your way, our next guest says, you know there are some things you can do to protect your job.
Former HR executive Janet Banks, co-authored (ph) the report in this month's "Harvard Business Review," welcome to the program. I wanted to ask you first, gosh, you don't have a bunker mentality and hide in your office. You've got to be out there showing that you're valuable in the office, that you're valuable to your clients, don't you?
JANET BANKS, FORMER HR EXECUTIVE: Absolutely. It really helps to act like a survivor if you want to be one. And that means that you need your feet firmly planted in reality, that this is a tough time, but you need to maintain a confidence and positive attitude, and an outlook that is focused on the future. That's the way to do that probably is to focus on your customers. If your customers think you're indispensable, chances are your company will, too. ROMANS: Yes. And if your company -- if your customers think you're indispensable, it's probably a good idea to make sure that your bosses know that your customers think you're indispensable. I mean, a lot of people always give me the advice and make sure -- make sure that you always know what your most recent big win was, or your big, you know, return to shareholder value, or whatever it is that you're measured on so that if you're asked, you can say, look, this is what I've done.
BANKS: Absolutely. You need to prove your relevance, and you also need to really use your attitude. It's the one thing that you really can control. A lot of things you can't control, but the personality that you bring to the office. When managers have to select between someone who is difficult, fearful, angry, they're much more likely to pick the person who is congenial, the person who brings positive energy to the boardroom or to the conference table, and lifts the spirits of other folks.
So you know, looking at the mirror and saying, who am I taking to work today is really important.
ROMANS: Now, a couple of things you pointed out that I think are interesting, if you see that layoffs are approaching and you're just trying to figure out how to position yourself, it's too late. You should always be ready for something like this.
BANKS: That's right. There's a plan B mentality that I think is important in the best of times and clearly critical in the worst of times. It's too late to scramble and paste together a resume when you get an opportunity to talk to someone about a new job maybe before the ax has fallen. So having your ducks in order, knowing what you're good at, knowing what you like to do, having the intention to keep your career moving regardless of economic times is important.
ROMANS: A couple of things you pointed out, too, flexibility, make sure that you're flexible in the workplace, and also your relationship with your manager really matters.
BANKS: It sure does. The better your relationship with your manager, the better chances you have of surviving.
Managers worry about three things. They worry about the work getting done. They worry about their team, and they also worry about themselves. So doing the work, that's a baseline. That's got to happen. But if you can help your manager rally the troops, rally the team around you, and then if you can show some empathy, I mean, it's hell to cut people.
ROMANS: Right.
BANKS: A manager has worked hard to develop a staff and then is forced to choose maybe half of it to let go.
ROMANS: I mean, as a former HR executive, you've been in those situations where you have to cut a certain amount of headcount...
BANKS: Absolutely. ROMANS: Or you have to take a certain amount of money out of the budget. I mean, that's just inevitable. What is the one thing you can tell people to make sure they're on the right side of those cuts?
BANKS: Well, to be working on what's most relevant for the future, and that means priorities change in a downturn. You may have had a terrific project that evaporates overnight. Can you show that you can move on and get behind the change quickly? The other thing is your own versatility. I mean, the more versatile you are, the more you have to offer.
ROMANS: Right.
BANKS: And actually, senior leaders look for people who are good corporate citizens.
ROMANS: OK. We have to leave it there, Janet.
BANKS: OK.
ROMANS: I'm so sorry. I wish we had more time.
Janet Banks, former managing HR director at FleetBoston Financial, thank you so much for your help here today.
BANKS: You're welcome.
ROMANS: Coming up on YOUR MONEY, sex, drugs and offshore drilling. Jennifer Westhoven will stop by next.
(COMMERCIAL BREAK)
ROMANS: Jennifer Westhoven is here with a salacious story right out of the business headlines this week -- Jennifer.
JENNIFER WESTHOVEN, CNN BUSINESS CORRESPONDENT: Yes, I mean, how often do we get -- it's like this is like a tabloid...
ROMANS: Right.
WESTHOVEN: ... perfect tabloid story in the business world. So sex, drugs and royalties in the government agency that's responsible for collecting oil royalties, there were reports delivered to Congress in the past week that accuse a dozen current and former employees of abusing alcohol, using cocaine, and accepting gifts. And I don't mean like a little pen. We're talking about ski trips, sometimes even sex.
ROMANS: Government employees.
WESTHOVEN: Yes. I mean, so this is like a heck of a party that was going on over there, except that, you know, we're talking about government workers. It clearly puts them in a very compromised position. They collect billions of dollars in royalties here.
An official at the agency said it is taking this report extremely seriously, and there's a kind of a question like, if this could affect the drilling debate it kind of undercuts the oil companies right now. You know, it looks like they clearly had a lot of influence at a time when this is really coming up for debate in Congress. House Democrats have signaled a possible compromise to allow expanded offshore drilling 50 to 100 miles offshore if the states approve.
ROMANS: Wow. OK. Text messaging rates, they are rising. Tell me about that.
WESTHOVEN: So they've been rising for a while, right? And I think that a lot of people may be got used to it. They went from 10 cents to 20 cents, but you consider --
ROMANS: And maybe the teenager knows suddenly they can get hit with a huge bill from the teens, you know...
WESTHOVEN: Yes.
ROMANS: ... are you OK? You know, these little words that I can't even actually, can't even understand what they're saying.
WESTHOVEN: These kids are sending thousands of them.
ROMANS: Right.
WESTHOVEN: But the question is, you know, apparently in Asia, there are a lot of services where you don't pay at all for text messaging because it's so cheap for the companies. It takes up only a tiny bit of space on the bandwidth.
So not so fast, says one senator. This is Herb Kohl of Wisconsin. He wants the heads of Verizon Wireless, AT&T, Sprint and T-Mobile to justify these higher fees which doubled to about 20 cents in the past few years. So the question is, I mean, they're so small and hardly using up any of the network, is it really fair for it to be charging extra for this? And it's not necessarily costing the companies.
ROMANS: You know, back on the booz (ph) beat, we went from sex, drugs, in the first story, to text messaging. And now, the beer drinkers uniting to defend Anheuser-Busch.
WESTHOVEN: There are a lot of lawsuits coming up around this. And obviously, you know, for years we've being talking about foreign companies having ownership in the United States. But I tell you, you get into beer and people get very upset.
So the beer drinkers are suing. They want the judge to block the $52 billion buyout of Budweiser brewer, Anheuser-Busch. And this group is saying that the deal by InBev, which is from Belgium, would break U.S. trust law. The deal is supposed to happen in the coming months.
Of course, the company says it doesn't violate anti-trust law. They're saying we have so many so few brands out there like Stella, you know, that it's not a problem. This suit is arguing actually, it's because they have so much control over the brewery. It's not which brands they own.
ROMANS: How fascinating. All right. Jennifer Westhoven, thanks. We'll see you again next week, Jen.
All right. Thanks for joining us for this edition of YOUR MONEY.
Ali Velshi is back with me next week. He'll be all dried off by then. We hope to see you as well, Saturday at 1:00, Sunday at 3:00. See you then.
WHITFIELD: Hello, everyone. I'm Fredricka Whitfield at the CNN world headquarters in Atlanta.
"BALLOT BOWL" begins in a moment. But first, the latest on Hurricane Ike's aftermath. It is a race against time in Texas and Louisiana. Rescuers are going all out to find thousands of people who refused to evacuate ahead of Hurricane Ike.
So here's what we know right now. Texas official say almost 2,000 people have been rescued along the Texas coast, but thousands more remain stranded. The Energy Department says more than 2 1/2 million homes and businesses are still without power. And hard hit Houston, the nation's fourth largest city, is under a week-long curfew.
Well, officials say as bad as Ike was, it could have been a lot worse. For one thing, the storm surge wasn't as big as expected. For another, Ike's death toll now at eight is much lower than emergency workers have feared. A FEMA official says the agency is doing all it can right now to help out those storm victims.
