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Putting Washington and Wall Street to the Test; Could the Worst of the Housing Collapse Be Over?; Who Picks Up America's Spending Tab?; The Final Word on High Gas Prices This Summer

Aired June 13, 2009 - 13:00   ET


CHRISTINE ROMANS, CNN HOST, YOUR MONEY: Hello. Welcome to YOUR MONEY. I'm Christine Romans. Ali Velshi is off this week.

Coming up, we put Washington and Wall Street to the test. The bailouts, the stimulus, all the efforts to rescue the American economy is it working?

And is the worst over in the housing collapse. Prices are cheap; the government will give first-time home buyers a nice tax credit to buy a house. But mortgage rates are rising. Is this still a good time to buy or frankly to sell a home?

America is spending big to fight the crises, spending money the government says he doesn't have. When does the bill come due and who picks up the tab?

Plus, we've got the final word on just how high gas prices could go this summer.

How the recession has changed how we shop and even how we're raising our kids.

Let's begin with jobs. The recession has destroyed 6 million jobs just this year, 2.9 million jobs have disappeared. The Obama administration claims things are getting better. Is that true? Bill Adair is the creator and editor of the Pluter Prizeman and Website he is here to put President Obama's claims through the truthometer.

Bill welcome to the program.


ROMANS: I've been trying to find these 150,000 jobs that have been saved or created. Maybe you can help me. The White House says they have saved 150,000 jobs through the stimulus. Is that true?

ADAIR: Well, it's a very hopeful estimate is what it really is. We gave it a barely true rating on our truthometer on Politifact. And the reason is that when we asked the White House for its reasoning, what they said is they basically took the anecdotes that they've heard from governments that said that jobs that might have been laid off weren't because of the economic stimulus and combined it with a baseline estimate of what the economy would have done if not for the stimulus. There wasn't enough solid data for us. We gave it a barely true.

ROMANS: The baseline estimates so far from the White House haven't always been right on target, have they?

ADAIR: They haven't. Baselines are a way that can really distort numbers. You know, it allows you to then say, well, compared to what it could have been and that allows you to make some very helpful assumptions. It really wasn't solid enough.

ROMANS: Our folks over at found that they think it is fuzzy math the claim of 150,000 jobs created so far.

Claim two in the first round of repayments from financial institutions that received the bailout money, the government has actually turned a profit. You know, I'm wondering if you think this is true. I just -- just today spoke with Citigroup and they confirmed they are paying 7.5 percent return on their bailout money.

ADAIR: This one really surprised us. I think a lot of us when we heard about the TARP, just figured that taxpayers were really going to take a bath on everything. But in this case, in the case of the ten who repaid this week, it is about $68 billion, repaid to the government, the government is, indeed, making a profit because of that money that you mentioned.

There's I think about $1.8 billion that the government is making through those dividends and then in addition, the government stands to get some warrants for stocks to buy stock in the future. So all in all, it will, indeed, be a profit, even when you include the money that the government had to borrow to pay for the T.A.R.P.

ROMANS: For the auto, not quite so sure, I think we are going to take a bath on some of that investment.

ADAIR: Exactly. And that's important to note that this is just on the first ten who have repaid this week. When you look at the overall cost of the T.A.R.P., even President Obama acknowledged that taxpayers are likely to have to pay overall.

ROMANS: A lot of political fighting this week about pay go, be pay as you go. The idea that in the budget, you don't spend a dollar if you're not getting it from some place else. You know, it's basically about balancing a budget. Pay as you go is the principle that helped transform large deficits into surpluses in the 1990s. Is that a true statement? Was it pay go that helped bring those great surpluses ten years ago, 15 years ago?

ADAIR: We gave that a half true on our truthometer when President Obama said it. The reason is that he's correct that pay go back during the '90s kind of set a culture for a little bit of fiscal belt tightening but the pay go rule that was in effect in the '90s was widely ignored at least in individual cases, and when you look at what really balanced the budget it wasn't so much the culture of pay go as it was that the government had cut defense spending because of the benefits after the cold war and the economy was booming. So he gets a half true on the truthometer for that one.

ROMANS: All right. So the truthometer with Bill Adair is barely true, half true and true for some of the administration claims about how things are working. Bill Adair thanks so much.

ADAIR: Thanks for having me.

ROMANS: All right. So is it working? Vice President Biden certainly thinks so.


JOE BIDEN, VICE PRESIDENT OF THE U.S: Things aren't going to get better overnight. Rebuilding this economy, it took us a long time to get in this trouble, and it will take us a long time to get out of this trouble. But we are starting to see some real progress.


ROMANS: Real progress. The Obama administration riding the momentum of an improving jobs picture, at least not a dramatically deteriorating jobs picture and a stronger stock market. Is it fool's gold, is another recession around the corner, a relapse, or have the president's policies truly put America's economy on the road to recovery?

Stephen Moore is an editorial writer for "The Wall Street Journal" and Hilary Rosen is a CNN contributor and a Democratic analyst. They both join us from Washington. I want to thank you both for being here and I want to continue on this idea of the jobs creation. Stephen, I want to ask you first, Karl Rove, Tony Fratto, people who worked in the Bush White House they have been publicly saying for more than a week now that it is Foley to say you have created any jobs in what has been a tsunami of jobs lost. Stephen Moore can the administration take credit for slowing job losses?

STEPHEN MOORE, EDITORIAL WRITER, THE WALL STREET JOURNAL:" That's a tough case to make Christine, because if you look at when the Obama administration was lobbying for the stimulus plan, what they announced was that if we didn't pass this stimulus plan, we were going to have a 9 percent unemployment rate. You probably remember that.

Well now we have a 9.5 percent unemployment rate and we did pass the stimulus. It's hard to see how jobs have been saved. What the Obama administration is saying maybe we haven't created jobs but we saved jobs. That's a hard proposition to refute. Christine, was your job saved? Was mine? Was Hilary's? We don't know the answer to that question. All we know is we're still continuing to lose a lot of jobs.

ROMANS: Hilary, can the White House, does it face any kind of problem if it tries to get too upbeat too soon when we're looking at rising mortgage rates, and we are looking at still job losses? Is there a risk in talking up glimmers of hope if a lot of people are still feeling a lot of pain?

HILARY ROSEN, CNN POLITICAL CONTRIBUTOR: Let's just go back to a couple of the facts that Steve just said, which is, you know, the council of economic advisors said recently when we made the claim about 9 percent unemployment going down, we didn't have the fourth quarter numbers yet, which were much bigger than the Bush administration had predicted they would be. And so what they are saying, though, is that the unemployment would have been worse had this stimulus not passed.

That is credible for several reasons. The vice president is tracking, you know, thousands and thousands of public sector jobs that have been saved, that -- where cities and states would have laid off people, where construction projects would have stopped had this not happened and those claims are legitimate and when you look at overall unemployment, this month we've had less than half the number of job losses that we had last month.

So this is a slow build. I don't think when you look at the politics of this, that anybody in the White House is doing what my friend Arianna Huffington calls premature exultation. I think what you see is people being sort of cautiously optimistic and that's the right posture.

ROMANS: Do you think it's working Hillary? If you have to boil it down in five words or less, is what the president is doing is working, is it?

ROSEN: Well, three things are happening that are big. First of all you are seeing a steadying amount of spending in the public sector that is stimulating some private sector spending. We've only had 6 percent of that money spent. The second thing is, you're seeing capital markets slowly rebound. The fact that banks can raise money to pay back some of the T.A.R.P. funds, the credit markets are loosening. The third thing is while nobody in the White House wants to talk about this as a measure; the stock market seems to be identifying a little more confidence in the economy.

MOORE: Christine --

ROSEN: Those are good things.

ROMANS: Is it working Stephen? Do you think its working or do you still see risks out there?

ROSEN: I think Hillary is partially right. No question the stock market has been performing very well. We may actually see an increase in stock values by the end of the year. They're up so far this year, so we've seen a nice rally in stock. I think the problem is, Hillary, you're right we are seeing a lot of jobs created in the public sector, but the problem is for every job we are creating in the public sector we're displacing jobs in the private sector.

You do see a kind of negative stimulus effect from all this government spending and debt. Remember, we're talking about $2 trillion of deficit spending this year. What I'm keeping my eye on Hilary that I think investors and homeowners should be watching is, a, look at what's happened to the value of the dollar which has plunged a lot. That means our dollars aren't carrying us as far as they used to. B, look what's happened to interest rate. If you look at the ten-year treasury bond that's up 150 basis points, a percentage point and a half in just the last three or four weeks. That's a really negative thing if you want to see the housing market rebound because it makes houses more expensive. Then c, look at what's happening in commodity prices. Those are rising too. The oil price went up above $70 a barrel. I think it's all a result of this excessive borrowing.

ROMANS: We're going to dig a into that more later on in the program so glad you brought that up Stephen. Because we're going to try to dig into what's happening with that. But I appreciate both of you dropping by. Thank you so much. Stephen Moore, editorial writer at "The Wall Street Journal," Hillary Rosen a CNN contributor here and a Democratic strategist. Thank you both very much.

Mortgage rates are rising. You just heard us talking about that. We are going to see if you missed out on refinancing or you can still get a very good historically low rate. Is there a great deal out there for you on a house right now?


ROMANS: Home buyers and homeowners across the country have been waiting and hoping for a housing recovery but mortgage rates are now spiking. That is right mortgage rates are going up and there's fear that could put the skids on the home market at the worst time. Dani Babb is the author of the book "The Accidental Land Lords" she is here in New York with me and Amy Bohutinsky is with in Seattle. A real estate website with a lot of fantastic information. Thanks both of you for joining me.

Dani I want to ask you first about these rising mortgage rates. I want to ask both of you about the rising mortgage rates. Because anybody who's looking to buy a home or refinance a home has noticed that things have changed over the past week and a half. In fact, on April 1st, the mortgage rate was about 5.13 percent. By June 10th, it was 5.95 percent. The difference, the monthly payment difference in that on sort of your average mortgage would be like $129 a month. That is real money for people and could be enough to give people pause to either refinance or buy a home.

DANI BABB, AUTHOR, "THE ACCIDENTAL LANDLORD:" It very well could, it's actually going to affect the jumbo market even more where the spread is larger and the value of the home is bigger as well. One upside here and that is if you may save it in property taxes because the value of the home is lower. So you have to look at both sides of the equation. Jobs are keeping people on the fence as well.

ROMANS: Amy let me ask you, are higher mortgage rates a problem here? Is the window closing for those first-time home buyers who want to take their $8,000 tax credit, they want to take home prices that are down 30 percent in some cases and they want to take really low mortgage rates and that combination is perfect for them right now.

AMY BOHUTINSKY, ZILLOW.COM: Certainly higher mortgage rates will hold some people back. Home prices continue to decline, there are more distressed properties on the market like foreclosures and short sales that are driving prices down further. For a lot of first-time home buyers the further drops in home prices are still enough to stimulate them to get out there.

To put some perspective, these mortgage rates they're high compared to the last six months but they are where they were a year ago and they are very consistent with where they've been over the last six years. For a lot of buyers, they're where they should be or where they can be for them to buy as long as prices keep dropping.

ROMANS: If you're a first-time home buyer you can be pretty nervous here. There are a lot of reasons still to buy a house right now, am I right?

BABB: You are.

ROMANS: There are a lot of reasons out there.

BABB: There are a ton of them. First of all the 3.5 percent FHA loan you may qualify for you may very well be able to use that $8,000 tax credit as part of your down payment. That may cover the down payment on some of these homes; you may get in with zero dollars down.

An incredible amount of inventory, short sales, foreclosures selling 10 to 20 cents on the dollar in some areas and people have to remember that it is the 80/20 rule in place. Seventy seven percent of foreclosures are coming from 20 percent of state. Not all areas are bad. You just have to do your homework. It's a great time.

ROMANS: I want both of you to weigh in here on refinancing for a minute. Because Ali and I have a lot of fans on Facebook who ask us specific questions and talk about something that Ryan sent us to on Facebook. He wanted us to specifically know about refinancing, he wants to know if we can talk about the process and what point it makes sense for homeowners.

I think it might be good to go over some of these rules of thumb again. He wants to know specifically how long you need to stay in the house, how does your current mortgage rate compare with what you'll be getting and the closing costs, at what point is it worth it to be refinancing, especially if mortgage rates are going up. Amy do you want to weigh in a little bit for Ryan on if he's considering refinancing right here, what makes it a good deal and good time?

BOHUTINSKY: So what he and anyone want to look at is the breakeven point. When you refinance there are costs up front and you either pay those or those go to the balance of the loan. You're going to save money on the monthly payment. You want to figure out where that breakeven point is.

For example, let's say you're paying $10,000 up front or that's going on to the balance of the loan but you're saving $500 every month on your monthly payment, doing the math there it tells you you'll break even in 20 months. So if you're going to stay in that home ten years, it makes great sense, a great idea to refinance. If you are planning to move in two years, it's not so good of an idea because you may not hit the breakeven point or you may only hit it for a couple months.

ROMANS: Dani do you want to add anything on to that? BABB: She's right. And remember, too, also the closing costs are negotiable. Originating fees, appraisal fees are often the highest. Some banks are doing them for zero.

ROMANS: Push back on the closing, push back and say that OK that's good advice.

BABB: And you can compare and give two lenders, these are the good faith estimates I want to go with you but you're not the cheapest.

ROMANS: Bottom line for both of you, mortgage rates are rising but if you're a first-time home buyer, yes?

BABB: Yes.

ROMANS: This is the time. Amy, thank you.

Go ahead.

BOHUTINSKY: I was going to say, for first-time home buyer's one thing very important to think about staying in the home. We're not in a time anymore where you can buy and sell in a couple years. Think about being there seven years or more and it can be a great time to buy.

ROMANS: Good advice. Those days are over. Those days are over, everybody. Dani Babb, author of "The Accidental Landlord" and Amy Bohutinsky from, thank you.

Not again. Gas prices are going up at a staggering rate. If you've been filling up the pump you know this. Are you going to pay $3 a gallon for gas this summer?


ROMANS: Call us you e-mail us, viewers are telling us that the rising costs of gas is coming at a very, very hard time for just about everyone and they want to know how much they're going to pay for gas this summer. Prices at the pump are steadily rising.

National average for a gallon of gas, now about $2.64, it has been rising for 41 days up nearly a dollar since the beginning of the year. Kevin joins us now to tell us where these prices are headed. Can they keep going higher? We're are going to try to get behind why they're going up, too, because a lot of people are thinking there's some major conspiracy happening to drive up their gas prices. Kevin Kerr is the editor and analyst for Global Commodities Alert. Welcome to the program.


ROMANS: First of all you think maybe we could pay $3 -- some people are actually paying $3 in parts of the country, now $3.50 by the end of the summer is that likely?

KERR: It's very possible. You know we've seen these prices climbing steadily as you pointed out and it's going higher. Obviously demand is picking up now. We're heading into the summer driving months. That's a big part of it. We've seen crude prices increase substantially over the last few months and that's added a lot of premium to the cost as well.

ROMANS: When you look at gas prices or oil prices over the past two and a half years, you can see last year was just horrific in terms of, you know the consumer impact of those high gasoline prices. But then there was this huge drop off, nothing like a global recession as my friend Peter likes to say, a global recession to really kill demand for gasoline and oil. But now look at the chart again. I mean it's coming back up. Are we going to go back to what we saw last year? Or was that kind of a, you know, we don't need to worry about that at this point?

KERR: Well, I think we always have to be concerned about it. When we saw crude oil prices hit the record high of $147, things were obviously ahead of themselves. That was not based all on demand. Gas prices over $4 a gallon; we saw that demand crash because of those prices. What we say in our business the cure for high prices is high prices. Sometimes that's true but now as we've seen these gas prices creep up and we're only in the early stages of coming out of this recession that concerns me a great deal.

If we can see prices of oil at $75 a barrel, $3 a gallon for gas, and we're only in the beginning stages of coming out of the recession, what happens when the world is fully back in recovery mode and we're using even more emergency? That concerns me a great deal.

ROMANS: Well here is the irony, you've got the idea that the world economy is eventually going to recover and that's helping drive money flows into commodities at the very time when higher commodity prices could keep the world economy from recovering. It's a terrible cycle here. Another thing that, and I like you to weigh in on this, what I have been trying to explain to people is when you put a gallon of gas in your gas tank, it's not just a gallon of gas that's in there.

Its expectations about the economy right now its concerns about the bailout. All the money that we've borrowed to spend is hurting the dollar and as that hurts the dollar and we worry about inflation that's making commodities richer, commodities like oil, right? It's the way the whole global financial system is all interconnected.

KERR: It's absolutely vital to understand that this weak dollar that we've been seeing not only from the fear of future inflation, but, of course, all the money that the Fed has been printing that has weakened the dollar further and as the dollar continues to drop you're going to see all commodities, especially energy and metals, climb.

As a flight to quality or a flight from inflation as investors look for somebody to put their money in besides the U.S. currency and that is exactly what we are seeing a large part of this rally I believe in crude right now is not so much demand based as weak dollar based.

ROMANS: Where you are buying gasoline, you are buying expectations about the economy and you are buying a big old international concern about the bailouts and printing money. Kevin Kerr, thank you so much. Editor and analyst at Global Commodities Alert. Great conversation. Come back soon.

KERR: Thank you.

ROMANS: OK. Why your share of the country's unpaid bills could top $155,000 in a decade.


ROMANS: The Obama administration is attempting to spend trillions of dollars we don't have to try to beat the current crises. They're betting on the economy eventually growing again. The big concern in the near term is this crisis and spending money to get out of it.

What are the consequences and will America's debt ultimately put the country in the path of fiscal collapse? David Walker is the former comptroller of the government accountability office. You may remember him from the film "IO USA" which will be showcased right here on CNN, he is has long been a voice of reason in this whole thing. How can we spend money we don't have in perpetuity?

DAVID WALKER, PRES. & CEO, PETER G. PETERSON FOUNDATION: We can't in perpetuity. In the short term it's OK to run deficits and accumulate debt levels to combat the global recession, deal with the financial institutions and housing challenge.

ROMANS: So what the Obama administration is doing right now is OK, you can see the reasoning for it?

WALKER: I can. Now frankly we have wasted a lot of money, we haven't structured some things properly but the short term is not the problem. The problem is the structural amounts, the difference between what we expect we're going to have to spend money on in the future versus the revenues that we have. For things like Medicare, Medicaid, Social Security, et cetera.

ROMANS: We've made promises and we are promising to pay for things that we don't have the money coming in to pay for.

WALKER: We can't even pay our current bills; much less the bills that we know are coming due in the not-too-distant future.

ROMANS: This was a problem before the current financial crisis.

WALKER: Correct.

ROMANS: But this crisis really puts a microscope on these things, doesn't it?

WALKER: Well I really do. The Chinese who are our largest lender are getting nervous and they are talking about it publicly. Britain, their outlook for their triple a rating has been downgraded.

ROMANS: And that's really serious. I mean the global markets were really shaken by that idea of downgrading a country like Britain, the outlook for its debt.

WALKER: And people don't realize but that Britain's statistics are better than ours. We have worst statistics on deficits to GDP, debt to GDP, foreign debt to GDP, savings to GDP, unfunded obligations to GDP. So we have two things going for us. Number one we have 64 percent of the world's reserve currency. That gives us more rope.

WALKER: That gives us more rope but not unlimited rope and we have lower tax levels than Britain. Taxes are going up.

ROMANS: Taxes in this country are going up?

WALKER: They're going up and they are going up a lot more than any politician is telling you they're going up.

ROMANS: Why won't they tell you they are going up I wonder, David?

WALKER: Well because they pannier. OK.

ROMANS: We were just talking about oil prices too and energy prices. Oil prices are rising in part because of all of this, in part because people have taken a look at our situation and said you know what the dollar, we're not quite as bullish on the dollar as we were before. We're going to sell the dollar; we are concerned about inflation that means money flow is going into commodities.

WALKER: Well all is priced in dollars. To the extent that the dollar is not worth as much or there is a fear that the dollar may not be worth as much in the future, then you charge more dollars to be able to maintain purchasing power.

Plus, interest rates have almost doubled on the 30-year bond for, you know, for the U.S. Treasury for U.S. Bonds since January of this year.

ROMANS: Let me ask you how are Americans going to feel this? How are they going to feel the debt burden and how quickly and how soon? Is this something that is way out in the future that we have plenty of time to solve?

WALKER: No. We don't have plenty of time. The clock is ticking. We probably have to make a significant down payment within the next five years, the sooner the better. You're going to feel it through tighter credit, higher interest rates, and higher oil prices. That's how you're going to feel it. And those aren't good things.

ROMANS: Basically that's lowering the standard of living of Americans. I mean we are talking about trying to preserve our standard of living, essentially right?

WALKER: The truth is, Christine, we are on a path right now, absent of dramatic reforms, where the standard of living for my grandchildren will be less than mine. That will be the first time in the history of this great country and that is unacceptable. ROMANS: All right. David Walker, we're going to have you come back and we are going to talk more about the problem, more about the solutions. Thank you so much. President & CEO of the Peter G. Peterson Foundation. Also the movie is "IO USA."

Now the president struck a cord of fiscal responsibility this week.


BARACK OBAMA, PRESIDENT OF THE UNITED STATES: Entitlement increases and tax cuts need to be paid for. They're not free and borrowing to finance them is not a sustainable long-term policy. Paying for what you spend is basic common sense. Perhaps that's why here in Washington, it's been so elusive.


ROMANS: Mark Weisbrot is the co-director with The Center for Economic and Policy Research and Shawn Tully is editor at large with "Fortune" Magazine. I want to start with you Shawn, because you wrote a piece that is pretty interesting piece where you basically said we are on a collision course with financial ruin in this country. And that my share of the bill is going to be $155,000 within a decade of paying for what has been spent that money that we don't have. Explain to me that pretty dire prediction. You say America's debt is the next big crisis and it is here.

SHAWN TULLY, EDITOR AT LARGE, "FORTUNE:" Yes. We now have 41 percent of GDP in debt in the U.S.; it is going to 82 percent according to the OMB estimates which I feel are much more reliable than the Administration's estimates. That's a very, very high number. And when we get out to 2019, ten years from now, the situation is not going to be any better. It's going to be getting worse. We will have almost a 6 percent budget gap.

We're going to have a $1.2 trillion deficit. And that's when all the big entitlement spending really kicks in. So, we are -- when you get to 82 percent of GDP and debt, you have no flexibility to do what President Obama is doing now. You cannot use a Keynesian model of spending more to bring the economy out of recession because you have too much debt. And, obviously, our foreign lenders are very worried about our ability to pay it back. The only solution is going to be in an enormous tax increase on the middle class that the president is not telling us about.

ROMANS: And you, David Walker, just said something very similar. You think higher taxes are coming and that politicians won't admit it. But Mark, you at the Center for Economic Policy Research, you think that we do have more flexibility. You're not as worried about some sort of huge middle class tax increase and some sort of fiscal calamity down the road?

MARK WEISBROT, CO-DIRECTOR, CENTER FOR ECONOMIC & POLICY RESEARCH: Absolutely not. There's a lot of fear mongering going on here. It's hard to know where to start with all the things that have been said.

ROMANS: Start at the top. Tell me what's the fear mongering and why you think these concerns about all of this debt are wrong.

WEISBROT: Well, I mean, the debt has never in the last century been a major determinant of our living standards for the future. The idea that our grandchildren are going to --

The rest of the YOUR MONEY broadcast was preempted by breaking news which was sent separately.