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YOUR MONEY

The Gathering Economic Storm; Storm Warning, U.S. Economy On The Brink; Europe's Crisis, America's Problem; The Harsh Cuts You Feel

Aired June 23, 2012 - 13:00   ET

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


ALI VELSHI, HOST: Here's a storm I've been telling you about, an economic storm that's doing a lot of damage at its center in Europe. But it's getting bigger and it is spreading out across the world. And it started to blow on to our shores.

I'm Ali Velshi, this is YOUR MONEY, and as long as your candidates don't tell you the truth about the economy, I will.

Right now that storm hangs squarely over Greece. It's erratic, though. Spain, Italy, Portugal, Ireland could all be next, needing emergency shelter and support. In an economic storm, what that means is more bailouts and cutbacks, with Europeans spending less money. And that means the world's factory floor, Asia, has fewer things to manufacture. China, an economy second in size only to that of the United States, or of Europe, has slowed. India has slowed, too. That means more than two billion people in the fastest growing nations in the world are buying less.

This is one big storm.

What is America doing about this storm? Well, we've got umbrellas. What we need are hurricane shelters. But you can't go out and build an economic hurricane shelter yourself. That is something you need help with. Government help.

Congress, for instance, could help stave off the effects of the storm. But they won't because that would mean being honest with you about things that are getting potentially worse and not better. And that kind of talk doesn't win elections. So Congress sticks to what it does best these days, partisan bickering and blame.

And then there is an entirely different storm brewing in Washington. Not the election. It's the so-called fiscal cliff. The series of tax increases and spending cuts that are set to kick in on January 1st. Now, the conventional wisdom is that Congress will get to it after the election. By then, we could be in a recession.

Your presidential candidates tell you they can solve it, but really they can't. From my perspective, it doesn't much matter who you vote for, for president. The president gets altogether too much blame and too much credit for what goes on in the economy. Here is what will matter. You can cast a ballot for somebody this fall who can control the weather closer to your home, your member of Congress, because Congress writes and -- if you believe in miracles -- passes the types of laws that can fight off the coming storm. No matter what President Obama or Mitt Romney say, they can only do so much to make you spend money and help create jobs. But Congress can, and should. Ultimately the best thing you can do is cast an informed ballot this fall for your senator, for your representative, for state and for city officials, and not one based on whether you're a Democrat or a Republican but one motivated by politicians who can put politics or at least partisanship aside to deal with this coming storm.

We're covering this storm like no other network can, by bringing together the best in the business. Christine Romans, anchor of "YOUR BOTTOM LINE" says we'll fall off a fiscal cliff if Congress doesn't act. Candy Crowley is CNN's chief political correspondent and the anchor of "STATE OF THE UNION." I am going to ask her point blank if there is a word from either candidate she takes seriously about the economy. Mark Preston is CNN's political director. He's spent six years covering Congress. He says don't hold your breath for something to happen any time soon. Will Cain is a CNN contributor and a conservative. He says the best thing Congress can do is maintain the status quo. And Harvard economist Ken Rogoff is the former IMF chief economist and the world's leading authority on financial crises. He says now is the time to act.

Candy, you are CNN's chief political correspondent, anchor of "STATE OF THE UNION," you follow this more closely than anyone else. You have been with candidates for -- I think I had hair when you first started following candidates around on campaigns. Now, amidst all of this partisan nonsense that passes for serious economic policy debate these days, is there a single word from either presidential candidate that a viewer who is concerned about this economy should take seriously?

CANDY CROWLEY, CNN CHIEF POLITICAL CORRESPONDENT: Listen, I think you can take the gist of what they say seriously. We know that in general, Mitt Romney is for not raising revenues and is for cutting spending. That he favors more toward the don't raise taxes, cut more spending. We know that President Obama thinks, yes, some taxes should be cut -- should be raised. And so you get sort of the generalities of it.

But let me tell you a couple of things about the specifics. And the first is that remember in 2008, when it was candidate Obama, he fought very hard against the idea of an individual mandate for health care insurance. So it depends so much on who he has to deal with by the time a president gets to office. So the more specific they get, I think people sort of stand back and go yes, but you have got to deal with Congress.

VELSHI: Right. And that's a good place to bring Mark in. Mark, you heard me say, Congress, along with possibly the Federal Reserve, holds the keys here. And it would be great if they all got together and said we're not waiting for the election. We're not waiting to see which way the political winds blow. We've got a job to do, and it's going to take all the time we need until the end of December to get it done. And you say that I'm smoking something. MARK PRESTON, CNN SR. POLITICAL EDITOR: You are smoking something, Ali, and you're probably living in California where it's legal to do that. But the bottom line is, this is not going to happen in my lifetime or your lifetime. We're less than five months before a November election, and we're talking about fixing the economy. What Republicans will tell you is that Democrats and President Obama have failed over the past couple of years to come to them and tried to cut deals. So what is the urgency five months before the election? What they'll also say is the bottom line is they can hold this off right now. Mitt Romney can become president. If Republicans can maintain control of the House, then they can have a better unified effort to try to do things the way that they think they should be done. Democrats are saying the same thing on the other side, Ali.

VELSHI: All right. Candy, let's talk about this. It does appear there may some solutions to be worked out by a Congress. But Congress is busy blaming the other side, and they are all saying that President Obama has not done as good a job as he can to either get deals by putting viable deals on the table or being a consensus builder. Does this now become an important part of the campaign? Not what your economic policies are, but whether you can get anything done in Washington if you don't control Congress?

CROWLEY: When you look at who's going to decide this election, as they do every election, and that is swing voters, those who can vote -- can go either way, they tend to have a tendency to go to one party or another but have crossed lines. When you look at that group, what do they most want? They actually want a president who is willing to deal with the other side.

So I think it's an important issue. I still think that the economy and how it's framed is the main theme of this election and will remain so. But certainly, your ability to compromise with the other side was a big reason that a lot of people liked the hope and change message of President Obama, because he, like President Bush before him, promised to change the culture of Washington. We're all going to get along, we're going to get something done, and it didn't happen. But swing voters like that message.

VELSHI: Mark, let me ask you this. I would really like to on that big wall of mine show -- say -- blame everybody. I'd like to put 535 members of Congress and the Senate up there and say those of who you wait for the election to try and solve this problem are all on this wall, and I will take off those faces and those names who have said, I will not wait, we'll compromise now, we'll hammer out a budget deal. We'll hammer out a debt ceiling deal. We'll hammer out the Bush tax cuts. We'll hammer out entitlements now. Would I have anyone to populate my wall with if I only chose those who are prepared to compromise?

PRESTON: There would only be a few left. And really, what you would normally find if you were to do that is you'd find centrist Republicans and centrist Democrats in the middle, who by and large are elected every two years or every six years based upon the fact that they represent a state that is more accepting of centrist views. If you're a conservative Democrat, if you are a liberal Republican, those are the folks who are really talking compromise at this point.

But again, it is the base politics that is driving all of this, Ali. It is liberal Democrats, it is conservative Republicans who want their members, their congressmen and their senators to really dig in and to hold back and not to cut these deals.

And as much as we're talking about how bad the crisis is right now, Ali, let's talk the day after the election when we have sequestration, when we have all these expiring tax cuts, all coming to a head. We always talk about how dysfunctional Washington is. Wait until after the election. You're going to see dysfunctional.

VELSHI: That's a ray of sunshine. Candy?

CROWLEY: Ali, I just want to say, the fault, dear Ali, lies you know, maybe not in Congress, but in ourselves. More and more what we have seen is, you know, the census comes along every 10 years, and depending on whether your state legislature is Republican or Democrat -- and there is different ways to do this -- they redraw those lines. What happens, the lines get redder if it's a Republican Congress that you have in your state, and they get bluer if it's a Democrat. So we're sort of self-segregating.

So what happens? You're elected by a very Democratic district or you are elected by a very Republican district. We have had all these wave elections, but the centrists are all but gone. And what is your impetus to say to the folks that elected you, yes, I know you elected me because I'm a Democrat, like you, but I'm going to cross this line.

VELSHI: You have --

CROWLEY: So we have some fault here.

VELSHI: Absolutely right. Mirror, mirror on the wall, who is the most responsible for this economic turmoil after all? It is probably all of us. Candy and Mark, stay where you are.

If your elected officials do wait until after the election to deal with that possible fiscal cliff, like Mark says they might, well, that is dangerous, it's irresponsible and it's cowardly. I know Christine Romans agrees with me, but conservative Will Cain doesn't, and we'll hear why. No one is more qualified to weigh in on this issue than Harvard's Ken Rogoff. He is the world's leading expert on financial crises. We'll be right back.

(COMMERCIAL BREAK)

VELSHI: The fiscal cliff -- you will hear this term for months to come -- it is the storm within the storm that I'm telling you about. If lawmakers in Washington can't get it together by January 1st, we'll dive right back in a recession according to the Congressional Budget Office. What is this fiscal cliff anyway? Christine Romans has been looking into it and she is breaking it down for us. Christine.

CHRISTINE ROMANS, CNN CORRESPONDENT: It's bad. I'll see your storm and raise you a cliff, Ali. There are two big forces at play here -- massive tax hikes, massive spending cuts. On January 1st, the Bush tax cuts, the alternative minimum tax fix expires. So that means, if nothing changes, your taxes will go up. At the same time, Medicare doctor pay will also go down. At the same time, federal spending is going to be slashed. If current law stays in place, $1 trillion will be cut over the next nine years, half in defense and half from non-defense spending. The Bipartisan Policy Center says that those cuts will mean a loss of about one million jobs over two years. A million jobs over two years. Not just government jobs, Ali, but jobs in the private sector as well, many from contractors working with the government.

It will almost certainly cause a recession. The CBO says if Congress drives up off that fiscal cliff, GDP will shrink at a rate of 1.3 percent. We're at 1.9 percent the first quarter. The economy is growing now. They're talking about early next year, seeing the economy shrink again.

This is important. It's very rare for the CBO, uncharacteristic for them to come out and say something like this.

Fed Chairman Ben Bernanke, who tries hard to stay out of politics, has been warning Congress about trouble ahead in the economy if Congress doesn't act as well.

What makes it so scary is this is all happening in an election year. No one expects Congress to deal with these big issues until after November 6th. We're also approaching the debt ceiling again. We can hit it as early as December. Just another thing to add to Congress' to do list. All the while, Ali, the bond market, interest rates are super low here, sort of giving cover to the urgency of all this as well.

VELSHI: Absolutely right, because it's still cheap for the U.S. to continue borrowing money. Christine, thank you.

Ken Rogoff, you know, even two years ago, people would have said to me, what are you panicking about? Election is in November. This happens by December 31st, they'll get it together. And we watched the last couple of years where we came up to that debt ceiling, where we don't get budgets done in this country. I mean, the basic thing that a government has to do is get its budget together. And they don't do that. So there's really, I mean, Ben Bernanke is worried that Congress may not get their act together. Are you worried or do you think they'll work it out?

KEN ROGOFF, HARVARD: I think they'll work it out, but I don't know what they're going to work out, and that's what scares everybody. It's hard to imagine they're really going to hit a deal before the election. There are just so many reasons for partisanship and sniping at each other. But they have such different visions.

And you know, Ali, we've been paralyzed for years now. We haven't undertaken fundamental reform. We've been using Band-Aids and tape to sort of keep the economy moving along. And this is a time, a crisis is a time you're supposed to take advantage to do things we couldn't do. And we're still sitting here. I think that is really the biggest issue in America today.

VELSHI: You mentioned last week that you thought if this storm is coming, the Federal Reserve can play a big role. They did a little bit this week, what we expected them to do that. They probably have more that they can do, but there is also a role for Congress. When I said that Congress can help build those hurricane shelters, I'm saying that they can fix a bunch of things. You think that Simpson-Bowles, another term that our viewers heard, but this gets swept under the table, you think that is something they can do.

ROGOFF: Yes, they can fix the tax system and try to keep rates low, but make it fairer, get rid of a lot of what we call tax expenditures, these tons of deductions. And some of the people you are going to see losing deductions you like, but on the other hand, they can keep rates low. And by the way, I think this idea we can't raise anyone's taxes, that's nuts. I mean, that's not so simple. Fairness is an issue here. But I think if you can keep the rates low so people want to work hard and they want to produce stuff, that's what makes America strong.

VELSHI: OK. We're going to come back to this conversation in a second. I want to bring Will back into the conversation. Will Cain, you say we're headed for a recession if we are headed for a recession, and the best Congress can do is maintain the status quo. I don't actually know if you said that. I've been telling everyone you said it.

WILL CAIN, CNN CONTRIBUTOR: I haven't said that once.

VELSHI: So I have really just been making stuff up.

CAIN: You said it to goad me. Look, I haven't said maintain the status quo. Christine is 100 percent right. Towards the end of the year, we're looking at a fiscal cliff. Right here. And what we do is exacerbate what is already a downward trend in our economy. We must do something. Status quo, no bueno, you must do something.

However, you must look at this. Our economy is already shaky. It is already uncertain. There are already, as you said, storm clouds hanging over it. Ken has talked about this. Europe, Asia, our current debt situation in the United States. These are all pushing down on the United States economy. So what can we do about that? Besides dealing with the fiscal cliff, what can we do about this? We have got two theories. And my theory to you is this. I'm going to give you 17th century religious philosophy here, Ali.

VELSHI: Whoa!

CAIN: That's right. Blaise Pascal.

VELSHI: You know the show is called YOUR MONEY, right?

CAIN: Listen to this. Pascal's wager. What he said is in a debate between whether or not God exists and atheism, only an irrational man would choose atheism. There is no upside. There is no win if you're right about atheism. You might as well believe in God regardless of the truth. What I am going to tell you is regardless of your economic philosophy, you might as well vote for Mitt Romney. Here's why. If you believe austerity is the way to economic growth, cutting taxes, cutting government spending, well, you got to vote for Mitt Romney, right? Because he said that's what he'd do. But if you believe stimulus is the way, government spending the way to economic growth -- well, you have to vote for Mitt Romney as well. Why? Because while President Obama says he believes in stimulus, he can't deliver it. Ali, he has had three years, he's not been able to put together another fiscal stimulus package. While Mitt Romney says he believes in austerity, I think there is a chance he doesn't. I think there's a chance he has no interest in short-term government spending cuts, and you might as well take that probability chance. You might as well find out, Mitt Romney, he may believe in stimulus. And you know what? He could actually get that through Congress, because he could call it infrastructure investment, combine it with tax cuts, and maybe actually get it through Congress.

President Obama is simply a bad bet no matter what you believe. That's what I think.

VELSHI: Wow. You see, Ken, what I got for goading him and misrepresenting him for the first half hour of the show?

CAIN: Where is the hole in my game, Ken? Where am I wrong?

ROGOFF: Well, I think what Ali said towards the top about, you know, there are a lot of issues having to do with what Congress is going to do is a big question here. And the president is a leader, but they can't do anything without Congress. We have a very divided Congress. The center has been disappearing, by the way, and so it's been very hard to get compromise done.

And I must say, with these storms coming in, and you look at the history of financial crises, when you really dig yourself a deep hole is when you get hit with a problem and you're paralyzed. You can't react quickly. And there's a danger we're moving in that direction with the very fractured government that we have. I'm not sure I quite come to your equation. I'm trying not to be partisan here. But it's a great graph.

CAIN: I think whether or not Congress needs to act, your point of acting is exactly right. I think Romney is the only one that can actually force action.

VELSHI: All right. From 17th century theology to 21st century economics. We got you covered here on YOUR MONEY. I'm going to bring Christine Romans back. After that demonstration by Will, I hope Christine has got something to top it. We're going to continue to talk about how you can make a difference to protect yourself from this storm that's headed your way. There are actually things, very specifically, that you can do that we haven't suggested yet. Stay with us.

(COMMERCIAL BREAK)

VELSHI: We're back with our conservative theologian Will Cain, Christine Romans and Ken Rogoff.

Listen, I want to just give you a picture of what is going on. There are lots of things. The economy is a complicated beast, but really the thing that you feel the most, the one that makes you feel things are getting better or worse is, in this economy, jobs lost or created. Let's take a look at the last year. And -- well, let's take a look at this first of all. This is a poll. A CNN-ORC poll that points out something you all know. The economy is the most important issue to 52 percent of those polled. By the way, right after that is deficit and health care, which kind of all have to do with the economy, right? If you had deep pockets, health care is not really your problem. We all know you can get health care. I'm a little puzzled by the 2 percent who say the policy towards gay is the most important issue in America, but that is the beauty of a democracy.

Now let's look at jobs. Jobs created in the last 12 months. There have been jobs created every single month for the last 12 months. So when I'm telling you about the storm, I'm not telling you we're in a terrible situation. But you know, right before that hurricane washes onshore, it's a sunny day. Look at the trend. January, we had a lot of jobs created, then a few less in February, then in March, and April and May. It is a trend that is starting to worry us. And Christine, we hear conflicting things from people about what happens to jobs based on whether it is Barack Obama or Mitt Romney. And I heard you say no jobs are going to get created because of either of them right off the top.

ROMANS: You know, it's demand. It's the things they can do. There are so many levers involved in creating jobs. And maybe the president has one of them, and that is confidence in the direction of the country, confidence in leadership, maybe, what they can do with Congress. But there are so many other things. And it's demand for these companies.

And when I talk to companies big and small, they're looking at Europe. They're looking at political issues in Europe and a slowdown in Europe. They're saying, well, I'm not going to add any more workers while Europe is still going. And they are looking at China slowing down. And they're looking, quite frankly, at technology and how quickly it's changing. Maybe they don't want to add as many workers this time. Maybe coming out of our recession, they don't think they need as many workers as they used to because things are just changing so quickly and they can do it somewhere else cheaper.

VELSHI: Everybody in America has seen this happen, right, Ken? They've seen businesses are doing OK. They're getting profitable. They're just not hiring everybody back. So what is it? What is that confidence that a presidential candidate can instill that will make a difference on the margin, that will make us feel better, that will make us invest, that will make us spend?

ROGOFF: I think you can have a huge difference in laying out a groundwork to build America over the longer term. I don't think there are any quick fixes here. We are in a mountain of debt. We're surrounded by Europe with a bigger mountain of debt. There are short- term financial problems where you just kind of have to swim through. But that doesn't mean that you don't have a vision of where you want to be, and there's an issue of where our jobs are going to be, how we're going to have infrastructure or education. I think fairness is an issue. There is no doubt that this globalization has really, really helped the richest, and, you know, not been as good for the lower income.

VELSHI: And the economic consequence of that, many will point out, is that the richest don't need to spend as much of their income as the poor do. So when you give people at lower income levels more money, if you are looking at that as a way to stimulate an economy, it tends to be more effective.

ROGOFF: Yes. That is sort of a Keynesian rationale, but I think this is a longer term thing of what is going to happen to your children and what's going to happen to your grandchildren. And it's a balance between those two things. Because if people don't feel it's fair, we're going to end up with an even crazier political system in the long run.

ROMANS: But you're talking about elections. We're going from election to election, not talking about the structural changes and how globalization means our grandchildren are going to have a different standard of living or have to -- what if you have a kid -- what if you have a kid who is average in America? What do you tell an average kid in America what your choices are going to be when we see all this?

VELSHI: Let me ask you this. Your analysis there was very interesting, that if you believe in austerity or stimulus, it equals Romney in the end. My argument, and I've been saying this now for a few weeks, why don't they just tell you the truth? Why do I have to believe that you tell me that Mitt Romney might do the right thing? Why can't we all just be honest about the fact that there are storm clouds coming? That's not partisan. That -- I'm not trying to scare anybody. I just want people to know this is not something that either of them on their own can fix. It's -- we're in for long haul.

CAIN: I think I disagree with you. I don't think they're being dishonest about the economic situation we're in. I think they recognize that, both Romney and Obama. I think they don't want to spend their time sounding pessimistic and raining on everyone's -- since there might be a recovery.

Where there is dishonesty perhaps is where -- what they would do to actually guard us against that downward pressure, against that economy. I don't know about Romney. I don't know truthfully what his economic philosophy is. I don't know if austerity --

(CROSSTALK)

VELSHI: But do you really think he is the guy who is prepared to guide Congress through stimulus? Then I'm not voting for him just because that makes him a liar.

CAIN: That makes you a bad better. That was my whole point earlier. You bet on certainties. I can tell you one thing for certain, President Obama can't execute on his vision anymore. He may believe in economic stimulus; he just can't execute it. You might as well bet on the probability that Mitt Romney is not telling you the truth about what he believes.

VELSHI: Fair enough. That's one way to look at it.

I want to ask you, Ken, you have said this many times. It becomes sort of common for you to say it because I associate you with it. You think that there's something to be done on infrastructure. Tell my audience again what you mean.

ROGOFF: Well, I mean, you look at world rankings of infrastructure and we're just drifting down them. If you go, you know, even to the China but you go to Spain, you go anywhere, their infrastructure has gotten better than ours is, and that ultimately affects your competing for jobs, especially manufacturing but many other things.

We can improve these. And there are more subtle things, like your electric grid, you know, the Internet and stuff, that require government money. Interest rates are very low. If you can borrow and effectively spend on these things, that's a win. That's a win-win. Because even though your debt goes up, it helps you grow faster to pay it off later.

Now, of course, if it's all a pork barrel project, as Will could say, well, you know, it's not going to work.

VELSHI: Will feels that nobody is going to use the word stimulus again, but maybe if we just start talking about money for infrastructure spending --

CAIN: Let me say this. If the three of us are right, if I'm right there is not that much of a difference in the short term, if Christine is right that confidence is important.

And Ken is right that long term issues of what we really need to use to instill confidence then our choices of voters are clear. Think about the long term. In the short term, there may not be that big difference.

VELSHI: On that note, we agree. Ken, stay right where you are. You have to make a deal at this table. The storm raging in Europe is starting to hit our shores. Does the president need to be tougher on Europe? Would that even make a difference?

(COMMERCIAL BREAK)

VELSHI: The economic storm raging in Europe is very real and is a threat to our own fragile economy. Mitt Romney says elect him or the U.S. is headed for disaster.

(BEGIN VIDEO CLIP)

MITT ROMNEY (R), PRESIDENTIAL CANDIDATE: If I were to get elected, we would instead in my view become more and more like Europe with higher deficits, with debt that can put us in Greece or Spain or Italy-like circumstance.

(END VIDEO CLIP) VELSHI: Did he just say that? Joining me now is my good friend, Richard Quest. He is the host of CNN's "QUEST MEANS BUSINESS." My old friend, Neel Kashkari is also joining us. He is the managing director from PIMCO, one of the world's largest bond fund managers.

You don't know how big they are? They manage more than $1.7 trillion. What that means is that these guys invest in debt at home and around the world so they know a lot about Europe's cash crisis.

Neil is also the former assistant secretary of the Treasury. You'll remember he ran TARP. Ken Rogoff is still here as well. I want to make something very clear right now because I hear this a lot from Republicans claiming America is on the path to becoming the next Greece.

The U.S. will never be like Greece. The American economy is dynamic with flexible labor laws and designed around a common purpose. Richard, the U.S. is not Greece, am I wrong?

RICHARD QUEST, HOST, CNNI'S "QUEST MEANS BUSINESS": You're right up to a point. But then you conveniently overlooked, yes, you may not be Greece per se, but you have the fiscal cliff. You can sleep walk towards it.

And if things don't go exactly according to plan, you could tumble over it. In an ideal world, thing goes according to plan. But, these things go wrong usually by accident, as we discovered with the debt ceiling last year.

A deadline missed, a decision taken wrongly and all of a sudden, a bad situation becomes worse.

VELSHI: All right, Ken, Greece has new leadership, but the storm I'm talking about is already ravaging the country. It's been doing it for years by the way. Does it now matter to you what Greece does or is this story already on its way?

KEN ROGOFF, ECONOMICS PROFESSOR, HARVARD UNIVERSITY: Well, Greece isn't the only story and it's not the immediate story, but it's not so. By the way, Ali, the new leadership looks a lot like the old leadership. They're basically the same parties that have gotten Greece into trouble and nobody has confidence in them.

I don't think they have the power to really change things. I don't think anybody does. You can't go through 100 years of evolution and in a few years. So Greece is still a problem eventually going to be leaving the euro zone. But there's Spain, there's Italy, there is everybody.

VELSHI: And Neil agrees with the idea that they are eventually don't know when, but leaving the euro zone. Neil, President Obama thinks that Europe has the capacity to solve this crisis on its own. Listen to what he said at the G-20 a couple days ago.

(BEGIN VIDEO CLIP) BARACK OBAMA, PRESIDENT OF THE UNITED STATES OF AMERICA: Even if they can't achieve all of it in one fell swoop, I think if people have a sense of where they're going, that can provide confidence and break the fever.

(END VIDEO CLIP)

VELSHI: Well, he could be caught talking about America, Neil. If people have a sense of where they're going, that could instill confidence and break the fever. He chose to tread very lightly at the G-20.

I happen to think he should have been tougher and that Europe needs to be made to understand that half measures are of no consequence and they can take the world into a recession. Can they?

NEEL KASHKARI, MANAGING DIRECTOR AND HEAD OF NEW BUSINESS INITIATIVES, PIMCO: Richard? Is that you? You're not even on camera and you're groaning and making noises.

Ali -- they absolutely can. Look, President Obama is right. They do have the capital to deal with the problem. You're right. They need to be decisive to put out the fire once and for all. But the Europeans understand this.

President Obama lecturing them is not going to motivate them, is not going to open their eyes. They understand what they need to do. The challenge is if they come in aggressively and put out the fire once and for all, it takes the pressure off the Greeks, off the Spaniards and off the Portuguese to make tough choices.

And as Ken Rogoff said, the Greeks have been doing this for 100 years. The Germans are saying we're not going to put out the fire. We need to keep the pressure on the Greeks to make tough choices.

That's why this crisis has dragged on for two years. That's why it's likely going to drag on for several more years because it's going to be band aids and half measures.

VELSHI: Richard, I don't know what is happening to him over there? What's going on?

QUEST: All right, I agree fully with everything that's been said. I'm going to put in one reason or excuse from the European side and it's this. They simply don't have the ability, the structures, the -- if you are like bureaucracy in which they can do this.

The way this has been set up is classically your horse built by a committee, which turns into a camel. And therefore, yes, in an ideal world you would take those decisions. You cut through. You make them.

But you're talking about 17 euro zone, 27 E.U. countries and it's not that practical, whichever way, I'll give you one example, the new bailout. The new bailout package that they got, the ESM that is being set up, even that is now being litigated in the German courts as being unconstitutional for Germany. So you get an idea. I was frustrated and angry and I use other words if it wasn't a foul word, the inability to deal with this crisis. But I'm starting to see the enormous nature of the task that they're facing.

VELSHI: Right. As you point out, some of these things happen by accident. As Neil points out, sometimes it only happens when your back is against the wall. We would have assumed that Europe would have felt the wall by now, but apparently something else has to happen before that actually changes.

You remember Neel was in the room when decisions were made, sometimes mistakes were made and accidents happen. I'm going to talk to him about how we accelerate this process.

In the meantime, it's been accelerated for us because 15 global banks have been downgraded, some of them are the biggest names you know JPMorgan Chase, Bank of America, Citi.

Ratings agencies may have a bad reputation, but coming up next I'll tell why you this is a big deal, why it's hurting the United States and why it's their fault, not the Democrats on the Republicans but yes, Richard, the Europeans.

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VELSHI: OK, I'm back with Richard Quest, Neel Kashkari and Ken Rogoff. Moody's downgraded 15 major global banks this week including the three biggest in the United States, Bank of America, JPMorgan Chase and Citi, because of their exposure to the global financial system particularly Europe.

First of all, your deposits are safe in the United States as long as you have less than $250,000 in any one account. If you have more than that, don't waste your time watching the show, turn the channel, watch sports or something else.

Now back to the downgrade. It wasn't expected but in this gathering economic storm I keep telling you, it's one more assurance that we're all connected and the crisis in Europe actually does affect Americans in a big way.

The downgrade means the banks, which may hold your portfolio might be less profitable because it will cost them more to borrow money. Neel, we are not talking about the fact that banks are like Greece or like Lehman Brothers where they are not going to be able to pay back their debts.

What we're saying is that some of what Americans think are the safest institutions in the country are at some risk of what Moody's calls out sized losses if things continue to go down. This is risk management.

This is saying that if things continue to get worse and worse, some of these major banks could take a hit and be at greater risk for not paying back their debts. You're the expert on the U.S. banking system. Is this serious? KASHKARI: Well, look, you're exactly right. It is serious because the banks do have exposure to Europe. We don't think the euro zone is going to fragment into 17 currencies. If it did, it would be very bad for the global economy, very bad for U.S. banks.

But we, you know, we're investing our clients' money. We trade with many of these banks. We do business with them. We assess their credit risk to make sure they are good stable entities for us to interact with them, transact with.

So it's an important topic. We're not surprised by it. We've been watching it for a long time. We do think most of the banks fundamentally are very healthy, but they are at risk. So you're right.

There's a lot at stake. If Europe doesn't get control of its situation, we're not going to be immune to it. It's going to affect our banks. It's going to affect our economy.

VELSHI: Well, one of the reason we like talking to you, Neel, is because PIMCO has skin if the game when it comes to debt. You understand because you have to trade it. Can these ratings agencies like Moody's take a hit to their reputation when they gave high ratings to junk mortgage backed bonds during the financial crisis.

Moody's has been on a bit of a downgrading spree lately. Is this part of a broad rehabilitation effort or should we just acknowledge that there is no value to listening to what they have to say about credit risk?

ROGOFF: To start with, there are a lot of investors around the world that have to listen to these credit agencies. They have funds where everything has to be AAA, AA, something like that. And when the credit rating agencies downgrade them, they got to kick them out of the funds.

These are big pools of money, pension funds and other big insurance companies and so it's very significant what they do. Now why are they doing it? There's no question that there's more vulnerability. You have to call a spade a spade.

They can't just sit there and keep all their ratings the same. Now some people say why these banks? Why not are there other banks? Why do they do one country and not another country?

I mean, it takes them time to sort through things. But there is no question the risks are heightened as Europe is sort of, you know, drifting in the wind here and we don't know what is going to happen.

VELSHI: So you say use it to underscore what we already know. There is risk out there. These guys are doing research and reiterating the fact there is risk. Neil, do you agree with that?

KASHKARI: I do agree with that. I mean, and you know, we at PIMCO do our own credit analysis of each of the banks that we work with and trade with. So we were not surprised by Moody's actions. As ken said, it just echoed the analysis that we had done on our own. But at the end of the day, we have enough resources and credit analyst that's we don't need to rely on the rating agencies. We can do our own work. The most people at risk are those that don't have that debt, they have to rely on the ratings agencies. So it's a serious situation.

VELSHI: Richard, of course this is not an American story. HSBC, UBS, Deutsche Bank and others were downgraded as well, banks that rely on the confidence of creditors and big customers in an already certain economic environment. How much damage does this already do to a fragile European banking system? I suspect you're saying not all that much.

QUEST: Not a lot at all. I agree with you and the gentleman about, yes, it's an effect for those investors who have to have AAA because of their rules and regulations. But it told us nothing that we didn't know already.

It was relatively irrelevant in term of the extra amount that they'll have to pay in interest charges for most of the big banks. All in all, it was like somebody saying -- it was classically, you know, locking the stable door or saying the horse bolted when it's already over the fence and away over the hills.

It was just more window dressing from Moody's who are a day late and a dollar short.

VELSHI: A lot of horse references. You are heading off to ride or something like that this weekend or something like that, Richard, always a pleasure to see you. Ken, thanks very much for joining us again and Neel, excellent haircut. Good to see you all of you.

Coming up, cuts closer to home. What cities are doing to survive with less cash and what you lose when budgets get squeezed? We'll talk to two mayors making some tough decisions next.

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VELSHI: Well, if you think that cutbacks what economists and politicians sometimes called austerity has nothing to do with you, think again, we all get hit.

Here in the United States, where you live, let me show you why. Let's go back to 1955. These vertical lines are recessions. During each recession, city hiring actually increased in the United States.

The last one, by the way, the last recession which technically ended in 2009, we also had hiring, but that's the bad news. Take a look at the big red block. Since the end of the last great recession 400,000 city and county jobs have been lost.

Now these are firefighters, policemen, teachers, health care workers, the services you depend on. This holds back the recovery because more people are not paying taxes. More are receiving taxpayer-funded benefits and you will feel it in one way or another. And it's mayors across the country who are making these tough decisions that are affecting our daily lives. So let's talk to a couple of them, Philadelphia Mayor Michael Nutter and Kansas City, Missouri, Mayor Sly James.

Gentlemen, thank you both for being with us. Mayor Nutter, I've spent half of my life in Philadelphia. When cuts were first made in Philadelphia, they were things like libraries and swimming pools and some of those is since reopened. You didn't have to cut emergency workers, police and fire. Where do things now stand for you?

MAYOR MICHAEL NUTTER (D), PHILADELPHIA: Well, all libraries open and none of them actually ever close. We did reduce some of the service. The summer of '09, we did not have all of the swimming pools open.

But the summer of '10 and summer of '11 and this summer, also swimming pools open, all rec centers open, full service for everyone. We never cut any police, fire or EMS works. We've kept public safety pretty protected.

And actually we graduated 60 new police officers just this past March and actually on Friday another 26.

VELSHI: You know, Mayor Nutter, one of the things we talked about earlier in the show when we talked about long-term solutions for the United States. Two of the long-term things we do is one is the federal government can support the building of infrastructure with the private sector and of course, education.

As Christine Romans said, the average kid in America is not going to be successful in the world. You can't be an average kid in America. So where these things touch most people is in their cities.

Infrastructure and public education are generally city and county and state responsibilities. You are under great pressure to educate and churn out non-average kids, above average kids in tough environments, how does that kind of austerity forced upon you affect you?

NUTTER: Well, it's become that much tougher. You know, the situation in Philadelphia is the state took over the schools back in 2001. So as mayor, I'm not directly in charge of schools and I have a couple of appointees to a five-member school reform commission.

Unfortunately, last year the Commonwealth of Pennsylvania cut public education funding by a significant amount and that impact rolled down Philadelphia to the tune of about $200 million. There's a current budget proposal by the governor to cut school funding across the commonwealth again in which we're trying to push back hard on that.

Our school district in Philadelphia is under severe fiscal challenge and fiscal distress. We are working with my city council trying to provide some additional funding support from the city side, but the Commonwealth certainly has an obligation and a responsibility.

And when those cuts hit, unfortunately, they start to come down on kids in classrooms or teachers in classrooms where real education and learning takes place. So we need more investment in education if we're truly able to compete, not less.

VELSHI: Mayor James, like you said, I think you and every mayor in the country have understood the cavalry is not coming. I mean, I think you'd be happy even if the cavalry didn't show up and nobody did any more harm.

MAYOR SLY JAMES (I), KANSAS CITY, MISSOURI: Well, if they just drove by and waved every now and then that would be a very helpful thing. But, you know, the problem is that the problems that we have in the cities are not going to go away regardless of whether or not the cavalry shows up.

So we've had to innovate and one of the innovations that we've taken on with regard to the issue of education that you raise is that we have looked at the 14 school districts that comprise Kansas City.

And one of the things that we know that would be extremely helpful in reinvigorating the American, urban, educational landscape is quality, early childhood education making sure that every child reads by third grade level.

And in Kansas city, we've create the turn the page program to address that very issue, to get to every single child regardless of what school district they may attend and work with them to make sure that they can read.

That's what cities have to do. That's what mayors and cities have to do is to find innovative ways to address complex problems because we can't wait for somebody to show up and that's not going happen in an election year where it seems that the election-year politics override the need to help the citizens of this country and this city.

VELSHI: That is exactly the point we've been making for this hour. Thank you to both of you, great mayors, Mayor Sly James in Kansas City, Mayor Michael Nutter in Philadelphia. Mayor Nutter, I'll see you in Philadelphia. Good to see you both.

NUTTER: Absolutely, thank you.

VELSHI: Let's continue this conversation online. I'll tell you how to do that next.

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VELSHI: Well, that wraps it up for the show, but the conversation continues online as it always does. Tweet me, my handle is @alivelshi. For those of you who prefer Facebook, subscribe to my page, Faebook.com/AliVelshi.

We are here every Saturday and Sunday. Have a great weekend.