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YOUR MONEY

U.S. Economy on the Brink; The Fiscal Cliff; Housing Bottoming Out; Still Too Big to Fail?; The Bigger Threat; The Social Investment

Aired July 28, 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: The storm I've been warning you about is upon us. The recovery is stalling. The U.S. economy is growing at a snail's pace.

I'm Ali Velshi. And this is YOUR MONEY.

Gross Domestic Product, it is the broadest measure of economic activity. It grew by only 1.5 percent in the second quarter. To really grow the economy and create jobs, the U.S. needs to grow twice as fast. But you already knew that. Because GDP measures what you live through. Two-thirds of the economy depends on spending decisions directed by you, the consumer.

But because this weak recovery feels like a recession to some of you, you're pulling back on your spending and that's because the traditional paths to prosperity are still strewn with debris from the last storm.

The big one, the recession. Your job and the wage you bring home is the single most important way to build wealth. But despite net job growth for two straight years, job creation seems to be slowing down. Earnings for middle income Americans fell some 7 percent in the past decade.

And then there are investments. Your IRA, your 401(k). Your pensions. They're our second road to prosperity but that's complicated in this volatile market. For those of you looking for a safe harbor by investing in fixed income or parking your money in the shelter of a bank, ha, you're getting nothing. Even our virtually nonexistent inflation is higher than what you're earning.

You are being penalized for not taking risks. And ironically, owning your home may be the one vehicle to personal wealth that shows some signs of some brightness. Home prices may have hit bottom and are finally bouncing back. And if that's the case, then now would be the best time to buy a home or refinance a loan. Because interest rates are at historic lows. But that's little consolation to scores of homeowners who have seen the value of their homes on average shrink by a quarter since the beginning of the recession.

Now I'm not a profit of doom. But as long as your politicians don't tell you the truth about the economy, I will. America could be headed to another recession and there may not be much that can you do to protect yourself. There is one thing you can do, understand how Congress is dangling you over a fiscal cliff. I'm talking about a series of tax increases and spending cuts that are mandated by Congress to take effect starting January 1st. If Congress doesn't act, if Democrats and Republicans can't get out of their own way, millions of middle class taxpayers will revert to higher income tax rates in the midst of an economic slowdown when those Bush era tax cuts expire.

Many of you in the middle class, the people we need to hold our economy up, could face even higher tax bills because more of you will have your income assessed at the alternative minimum tax rate. And there's continued bad news for retirees and those of who you rely on dividend paying stocks. You could see your tax bills double.

That's not all. Because Congress couldn't agree on how to cut the budget as much as a trillion dollars in across-the-board mandatory spending cuts could kick in starting January 1st and that could fuel a wave of job cuts.

All of this is avoidable. Congress could rid us of this uncertainty right now. But why eliminate uncertainty when you can use that uncertainty to scare people into voting for you or voting against the other guy?

Washington won't act before the elections because members of Congress would prefer to play Russian roulette with the American people in order to get votes. Your vote should go to a congressional candidate who is willing to put the economic good over election-year politics.

Harvard economist Ken Rogoff is a former IMF chief economist and is the world's leading authority on financial crisis. Chrystia Freeland is the editor of Thomson Reuters Digital, and Will Cain is a CNN contributor who's so wrong about the true threat of this absurdly partisan Congress that I insist that he comes on until I can convince him otherwise.

Welcome to all of you.

WILL CAIN, CNN CONTRIBUTOR: Bravo you for having some background music to your sermon this week. I feel like we're about to land on an asteroid and save the world from -- the world from doom.

VELSHI: I would like to do that. I would like to know where the asteroid is coming from.

Ken, we have -- in my opinion, I'm calling it storms. OK? Maybe they're not asteroid, but we have two storms. We've got the one over Europe that's getting big. And hitting us. The waves are getting higher. The winds are getting stronger. And then we got this one coming out of Washington which in my opinion seems entirely avoidable and fixable.

What's your thought?

KEN ROGOFF, ECONOMICS PROFESSOR, HARVARD UNIVERSITY: The one in Washington is contrived. But on the other hand, it reflects our politics and our voters which are incredibly divided. So I don't think we're going to go off the fiscal cliff. But I'm not sure. Maybe we'll get to next year and they'll say well, we're not -- we're going to do it retroactively. And a lot of stuff will start unwinding.

Europe, that's a deeper problem. There's years in the mud there.

VELSHI: I'm not sure is the problem. It's likely that they will fix it. It's likely it will be at the 11th or 12th or 13th or 14th hour that they'll deal with all of these things. But decisions have to be made ahead of that.

ROGOFF: And what if it's another patch that fixes it for six months or a year and leaves it hanging over the longer term?

VELSHI: Will Cain, this is my attempt to get you to come over to my side. We're dealing with the fiscal cliff now. And it comes with a cost.

CAIN: It does come with a cost. First, I can't match your outrage on the fiscal cliff for two reasons. Number one, I do think it will be resolved.

VELSHI: Right.

CAIN: I think -- Ken just suggested because there's not any political benefit to not solving it. So across the aisle, Republicans and Democrats, there will be an impetus to solve the fiscal cliff. But more importantly I think we have to analyze the potential cost. And that is if you extend the fiscal cliff or avoid going over, you inevitably continue to ramp up this deficit spending which doesn't have a problem right now. Ken has written about. Potentially, as you continue to rack up debt.

VELSHI: Right.

CAIN: It will have a depressing effect on your economy. So you have to balance that against the immediate potential recession of going over the fiscal cliff.

VELSHI: But generally speaking, we've all agreed that this balancing thing you're doing with your hands is exactly what we have to do.

CAIN: Right.

VELSHI: We can't have serious cuts right now.

CAIN: Right.

VELSHI: We do need to deal with our budget in the long term and our deficits and debt in the long term. And in the middle, we need to give people some ability to plan.

CAIN: Yes. No, I totally agree with you. But I mean we don't do that.

VELSHI: Right.

CAIN: We continue to, as you and I have talked about, handle the short-term problem only. I imagine what we'll do is avoid going over the fiscal cliff and never address our long-term problems.

CHRYSTIA FREELAND, EDITOR, THOMSON REUTERS DIGITAL: I would just like to jump in here for a minute, Ali, and say, I think we really have to get the budget deficit issue in perspective and understand how it fits into where the U.S. and the world economy are right now. The reality is all of the warnings about how the bond vigilantes were coming after the U.S., those have not materialized. And the truth is people are practically paying the U.S. government money.

VELSHI: Well, they are.

FREELAND: Right.

VELSHI: Because the 10-year bond returns you less than inflation will take away from your money.

FREELAND: People are paying the U.S. government money.

CAIN: But Chrystia --

FREELAND: Hang on, hang on, hang on, Will. To hold on to their money. The clear and present danger is not at this moment the budget.

VELSHI: Right.

FREELAND: Sure, medium term you have to worry about it. But right now any sensible person needs to be much more worried about two things. One, overall the world's economy. Is it going to go into a recession or a depression? And number two, and this is nontrivial, the lost generation of people who are not getting jobs right now, of children who are not getting educated.

And it's really easy to talk in abstract terms and to be like the brave courageous deficit cutter. But that is not the challenge for 2013.

VELSHI: How do we balance that out? How -- Ken, what's -- what's your view of this -- it's not the first time in history we face the got to or not cut now, got to cut later. The issue, the struggle we seem to all have is where the inflection point is. How we make the tough decision. Where do we transit from lots of government money into no government money, and higher taxes.

ROGOFF: Well, we certainly don't want to do it all at once. So the fiscal cliff is crazy. On the other hand, it's not a free lunch just expanding, digging ditches. You need to have, you know, things that you're spending on that make sense.

There's a lot of things Congress could do but doesn't do. And that's simplifying the tax system would help a lot and making it fair at the same time. We could improve our infrastructure. We have this incredible bonanza from energy from the gas revolution that might make us an oil exporter for a little while. And cheap gas for a long time.

We could bring manufacturing back. But everything is sort of frozen at the moment because the government is so paralyzed.

CAIN: But everything is frozen. All of these measures that Ken talk about, which (INAUDIBLE) broad agreement this table need to be done.

With all due respect, Chrystia, they're not abstract. These are problems that must be dealt with and the reason they're not is because we're always dealing with emergency situations. We're always dealing with the next fiscal cliff, the next need for quantitative easing. Not -- these are things that I have not opposed but we always put these things on the front burner.

FREELAND: We're not actually always dealing with emergency situation.

CAIN: Credit expansion -- no.

FREELAND: These have been times -- consider the '90s. There have been times. I mean the big problem at the end of the '90s and early turn of this century was a budget surplus. We mustn't assume that the conditions that prevail today are the conditions that are going to prevail forever.

CAIN: But, Chrystia, did we deal with those long-term problems when there was a budget surplus?

FREELAND: Well, actually -- no, actually, there was a budget surplus and I'm afraid it was George Bush who squandered that money and who embarked on two wars without a tax increase which is not --

CAIN: And I think you've illustrated my point.

FREELAND: Which is not the American way. But I think that Ken has made a central point which to me is the counter to Ali's storm warnings. For me, actually I am pretty bullish about the U.S. economy. And I am bullish because of this energy revolution which is coming. I don't think that that is sort of fully taken into account in our economic discourse. But the shale gas is really going to transform the economics of the U.S. in the world economy.

VELSHI: That's because everybody doesn't know where Chrystia comes from. She comes from right where the oil sands come from in Canada.

FREELAND: I -- I come from oil --

VELSHI: She knows what an energy revolution really looks like.

FREELAND: Yes.

VELSHI: And my only point is I agree with you on that. I think energy is a great story. I still think Congress can mess things up and it's going to hurt on the way there if we don't fix it.

Hold that thought for a minute. Congress' failing to take action to protect American workers from an oncoming storm. I'll show you what jobs are at risk and whether your state could be the hardest hit.

Plus that hammering you're hearing down the cul-de-sac from where you live could be the sound of a real heartbeat in the housing market. Stick around.

(COMMERCIAL BREAK)

VELSHI: I've been harping on about this fiscal cliff. Let's talk about what it means to you, the threat of the so-called fiscal cliff, just the threat of it could cost you your job.

Christine Romans joins us now. She's the host of "YOUR BOTTOM LINE."

Christine, what happens if we go over the fiscal cliff?

CHRISTINE ROMANS, HOST, YOUR BOTTOM LINE: It'd be terrible. First of all let me focus on one aspect of it. The so-called sequester. That's mandatory spending cuts that automatically kick in if Congress doesn't act. They're estimated to be $1 trillion in cuts over several years split evenly between defense and nondefense programs.

The cuts will lead to immediate reductions in procurement spending in the private sector which could result in two million direct job losses in Fiscal Year 2012 and 2013 including professional and business services, maybe a half a million jobs lost there. Manufacturing jobs, an estimated 350,000 lost there. And it would, of course, hit federal workers very hard, about 300,000 jobs lost there, while suppliers and vendors that do business with federal agencies and contractors could see their own indirect losses as a result.

Where would these job losses be? California, Virginia, Texas, Maryland, the District of Columbia. They would each lose more than 100,000 jobs. And if Congress eventually addresses sequester say, in the lame duck session after the November's election or maybe early next year, it may be too late to avoid a round of job losses, Ali, that's because the Federal Warren Act requires businesses with more than 100 employees must notify workers 60 days in advance.

That means since sequester takes effect on January 2, layoff notices would start coming out in the first week of November just in time for voters going to the polls -- Ali.

VELSHI: Christine, come over here and join us.

ROMANS: Sure.

VELSHI: One thing that Ken Rogoff says is yes, probably deal with these things. But you're not sure they'll deal with them. And that's where the problem comes in. This Warren Act means that some companies may have to lay people off.

ROGOFF: Well, that's a frightening story that they actual have to start acting in November because there's an awfully good chance they won't figure out what to do until really the beginning of the year because we're going to need to see the election before they have any kind of big deal. And then they're going to want to have the lame- duck Congress pass it. But they're not going to want to be chopped into that probably. Then we'll get into the year. There'll be wrangling for a while. And a lot of stuff unfolds.

ROMANS: It's more likely that it will actually do something to change the Warren Act rather than to change the fiscal --

VELSHI: Change the actual -- that's -- you're probably right.

ROMANS: So that nobody has to go out and have layoff notice on their hands right before an election.

VELSHI: But that worries you more because if you are one of these people who works in one of the industries, people like to say government cuts. These are not government cuts. When you cut government spending, these are private sector workers, contractors.

ROMANS: Yes. Our government is addicted to contract workers.

VELSHI: Right.

ROMANS: And those contract workers are going to go.

VELSHI: So you're a contract worker for the government, Will. You are sitting here with that same uncertainty saying, am I going to lose my job at some point? So Chrystia took a piece out of you talking about the fact that these are not abstractions. These arguments are real jobs and real people's livelihoods that are going to be affected because of some idea that we've got to get the debt under control right now.

CAIN: OK, so, look, here's what I was pausing. That there's a cost benefit analysis. The cost benefit is that this debt we're racking up, that we'll continue to rack up at a greater pace should we go extend the fiscal cliff.

VELSHI: Right.

CAIN: Not go over it, has an effect on economists. Ken wrote extensively about this. And it's not just the bond markets Chrystia brought up.

VELSHI: He is trying to legitimize his argument, Ken, by continuing to point at you.

CAIN: It's not just the bond markets' day of reckoning. It has a depressing effect on your economy. Now I recognize that you have moments in economies when you cannot take a hickey, you can't take a hit. Right? We had that in '08, we had that at several times in our past. And Chrystia made the argument, we're there again. You can't let the fiscal cliff push us over. We can't take this GDP contraction.

My question is simple. And I don't have the answer. I'm sure Ken does. Which --

(LAUGHTER) CAIN: Which is the bigger hickey to take, the long-term one where we continue to rack up debt or this possible 3.5 percent contraction in GDP, the recession for the fiscal cliff?

(CROSSTALK)

VELSHI: Let's ask the expert. Let's ask -- Ken, what's the -- what's the compromise?

ROGOFF: I think it's obvious you have to do something much more gradual here. Not only are we barely growing 1.5 percent the most recent number. But the rest of the world is slowing down. This isn't a time to sort of contract artificially. This is a poison, folks. It's completely contrived.

VELSHI: Right.

ROGOFF: Because Congress couldn't agree. They said to make sure we agree we'll put in this through a cost cut.

VELSHI: We'll put in this poison pill. But generally the point of a poison pill is you're not supposed to have to take it. It's supposed to -- it's supposed to force you into hard decisions.

ROGOFF: Do you believe that?

VELSHI: Back to the --

(LAUGHTER)

VELSHI: Back to Will's point which is, which is compelling, though I think not fully thought out, where you say we can't always act like we're in an emergency.

CAIN: Right.

VELSHI: Christine, you have said this many times. With respect to unemployment insurance benefits. But what -- what do you do in the case that it is kind of emergency-ish? I mean the patients -- it's like saying I can't keep trading this patient who isn't stabilizing.

ROMANS: Here's what makes me crazy, is that they only see two things. Deficit reduction and debt control or the fiscal cliff. And we have people who represent us in Congress who are supposed to be able to figure something out somewhere between that. And we have an emergency in the economy right now with Europe and a lot of other things happening in our own domestic economy. I mean it's like -- it's like malpractice. It's like congressional malpractice.

CAIN: That would be ideal, Christine, right? If we --

ROGOFF: That's a good word. That's a good word. It's what it is.

ROMANS: Congressional malpractice.

ROGOFF: Absolutely. CAIN: And that would be ideal, though, for them to handle both of those problems at the same time.

VELSHI: Yes.

CAIN: And let me say in the end, I'd buy it. We're in an emergency. You cannot go over the fiscal cliff.

VELSHI: Right.

CAIN: But I think that our other problems are not abstract. I think when you -- when you purchase this avoidance, you have to understand the price you pay.

VELSHI: I think you're right about that. But you know what? When we gave the Bush tax cuts, we purchased avoidance. I mean the Bush tax cuts and the wars are a big part of our projected debt. So we have to always decide in --

CAIN: Undoubtedly.

VELSHI: -- good times and in bad that if there are unintended consequences, the things we do. And I don't know, Ken. I'm sure the government employees are very smart economists and you can't all have different opinions on this thing. I mean at some point doesn't the economist come into the room yelling, guys, you can't do this even if it gets you some votes, it's wrong? It's -- as Christine says, malpractice.

ROGOFF: But the question we -- who's going to pay the taxes? That's what the real fight is over.

VELSHI: Right.

ROGOFF: And how are we going to pay taxes? Everybody is trying to protect their special interest. Congress doesn't want to give up all the exemptions.

ROMANS: Yes.

ROGOFF: Because that lets them give favors to their -- people who give them money under the table so people don't understand it. We have to fix the tax system. And they have avoided that. The Bowles- Simpson came out. They made a proposal and it didn't go anywhere.

VELSHI: And they avoid it.

ROMANS: You know what, they avoided it because there isn't -- they don't feel the emergency right now. Bond yields are so low. We can borrow money super cheaply, right?

VELSHI: Yes. Yes.

ROMANS: I mean they see an emergency in Europe. They see an emergency in Greece and Spain.

VELSHI: Right.

ROMANS: But -- we don't feel it yet here. Right?

VELSHI: Which actually is to your point, Will, that you're trying to make the point that this is important. This is urgent that we deal with this debt and deficit issue, it doesn't feel as urgent as getting people jobs.

CAIN: It is not just about debts and deficits. It's about economic growth as well.

VELSHI: Yes. Yes.

CAIN: This is a patch. That's the point. The fiscal cliff thing, it's a patch. It doesn't address the real problems that he's mentioned several times, Ken, with tax --

ROGOFF: Right.

CAIN: With tax reform or entitlement reform. They lay the groundwork for real economic growth.

VELSHI: All right. Congressional malpractice. You heard it here first. You're going to probably see that a lot on my show. I like that, Christine.

ROMANS: All right, good. Don't you give me credit, I'll (INAUDIBLE).

VELSHI: Christine, stick around. Don't go anywhere.

Ken, great to see you in person. Real treat for us.

Will Cain.

CAIN: Glad you got to see me.

VELSHI: Always.

(LAUGHTER)

VELSHI: Glad I got to see you, too.

Coming up, as home prices improve and mortgage rates hit a new record low, you may finally be able to sell your house. But should you be buying a new one? Report after report says the housing market is coming back but the smartest guy in the world on housing says not just yet. I'll hear from him on the other side.

(COMMERCIAL BREAK)

VELSHI: Everybody is complaining that I'm being doom and gloom about the economy. I've been telling you that housing is the one ray of economic hope in our environment. Buying a house may not make you rich again for a long time. But most indicators suggest that housing is coming back. Some of them suggest housing is on a tear. Shares of home building stocks have surged an average of 49 percent this year as investors continue to bet on a rebound.

We're seeing it in the auto industry where home construction is driving truck sales higher. The big three saw sales of full-sized pickup trucks jump 13 percent in the first half of the year after a very strong December.

We're seeing it in retail. Lumber liquidators smashed quarterly profit estimates as same-store sales surged 12 percent. Home Depot shares up 27 percent this year.

Let's bring in Christine Romans, host of "YOUR BOTTOM LINE."

Christine, housing look like -- looks like it's back. Am I wrong?

ROMANS: Well, Ali, helping you prove your case, Zillow this week making the calls that the bottom is in. Why? Well, one piece of evidence, home values are up for the first time in five years. Look at that after losing a quarter of their value. Zillow sees a little uptick in home values right here. And that's one of the reasons why they're saying a bottom has been reached.

Here's what the country looks like. Green, Ali. These are the markets that Zillow says have hit bottom. Look in parts of California, Arizona, Phoenix. Phoenix prices up 10 percent. Parts of Colorado, even over here in Florida, you know, kind of ground zero to the real estate speculative, boom and then bust. So you're seeing some recovery there.

Red on this map, anywhere you see red, Ali Velshi, this means, Zillow says, there is no bottom. Not even in the next 12 months.

Homes now are more affordable than they've ever been in 20 years measured against median income. So if you have a job and you have savings, it's a good time to buy. And that housing affordability number is pretty good for you overall.

One last thing here. Mortgage rates. Mortgage rates have never been cheaper. Thirty-year money, 3.49 percent on a -- on a 30-year fixed rate loan. A new record.

Ali, all the ingredients are there now we just have to bake in a recovery.

VELSHI: And that is the trick. You can have almost all the ingredients or not the right temperature in the oven and your cake doesn't get baked.

Christine, stick around. I want to talk housing some more.

Let's bring in Bob Shiller. He's a professor of economics at Yale. He is the co-founder of the famous S&P Case-Shiller Home Price Index, which saw its first uptick in seven months in April.

Now, Bob, sales hit a blip in June. Declining after a string of gains. But it seems to me that the vast majority of evidence suggests that housing is back. ROBERT SHILLER, ECONOMICS PROFESSOR, YALE UNIVERSITY: Well, I agree that there's a lot of positive indicators. And that housing prices will probably go up through the summer at least. But I know what you mean by housing is back. This suggests a -- I hear it from a lot of people.

VELSHI: Yes.

SHILLER: That we're off to the races again. I think a much more likely prospect is disappointing at -- you know, the -- the CME futures market has it going up, you know, like, 1 and 2 percent a year. You know, just keeping pace with inflation. That's not exciting. You're acting -- why are you so excited?

(LAUGHTER)

SHILLER: It's not -- it's not --

(CROSSTALK)

VELSHI: Because we think of -- the reason we're so excited --

SHILLER: It's not a major breakthrough we had.

VELSHI: Well, you're actually the expert on this. The reason we're so excited is because housing creates -- housing prices going up are one of the legs of the prosperity's tool. It's the thing that makes us feel better. So we think it'd be binary, right?

SHILLER: It would be nice --

VELSHI: It's either going up or it's going down. You're saying maybe goes up for a long time at such a slow rate that it will make no difference to anybody.

SHILLER: This is a problem being a forecaster. Usually you have to -- give bland forecasts. So yes, it might go up a couple percent a year. I'm not excited by that. But as for your basic question, should you buy a house now? I would say if you are interested in buying a house, Christine is exactly right. You know? It's affordable. And we don't know which way it's going to go. You might as well just do it.

VELSHI: So, Christine, you gave a lot of evidence as to why prices are coming back and sales are increasing. But in the end you can have most of the ingredients in the -- in the cake. There is one ingredient bigger than all others.

ROMANS: Yes.

VELSHI: When it comes to a housing recovery and that is?

ROMANS: The job. Your job and a jobs recovery. And that's something that's really important here. You're not going to have a full real recovery in the housing market until you have a jobs recovery because you need a job to pay the mortgage. Right? Unless you're independent --

VELSHI: Or to get a mortgage afterwards.

ROMANS: Unless you're independently wealthy and then you're not even getting a mortgage or paying cash. And that's where a lot of the action in the housing market has been. It's been cash buyers and foreign buyers. It's not been Joe and Jane and their two little kids and their job in the suburbs. It's been -- it's been someone else.

So jobs and savings I think are the most important thing here. And, you know, Bob and I have talked about this before. I feel as though there are two housing markets here. There's the distress housing market where the foreclosures are happening, and then there's this other housing market where people are having an opportunity. But those people have savings and a job.

And it's almost a two-speed recovery in housing. There is some opportunity for some but a lot of the same devastation for everyone else.

VELSHI: Robert Shiller is the -- is an economics professor at Yale University. He is the author of a great book called "Finance and the Good Society" and about 18 other books that he's written.

(LAUGHTER)

VELSHI: Always good to see you. Christine, thank you as well.

All right. TARP, the Troubled Asset Relief Program, it may go down as the thing that stopped the great recession from becoming a depression. But the cop in charged of it says that Washington abandoned you in order to save the banks. He'll make his case next.

(COMMERCIAL BREAK)

VELSHI: So if you're still watching me and there is some chance that you believe we could get hit by another massive economic storm. A lot of people think the last recession wasn't worse than it was because the government stepped in with TARP, the Troubled Asset Relief Program. Now in a controversial new book, the man who served as the official watchdog for the Treasury Department's economic crisis response says that the $700 billion TARP program may have actually caused more problems than it solved.

I'm going to talk to him in a minute. But first I want to remind you about what we are talking about here. TARP gave the banks money, encouraged them to lend it out to keep Americans in their homes, running their businesses, going to college and buying cars.

Here's a scene from "Too Big To Fail," the movie that portrayed an exchange between Federal Reserve chairman Ben Bernanke and then secretary -- Treasury Secretary Hank Paulson.

(BEGIN VIDEO CLIP)

PAUL GIAMATTI, ACTOR, "BEN BERNANKE": Why don't they use the money the way we're asking them to? They will. Lend it out, won't they?

WILLIAM HURT, ACTOR, "HENRY PAULSON": Of course they will.

(END VIDEO CLIP)

VELSHI: Four years after the crash, credit is still tight. Americans who want to become homeowners still have trouble getting mortgages. But taxpayers, that's you, still own part of the companies that got bailed out. You own one-third of General Motors, 61 percent of AIG and nearly three quarters of Ally Financial, and you continue to pay for the bailout.

The Congressional Budget Office estimates that TARP will end up costing $32 billion. The Treasury's estimate is even higher, $70 billion.

Well, Neil Barofsky was the special investigator general assigned to monitor TARP. He's now joined the ranks of its critics with a new book called "Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street."

Neil, welcome to the show. The problem back then very clearly like the name of the movie that I just showed that clip from was too big to fail. Four years ago the assets of the five largest U.S. banks were $6 trillion. Now they're $8.5 trillion. The banks are bigger than they were then. If they were too big to fail then, they're much bigger now.

NEIL BAROFSKY, FORMER SPECIAL INSPECTOR GENERAL, TARP: Exactly. And this was -- this was the policy response of our government. You know, a government which is I detailed in the book is really puts the interest and defers the interest of the largest financial institutions over that of the taxpayer. And they've grown these banks bigger with the government support.

And as we know, TARP was supposed to do a lot more than just, you know, shovel money into the capital holes of the banks. It was supposed to protect the system increase lending and help the economy. And as we know, the only real policy ties to that goal was what you saw in that clip.

VELSHI: Right.

BAROFSKY: A hope.

VELSHI: A hope.

BAROFSKY: But they didn't do the --

(CROSSTALK)

VELSHI: Could it have been done -- because we may get into this situation again, I hope not. Could it have been done in some fashion that had more of -- more than a hope attached to it that we're going to give you access to all of this capital in the midst of a credit freeze where no one could barrow money from anyone but you've actually got to do something with this in terms of lending it out to people?

BAROFSKY: Absolutely. This money was given with no string attached. And when I went down and started making recommendations, not just about these things but also about anti-fraud provisions, conflicts of interests that were cooked in.

I was met with such steely resistance.

VELSHI: Yes.

BAROFSKY: So, you know, for example, an incentive to actually lend the money or requirement to lend the money out to the economy. And the answers I would get no matter what the subject was was always the same. And it really crossed administrations. I was told oh, no, we don't need to do. We don't need to have conditions. We don't need to have transparency.

VELSHI: Why -- why were they so differential? Why were the administrations so differential to the banks? Because we like to see in political commercials that we're not, that they're the 1 percent. They're the problem. But why -- you were inside and you say that Treasury was highly differential to the banks.

BAROFSKY: Exactly. And their response was, well, we don't have to worry because the banks -- they would never embarrass themselves. They would never risk the reputations. And part of the problem is is the big revolving door between Washington and Wall Street. And it's not a Democrat problem or Republican problem. But so many of these individuals come from the very same banks --

VELSHI: Will breaking them up make any difference? You'd go from 20 big banks to 50 or 80 smaller but still influential banks, all of whom have the same interest. So they would lobby the same way. They take the same position on things. These banks don't tend to differ from each other on what they want the government to do.

BAROFSKY: The difference is if you have what -- what we have now are these bank that are too big to fail. And that means that if anything happens to one of them, they lose so much money, they get in trouble with the law. If they go down they bring the whole system down.

VELSHI: Right.

BAROFSKY: And that --

VELSHI: Credit freezes up, people lose jobs, the economy suffers.

BAROFSKY: Right. Distorts all the incentives.

VELSHI: Right.

BAROFSKY: So as a result, they can take more risks than they normally would --

VELSHI: Yes.

BAROFSKY: Because of that influx of guarantee. And equally important, as we see, the parade of financial scandals every day.

VELSHI: Unbelievable.

BAROFSKY: They can't be charged. They can't be held criminally accountable. Because if the United States government wants to indict one of these banks, boom, economy over.

VELSHI: Sandy Weill -- let's just play -- you've heard him already. He's a former CEO of Citigroup. Probably a poster child for too big to fail. Agrees with you. He says he wants to break the banks up a little bit. Listen to what he had to say.

(BEGIN VIDEO CLIP)

SANFORD "SANDY" WEILL, FORMER CEO, CITIGROUP: So I think what we should probably do is go and split up investment banking from banking and have banks do something that's not going to risk the taxpayer dollars. That's not going to be too big to fail.

(END VIDEO CLIP)

VELSHI: He's talking about the Volker Rule. Very weird. We've been trying to get more comment from him. Strangely, he has said he is making no further comment than that interview he did.

What's up with that? What do you make of that sea change?

BAROFSKY: Well, I think there is just this growing recognition that we have to break up the banks.

VELSHI: Right.

BAROFSKY: In order to have a better economy. It'd be better off for shareholders, better off for investors and better for all of America.

VELSHI: Does anybody suffer if we break up the banks? I mean do bankers still not make lots of money?

(CROSSTALK)

VELSHI: The shareholders is not going to (INAUDIBLE) money.

BAROFSKY: Under this current model, the too big to bank and their executives make more money because they get what's essentially a subsidy.

VELSHI: Right.

BAROFSKY: From the assumption that they'll be guaranteed. They get this immunity --

VELSHI: Right.

BAROFSKY: Immunity thing from prosecution to a certain extent because of these fears. You take that away, they individually will suffer. But it's very interesting. If you've seen this happen the last year, it's more and more economists, regulators, specials inspectors general come on the side. Who's really left depending the status quo? The big banks and their enablers in Washington.

VELSHI: Right.

BAROFSKY: The United States Treasury Department that fought against bipartisan effort to break up the banks back in 2010, they're among the very few people that are still on the sides of keeping what is a very, very broken status quo.

VELSHI: And you write in the book, I now realize the American people should lose faith in their government.

It's an excellent read, Neil Barofsky is a former special -- inspector general of TARP. A senior fellow at NYU Law School and he's the author of "Bailout: An Inside Account of How Washington Abandoned Main Street while Rescuing Wall Street."

Good to have you here.

BAROFSKY: Thank you.

VELSHI: The store may be hitting regardless. But which is a bigger threat to the U.S. economy right now? Europe or the fiscal cliff? Only one may be in your power to control.

Plus, could Facebook's flop be your gain? We go past the earnings breakdown and get the answer to the one question you want to know, is it time to buy Facebook stock?

(COMMERCIAL BREAK)

VELSHI: You've heard me say this before. Right now there are two urgent storm clouds threatening your prosperity, one of them is Europe's debt crisis. The other one is the fiscal cliff that we are headed over if Congress doesn't act.

Now the International Monetary Fund has made its voice clear. If Congress fails to avoid the fiscal cliff, U.S. growth will hit the skids coming in well below 1 percent and quite possibly taking down the rest of the fragile world economy with it.

Treasury Secretary Tim Geithner strangely is emphasizing the other view. He thinks Europe is the bigger threat telling Congress this week that Europe is hurting growth and tightening financial conditions and that is exacerbating the global economic slowdown.

So how about a little cross-Atlantic debate?

Richard Quest, host of "QUEST MEANS BUSINESS", joins me now.

Richard, the question is this. Which is the bigger threat to the U.S. economy and hence the global economy? What you guys are doing in Europe or the fiscal cliff in the United States? And given that it is my show, I will go first.

(LAUGHTER)

VELSHI: Control Room, give me 60 seconds on the clock.

All right. Richard, I know you Europeans are self-important but the fiscal cliff is, in fact, the bigger threat. We are talking about a half a trillion dollar hit to the U.S. economy next year alone. If our Congress does not act by January 1st, a mix of huge tax hikes, massive budget cuts will take effect and that's going to push the U.S. economy back into a recession.

Those job cuts we see here are going to be fast and furious, at least a million private sector jobs lost by 2014. Some people say two million jobs. And every single day brings us closer to impending disaster even as the American consumer is already, as you know, Richard, pulling back.

Retail sales have declined now for three months in a row. Now I'm not saying -- I know you're upset about this. I'm not saying Europe is not a major concern. We've had some pretty ugly selloffs because of your business over there. But the fact is, major indices are still up for the year. We don't know what's going to happen if Greece exits the euro or Spain needs a bigger bailout.

But the point, Richard, is we can't do much about either. The U.S. can fix its problems right now.

RICHARD QUEST, HOST, QUEST MEANS BUSINESS: All right, Ali. You are once again delusional and devoid of reason. And if you give me 60 seconds on the clock, I will put you right.

The truth of the matter is it's a silly question. It's like saying which is better, the devil or the deep blue sea? Being caught between the rock and the proverbial hard place.

The reality, of course, is that this particular moment when you and I are talking, it's a Eurozone crisis that's by far and away the most serious. For one simple reason. Seventeen countries, 27 in the European Union, and inability to disagree, a central bank not doing what is necessary.

So that is why today the Eurozone is more serious. But the fiscal cliff becomes more serious later in the year. And you missed one very important point.

VELSHI: What's that?

QUEST: They are both serious because they are structural, not cyclical. Solving both the fiscal cliff and the Eurozone crisis will would involve major political upheavals and decisions, the sort of leadership that's been singularly lacking on both sides of the Atlantic so far today.

VELSHI: You had three seconds to spare. You make a good point.

QUEST: I --

VELSHI: We will agree --

QUEST: I --

VELSHI: We will agree that there's --

QUEST: I've proven the point. I've proven a point that in those three seconds you can take to the bank.

VELSHI: You are -- you are right. These are both very serious issues. So where we probably differ here is not that one is more serious than the other but at the time and place that we're at right now, Europe is the bigger threat as we get closer to where this fiscal cliff happens at the end of the year starting December 31st, January 1st, it may become more important. You disagree?

QUEST: I do disagree. Because solving that fiscal cliff problem really comes down to four -- five elements. The president, the Congress, where the Congress, Republicans and the Democrats.

VELSHI: Right.

QUEST: So were they -- so solving the fiscal cliff is actually --

VELSHI: Easy.

QUEST: -- quite a small tight narrow body.

VELSHI: Right.

QUEST: Seems a lot. You take the Eurozone with its 17 countries, the ECB, the EFS and all the different other bodies.

VELSHI: Right.

QUEST: The IMF, everybody, then you realize why in -- I come back to what I said before. The way the U.S. solved the great recession with TARP, stimulus.

VELSHI: Yes.

QUEST: Dodd-Frank is a model compared to the Europeans' inactivity.

VELSHI: Well said, my friend. Always a pleasure to see you. We'll make this a habit.

Richard Quest, host of "QUEST MEANS BUSINESS" joining me from London.

QUEST: Sure.

VELSHI: All right. Coming up next, Facebook's stock has flopped since it opened in May. Now that we have some real earnings information, is this the time to get it? And is the stock a bargain? I'll tell you on the other side.

(COMMERCIAL BREAK) VELSHI: You know what I'm tired of hearing about? Facebook. It's probably the most overhyped public company since pets.com and its demented sock puppet in those Super Bowl commercials.

You know the story by now. The IPO sizzled in May, shares of the social network have been a on a slippery slope since we saw those images of Mark Zuckerberg and his crew partying like rock stats in Menlo Park last spring.

Well, Facebook reported its first quarterly results as a public company this week and the result were underwhelming. Yes, they made over $1 billion in revenue in the quarter but they've got 955 million users. When your sales can't keep up with your users, you've got a business problem.

When a lot of those users use Facebook on their smartphones where Facebook makes little to no money, you've got a bigger business problem.

Now I actually think Facebook will figure this out eventually. But for now, the company has a lot of work to do. Now, listen, I like Facebook. I use Facebook a lot. I ask you to come to my Facebook page every show. I'm just tired of talking about whether Facebook is a good stock to buy or not.

But my producer says you're not tired of hearing about it, so I am going to talk about it one more time until the company starts making real money and earning a real profit. And I'm going to bring in smart people to talk about it with me.

Matt McCall is the president of Penn Financial Group. Ned Riley is the chairman of Riley Asset Management.

Hey, guys, good to see you. My viewers only care about one thing right now, it seems, and is this the time to buy Facebook stock?

I'm going to start with you, Matt. If you own Facebook stock, first of all if you're one of those people who've gone in at $35 or 40 bucks or wherever you got in, would you buy, would you sell, or would you hold right now? Where do you think this is going?

MATT MCCALL, PENN FINANCIAL GROUP: One thing I'm definitely not doing if I own some, I'm not buying more. I'm not doubling down.

VELSHI: Right.

MCCALL: It's never a good strategy. I would probably hold here --

VELSHI: Right.

MCCALL: -- because we're getting whacked after the earnings report.

VELSHI: Right.

MCCALL: We may get a bounce next week. So hold on right here.

VELSHI: All right. So I'm going to put a circle around the whole for you, Matt.

Ned, what do you think? Assuming you own the stock, which I know you don't.

NED RILEY, CHAIRMAN, RILEY ASSET MANAGEMENT: No, I don't. I don't like it -- as -- two months ago when you had me on the show, I said I wouldn't touch it in a month, I wouldn't touch it in three months, I wouldn't touch in a year. My rationale is the same. They don't have the platform to generate revenue from the mobile phone area.

They have a lot of competition in terms of others offering the social networks. I mean, they have sellers in the background, those that didn't partake in the IPO that are just eager now get out of this stock. They thought it'd probably be $75 to $100 today.

VELSHI: Right.

RILEY: And they would love to dump it. And now they're stuck with this start at $22 when it was at $45. So I didn't like it then, I don't like it now. And unfortunately the only thing that could probably bail this company out is a -- is a takeover and nobody has the pockets yet.

VELSHI: Sure.

RILEY: To pick up something of $50, $60 million.

VELSHI: So that means if you were one of those -- one of those people who bought it somewhere between 30 and 45 bucks, what would you do? Would you hold it, would buy it, sell it?

RILEY: Well, for the sake I think the traders are going to make some money on this one probably over the next six months, I'd hold it, but I would trade right out of the stock when we got up maybe into the 30s. But that's not a buy in my estimation. I'm a long-term holder. And I'm not going to gamble on somebody else's folly.

VELSHI: All right. So both of you are saying if you happen to hold it at a price higher than where it is right now, then stay holding it.

Let me ask you, Ned, while you're there, is there a price at which you would buy this stock? It's trading in the low 20s now. Is there a price at which you'd say there's value in it?

RILEY: Well, I suppose at some point, Ali, it's right now 60 times earning, the earnings aren't growing, the model really stinks right at the moment, but the user base is huge. I mean you can't deny the fact this company has done a very good job in generating interest with a lot of people. But at a price and it depends on the fundamentals at that particular point, you've got to anticipate because the market's going to beat you to the drawer on this one as well as any other stock.

I might buy the stock maybe, but at what price? I could pay higher for it if I'm convinced that the company has all the wherewithal to get -- to be successful in the future. But right now I love -- (CROSSTALK)

VELSHI: What would you pay for it today? If I could get it to you at a certain price, what would you pay for it today?

RILEY: Probably around $12 to $15. Maybe.

VELSHI: All right. $13 to $15. Matt, what do you say right now?

MCCALL: I'm going to a little bit higher. I'd be willing to pay for like $17, $18 for Facebook. The concern, though, that I have is similar to Ned, where basically the numbers are slowing down, Ali. I mean this is a company still in its infancy and numbers are already dropping. We saw Ad Impressions United States has quartered down 2 percent. That's huge.

Why are they dropping? Because you mentioned it in the open, they're moving to mobile.

VELSHI: Right.

MCCALL: And they're not making money off that yet. This is a great business problem that eventually they will figure it out, but it probably drops down to the teens before they do figure it out.

VELSHI: What do you think happens to the stock over time? I mean that's -- I've asked you the same question. I'm going to ask --

MCCALL: Sure.

VELSHI: It's really largely the same question because we have people who bought the stock who are saying at these lower prices, do it buy in? So you think this thing is higher or lower in a year?

MCCALL: I think it's lower in a year. I think we do get a balance after earnings. We have some people coming in.

VELSHI: Right.

MCCALL: Vultures trying to pick up below 20s.

VELSHI: Yes.

MCCALL: I think it's lower in a year. Probably high teens, high to mid teens. At that time, it's probably a flyer.

VELSHI: Right.

MCCALL: Put some money into it.

VELSHI: Ned, what do you think? Higher or lower in a year from now?

RILEY: I think lower. I said it two months ago. And on the offering price it could be higher or lower, I said lower. I'm going to stick with my guns on this one. However, this area is a growth area.

VELSHI: Right.

RILEY: It's just learning how to capitalize on the growth that's out there. And I mean the demographics definitely favor, you know, a company like Facebook. You just got to figure it out.

VELSHI: Sure. You just got to figure out how you make --

RILEY: And how you're going to make money.

VELSHI: How you make money and how much it's worth. So both of you guys are saying if you're stuck with it right now, you'd probably hold but it's going lower and you think it's going be lower, or you'd be buy it at a lower price and you're both guessing that it's going lower right now. But that's a choice people are going to have to make if they own it.

Thanks, guys. Good to see you, Matt. Good to see you as always, Ned.

These are not two guys who are going to be convinced to buy Facebook.

All right, coming up, I say Congress is threatening American workers by playing Russian roulette with their future for political gain. If you are ready to debate me on that point, I'm going to show you how to do it next on "YOUR MONEY.

(COMMERCIAL BREAK)

VELSHI: Your Congress refuses to act to save us from the potential economic storm that may be headed our way. Congress' refusal to do anything about the combination of tax increases, spend cuts and potential job losses is sending you to the brink of a fiscal cliff that it has created. If Congress worried more about saving your job than saving their own, they would take the steps to protect you today from the coming economic storm.

I know you've got a strong opinion about whether or not I'm right. I hear from you every week. So do it again. Tweet me right now. I read them all and I love to debate. @Alivelshi or find me on Facebook.com/alivelshi.

Thanks for joining the conversation this week on YOUR MONEY. We're here every Saturday 1:00 p.m. Eastern and Sunday at 3:00 p.m. Have a great weekend.

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