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President Obama on Economy; Pirates Strike Again; Every Day is Tax Day; Don't Overlook These New Tax Credits; President Obama Speaks at Georgetown University
Aired April 14, 2009 - 11:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
TONY HARRIS, CNN ANCHOR: It's Tuesday, April 14th, the day the White House introduces first dog Bo. Here are the top stories in the CNN NEWSROOM.
The president live this hour, talking about the economy, the challenges and signs of hope. We have a lot of analysts with us this morning to break it all down for you. Our focus all week -- your taxes, the real deal, hidden taxes you may not know you're paying, and tax credits you don't want to miss.
ROB MARCIANO, AMS METEOROLOGIST: I'm Rob Marciano in the CNN Severe Weather Center. Yet another rough day of rough weather across the Southeast focused central on northern Florida. Damaging winds from Jacksonville, all the way down to Tampa.
A complete weather rundowns throughout the CNN NEWSROOM.
HARRIS: All right. Let's go.
Good morning, everyone. I'm Tony Harris. And you are in the CNN NEWSROOM.
The economy is making progress, but we are not out of the woods yet. That is the message we are likely to hear from President Obama in about 30 minutes. We will have live coverage of his speech at Georgetown University.
White House Correspondent Suzanne Malveaux and Christine Romans of our CNN Money team here to set the stage for us.
Suzanne, let's start with you.
What are the promising signs that the president will likely point to in this speech?
SUZANNE MALVEAUX, CNN WHITE HOUSE CORRESPONDENT: Well, Tony, we're told that don't expect to new policy initiatives or even specifics or any details. But we are going to hear a tone from the president that is quite optimistic.
This is an excerpt that we got of, a copy here, an advanced copy. He says all of the actions, "... the Recovery Act, the bank capitalization program, the housing program, the strengthening of the non-bank credit market, the auto plan, our work at the G-20, have been necessary pieces of the recovery puzzle. They have been designed to increase aggregate demand, get credit flowing again to families and businesses, and help them ride out the storm. Taken together, these actions are starting to generate signs of economic progress."
So we're going to hear the president talk about these glimmers of hope because of this economic stimulus plan. He's going to talk about where the taxpayer dollars are going, that $787 billion economic stimulus package, how is it being spent. And he's also going to say, look, please be patient, this is going to take a long time.
There's still a lot of people who are unemployed, who have lost their homes. But they do believe, this president believes, that they're beginning to see a little bit of a turn in the corner here, if you will, towards some progress in dealing with this economic crisis -- Tony.
HARRIS: And as you mentioned, he's going to balance out the speech with a look at some of the challenges that remain for this economy.
Suzanne, appreciate it. And we will talk to you after the speech.
You know, a majority of Americans think President Obama has a clear plan for solving the country's economic problems. In the CNN/Opinion Research Corporation poll, 58 percent of respondents said yes, the president does have a plan, 42 percent say he does not.
So let's drill down a little more on what we expect from the president during his speech.
Christine Romans of our CNN Money team joins us live now from New York.
And Christine, so the president, as we just heard from Suzanne, is going to highlight what he sees as some progress being made on the economic front. And there is some good news to report, isn't there?
CHRISTINE ROMANS, CNN BUSINESS CORRESPONDENT: There is. You know, housing activity has perked up. And the president pointing out in his prepared remarks, and he'll tell the American people, that for people who are creditworthy and are refinancing their homes, that's putting $2,000 of savings in their pocket, and that helps. We know the small business lending and the consumer lending market, he says they're doing what they can, and actually seeing signs of improvement in their efforts to get the markets for those parts of the economy healed.
But he says that lending still isn't what it should be. And he says we still have work to do here.
You know, a lot of imagery in this speech. He talks about riding out the storm. He talks about a house built on a rock. He talks about not being out of the woods yet, but rolling up their sleeves and working every single day to try to solve these problems.
HARRIS: Well, you see where I'm going with this. I'm wondering if there is a risk of the president sounding too optimistic a tone.
ROMANS: That is always a risk, especially, Tony, when we continue to get day-to-day economic numbers that are showing that how people feel isn't necessarily glimmers of hope. You look at retail sales, that number this morning, for March, down 1.1 percent. Worse than economists had expected.
It tells us that people are pulling in on things like appliances, they're not reaching in their pockets to buy new appliances, clothing, cars, all kinds of different things they're just not spending money on. And wholesale prices, this is an inflation gauge. It's not what you pay at the grocery store, but it's the level before that, before it gets to you. Those prices down 1.2 percent. That's a sign of weakness in the economy, Tony.
So they have to be careful. And I think they are in this speech about talking about glimmers of hope when, indeed, millions more people -- there's zero doubt that million more people will lose their jobs. You've got to be careful about hearing your president talk about glimmers of hope when you just lost your job, and you're like, this just got a lot worse for me.
HARRIS: Yes. And hopefully when you hear the president being optimistic, maybe that translates to you, maybe things will get better for me in the short term.
But I'm curious to your thought on this -- you know, we may be seeing a real paradigm shift. We may be a different economy post- recovery than we were going into this.
Do you think there's something to that?
ROMANS: I think that there really is, Tony.
HARRIS: We may not spend as much in the future.
ROMANS: Yes, it's a giant -- hitting the giant control-alt- delete reboot on the American economy. No, I do think so. And I think that whether they can't or they don't want to, people are not going to be able to spend more than they earn.
That just isn't going to be able to continue. And it's going to require some real big changes and some real big things.
Now, the president here talking about the five pillars of the economy. He's talking about education for our workers, about investments in health care and in energy, in rules of the road for Wall Street and for how we're going to regulate our economy.
In a way, it's as if we're, we've got this near-term crisis which is terrible and deep. But the president, using this time to fix some of the -- or to address some of the bigger-term problems in the economy, and he's telling the American people, look...
HARRIS: Some of the more structural concerns.
ROMANS: ... this is what we're doing. We're using this time right now to double down and try to fix some of our problems.
HARRIS: Good stuff. Great. Christine, we'll talk to you after the president's speech.
Thank you.
ROMANS: Sure.
HARRIS: And just another reminder. We will have live coverage of President Obama's speech on the economy. That is coming up at the bottom of the hour, scheduled for 11:30 Eastern, and that is 8:30 Pacific.
Almost one week after being hijacked on the high seas, word now the crew of the Maersk Alabama will soon reunite with their captain. Here is what we know.
Ship Captain Richard Phillips is on the USS Bainbridge headed to Mombasa, Kenya. That's where his crew is getting some R&R at a beach resort. Once reunited, the men are expected to be flown home together by the Maersk shipping line.
Meanwhile, Somali pirates have brazenly hijacked four more ships in the Gulf of Aden -- two of the freighters and two fishing boats. Ships are now being warned to stay clear of the pirate-infested waters near the Horn of Africa.
Our David McKenzie following all the developments from Mombasa, Kenya.
David, good to speak with you.
The U.S. action in that region, I'm wondering here, it certainly is not stopping the pirates. If anything, as we mentioned just a moment ago, they appear more brazen.
DAVID MCKENZIE, CNN CORRESPONDENT: That's right, Tony. Good to talk to you.
Basically, the pirates are just doing business as usual. We can't necessarily say that they're doing this because of the U.S. attacks on their fellow pirates. But what we can say is that pirates in the last few weeks have risen dramatically. And it shows no signs of abating.
Just today, as you say, four ships taken, two freighters and two fishing boats. So what it means is they certainly aren't taking any actions by the French or American navies particularly seriously. They're just going out there, doing their things, getting boats, bringing them back and then asking for ransom. What it might mean, though, is that there will be a more concerted effort by the Navy right now to do something about this, because with the world's attention on this issue, it's really quite tragic-comic that you've got these amazing navies out there, with lots of weapons, lots of sophisticated technology, but yet, the pirates are still able to do this, just about every day -- Tony. HARRIS: And David, let's turn our attention to the crew of the Maersk Alabama. You spent some time talking to the crew. What have they been telling you?
MCKENZIE: Well, Tony, they essentially are chilling out, relaxing. They're decompressing from what must have been a harrowing experience.
I've been here all day at this beach resort in Mombasa. They came here early this morning after they left the Maersk Alabama.
We spoke to one of the crew members who has been sailing for a very long time, and he certainly seems quite emotional about the return of their captain.
(BEGIN VIDEO CLIP)
JOHN, MAERSK ALABAMA CREW MEMBER: I'm talking to you because I hope that you people can pressure all these people in Washington to get out of the air-conditioned offices and do something to help us.
MCKENZIE: What was the worst thing about your ordeal?
JOHN: Laying there, 12 hours in total darkness, in heat and fear. Do you understand that? Can you imagine that? I didn't know if they were going to find us or not find us. That's what I want you to understand, that there's a lot of emotions involved in this.
(END VIDEO CLIP)
MCKENZIE: Well, Tony, so obviously he had a harrowing experience, stuck in that cabin, in that ship, for many hours. They expressed that they really are just grateful to be alive. And many of them suggest that -- or say that the captain of the ship is really who allowed them to be here today. And they are eagerly awaiting his return -- Tony.
HARRIS: This is still some story unfolding.
David McKenzie for us with the Maersk Alabama and the crew in Mombasa, Kenya.
David, good to talk to you.
Only one more day left to file your 1040. We are the only network bringing you the real deal on your taxes, cutting through all the numbers to get you the facts. Revealing the hidden taxes, helping you find the tax breaks and credits, your tax answers, in the CNN NEWSROOM.
(COMMERCIAL BREAK)
(WEATHER REPORT)
(COMMERCIAL BREAK)
HARRIS: OK. Here we go.
You know the real deal now about your income tax. It is due tomorrow. But Tax Day isn't a once-a-year event. There are taxes you pay every single day, and many people are pretty clueless about it all.
Let's talk to the Dolans, because we love the Dolans. Nationally syndicated radio show hosts on personal finance...
KEN DOLAN, HOST, "YOUR MONEY MATTERS": Tony!
HARRIS: Ken, good to see you.
K. DOLAN: Tony, it's good to see you.
HARRIS: Daria, I don't know why you stay with that man.
DARIA DOLAN, HOST, "YOUR MONEY MATTERS": I got to tell you, I'm chained at the hip, Tony.
HARRIS: But God love you.
K. DOLAN: Tony, I'm loving the fire on this tax thing. I'm loving your attitude, man.
HARRIS: Do you feel it? OK. Great.
K. DOLAN: I can absolutely feel it.
HARRIS: Well, then let's drill down on this, and try to put a stamp on this. Help us understand a little better.
How much do you estimate Americans are paying in what you call hidden taxes every year?
K. DOLAN: Yes. You know, you think tomorrow is Tax Day, Tony Harris, but yes, it is. But every day is Tax Day.
D. DOLAN: Well, and the fact of the matter is, I was laughing yesterday as everybody was saying "Happy Tax Freedom Day," because the fact of the matter is, we only pay about 50 percent of our taxes through the federal taxes.
HARRIS: Wow.
D. DOLAN: But there are another 50 percent that are getting nickeled and dimed out of us every time we turn around.
K. DOLAN: We've got a very upset satellite guy here. Chris (ph) went out to get a package of cigarettes and didn't realize that the latest gain in cigarette tax just went into effect, 62 cents a pack. He said it was $6.19.
HARRIS: My goodness.
K. DOLAN: Excuse me, local bank. Could I take a loan? I'd like to get a beer and a carton of cigarettes.
HARRIS: All right. So what we're talking about here are taxes that are indirectly assessed, right, on consumer goods, really without the consumer's knowledge? We may think we know, but we may not know the full extent of the tax that we're paying, correct?
K. DOLAN: Well said. That's a good definition, Tony.
HARRIS: OK.
D. DOLAN: So let's start right at the gas pump.
HARRIS: You want to start there?
D. DOLAN: Yes, let's start at the gas pump.
K. DOLAN: I don't want to start at the gas pump.
HARRIS: Talk to us about how much of every gallon of gas goes to taxes.
D. DOLAN: All right. Well, 18.4 percent -- cents of it is for federal taxes.
K. DOLAN: That's across the board.
D. DOLAN: But then the states get their little pound of flesh as well. So it could be anywhere, depending on what state you live in, from 7.5 cents in Georgia, where you are, all the way up to 35 cents in Pennsylvania.
HARRIS: And the gas-guzzlers, there's a tax on gas-guzzlers as well?
K. DOLAN: Yes, but it's not that much, Tony. There's just some of those large -- some of the trucks and the large SUVs. It's only up to $7,700, Tony. I don't think that's any reason to get mad.
HARRIS: Oh my -- $7700?
D. DOLAN: Well, they assess it on the dealer. And guess what? He's not going to pay it. He passes it along to you.
K. DOLAN: And it's calculated, Tony, on the miles per gallon of the individual vehicle.
HARRIS: Got you.
K. DOLAN: Up to $7,700.
HARRIS: You know, I believe most of us get the idea that we're taxed on airline tickets and hotels and rental cars. We may not have the full scope of how much we're paying. Help us here.
K. DOLAN: Tony, I flipped out. Daria and I travel and speak across the country all the time. The last time I checked out of a nice hotel, I saw the tax. I said, "Is that the room charge or is that the tax?"
No kidding. They said, "No, sir, that's the tax." I said, "I don't want to see the room charge."
D. DOLAN: So in your hotel and rental cars, you could be paying as much as 40 percent of what it costs you that go to taxes.
HARRIS: Whoa.
K. DOLAN: 7.5 percent.
D. DOLAN: But then this one I really love. You know, 7.5 percent on a domestic airline ticket. But then, you go down to stop before you go up again to get to your destination, $3.50 a way.
HARRIS: Whoa. All right. I want to jump ahead.
K. DOLAN: That's $7 for me.
HARRIS: Exactly. I want to jump ahead before we run out of time with the Dolans.
Great to have you back on the program.
K. DOLAN: Thank you, Tony.
HARRIS: I want you to look at the list of items where we pay an exice tax on imports. We'll put it up in a second here, and you tell us that the excise tax makes the price of imported goods artificially high, in part to make it easier for domestic products to compete, correct?
D. DOLAN: Yes, exactly.
K. DOLAN: Exactly, but it's getting harder and harder. As you've got up there on the screen, Tony, bicycles, 11 percent.
HARRIS: Look at that.
K. DOLAN: Table linens, 12 percent. Cotton hammocks -- oh, my favorite -- I've got to get a couple of those today -- 15 percent. And plastic school supplies, up 5 percent.
I mean, it really adds along the way in the production line. It adds up to a lot of dough.
HARRIS: That's right. I absolutely -- we're out of time. I absolutely miss the energy, I miss the snark.
We're going to have you -- I know. I know. We gave you short shrift today, because we've got the president.
It's great to see you.
Daria...
K. DOLAN: See you again, Tony.
D. DOLAN: We love you Tony.
K. DOLAN: We love you, Tony.
D. DOLAN: Thanks for having us back.
HARRIS: Big kisses to you for dealing with that man. See you next time.
Still to come, money tight, right? Everybody understands this. You want to get all the tax breaks you can this year.
Gerri Willis shows us some tax credits you don't want to miss.
(COMMERCIAL BREAK)
HARRIS: So let's talk about what President Obama needs to say and what we should watch for during his economic speech.
For that, we turn to two distinguished economists. Putting more pressure on them. They better be good this morning.
Thomas "Danny" Boston is a professor of economics at Georgia Tech. And Rajeev Dhawan is an associate professor and director of the Economic Forecasting Center at Georgia State University.
Gentlemen, it's good to see you both.
And Professor Dhawan, let me start with you. The president is expected to talk about some glimmers of hope in this economy, the promising signs of economic recovery.
Have you seen them?
PROF. RAJEEV DHAWAN, GEORGIA STATE UNIVERSITY: I think the only sign that I've seen clearly is a little bit that the stock market was up in the month of March from its lows, a little bit there was some feeling that the retail sales were going up. But today, that was squashed, too. And that's about it. I mean, everything else is kind of like, we've fallen so far down, that any bounce feels like a recovery.
HARRIS: Well, Professor Dhawan, what does that say to you, five weeks, essentially, of gains essentially for the markets? At different times we've been told not to pay so close attention to the markets, and then we do, on any swing up or down. We seem to be in positive territory, at least over the last five weeks. We were down yesterday, and I can't see where we opened today.
What does the market activity indicate about this economy?
DHAWAN: I think the market is a little bit more optimistic about the game plan this administration and the Treasury and other people have for cleaning up the toxic debt and other issues.
HARRIS: I see.
DHAWAN: I mean, it's only a plan so far. It's getting executed. It's going to be a while before it gets done. And it's going to be much longer before the all the problems are cleaned up.
So one has to be very realistic. One has to be optimistic, but realistic.
HARRIS: And Professor Boston, let me come to you on this. What do you expect the president to point to as signs that we can all understand, not nanoeconomics, OK, but in real terms that the American people, all of us, can understand as to the progress in this economy?
PROF. THOMAS "DANNY" BOSTON, GEORGIA TECH: I think the most important thing is the confidence. What the stock market reveals more than anything is that there's a growing level of confidence in the economy.
We no longer compare ourselves to the Great Depression. And so that's the most important thing.
And he'll point, I think, also, to the spending that's taking place. You can't point to tangible outcomes; it's too short. But the spending that's taking place and the likelihood that that's going to make things better.
HARRIS: And Professor Dhawan, let me ask you about the remaining challenges for this economy. The president is going to attempt to balance off the speech with the remaining challenges.
What is he likely to point to? I would imagine jobs has to be at the top of the list.
DHAWAN: I think he might want to talk about all the positive things he's seen. And you know, we have seen like one good month of data, and one month does not make a trend. You've got to see the second. And by the time we see the third one, I'll declare it, like, this is a trend.
So it's going to be optimistic. I mean, that's the whole point. But at the same time, you know, people are saying, you know, what's the -- what's the next step? Kind of like, when are the things getting fully executed? A little bit of spending here and there does not make up for the lack of spending or non-spending by the people.
HARRIS: Got you.
And Professor Boston, I'm wondering, programmatically, in terms of policy, is there much more the president can do right now?
BOSTON: There's not much more he can do. He can only sell what he's already done. And I think that's going to be his biggest challenge today, to sell the American people on the fact that we've done all we can do, we've done it in a variety of areas, and it's going to take time for it to work itself through. HARRIS: All right. Gentlemen, stay with me, and we'll watch the speech together, and let's talk about it in more detail after the president's remarks.
All right? Deal?
DHAWAN: Very good.
BOSTON: Good deal.
HARRIS: All right. Thank you, Gentlemen.
We are awaiting an economic speech by President Obama. A panel of experts, you just heard from them on what they want to hear from the president. And shortly, T.J. Holmes is asking you from downtown Atlanta, you, the taxpayer, what you want to hear.
That's coming up.
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HARRIS: President Obama expected to try to balance optimism and caution about the economy.
Live pictures now from Georgetown University, where the president will be speaking shortly. We will, of course, have live coverage of his speech when it gets under way.
You know, tomorrow is tax day. If you are rushing to file your 1040, don't overlook a handful of brand-new tax credits. Personal financier, Gerri Willis is here.
And Gerri, boy, you went straight to the pros for this one?
GERRI WILLIS, CNN PERSONAL FINANCE EDITOR: Absolutely. And, you know what I want to know? I wanted to grab the biggest, the most luscious tax credits out there.
Here's what one tax expert had to say.
(BEGIN VIDEO CLIP)
BOB MEIGHAN, VICE PRESIDENT, TURBOTAX: The most valuable credit this year will be the first-time home buyer's credit, which is worth up to $8,000. So if you're buying a house for the first time - you get a credit. Plus, you get the traditional deductions, like your mortgage interest; your points, if you pay points; and your real estate taxes.
(END VIDEO CLIP)
WILLIS: All right, Tony, let's drill down on some of those benes out there for people filing, still filing now.
We mentioned the $8,000 first-time home buyer tax credit. You can claim the credit on your '08 or '09 tax credit. If you buy house this year before December 1st. Here are the income limitations, though. The credit phases out with joint filers of with income of more than $150,000; single filers with income above $75,000.
Now, let's say you already have a house, Tony, but you're a non- itemizer. Well, you can deduct up to $500 this year for individuals, $1,000 for married couples filing jointly. In the past, mortgage interest deductions were only available to people who did the long form.
OK, you've got a second chance this year at the stimulus payment, if you didn't get it last year. Remember, that was a lot of dough, $600 for singles, $1200 for married couples. If you didn't get the full amount, you may qualify as a tax credit on your '08 return. This could happen if your financial situation was different in '08 from '07. Let's say you lost your job, maybe you had a baby, you adopted a child, you would be eligible to get some of this dough.
All right, flood victims can file later. This is another good- news story here. Victims of severe flooding in Minnesota, North Dakota, you don't have to worry about your taxes right now. You have an extra 30 days until May 15th to file. So that's at least some good news out there for people who are rushing to get done.
HARRIS: Love it. Yes. What about the goodies coming up next year, Gerri?
WILLIS: All right, well, some of the stuff is for next year.
Energy-efficient home improvements. The tax credit will cover up to 30 percent of cost of products installed. So anything you do this year, installing siding, windows, doors, you'll going to get a little tax break. It's up to $1500 in tax credits for the next two years.
And your first $2400 of unemployment benefits in 2009 will not be taxed. This was really double-jeopardy out there. You would get the unemployment benefits and then you would have to pay taxes on them. People hated that.
HARRIS: Hey, Gerri, I want you to talk for a moment about the president and the speech coming up in just a couple of moments. I asked you this morning to suggest some of the progress that's been made and some of the challenges still ahead for this economy. And to your work and the work you do for homeowners every day, you went right to the housing sector on this, didn't you?
WILLIS: Well, it's really all about consumers. And the thing that got us into this mess in the first place was the housing sector. And we've actually seen some good news out of that sector recently. February, existing home sales up five percent. A shocker to everybody, including the experts who watch the sector. New home sales went up, too.
And what's going on here, Tony, the Fed has been active, driving down mortgage rates here. The current 30-year fixed rate is at 4.87 percent. I have to tell you - that's amazing. Just unprecedented. If you need a new mortgage, it's time it call your banker and get one. And that's really sparking growth in this sector.
The question is - will it be enough? You know, we've still got inventories, nine months' worth of housing inventory out there that needs to move, that needs to be sold. The usual levels are like six months' worth, you know, less. So, there's a lot of work yet to be done in the housing sector. And I have to tell you, foreclosures will probably be yet again, some three million this year.
So, there's a lot more to be done in that sector, Tony. We're still waiting for real recovery, but we're seeing little glimmers there.
HARRIS: Let's see if the president, I know you'll be listening, if the president talks about the housing sector. We're sure that he probably will.
All right, Gerri, appreciate it. Thank you so much.
WILLIS: My pleasure.
HARRIS: You know, it is crunch time for taxes. This week find out where your money really goes and why. Your taxes, the real deal, the special three-day event. Every newscast around the clock only on CNN.
CNN ANNOUNCER: You're watching CNN, you're severe weather headquarters.
So check out this iReport. The storm that pounded Atlanta yesterday, toppled trees all over the place and made a real mess for anyone trying to get around. Boy, can you imagine rush hour here in Atlanta yesterday? Folks trying to get home. Of course, trees took out power lines as well. At least 150,000 people left in the dark. One person sadly killed when a tree fell on his car.
Let's get to Rob Marciano this morning.
(WEATHER REPORT)
HARRIS: Once again, we are waiting, just minutes away, we understand, from the president's economic speech on progress and challenges still ahead for this economy, coming up in minutes in the CNN NEWSROOM. When the president begins his remarks, we will of course bring those to you live.
You know, it was the Navy SEALs who is helped rescue the American captain kidnapped at sea. What does it take to be an expert killer? We get down and dirty in the desert sand with the SEALs as they go through rigorous training.
(COMMERCIAL BREAK)
HARRIS: Just what GM doesn't need right now - bad publicity. The struggling automaker is recalling 1.5 million cars because of possible engine fires? The cars were made between 1997 and 2003. The recall includes Chevy Impallas, Luminas and Monte Carlos, Buick Regales, Oldsmobile Intrigues and the Pontiac Grand Prix. GM says, sparks actually could ignite oil on the engine. The repairs won't cost you anything.
President Obama isn't the only one talking about the economy today. So is FED Chief Ben Bernanke, and he is also saying there are signs of life. Susan Lisovicz is at the New York Stock Exchange with details.
And Susan, I believe the FED chief is in our neck of the woods today here in Atlanta.
SUSAN LISOVICZ, CNN BUSINESS CORRESPONDENT: Yes, he's going to be speaking in Moorehouse College right in southwest Atlanta, Tony. And so that's a big day for the college.
HARRIS: Absolutely.
LISOVICZ: And of course, whenever the FED chairman speaks, we all listen. And what he's saying is actually a theme that the president, we expect the president make in just a matter of minutes. Saying that there are tentative signs that the economy is decline is easing, and he cites some of the things that Gerri and you were just talking about. For example, signs of life in the housing sector. New and existing home sales rose in February. New home construction was up. Also, big ticket items. New car sales were better than expected. Or perhaps, the better way to put it is, not as bad as expected. The declines were not as bad as expected. But he also says, you know, again something I think that the president will be saying, that the recovery won't be smooth. That a leveling out of economic activity is the first step, the first step, toward to recovery. We won't have a sustainable recovery without the stabilization of our financial system
HARRIS: And I'm watching you, Susan, and watching the president. The president is at the podium. Georgetown University, let's listen to President Obama.
(APPLAUSE)
BARACK OBAMA, PRESIDENT OF THE UNITED STATES: Thank you so much. Please, everybody be seated.
Good to be back. Thank you so much. Please, everybody be seated.
Well, to President DeGioia, thank you so much for the gracious introduction, and thanks for bringing your family, including J.T. Appreciate you.
(LAUGHTER)
The -- we're going to invite him over to hang out with the girls.
(LAUGHTER) He's a pretty good-looking young man.
(LAUGHTER)
To Mayor Adrian Fenty, who's doing such a great job in this city, thank you so much for your attendance.
(APPLAUSE)
To Representative Donna Edwards, who is -- who is here and represents Maryland's Fourth District, thank you.
(APPLAUSE)
To Georgetown University students, it is great to see you.
(APPLAUSE)
Thank you. Thank you. Yes.
It is good to be back. I've appeared in this room during the campaign, and had a wonderful reception then, and it's wonderful to be back and be with all of you.
We're going to talk about the economy today. And I was telling President DeGioia this may be a slightly longer speech than I usually give, but it's a slightly bigger topic, and that is how we are going to deal with so many of our economic challenges.
You know, it's been 12 weeks since my administration began, and I think that even our critics would agree that at the very least we've been busy.
(LAUGHTER)
In just under three months we've responded to an extraordinary set of economic challenges with extraordinary action; action that's been unprecedented both in terms of its scale and its speed.
And I know that some have accused us of taking on too much at once. Others believe we haven't done enough. And many Americans are simply wondering how all of our different programs and policies fit together in a single, overarching strategy that will move this economy from recession to recovery and ultimately to prosperity.
So today I want to step back for a moment and explain our strategy as clearly as I can. This is going to be prose and not poetry.
I want to talk about what we've done, why we've done it, and what we have left to do. I want to update you on the progress we've made, but I also want to be honest about the pitfalls that may still lie ahead.
Most of all, I want every American to know that each action we take and each policy we pursue is driven by a larger vision of America's future: a future where sustained economic growth creates good jobs and rising incomes; a future where prosperity is fueled not by excessive debt or reckless speculation or fleeting profits, but is instead built by skilled, productive workers, by sound investments that will spread opportunity at home and allow this nation to lead the world in the technologies, in the innovations and discoveries that will shape the 21st century.
That's the America I seek. That's the America that Georgetown is preparing so many of you for. That is the future that I know that we can have.
Now, to understand how we get there, we first need to understand how we got here.
You know, recessions are not uncommon. Markets and economies naturally ebb and flow, as we've seen many times in our history.
But this recession is different. This recession was not caused by a normal downturn in the business cycle. It was caused by a perfect storm of irresponsibility and poor decision-making that stretched from Wall Street to Washington to Main Street.
As has been widely reported, it started in the housing market. During the course of the decade, the formula for buying a house changed: Instead of saving their pennies to buy their dream house, many Americans found they could take out loans that by traditional standards their incomes just could not support.
Others were tricked into signing these subprime loans by lenders who were trying to make a quick profit.
The reason these loans were so readily available was that Wall Street saw big profits to be made. Investment banks would buy and package together these questionable mortgages into securities, arguing that by pooling the mortgages, the risks had somehow been reduced. And credit agencies that are supposed to help investors determine the soundness of various investments stamped the securities with their safest rating when they should have been labeled "buyer beware."
And no one really knew what the actual value of these securities were. No one fully understood what the risks were. But since the housing market was booming and prices were rising, banks and investors just kept buying and selling them, always passing off the risk to someone else for a greater profit without having to take any of the ultimate responsibility.
Banks took on more debt than they could handle. The government- chartered companies Fannie Mae and Freddie Mac, whose traditional mandate was to help support traditional mortgages, decided to get in on the action by buying and holding billions of dollars of these securities.
AIG, the biggest insurer in the world -- had a very traditional insurance business that was very profitable -- decided to make profits suddenly by selling billions of dollars of complicated financial instruments that supposedly insured these securities. Everybody was making record profits. Except the wealth created was real only on paper.
And as the bubble grew, there was almost no accountability or oversight from anyone in Washington.
Then the housing bubble burst. Home prices fell. People began to default on their subprime mortgages. And the value of all those loans and securities plummeted.
Banks and investors couldn't find anyone to buy them. Greed gave way to fear. Investors pulled their money out of the market. Large financial institutions that didn't have enough money on hand to pay off all their obligations collapsed. Other banks held on tight to their money and simply stopped lending.
Now, this is when the crisis spread from Wall Street to Main Street. After all, the ability to get a loan is how you finance the purchase of everything from a home to a car to, as you all well -- know very well, a college education. It's how stores stock their shelves and farms buy equipment and businesses make payroll.
So when banks stopped lending money, businesses started laying off workers. When laid-off workers had less money to spend, businesses were forced to lay off even more workers.
When people couldn't get a car loan, a bad situation at the auto companies became even worse. When people couldn't get home loans, the crisis in the housing market only deepened.
Because the infected securities were being traded worldwide and other nations also had weak regulations, this recession soon became global. And when other nations can't afford to buy our goods, it slows our economy even further.
So this is the situation, the downward spiral, that we confronted on the day that we took office.
So our most urgent task has been to clear away the wreckage, repair the immediate damage to the economy, and do everything we can to prevent a larger collapse.
And since the problems we face are all working off each other to feed a vicious economic downturn, we've had no choice but to attack all fronts of our economic crisis simultaneously.
Now, the first step was to fight a severe shortage of demand in the economy. So the Federal Reserve did this by dramatically lowering interest rates last year in order to boost investment.
My administration and Congress boosted demand by passing the largest recovery plan in our nation's history. It's a plan that is already in the process of saving or creating 3.5 million jobs over the next two years. It's putting money directly into people's pockets with a tax cut for 95 percent of working families. It's now showing up in paychecks across America. And to cushion the blow of this recession, we also provided extended unemployment benefits and continued health-care coverage to Americans who have lost their jobs through no fault of their own.
Now, you will recall that some argued this recovery plan is a case of irresponsible government spending, that it's somehow to blame for our long-term deficit projections, and that the federal government should be cutting instead of increasing spending right now. So I want to tackle this argument head on.
To begin with, economists on both the left and the right agree that the last thing a government should do in the middle of a recession is to cut back on spending.
You see, when this recession began, many families sat around the kitchen table and tried to figure out where they could cut back. And so have many businesses. And this is a completely responsible and understandable reaction. But if everybody -- if every family in America, if every business in America cuts back all at once, then no one is spending any money, which means there are no customers, which means there are more layoffs, which means that the economy gets even worse.
That's why the government has to step in and temporarily boost spending in order to stimulate demand. And that's exactly what we're doing right now.
Now second, I absolutely agree that our long-term deficit is a major problem that we have to fix. But the fact is that this recovery plan represents only a tiny fraction of that long-term deficit. As I will discuss in a moment, the key to dealing with our long-term deficit and our national debt is to get a handle on out-of-control health care costs, not to stand idly by as the economy goes into freefall.
So the recovery plan has been the first step in confronting this economic crisis.
The second step has been to heal our financial system so that credit is once again flowing to the businesses and families who rely on it.
The heart of this financial crisis is that too many banks and other financial institutions simply stopped lending money. In a climate of fear, banks were unable to replace their losses from some of those bad mortgages by raising new capital on their own, and they were unwilling to lend the money they did have because they were afraid that no one would pay it back.
It's for this reason that the last administration used what they called the Troubled Asset Relief Program, or TARP, to provide these banks with temporary financial assistance in order to get them lending again.
Now, I understand that TARP's not popular, and I have to say that I don't agree with some of the ways the TARP program was managed. But I do agree with the broader rationale that we must provide banks with the capital and the confidence necessary to start lending again. And that's the purpose of the stress tests that will soon tell us how much additional capital will be needed to support lending at our largest banks.
Ideally, these needs will be met by private investors who are willing to put in money to these banks. But where that's not possible, and banks require substantial additional resources from the government, then we will hold accountable those who are responsible, will force the necessary adjustments, we'll provide the support to clean up those bank balance sheets, and we will assure the continuity of a strong and viable institution that can serve our people and our economy.
Of course, there are some who differ with our approach.
On the one hand, there are some who argue that the government should stand bank and simply let these banks fail, especially since in many cases it was their bad decisions that help create the crisis in the first place.
But whether we like it or not, history has shown repeatedly that when nations do not take early and aggressive action to get credit flowing again, they have crises that last years and years instead of months and months: years of low growth, years of low job creation, years of low investment, all of which cost these nations far more than a course of bold, upfront action.
And although there are a lot of Americans who understandably think that government money would be better spent going directly to families and businesses instead of to banks -- you know, one of my most frequent questions in the letters that I get from constituents is, "Where's my bailout?" And I understand the sentiment. It makes sense intuitively, and morally it makes sense.
But the truth is that a dollar of capital in a bank can actually result in eight or 10 dollars of loans to families and businesses. So that's a multiplier effect that can ultimately lead to a faster pace of economic growth. That's why we have to fix the banks.
Now, on the other hand, there have been some who don't dispute that we need to shore up the banking system, but they suggest that we've been too timid in how we go about it. This is essentially the nationalization argument that some of you may have heard.
And the argument says that the federal government should have already preemptively stepped in and taken over major financial institutions the way that the FDIC currently intervenes in smaller banks, and that our failure -- my administration's failure to do so is yet another example of Washington coddling Wall Street.
"Why aren't you tougher on the banks?"
So let me be clear: The reason we have not taken this step has nothing to do with any ideological or political judgment we've made about government involvement in banks. It's certainly not because of any concern we have for the management and shareholders whose actions helped to cause this mess.
Rather, it's because we believe that preemptive government takeovers are likely to end up costing taxpayers even more in the end, and because it's more likely to undermine than create confidence.
Governments should practice the same principle as doctors: First, do no harm. So rest assured, we will do whatever is necessary to get credit flowing again, but we will do so in ways that minimize risks to taxpayers and to the broader economy.
And to that end, in addition to the program to provide capital to the banks, we've launched a plan that will pair government resources with private investment in order to clear away the old loans and securities -- the so-called toxic assets -- that are also preventing our banks from lending money.
Now, what we've also learned during this crisis is that our banks aren't the only institutions affected by these toxic assets that are clogging the financial system.
AIG, for example, is not a bank. It's an insurance company, as I mentioned. And yet, because it chose to insure billions of dollars worth of risky assets, essentially creating a hedge fund on top of an insurance company, its failure could threaten the entire financial system and freeze lending even more.
And that's why, as frustrating as it is -- and I promise you, nobody is more frustrated than me with AIG...
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... I promise...
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... we've had to provide support for AIG, because the entire system, as fragile as it is, could be profoundly endangered if AIG went into a liquidation bankruptcy.
It's also why we need new legal authority, so that we have the power to intervene in such financial institutions, the same way that bankruptcy courts currently do with businesses that hit hard times, but don't post systemic risks. And that way, we can restructure these businesses in an orderly way, that doesn't induce panic in the financial system.
