CNN IN THE MONEY
Are L-1 Visa Holders Taking American Jobs?; Oregon School Districts Out of Money; Should States Put Limits on Payouts on Lawsuits?
Aired June 8, 2003 - 15:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
ANNOUNCER: From New York City, America's financial capital, this is IN THE MONEY.
JACK CAFFERTY, HOST: Welcome to IN THE MONEY, I'm Jack Cafferty. Coming up on today's program: cheap and cheerful. We will tell you about the visa that's putting low-cost overseas workers into U.S. jobs and shutting Americans out.
Plus, class dismissed -- early. Some Oregon school districts letting the kids go because they're running out of money. We'll see how America's economic crisis is affecting the nation's student population.
Also ahead, legal eagles or vultures with a vengeance. We're talking lawyers here. States are putting limits on the payouts from lawsuits. We'll look at whether some attorneys have finally gone too far.
And here to boost our wit and sophistication factor for the next 60 minutes on today's program, CNN correspondent and my old pal Susan Lisovicz, and sitting in for Andy Serwer, who's on assignment for "Fortune" magazine, is his fellow editor at large for the same publication, Justin Fox. What do you make of the stock market? I mean, it just doesn't want to go down these days. What's driving that thing?
SUSAN LISOVICZ, CNN CORRESPONDENT: Well, I think there's some -- been some improving signs. I mean, the housing market remains strong, manufacturing had been weak, and we've been getting signs that there have been improvements there...
JUSTIN FOX, "FORTUNE" MAGAZINE, EDITOR AT LARGE: And the world didn't come to an end.
FOX: And, I think a lot of that was sort of priced in early in the year...
CAFFERTY: War related. Right.
FOX: ...that we were in for a horrible, horrible time.
LISOVICZ: But Justin can you say we really have a bull market now? A lot of people are afraid to say that...
FOX: I find it hard to believe in it. I just don't see how it can -- I can totally believe that stocks can hold their current values, but I just don't see it keeps going.
CAFFERTY: You know, the DOW pushed through 9,000, and twice in the last nine or ten months it's gotten up to 9,000 and then rolled over and gone back to retest the lows and there's a lot of anxiety, right now, whether the third time's the charm or not. What do you think?
LISOVICZ: Well, the DOW is now above 20 percent -- one of the ways that you characterize a bull market is if it's 20 percent off its lows and the DOW is well above that and that's, you know, one of the technical factors. The fact that it was able to stay above 9,000 even in the face of some bad news was encouraging.
FOX: I -- I mean, I bet we get another drop, but it'd be really encouraging if it doesn't go down as far as it did last fall, then we can start thinking -- OK, we're solidifying, and the economy is doing better. I mean, I think the economy, by the end of the year, is going to be growing and maybe even one or two companies in America will be hiring people, but I wouldn't bet on that.
CAFFERTY: You know, you're starting to hear those old phrases we heard back in the '90s before the market bubble burst like, you know, any pullback is a buying opportunity and any pullback represents consolidation of gains. Those phrases haven't been around in about three years, so it'll be interesting to see what happens.
All right, if you're a tech worker looking for a job, it is more and more likely that you're not competing with someone from across town. Rather, that you're up against someone in some other part of the world. The "New York Times" reports a growing number of U.S. tech firms are hiring people from other countries, mainly India, at cheaper rates than they'd have to pay Americans to do the same job. It starts when companies based abroad bring the workers here on what is called an L-1 visa, then those employees are contracted out to U.S. businesses. Congress originally adopted the L-1 visa to let American companies transfer workers from their overseas offices back here to the United States, but the number of those temporary visas reportedly jumped 40 percent between 1999 and last year.
LISOVICZ: That's a lot of people stopping by the head office. U.S. businesses say that the L-1 visa gives them the freedom they need to move employees with special knowledge of the company, but some immigration experts allege that the privilege is being misused. Last month Florida congressman John Mica, who's a republican, introduced a bill that would block companies from hiring foreigners on L-1 visas. He joins us now from Washington. Welcome.
REP. JOHN MICA (R), FLORIDA: Good to be with you.
LISOVICZ: So, your concern is just that you really want to tighten these visas, not that they should go away completely? MICA: Absolutely. What's happened is some of the international firms have found a loophole, and actually, most of the American businesses take advantage of lower-cost labor when they can, and given the opportunity by some of these enterprising body shops, they call them, we're seeing a huge influx of tech workers...
FOX: What do you mean by huge? I mean...
MICA: Oh, it's pretty substantial. We're talking about over 300,000 in the last four or five years, which is very significant impact in the high-tech area, particularly when you have had a downturn in that industry. So, they're looking for ways to shed labor and higher-cost labor and bringing these folks in and that wasn't what Congress intended.
CAFFERTY: Are these L-1 visas tech -- technology-specific?
MICA: That's right. They're tech-specific and it's sort of a tricky issue because when the economy was good you wanted to -- and high-tech was roaring you wanted to not interfere with the progress, growth of the industry and you -- we also, in a global economy, you wanted to allow inter-company transfers and have some of these folks come from abroad and work where they were needed, but what's happened is we've had a downturn and we've actually had an increase in the number of these folks coming in, and now they're supplanting -- what's really taken place is a few companies overseas have formed some shell companies, put these folks on their payroll, and then qualify to the, sort of the letter of the law but not the spirit and intent of the law, and that's what we want to close up. We're not going to eliminate these because it may be necessary for legitimate purposes, but folks have taken advantage of this and are using it as a loophole to bring in cheap labor.
LISOVICZ: Congressman, is there any concern about security? I mean, we've really seen -- seen people who are not American, that there's, you know, really been a tightening up in that area for the last couple of years. Is that an issue at all?
MICA: Well, there has been a tightening up and that's put a little bit of a clamp, but most of these people are not security risks they're a little bit of an economic risk, particular to America -- particularly to Americans that hold high-tech jobs and that's unfair. There's also the question, too, we have to be careful for because we don't want to move the whole operations of some of these high-tech software development offshore. We want to keep it in the United States. So, we've got to form a delicate balance to keep jobs here, but not allow this loophole.
FOX: Because, that -- I guess that's where I just get a little bit scared with any of this tweaking, is that clearly immigration is what makes this country great. In the '90s it was a big part of why our technology industry did so well. A lot of the greatest ideas, the best companies were the ideas of immigrants, a lot of them from India and I just -- clearly it's a balancing act. How -- how much do you worry about these kind of bigger economic issues of cutting back on immigration? MICA: Well, all you have to do is look at the statistics and people have taken advantage of this in a down economy in a down industry. Anyone who looks at high-tech sees the number of jobs that have evaporated, if you've got more people coming in from one specific area, and this is nothing against any nationality, my grandparents were immigrants. I strongly support legal immigration. This wasn't the intent, though, of the Congress or the purpose of the law.
CAFFERTY: What are you going to do to tighten these so-called loopholes? As long as there's a financial incentive for corporations to do what they're doing now, they're going to do it. To suggest that they're voluntarily going to say -- oh, gee, we're being naughty and therefore we're going to change our ways, I think is a bit that naive and yet if you get into the business of legislating what they do, then you're going to be criticized for regulating business, which a lot of people say there's too much of in this country already.
MICA: Well, the very first thing I want to do is eliminate the body shops, the shell operations where they're taking these people on as employees, meeting again, the letter of the law the way it's written now, we'll eliminate that provision. Also, there's tricky provisions because you can use employees, and there are certain restrictions on employees, and then you can also use contract labor and we've also seen them replacing personnel with contract labor, so we want to tighten up on a couple of ends, but leave open the opportunity for legitimate inter-company transfers where we have the need and real purpose of the law for high-tech development and exchange of personnel.
CAFFERTY: All right, congressman, we're going to have to leave it there. John Mica, republican from the state of Florida. Thank you for being with us.
MICA: Thank you. My pleasure.
CAFFERTY: All right, sir.
Coming up on IN THE MONEY as we continue, schools in trouble because the grown-ups are flunking math, as a budget crunch forces some Oregon kids to start summer vacation early. We'll look at what tight finances mean for education all around the country.
Plus, old enemy, new threat -- forget about SARS, we'll tell you why you ought to be afraid of the flu.
And same game, new rules -- more states drawing the line on cash awards in lawsuits. Find out what that means for business and for you, as IN THE MONEY rolls on.
CAFFERTY: Summer vacation off to an early start this year for students in dozens of school districts in the state of Oregon and the only ones happy about that are the kids. The "New York Times" reports a shortage of cash has forced 84 districts in Oregon to close ahead of schedule and Oregon isn't alone in feeling the budget pinch. Schools across the country, reportedly, suffering from budget cuts. But in Oregon, where there's no sales tax to balance out a drop in state tax income, nearly half of the school districts had to wrap up early this year. What's more, the money's tight all the way to the top of the ivy tower; we told you two weeks ago that tuition is skyrocketing at state universities around the country, as well.
For a look at how state budget problems are impacting American education we're joined from Washington, D.C. by Dan Fuller, the director of Federal Programs for the National School Board Association.
Dan, nice to have you with us. Thanks for joining us.
DAN FULLER, NATIONAL SCHOOL BOARD ASSOCIATION: Hi. How are you?
CAFFERTY: Besides Oregon who else is being affected in this way, and how serious is the problem in your opinion?
FULLER: Well, right now there are about 41 states that are facing severe budget shortfalls, which means that there are likely about 41 school -- states that will be cutting education funding, we're seeing it all around the country, from California to New York and everywhere in between.
LISOVICZ: Well, you know, Dan, let's talk about Oregon, for instance, because it closed it's schools three weeks early, now, that is, of course, alarming to a lot of parents who may have to get daycare early, for teachers who may have to take extra jobs, but ultimately we're concerned about education in this discussion. Does it really matter? Does three weeks earlier really have a long-term impact on a child's education?
FULLER: Well, what happened out in Oregon is, the local school board members made the tough decision. They didn't have the money, the money didn't come from the state and they were able to assess the educational impact, and they determined that the children's education would not be harmed if they had to end up the school year early through loading up more courses and things like that, so they were able to meet the funding shortfall while still educating the children.
FOX: Well, one of my concerns, here, is that every recession, and we don't have them as often now, so maybe people don't remember, we have these crises in state funding and because education is usually the biggest part of state spending it always ends up schools get closed -- I mean, is there any solution to that? Is there any way that every ten years we don't have this crisis? Because that's the way it's working now.
FULLER: Sure. Well, first and foremost the single largest factor that would help schools right now is for the federal government to fund the mandates that they require, for example, educating children with disabilities. Congress promised 28 years ago to pay 40 percent. 28 years later we are getting only 18 percent, that translates into about $10 and a-half billion that local schools have to make up. With the education of disadvantaged children, Congress created that program in 1965 and required schools to help educate children who are disadvantaged and right now they are funding it at about one third of the need, which means that, unlike Congress, local school boards cannot pass down -- pass along expenses.
FOX: Well, Dan, were you screaming about this three or four years ago when Congress had a ton of money, or is it just the kind of thing that nobody -- it's hard to get people to pay attention to when schools aren't being shut down?
FULLER: Oh, no, it's -- the problem is exacerbated as time goes on and we have been talking about this for a number of years and trying to get Congress to meet the requirements. When they tell you to do something, it's only fair that they should pay for it.
CAFFERTY: What about the amount of money that is lost or wasted through the mismanagement of the funds that are available, support of bloated bureaucracies? Rudolph Giuliani, when he was mayor of New York made a crusade out of screaming to anyone who would listen, about the bureaucracy that is the New York City Public School System. We spend as much or more per student in this city as I think they do anyplace in the country, but then you pick up a newspaper and you find out that there are janitors in the schools, here, making upwards of $150,000 a year to do janitorial work. I mean, what about that kind of money that should ought to be going some other place, perhaps, than to bloated union contracts?
FULLER: Well, I think it's interesting, the Educational Research Study Services did a study a couple years ago, and they found that many in the private sector, including manufacturers, had far more employees per administrator. For example, in manufacturing it was about 5.8 employees for each supervisor, in communications it was about 3.6 employees per administrator, in schools it's about 12.8 employees. So, I don't think we're talking about bloated bureaucracy. I think what we're talking about is incredible needs at the local level that's not being met.
CAFFERTY: What about the needs, though, that might be met if there was more attention paid to the kind of, perhaps, dramatic example, for example, those janitors' contracts? I mean, that's just -- you can't convince me that's money well spent.
FULLER: Well, what you're talking about most likely are these union agreements, but you're also talking about overtime, which is indicative of the fact that the janitors had to work harder and perform for more hours and they were paid overtime as a result of their union agreement. But, you're talking about a couple -- couple instances in the thousands of dollars where schools are looking at funding shortfalls from Congress in the billions of dollars.
LISOVICZ: So, with the exception of say, the New York City schools, which must be remarkably clean with those types of janitors' salaries -- what is your proposal? How do we ride through this very difficult time?
FULLER: Well, local school board members all around the country are making the tough decisions, right now and we've seen some very interesting things. I think first and foremost we need to get Congress to pay for what they require. No child left behind holds great promise, but it's just promise without the money, right now. So, when we get more money from the federal government -- and also what we're seeing around the around -- the country is tremendous community support for schools. Parents holding bake sales, fund- raising telethons, things like that. There was one example of a community in Oregon which actually donated blood and plasma to help pay a teacher's salary, so we're seeing support at the local level. school boards are make the tough decisions, and we could really use the support from Congress to help us meet these requirements.
CAFFERTY: That's a dire example, when you're donating blood to pay teachers' salaries. That would be a way to bring home the nature of the problem, I suppose. Dan, we're going to have to leave it there. I appreciate you taking the time to define what is a growing national problem along with many other budget shortfalls the states are facing. Dan is the director of Federal Programs at the National School Board Association, joining us from Washington, D.C. Thanks for being with us. I appreciate it.
FULLER: Thank you.
CAFFERTY: Still ahead on IN THE MONEY as we continue, danger in the air. We're going to talk about a virus that one doctor says will make SARS seem like something to smile about.
And, the price and pain of businesses and insurance companies who are getting hit by ever-increasing awards on personal injury lawsuits. We'll have a debate on whether or not the time is passed for tort reform and how it affects you and the economy. Stay with us.
CAFFERTY: Well, we've got some good news this week. SARS appears to be peaking, maybe even slowing down. One researcher, though, is warning an even more dangerous bug could be ready to strike. As of this week the World Health Organization attributed 800 deaths, just a little short of that, to SARS worldwide. The WHO says the virus is past its peak, but could stage a resurgence. Even so the financial damage, a lot of it's already been done. Fear of SARS has hit Asian businesses very hard, especially tourism. One World Health Organization official this week reportedly called it Asia's biggest economic disaster in 30 years, and the world bank's estimating the total cost of damage done to the economies by SARS in the range of $20 to $25 billion.
SARS may have passed its peak, but one World Health Organization doctor says we could face an even bigger threat from a much more familiar virus. It's the flu, as in influenza. It sweeps the world in what's called a pandemic about once every 25 years, although it comes around about once a year to most of us. The last pandemic occurred 35 years ago, and officials believe the next one is long overdue. Dr. Stohr is a project leader of the World Health Organization's influenza program, and he joins us today from Geneva, Switzerland.
Doctor, welcome, it's nice to have you with us. Why should I be that concerned about the flu? I get my flu shot, even if I get a little case of it every year, it seems to come and go in a few days. Why should I be concerned, now?
DR. KLAUS STOHR, WORLD HEALTH ORG.: That's correct. Most of the people who do have an influenza infection will certainly not have to be hospitalized, but there are in the United States more than 100,000 people every year who have to be hospitalized because of influenza, and up to 40,000 die. So, influenza is not just a little bit of a fever and coughing, it's really a disease which affect many people, particularly are those with chronic disease and who are over 60.
CAFFERTY: So, is SARS -- all the fears about SARS, is simply the result of the alarmist approach to a new and unknown virus that the news media got a hold of and blew into something bigger than it is or is it potentially the kind of disease that you're talking about with influenza?
STOHR: Well, with us we are being faced with new emerging diseases. We have no drugs, we have no good diagnostic tests, we have no vaccine, and the disease has, certainly, the potential to cause a global health emergency, as it has shown in the past. The disease can be controlled now; we believe if we continue with the drastic efforts which have been taken it can be certainly put back in the box. But, if we don't move now, it could certainly become a disease which we will have to deal with for the next years, and that is a threat which we are facing.
FOX: With the flu, sorry. With the flu is the issue that every quarter century or so it's a new kind of flu? Is that what makes it so dangerous, that's what creates the pandemic?
STOHR: Well, we have our annual epidemics, which are bad enough; more than a million people are dying every year from influenza. Now, this influenza virus has other surprises. It does not only change a little every year, it can every 25, 30 years, it's unpredictable when, make a big genetic change, and then the new virus which emerges will be deadly, no one is going to have immunity, and during the big outbreak during the -- three times during the last century, up to 50 million people died within a very short period of time.
LISOVICZ: OK. So Dr. Stohr, there's a lot we don't know, and you're certainly saying that we're overdue for this pandemic, but there's a lot we do know as well to how to prevent ourselves from getting sick with influenza. One of them is to get our flu shot, like Jack does dutifully every year, another is to keep our hands clean -- and what else can we do?
STOHR: Well, we can receive, every year, our influenza vaccination. It makes sense for everyone who is over 50 -- over 55, to get the vac -- the influenza vaccine. But this vaccine, which we are producing now, will not be effective when the pandemic comes, and the pandemic will travel around the world within three to six months. Up to 50 percent of the world population will be affected, millions of people will die. This is something which we have seen in the past and is worse, it's going to lead certainly to a global health emergency because of the burden to the health care system and to hospitals.
CAFFERTY: Why does so much of the stuff come out of Asia, doctor? We've had Asian flu, SARS originated in China. What is it about Asia that provides the rest of the world with these little organisms?
STOHR: Well, first of all, we must not forget that most of the people in the world are living in Asia. So it's -- and the same applies also to animals. So, it's perhaps a question of, perhaps, statistical probability, that many diseases are coming from a place where many people and many animals are living. In addition, we know that for instance, some viruses need very close contact with animals, as well as humans, like the influenza virus and the conditions appear to be more conducive to that interaction in Asia.
CAFFERTY: All right, Dr. Stohr, we're going to have to leave it there. Thank you very much for being with us.
Dr. Klaus Stohr, the project leader for the Global Influenza Program at the World Health Organization, joining us today from Geneva, Switzerland.
What an impressive program, we've got people on all the way from Switzerland.
Coming up next on IN THE MONEY: drawing the line -- more and more states are putting limits on payouts on lawsuits with everyone from surgeons to burger flippers calling for protection from high claims. We're going to have a debate on that.
Plus, your home is your castle, and it's probably your biggest investment, but some people think the value of that investment could soon head south. We'll talk to the author of a new book who says that there is a crash coming in the housing market.
And from law and order to home and hearth, if you have something to say about something on this program, write and tell us all about it. Our e-mail address is inthemoney@CNN.com. Back after this.
LISOVICZ: As personal injury suits get bigger, so does the fight over scaling them down. According to the "New York Times," people who want change say nearly 20 states are considering restrictions on medical malpractice and other suits. And in at least 11 others, lawmakers are reported to have already signed off on tighter rules. The battle over medical malpractice claims may be the hottest of all. Doctors say liability insurance costs so much it's putting many of them out of business. One medical group says the average price of coverage runs as high as 71,000 bucks a year for neurosurgeons.
CAFFERTY: Changing the system might mean more cash for all of us. A congressional study out last month reportedly says that tort reform could save U.S. taxpayers $15 billion over a decade. Then again, if you're in pain from a doctor's mistake, and they do make them, do you really want a cap on the amount of money you'll be able to collect? Joining us to debate that issue, a trial lawyer and someone who thinks that trial lawyers ought to be reined in. Barry Nace is a medical malpractice and liability lawyer and a partner in the Washington, D.C. law firm of Paulson and Nace. And Phillip Howard is the chairman of Common Good, a group which says it wants to reform what it calls America's lawsuit culture.
Let's begin with you, Mr. Nace. Susan alluded to the fact that, in her intro, that among other things, physicians are being faced with malpractice insurance premiums that are cost prohibitive, and, in fact, many of them are being driven out of the profession. Isn't it past time that something be done about the cost of the insurance, which is directly dictated by the size of the settlements that are being awarded?
BARRY NACE, ATTORNEY-AT-LAW: Well, I would agree with you that it's time that something should be done, but it -- and it should be with respect to the insurance industry, which -- the rates are not being dictated by the size of the awards.
There's a lot of data that shows that the awards have not gone up. If anything, the median has going down. The number of lawsuits being brought in medical malpractices isn't going up, it's going down. What we've seen over the years is that every time the insurance companies have a crisis of their own, because they're not making enough money, primary through their investments, what they want to do is raise the cost of insurance premiums.
CAFFERTY: But the cost of premiums is driven by their expenses, right? I mean, the more they have to lay out to pay damages collected against the policies they write, the more they wind up having to charge in the way of premiums, so there is a cause and effect thing to a degree, is it not?
NACE: No, it's not a cause and effect. A very small amount of that is what you would call a cause and effect. They lose their money in the stock market like a lot of other people do, and they've got to try to recoup it some way.
But when you know that the number of malpractice lawsuits is not going up, we know that the median awards are not going up, there's only one thing that's left, and that's the insurance companies not taking care of their house like they should.
PHILIP HOWARD, CHAIRMAN, COMMON GOOD: You know, that's just not accurate. Most of the -- over half the doctors are insured by companies that are actually owned by the doctors themselves. They are hardly gouging themselves. And most of the leading patient safety experts and consumer groups are now coming out for an overhaul, not only because doctors can't afford these premiums, which are driven by the increases in verdicts, which have doubled in the last 10 years, but also because it's making doctors paranoid. So, they are ordering -- they are wasting billions in unnecessary tests and procedures that could be used to take care of people who are really sick. NACE: This idea that they're wasting money doing unnecessary studies -- something's been around -- people talk about that a lot, but there's no data that shows that. And the data clearly shows that the malpractice awards are not going up, they are going down. This is the same thing that we hear year after year after year, and the data doesn't support it.
HOWARD: Right. And so what you have is insurance companies going out of business. The largest insurer, St. Paul, went out of business not because it was making so much money. It's really costing us much.
LISOVICZ: Can I put a question to both of you? One of the complaints, other than that we, by nature as Americans, are litigious, is that oftentimes the juries simply are overwhelmed by the complexity of the information, especially in medical malpractice suits, and that it's highly specialized information.
I would like both of you to quickly address whether you would be in favor of a special court just dealing with medicine, special courts that, say, already exist for other highly specialized area like taxes and patents? Would that be the answer to end the clogging in the systems and end these crazy awards and appeals?
NACE: Well, let's say first of all, there's not a clogging of the system. We have to start with that. Civil lawsuits make up a very small percentage of lawsuits. Most of the lawsuits that are filed are from companies suing companies, not individuals, not tort case and not malpractice cases.
But as far as who should decide these issues, the juries have been able to do this, they are intelligent people, they are able to figure these things out. If the jury makes a mistake at some time, and awards, quote, too much, end quote, we have safeguards in our system. We have procedures in which the trial judge has the ability to reduce the award to the amount that he thinks is fair and reasonable that a jury could award.
HOWARD: So, Mr. Nace, you're saying everything works perfectly now?
NACE: I think the system works very well. I have a lot of faith in the juries that do this. I have a lot of faith in our court systems to do it right, and they have been doing it right. These crazy awards that you hear about really don't occur. It's very seldom you hear anything like that in a medical malpractice case. They're very difficult cases for lawyers to put together, to start with.
HOWARD: You know, there are at least two problems with the jury system. One, the studies done by the patient safety experts show that the results are practically random. Doctors who did nothing wrong sometimes get hit with huge verdicts, especially in babies who are born with terrible problems, because the jury is very sympathetic to them, and often doctors who did something wrong get away with it. So, it's unreliable for both sides. And the unreliability of the system is exactly why we need a special court. It's better for the people who are really injured, and it's better for the people who have their lives on the line every day and in every examining room. The doctor, they deserve a system that's reliable to distinguish between right and wrong.
CAFFERTY: Let me ask you both this question, and Mr. Howard, I know you're in favor of change, and we'll get Mr. Nace to weigh in on this also. But, if, in fact, the system needs changing, how do you change it? How do you fix it? What do you do?
HOWARD: Well, we have a brought coalition of consumer groups and others who come together calling for a special medical court system. And so, we have their bills in Congress being drafted to -- for pilot projects to restore reliability to the system.
So, it will be better for consumers. Maybe they won't get rich, but they'll get money sooner without having to pay half of it to lawyers. And it's better for doctors who won't live in fear of being ruined every time a sick person gets sicker.
CAFFERTY: Mr. Nace, what's your answer. If you accept that it's an imperfect world, what needs to be altered, in your opinion?
NACE: Let's correct a few things. First of all, the lawyers don't get half of the money. That just doesn't happen, number one. And number two...
HOWARD: How much do you get?
NACE: I'm sorry?
HOWARD: How much do you get? A third?
NACE: Anywhere, depending if you're taking a federal tort claim case, you would get 20 percent, you may get as high as 40 percent, and please let me finish. If you are taking those -- you have to remember that the courts have to approve the attorneys fees. Right now for any minors, most places in wrongful death cases, they have to be approved. Nobody is getting -- the people aren't getting rich.
HOWARD: The total fees are between a third and 40 percent for the plaintiff's lawyer, and there's also a lot for defense lawyers, as well. If you add it all up, it ends up being more than half the money goes to lawyers. If you had a reliable system, that money could be freed up to go to people who really are injured.
NACE: Well, you know what? When I'm involved in a case, and it's me on one side, and I see the other side having six lawyers involved in the case, which frequently happens, there's not a lot of sympathy to say that, well, the doctors and the hospitals and the insurance companies have all these lawyers that they want to pay. They don't have to have six lawyers in these cases, so don't talk to me about the fact that they have expenses. They choose to have those expenses. HOWARD: Great, so let's go to a more reliable system where the court appoints the experts. It's much more efficient. You get the verdict sooner, and people could count on it.
NACE: The fact that a court would appoint an expert doesn't make anything more efficient or more satisfactory. We always have experts on our cases, and the defense always comes in with more experts because they can afford more, and they can pay more on these things.
CAFFERTY: Gentlemen, we are going to have to interrupt and bring this to a close here. We're not going to get this solved today, but I think we'll go away enlightened about some of the dimensions of the discussion that maybe we weren't aware of. Barry Nace, medical malpractice liability lawyer, and Philip Howard, chairman of the Common Good. Thank you very much, gentlemen, for your input.
HOWARD: Thank you.
CAFFERTY: Perhaps we will revisit this at a future time.
NACE: Thank you very much.
CAFFERTY: All right. Coming up on IN THE MONEY -- the big chill. We'll hear from an economics expert who says the hot housing market may soon be heading south.
And a chance to tell you -- tell us what's making your day, or we'll tell you what's making our day, or something along those lines. It's about the e-mail. You've seen this clip before. It's all about the e-mail.
CAFFERTY: Borrowing money to buy a house got even more painless this week. Mortgage rates dropped to their ninth record low of the year. Money has never been cheaper. Mortgage lender, Freddie Mac says you can get a 30-year conventional, fixed-rate loan for 5.26 percent.
Loan numbers like that just one factor driving a booming housing market that continues to reach new highs. However, some say the rapid acceleration in home prices has created a bubble, and our next guest says it's ready to burst. John Talbott is the author of the book, "The Coming Crash in the Housing Market". He's a visiting scholar at UCLA. He's a former investment banker with Goldman Sachs, and he joins today us from California.
John, nice to have you with us. Thanks for joining us.
JOHN TALBOTT, AUTHOR: Well, thank you very much. It's good to be here.
CAFFERTY: What makes you say we have a bubble? A couple of things that occur to me off hand, the regional nature of housing prices and the fact that we are probably going to have pretty cheap mortgage money around for a good long while. There's no indication the Fed is going to be raising rates any time soon. Why do you say we have a bubble?
TALBOTT: Well, those are both very good points. You know, traditionally, real estate is thought to have been a very localized industry, location, location, location, being the first three rules in real estate.
TALBOTT: But I argue in my book there's a systemic problem in the financing of mortgages and residential real estate today, and I give some very strong evidence. Thirty-nine years in a row, housing prices in the United States on average have increased. The last five months they're absolutely flat.
Last year, 199 out of 200 metropolitan markets in the United States showed an increase. This year, first quarter of this year, 60 percent of those markets are showing a slight decline. So, there's some evidence that we might be peaking.
FOX: Why is it not just going to stay flat? Why are you so worried that we're headed for some sort of big drop?
TALBOTT: Well, you know, my theory is that this isn't a real market. A real economic market you have to have lots of willing buyers and sellers, and although there's millions of home buyers and home sellers, I think they're all being driven by the same economic formula, which is the amount of money the banks will lend them, the qualifying formula.
And so, all the banks end up lending the same amount of money to everybody, and I know very few people who are willing to spend less than what they qualify for a home.
LISOVICZ: So, you're talking about bad credit here? You're saying there could be a lot of people who will default on their mortgages? Is that what you are really worried about?
TALBOTT: Absolutely. Absolutely. The personal bankruptcy rate in this country has gone from 200,000 individuals to 1.5 million over 20 years. The foreclosure rate is increasing every quarter and is up to 1.2 percent, and that's during the biggest housing boom in history. So, could you imagine if prices peaked or started heading south what would happen to that foreclosure rate? It's a very serious problem.
CAFFERTY: Have we ever had a dramatic housing bubble in the history of this country? I ask that in all honesty. I really don't know the answer.
TALBOTT: I don't know if nationally we have, but obviously, regional markets have. Houston did with the oil and gas. Boston did with the high tech. Here in Los Angeles, we had in -- right around the recession of 1989. I would say 1989, 1990 was the most recent.
CAFFERTY: Silicon Valley I guess had one, right?
TALBOTT: Absolutely. And I have brothers and sisters in Seattle and Portland, and they're seeing prices trade off there with the high- tech sector trading off.
FOX: Here's my problem. I've got a big down payment sitting around, still waiting to buy a place in New York, and everybody keeps telling me that there's a bubble and that prices are going to drop. And they just -- when is it going to come? I mean, I know this is schadenfreude on my part, I shouldn't be wishing for it.
CAFFERTY: Are you wishing for the rest of us for our homes to go in the porcelain facility so you can pick up a house at a bargain? What is this?
FOX: There's something to that, yes.
CAFFERTY: Since you ask.
TALBOTT: It's very interesting. You know, the people that interview me, they fall into two distinct categories, the renters and home owners. You can imagine which group is happy to talk with me.
But I don't pretend to be able to call exactly when markets can crash, but I can tell you a story about this market that will scare you and make you think that maybe prices aren't going to head to the sky, and this is good news for potential home buyers. I mean, for the first time, instead of thinking they have to buy in now or they won't be able to afford to, here they can take a different tack and say maybe trees don't grow to the sky.
LISOVICZ: But, you know, John, this isn't day trading. I mean, people buy homes, and they keep them for a long time typically. So, if prices come down a little bit, that would only be natural. In fact, housing moves in cycles just like the economy, just like the stock market. What's wrong with that?
TALBOTT: You know, if you substituted the words for "high-tech stocks" for the word "housing" in your last sentence, you would have exactly what I heard in 2000 for how the stock market reacts. People were convincing -- brokers were convincing investors that stocks are long-term investments and that over the long term, stocks do better than bonds, and so what is your risk in the short term?
And that's sort of extending a logical economic argument to its absurd extremes. I mean, you don't want to be buying in at the peak of any market, and all my analysis shows this is near the peak.
CAFFERTY: On the other hand, though, John, I mean, take a look. Where you make some money these days? Stock market for the last three-and-a-half years has been doing nothing but going down. There's been a couple of little vibrations that indicate there might be something going on, but the economy certainly isn't rolling back just yet. Bond market is, if anything, way overbought, and interest rates being as low as they are, how much more upside is there in bonds?
So real estate, in addition to being a shelter for American family, has become the investment, if you will, of last resort. Given the fact that there's no place else really to go out and make a buck these days, why shouldn't people keep putting money here? TALBOTT: I think you hit on one of the reasons why we're experiencing this increase in housing prices. You know, the market softened, the stock market's soft, the economy is soft. Commercial construction is soft. The vacancy rates are very high in the commercial sector, and yet housing is up dramatically in the last three years.
So, you know, I think what people are saying is they're pulling their money out of maybe some of the high-tech stocks where they've suffered in this century, and now putting it into what they think are bricks and mortar, and bricks and mortar, while they can't evaporate like some of the high-tech companies did, you have to ask that question, what price are you paying for that bricks and mortar?
CAFFERTY: Fair enough.
TALBOTT: Leon Cooperman, back in 1987, when I was on Wall Street with Goldman Sachs, they asked him, where should you put your money, given that the stock market was trading off, and he said, I would put half my money in cashed and half in canned goods.
CAFFERTY: Well, cash doesn't -- go ahead.
TALBOTT: There is some logic to that, and that's a funny answer. The logic is that very smart, wealthy people, when markets are peaking, take their money off the table, and when people with leverage get in trouble, they come in and buy assets very cheap. So...
CAFFERTY: Investors makes profits, pigs get slaughtered, as they say. There's a time to get out.
If you're concerned about the crash in the housing market, that's the name of John's book, "The Coming Crash in the Housing Market". John Talbott is the author. John, appreciate you having the time to spend with us here today.
TALBOTT: Oh, thank you very much.
CAFFERTY: I'm a homeowner, I hope you're wrong.
We're not catching bouquets here on IN THE MONEY, but you can toss us an e-mail. Tell us what's on your mind at firstname.lastname@example.org. Back in a minute.
CAFFERTY: If you feel the need to communicate, you've got something you want to speak about, get up off the couch and get over to the keyboard and get about the task at hand. The e-mail address for this program is email@example.com, and that funny looking dude has nothing to do with answering the mail, but another funny looking dude, Dave Novak, does. Back after this.
CAFFERTY: Funky music. Time to check the e-mails for the week. A lot of you weighed in on our story about corporations that have subsidiaries in Iran. Thomas in Arizona wrote to us and said, "I can't help but think U.S. oil companies like Halliburton are running American policy. Clearly, we are not out of the woods with such corporate ethics."
Our segment on suicide bombers and what motivates them also produced a lot of reactions. David from California writes, "It is time for us to use a weapon we invented in the first place, public relations. We have got to convince the general Muslim population that we are decent and kind people. There used to be a saying that running the world is not a popularity contest. With one terrorist capable of carrying as much force as an army, it is now a popularity contest."
And our debate on how the new federal tax cuts will or won't help American workers produced this comment from Mary in Missouri, "I think if the government wants to really get job growth, it needs to quit sending jobs overseas. Here in Missouri, when we call the state capitol, you get somebody in India."
INTHEMONEY@cnn.com is the e-mail address. We'll pick a few, read them every week. We pick a lot more and totally ignore them. And that's it. We appreciate you joining us for the last hour. We will see you next Saturday on IN THE MONEY or tomorrow morning on AMERICAN MORNING, at 7:00 Eastern time. Have a great week and thanks for watching.
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