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Encore: CNN Money Summit

Aired January 31, 2009 - 20:00   ET


ANDERSON COOPER, CNN ANCHOR: Thanks for joining us for this, the first CNN "MONEY SUMMIT." It's happening at a time and a place that most of us have never seen before. The global economy, our economy is sinking.

So are the hopes of many to keep food on the table, or roof over their heads and a future safe from want and fear. People are scared and understandably so. The new President, well, he's trying to sound cautiously optimistic.


BARACK OBAMA, PRESIDENT OF THE UNITED STATES: All we can do, those of us here in Washington is to help create a favorable climate in which workers can prosper, businesses can thrive and our economy can grow. And that is exactly what the recovery plan I've proposed is intended to do and that's exactly what I intend to achieve soon.


COOPER: Well, the problem is as always not everyone shares the urgency or agrees on what to do. The best that we can do right now is to try to lay out the problem for you, lay out all the angles and walk through the same solutions that the new President and policymakers are considering right now. To put everything on the table so you can decide for yourselves.

For that and for the rest of the CNN "Money Summit" let's turn things over to CNN's chief business correspondent and author of "Give Me My Money Back," Ali Velshi -- Ali.

ALI VELSHI, CNN CHIEF BUSINESS CORRESPONDENT: Anderson thanks, the idea this hour is to bring some of the brightest minds to bear on the problem and we have. And to approach it not just as they see in Washington or on Wall Street, but from your standpoint to address each aspect of this economic crisis as it affects you at home, at work and in the marketplace.

In a phrase, "Your Money, Your Future." And in another, "What's the plan?"

We'll be looking at plans from the White House and others to pump up the economy. We'll examine how each proposal and mix of ideas is likely to create or preserve jobs, a tough task, even in the best of times when it takes 100,000 new jobs a month just to keep up with the growing population. Also in this hour, the housing mess, how we got into it, what it's going to take to get out of it and this, a provocative question, was it a mistake to encourage so many people to own homes in the first place?

Well, speaking of mistakes, where were the regulators? Where was the oversight in the housing market and on Wall Street? We'll tackle that.

And throughout it all, we'll keep our eye on what this is doing to the American dream of prosperity and progress and people overcoming adversity.

Well, with us throughout the hour a panel of distinguished experts, including "Fortune" managing editor, Andy Serwer and CNN senior political analyst, David Gergen. We'll get to our panel in a moment.

But we begin with the big picture, one that seems to grow darker every day. This is easily the worst economic situation facing an incoming administration in generations. And there is very little agreement on the best way to solve it.


VELSHI: The recession is now in its 14th month, close to the longest the United States has ever seen. And while it didn't start with job losses, unemployment is now issue number one for this administration; 2.6 million Americans lost their jobs in 2008. And 2009 has started with companies announcing more than 200,000 job cuts worldwide. Many who still have a job, fear losing it and hold back on spending, that slows the economy down even more.

OBAMA: These are extraordinary times and it calls for swift and extraordinary action.

VELSHI: The new President has a plan to create or save up to four million jobs. That's a start, assuming you believe the government can create jobs and some people don't.


OBAMA: So help me God.

VELSHI: Despite his electoral victory and a Democratic majority in Congress, passage of the recovery plan is no slam dunk, nothing with the number 800 and the word billion ever is. And some conservatives say enough is enough with government spending.

We all, our government, our employers and us borrowed too much money. But borrowing has been a lot tougher since the credit crisis set in. October's $700 billion bailout was supposed to solve that problem, it didn't. Half of it has already been spent, pumped into the banks, but loans are still tough to come by.

That means would-be home buyers can't close the deal despite home prices that are down, on average, 15 percent from December 2007. Any pick-up in lending is now too late for another 3.1 million Americans who lost their homes to foreclosure in 2008.


VELSHI: And then there's the stock market, 401(k)s and IRAs were devastated in 2008; that's what the year looked like. Millions of Americans have turned their backs on Wall Street, fearing more losses and feeling betrayed by the financial regulatory systems and the scandals like Bernard Madoff.

Trust will take time to rebuild, perhaps more time than many Americans have.

So let's start there with our panel. Let's start with Andy Serwer, a managing editor of "Fortune."

Andy, you have followed every portion of this development in the last couple of years. The issue is confidence, the issue is trust and there's very little reason for our viewers to have any of either.

ANDY SERWER, "FORTUNE" MANAGING EDITOR: I think that's right and that's what President Obama is working on fundamentally. I mean, the centerpiece of his program is the stimulus package, but the President needs to show that he's assertive, that he has the political capital to get this passed and to show that he has a plan to get America back on its feet again.

VELSI: Let's talk to our senior political analyst at CNN, David Gergen. David, you have seen the challenges that any administration comes into office with. These haven't been seen in our generation, or in our lifetime.

DAVID GERGEN, CNN SENIOR POLITICAL ANALYST: They haven't been seen in our lifetime, we have enormous perils here, but politically, we haven't seen a President come in with this deep a reservoir of support, of trust, of confidence as Barack Obama has. Now how long it will stay, how long it will remain is one of the great political mysteries. But as he starts, he has enormous support from the public here in this country and overseas.

VELSHI: Jeanne Sahadi, senior writer at You have spent so much of your time writing about these specific issues, and they are so complicated. We're sure that everybody in understands the depths of it. How does the viewer or how do our viewers understand what's at stake here.

JEANNE SAHADI, SENIOR WRITER, CNNMONEY: I think you have to have a little bit of patience with lawmakers. Even though you may not like them, this is a really tough problem to unknot -- everything is sort of intertwined, and you move one thing and it breaks something else. So I think they're trying their best.

When I talk to people, they say this is basically a big experiment, what they're doing. Everybody that stands up and says this will work and that won't work, is not telling the truth. They're not quite sure how it's all going to play out.

VELSHI: They don't really know.

All right, what we do know Amanda Gengler, is that this economy is so dependent on the consumer and the consumer has checked out for a little while. They are a little concerned about what's going on. They are not buying anything from cars to houses to smaller things like that.

What has to happen to get the consumer more confident about this economy?

AMANDA GENGLEER, WRITER, MONEY: We absolutely put our brakes on at the end of the third quarter. And I think one of the things that consumers need to figure out is where their money in the future is going to come from.

So much of our spending came from our home, home prices were going up so fast that it was just a Piggy bank and guess what, that's not there anymore. So we're going to have re-adjust our spending patterns to what the future holds.

VELSHI: Amanda Gengler, is with "Money" magazine.

Telis Demos, what's the most with "Fortune". Telis what's the most important thing? If the President had to choose one thing to focus on to fix this economy, what is it? Is it jobs, is it housing? Is it the banks? What do they have to turn their attention to most importantly?

TELIS DEMOS, WRITER, "FORTUNE": I think the place that he has to start is with the financial system, with the banks. I think that in order to get consumers feeling better about the economy, in order to get businesses investing and growing, there have to be banks willing to lend. There has to be capital out there for businesses to turn into jobs.

You know, the government can only do so much.

VELSHI: But people are so angry at the banks. They feel like they've been given these bailouts and that they're not lending as we expected they would. And really, what people think about the banks is, the headlines that they see in the newspaper about banks doing irresponsible things and people renovating offices and people buying jets.

Are we going to be able to get over that, Walter?

WALTER UPDEGRAVE, SENIOR EDITOR, MONEY: Well, I mean, I think that the problem is, you want the banks to lend, but you have to have people out there with the confidence of borrowing and that they're going to have money to repay the loans and that they're going to have money to spend.

So on the one hand, you want to encourage people to spend, but people are basically tapped out. And, in fact, looking at this longer term, we really need to have people starting to save more, which is a little bit contrary to the short-term solution. So there's a little bit of tension here about what the President needs to do in the short-term to stimulate the economy and what people are beginning to realize, some habits that they have to change if they want to survive long-term and build wealth for things like retirements.

VELSHI: That could really hurt us though, if people do change those behaviors and start to save which is probably what they need to do.

Katie Benner of "Fortune" magazine.

KATIE BENNER, WRITER, "FORTUNE": I was -- going back to the idea of trust. I think one of the things that Telis was saying of having the banks back on track, one of the reasons why people find it difficult to understand, and is this important is because they are angry.

But what people don't understand is that what was happening on Main Street with their homes was so -- so intertwined with what was going on with the banks. Neither would have been possible without the other. You wouldn't have gotten your huge house and you're great mortgage if Wall Street hadn't been packaging you're loans. And Wall Street wouldn't have gotten more and more credit if you hadn't been buying a house.

So for as angry as we might be at the financial system, we as consumers helped fuel it. We, as consumers are going to have to cut back like everybody else. And everybody is going to get a bailout. It's sort of like the moral hazard question and blaming people and feeling betrayed. You have to put that aside and just work together.

It's like you can't divorce the financial system. It's not like a spouse you can get rid of because they betrayed you. We're stuck with one another.

VELSHI: Well, you could. If you could divorce the financial system, we would be looking at the biggest divorce in history.

David, this is not science, it's not chemistry, its confidence, its trust. They have to be able to say, they feel -- the American people feel that Washington has let them down. They certainly feel Wall Street has let them down.

And Barack Obama comes out and says I'm confident that we can fix this. Where does that honeymoon run out? What has to happen for people to continue to believe that?

GERGEN: We don't know, we've only had one President in modern times who has gone through on anything like these and that was Franklin Roosevelt. He didn't get us out of the valley, but he did build a bridge of hope across the valley, he gave people more hope in the future.

And gradually things started turning and changing, he did get people to work. The CCC for example, for the first two months in office, he had 275 people working in the woods; on the Civilian Conservation Corps. There are things like that that can be done. Here's the interesting question. To go back to Jeanne's point, right now we have an administration. We have people on Wall Street who have never seen times like this and they simply don't know the real answers. They're going to experiment.

But the answer to your question is, if he can get things -- the wheels turns in Washington, people have trust in him, well, they then start having more trust in the future, and they then start buying things. When they see things start -- the wheels start to turn, well, they get back into the game.

VELSHI: Trust and confidence are two important measures in getting back the American consumer, getting back the American investor and getting us all back to another road. There is also the other fact, we all have to have work.

We'll have more with our panel. Just ahead, job losses and how to shift the tide to put America back to work. What works best and what works fast? When our CNN "MONEY SUMMIT" continues.



JOHN STEVENS, IREPORTER: I just want to work, I want to support my 4- year-old son. I want to be able to pay my bills and I want my life to go back the way it was.


VELSHI: That was iReporter John Stevens and he's not alone. Our economy needs to grow just to keep up with the growing number of people who are coming into the job market.

Yet every day the headlines reflect a shrinking economy, losing in a matter of days the number of jobs that it should be creating in a month: 10,000, 30,000, earlier this week, more than 70,000 layoffs announced in a single day.

Let's have a look at the job situation in this country. The unemployment rate in America is now 7.2 percent. And that may not even reflect the full case because so many millions of Americans are under-employed or have been unemployed for so long that they're actually off the rolls.

But let's take a look at this map. These states in red are those with an unemployment rate that is higher than the national average. In fact they are worst off than the national average, that's another way to look at it.

Take a look at the U.S. south, if you take a look at these states. Florida has an unemployment rate of 8.1 percent, Georgia 8.1 percent, South Carolina 9.5 percent, North Carolina 8.7 percent, Indiana 8.2 percent, D.C. 8.8 and Rhode Island 10 percent. One of only two states with an unemployment rate that is in double digits and the other one is Michigan and that's pretty obvious with all those auto industry losses.

There is not much hope for those people in Michigan but take a look at the West. California has an unemployment rate of 9.3 percent and some of the highest foreclosure rates in the entire country. Same with Nevada, highest foreclosure rates in the country and not a lot of relief, because of an unemployment rate of 9.1 percent. Oregon faces the same problem, 9 percent unemployment.

There are fears that unemployment in this country could actually reach double digits and it's one of the biggest issues that's facing this administration.

Amanda Gengler, from "Money" I want to ask you -- the administration has come up -- President Obama has come out with a plan that says that they can create 3.6 to 4 million jobs, create or save, they say, in the next couple of years.

Is that something that our viewers can look to as a place to place some hope?

GENGLER: Absolutely. I think that -- we aren't going to know how well Obama's plan works, whether or not he can achieve that. It's not clear where you should head next. If you're a mortgage broker or someone in finance, your job might never return.

So where do you go? Well, you look at where Obama plans to invest money in the future. And you can see, the health care, education, those are industries that generally hold out fairly well in a recession.

Maybe you want to study civil engineering or learn about green building design. You really can look to where he plans to put money as sort of a map for where you should begin your job search.

VELSHI: And you could take a look at the biggest losers in industry in the last year, in the last few years. We've lost so many jobs in manufacturing; we've lost many jobs in construction. Along with taking clues from the administration's plan to create jobs, you can also look at the trends from the jobs that were gained or lost in 2008.

Let's have a look at the biggest winners and losers from the year. Hospitals and health care added 335,000 jobs, education, as Amanda was talking about, added 97,000 jobs and the government added 84,000 jobs. Although it's not always a sign of healthy economy that the government is one of the growing areas of employment.

Let's take a look at the big losers, administrative and support services, losing 640,000 jobs, typical office jobs; specialty contractors and construction losing 545,000 jobs because we're not building homes. And that's such a big part of American industry.

Transportation and equipment losing 174,000 jobs; there are many jobs that have been lost in manufacturing as those factories close down.

Stephanie, you've covered the technology industry which was so much the heart of growth through the '90s and early 2000s. Where is that in this environment? Is that still a logical place for our viewers to think about if they're looking at retraining or going to college?

STEPHANIE MEHTA, ASST. MANAGING EDITOR, FORTUNE: Well, technology is always going to be a really important part of the American economic landscape and there's no question that the technology sector stands to benefit from some of the stimulus package. As Amanda alluded to, there's a lot of money earmarked for modernizing health care systems and specifically computerizing and digitizing health care records.

Technology really was a driver organically of leading the United States out of the recession. In the 1970s, it was semiconductors. In the 1980s, it was the personal computer and as you alluded to Ali, in the 1990s and in 2000 there was the Internet.

There's no big idea just waiting to burst out right now out of Silicon Valley or out of the technology sector. There's green technology. There's health care digitization, there's a couple of things, but they're all small things.

VELSHI: So that's something you can really --

MEHTA: It's nothing like the Internet that created EBay --

VELSHI: Right.

MEHTA: -- that created Amazon, that created not only new industries but also lots of new businesses and jobs.

VELSI: So Andy, is that an opportunity for President Obama? Can he find what that is, he's sort of hinted that it might be an alternative energy environment? Is that big enough?

SERWER: Well, don't underestimate green, Stephanie. I really think green technology is going to be huge and if you think about in its totality, and not only energy sources like solar but think about the auto industry too.

We're going to redefining that business, it's going to get remade in this business. We're going to be making cars for a long time. It may be battery-based and there's a whole explosion of technology going on in that area as well.

And I look for other businesses that are in the tank right now to be revived as well.

We're talking about finance for instance. The need for financial planning is going to go on for a very long time in this country and in fact people need that advice more than ever. So that's not going away either.

VELSHI: The debate, David Gergen, here is almost ideological about whether or not government can create jobs. What role government has in creating jobs and quite simply, there are some who say government should get out of the way of that and just lower taxes and let business do it and others who say government can have a very important role in a recession in creating jobs.

You've been in government, what can they do?

GERGEN: I think there's a remarkable consensus actually among economists on both left and right. Including many strong pre-market economists are saying the government should stimulate now, the government should inject money into the system now and help create jobs and help get the wheels turning again.

And the idea right now, Ali, within the White House and within the administration is, we're going through a transition now in the next couple of years. They put money in many cases for more traditional jobs: roads, bridges, infrastructure, paving, rebuilding, building new bridges.

Those are more traditional jobs, but in the long-term, what they want to do is move toward a new wave of green jobs and then over that with the horizon they're hoping there will be a whole new wave of biotech jobs. That's farther down on the road.

UPDEGRAVE: I mean, I think there is a consensus that the government should be stepping in to create jobs, --

GERGEN: Right.

UPDEGRAVE: -- stimulate job generation, that sort of thing.

But the idea that the government can somehow decide or pinpoint what areas in the future are going to be the most productive areas or where this big new idea is going to come from, I don't think there's much basis for that.

GERGEN: They're not going to be choosing -- this is not industrial policy, this is not choosing winners and losers as we would have done under an industrial policy. It is putting much more money into research and innovation and then on the private sector, hopefully we don't try to nationalize.


VELSHI: Jeanne, can we do it?

SAHADI: Well, I have some not great news from some economists and also from Obama's team. They look at his jobs plan and say, yes, 3 million to 4 million jobs they say they've created. But they say that's not going to be the answer for the economy.

If we were going to be by the end of 2010 where we would be for the economy to be in good shape, we would actually have to create 8 million jobs in those two years. So for us to get back to so-called normal, it's going to be more around 2012 is what I'm hearing from economists.

VELSHI: Katie did --

BENNER: Well, I just want to say, I think one of the reasons -- it's not trying to pick winners or losers. If you go back in time for just a second and one of the reasons that the U.S. became an economic power house is because we both consumed and produced.

VELSHI: Right.

And now all we do is consume. And we're global now, so until we can find a thing to produce that not just Americans but the whole world wants to buy, we're not going to be a power house again.

VELSHI: Telis.

DEMOS: We're coming out of such a huge hole, through our national deficit. I mean, we've got trillions of dollars to repay. And every dollar that we spend today, unless it's really productive in the future, it's just a losing proposition for us, just because we have so much of that to pay back.

And that's why a road or a bridge might employ somebody today, but how much is that going to return over time. Whereas investing in a kid's education, a kid's science education, that might pay dividends -- huge dividends, if they invent the Google of 2015 or something.

VELSHI: Well, that's this summit is about. Figuring out, we know the money is going to be spent, what is the best way to get a return on every dollar that is spent on stimulus or anything else by this government?

Just ahead, the match that lit the powder that blew a hole in Wall Street and then the rest of the economy. How home sweet home turned bitter and what to do about it next.



OBAMA: For homeowners who are victims of fraud, I have also proposed a $10 billion Foreclosure Prevention Fund that would help them sell a home that is beyond their means or modify their loan to avoid foreclosure or bankruptcy. It's also time to amend our bankruptcy laws so families aren't forced to stick to the terms of a home loan that was predatory or unfair.


VELSHI: That was the candidate Obama on the campaign trail making promises. Now President Obama has to deliver. The housing crisis is now affecting everyone whether or not you own a home.

Let's talk about how we got here, how to get out and at the end of the day, how to turn houses of horror back into home sweet home.

Now, the housing crisis was really the trigger for this recession. And never before in America has housing actually triggered a recession. But to give you some sense of how big a deal it was. Let's see how we got here. Now, this is a scene that played itself out across the United States and that's it illustrated for you, and we're showing you Anytown, U.S.A. And have taken a real town and we've superimposed a grid and a chart to give you a sense of this housing bubble and how it burst.

Let's take you back to 1979. Now, back in 1979, the price -- the median price of a single family home in the United States, that's the most common and popular type of home, well, the median price was just $153,000 and that's adjusted for today's prices. The median is the price at which half of all homes are sold for more than that price and half are sold for less.

Well, let's go from 1979 to 1989. We had a bit of a recession there and home prices came down but they went back up. And so by 1989, the same median price for a single family home in the United States had gone from $153,000 to $167,000. And as you can see, the median price was going up and the size of the home was going up too.

But what happened between 1989 and 2006 was truly phenomenal. Take a look at this. The median price of a single family home went from $167,000 in 1989 all the way up to $276,000. And take a look at that median home. It's a lot bigger than the last ones that we were looking at.

This is what had happened. Home prices had been going up for ten straight years. People began to think that home prices could only go up. And as a result, they were using their homes as a piggy bank.

Well, our chart doesn't go much beyond 2008 because we don't know what's going to happen in 2009 and what's going to happen after 2009 could determine whether or not we get out of this crisis. So the best guess is that we have to solve this housing crisis along with everything else in order to get our economy back on track again.

Let's start with Amanda Gengler, how big a deal is it that we start getting housing prices back up? Can we get out of this crisis? Can we get out of this recession? Can the Obama administration lead us out without a definitive plan to fix this housing crisis?

GENGLER: No, and we have not had a good plan yet. I mean, the housing crisis is what got us here.

Now, from a consumer standpoint, there's one thing that has been talked about for a while but seems to be gaining some traction right now which is allowing bankruptcy judges to come in -- if someone files for bankruptcy and restructure their mortgage. If that happens, that would be the most aggressive stance that we have taken directly at the homeowner, at the consumers to stop foreclosures, because that's what needs to be done.

VELSHI: Telis, you have made a point that you think solving the banking issue, the credit issue is the biggest deal of all. Is this part of solving it? Does the administration force banks to lend or do they actually go right to the heart of the problem and restructure people's mortgages like Amanda was talking about. TELIS DEMOS, WRITER, FORTUNE: Well, I think that banking has two aspects related to housing. One is that part of the reason that the housing market, that you can't get a good price for your home is because there's no buyers. And there are no buyers because nobody can borrow money because banks are not lending.

And the other thing is that banks which are invested in mortgages through these securities that packaged millions of mortgages together, they don't know what the losses are going to be on those because the price of houses keep falling. That's another reason that banks can't lend to any sort of businesses because they've got these huge liabilities on their balance sheets. They owe trillions of dollar they don't even know yet for housing.

So that's why I think getting banks confident about exactly the extent of their losses on housing is an important part of getting that market going again. That's why, again, I think you've got to start with banking.

VELSHI: Again, the phone calls and the e-mails we get here at CNN: "Where's my bailout, I didn't do it wrong, when does somebody come in and save me?" How does the administration tackle this?

GERGEN: What the administration is planning is just after they get this stimulus package passed, which they will get -- they will be disappointed about the number of Republican votes, obviously. They'll get that passed then they're going to come back with a revised way to spend the additional money -- the $350 billion from the TARP program.

And they're going to do two things: one is to address Amanda's point. They very much agree that you've got to stop the foreclosure rates. The people in their homes now have got to be protected in some way. There are a variety of ways you might want to do that, you might renegotiate mortgages. There are a variety of ways to do that but that's going to be a new element.

The Bush administration rejected that; they didn't want to make that part of TARP.

The other part of TARP is how do you save the banks themselves with all these bad assets? And what do you do about that. Clearly you're going to need to put more money into the banks. They would like not to own the banks. They would like not to engage in nationalization. There is a growing fear that's where we may wind up.

VELSHI: Let's just address the foreclosure issue for a second. Let me give you a sense of where it's the worse in the country. You'll recall that there were a number of states where home prices had increased in double-digits. While we should you that chart earlier of how home prices have gone so high, there are some parts of the country where you had seen home prices go much higher than the national average, largely because of speculation.

Las Vegas is really the heart of this issue. The foreclosure rate in Las Vegas, according to an organization called Reality Track is 8.89 percent. That means that 8.89 percent of all homes in Las Vegas are at some point in the foreclosure process.

It means that the homeowner could be 90 days late. They might have gotten their first notice, all the way to the fact that the home might have been repossessed and in this case what happens in Vegas doesn't necessarily stay in Vegas. That pattern repeated itself in Arizona, in parts of the southwest, in Colorado, big retirement places.

It also happened in Florida. Florida was one of these big places where people would buy properties for speculation. There was a real rush to get into those properties and those property values collapsed. What you are seeing in the west and in Florida now is a pickup in home sales because those places that went the highest also collapsed the most and home prices are now very low in those areas.

It's a different story in parts of the Midwest which have also seen massive foreclosure rates: Michigan, Ohio, Illinois, factories closing down, jobs being lost, entire towns being crippled and as a result of that, people can't get out from under their homes; that maybe a different story. There's no real obvious guesses to when foreclosure rates are going to end in those particular places.

But Walter, ultimately, is it crucial to the recovery that we somehow address foreclosure and those people who haven't been foreclosed upon who feel that they did the right thing and everybody else is getting bailed out. We call it moral hazard, you help some people out and you reward bad behavior.

WALTER UPDEGRAVE, SENIOR EDITOR, MONEY: We got into this through a housing bubble and I don't think the solution to a bubble is trying to pop a profit up again on the down side. Housing prices have to settle to a level where people will be confident that they bottomed out and they can actually come in and buy a house without going down a whole lot more.

I think it's hard to do that when you're sort of manipulating the foreclosure rate.

ANDY SERWER, EDITOR, and FORTUNE: And we have to let prices settle, as Walter suggests. We have to address bad assets and then we also have to make sure that people who want to get homes can get homes. So it's a very difficult thing to try to achieve.

And I'll take what David said a step further. I think the Bush administration was negligent in not addressing this. And I think there are tremendous amount of plans right now. I know there's a lot of back room discussions with Larry Summers, with Tim Geithner, with Sheila Bair from the FDIC who's been on point in terms of really having the good plan, trying to settle what's going on at Indy Mac.

VELSHI: All of these different places, you have listed about six of them already.

SERWER: Right. And there's about a dozen more than that.

VELSHI: And is there one man or should there be six? I mean, part of the problem is that I think a lot of our viewers have no idea that there's something being done.

SERWER: That's right. There's -- things are being done. And I liked David's idea or notion that this is happening after the stimulus plan goes through. We're waiting, you know, we're waiting here and I think its months overdue.

VELSHI: Just ahead, the men and women who were supposed to be looking out for you. What are they doing about regulation? How they fell down on the job and let the scammers and the schemers and the predators run wild. But maybe, maybe also how we all fell down on the job by electing and entrusting them.

That and more as our CNN summit continues.


ERICA HILL, CNN CORRESPONDENT: I'm Erica Hill, more of our "CNN MONEY SUMMIT" in just a moment.

But first the headlines: a horrific scene in Arizona where at least six people are dead following a bus crash, another 16 injured. It happened 27 miles from the Hoover Dam. Officials say this was a single vehicle accident.

Did a cop charged with a New Year's Day murder think he was using a taser instead of a gun? That is what his defense attorney maybe suggesting in court papers. The video allegedly shows the former Bay Area Rapid Transit officer standing over an unarmed man before shooting him in the back. His bail was set today at $3 million.

And they're calling it the worse ice storm in Kentucky's history; more than 600,000 customers without power. At least nine deaths have been reported; 78 of the state's 120 counties in a state of emergency.

Those are your headlines at this hour. I'm Erica Hill. More of the "CNN MONEY SUMMIT" in 90 seconds.



OBAMA: In the last few days, the alleged scandal at Madoff investor securities has reminded us yet again of how badly reform is needed when it comes to the rules and regulations that govern our markets. Charities that invested in Madoff could end up losing savings on which millions depend; a massive fraud that was made possible in part because the regulators who were assigned to oversee Wall Street dropped the ball.


VELSHI: Let's talk about scandals now with the proviso that only some of them involve law breaking. Editor Michael Kinsley (ph) once observed that often times a scandal is what is perfectly legal.

We have seen predatory lending, Ponzi scheming, unbelievably negligent accounting, bad underwriting -- you name it. Some of it criminal, some of it actionable but some of it within at least the letter, if not the spirit, of the law. All of it outrageous and much of it either unseen or overlooked by the people responsible for spotting it.

Back to our panel now.

Telis Demos from Fortune, I want to ask you, because you think that we're looking for lightning rods, we're looking for people to blame. But in the case of Bernard Madoff, for instance, a scandal that really has rocked the world, you think that the SEC wasn't necessarily negligent in not catching this?

DEMOS: I think there's been a misunderstanding of the SEC's role. I think some people imagine the SEC is like the CSI of financial crime scene of the day. Look at documents, was this faked? Was this added later? That's not really their job.

The SEC is a rule maker, they create institutions about how businesses should do their books, rules about trading and things like that.

So the Madoff -- what he did really went beyond the pale of any sort of previous financial scandal. It wasn't just accounting chicanery; he was making things up. He was just making up trades, saying that he bought a stock at a price on a day in which it never traded.

VELSHI: The SEC wasn't built to solve that problem?


VELSHI: Walter, I think you'll agree with me here that the takeaway for the average person who doesn't have tens or hundreds of thousands of dollars to invest is that if you do remain diversified and you follow some very basic investment principles, then the worst scandals are still going to only be a small piece of your portfolio.

UPDEGRAVE: Right, you're not as likely to get hit. And I think Telis makes a great point here about the SEC and what its role is. It would be unrealistic to rely too much on it.

There are thousands of independent investment managers out there, money fund managers, hedge funds, there's no way one agency is going to be able to keep track of them at all unless we want to spend millions of dollars --

VELSHI: It's kind of like the pre-9/11 national security framework for finding out what was going. There are trends that couldn't be determined because too many people were looking at too many different things, don't you think?

GERGEN: I just fundamentally disagree that the Securities and Exchange Commission wasn't set up to police and enforce a set of rules about transparency and honesty and fraud. That's why we created it back in the 1930s.

For a variety of reasons, partly having to do with ideology that people wanted to stand back and let the market run. Alan Greenspan, to his credit, has said one of the fundamental mistakes he made was just to trust that the private sector would look after itself, would be self-policing.


GERGEN: We stepped back too far. You need to get the SEC and we need better people to go into the SEC. We've denigrated government jobs so much we don't have the kind of talented people that once went in there 20, 30, 40 years ago as young lawyers who were really good.

But the other part of this is there's been a whole series of new kind of instruments created in the financial markets that have not been regulated. Now we have to regulate them. But the question goes back to what Walter has been trying to emphasize all along here. How do you strike a proper balance? How do you regulate without strangling?

There are many people who used to have young companies that have what was called IPOs as you all remember. They would come out and seek money in the equity market -- and then along came Sarbanes-Oxley and they think it went too far.

UNIDENTIFIED MALE: I don't know about that. A lot of people have used Sarbanes-Oxley to say that we have had too many regulations. You see, these are people who to say that we have been driving companies to Europe and to England and all that.

If you look -- I'm not sure that's the case but I do think what you're saying David is the balance. The people who say we can't have regulation, we can't listen to those people. And the people who say we overregulate, they're not on the table either. We've got to strike as balance.


KATIE BENNER, WRITER, FORTUNE: I think we just need smarter regulations.

VELSHI: Right.

BENNER: But when you talk about new products, we regulate people based on what they say they are. I'm a hedge fund, I'm an investment banks. But when we have a system where hedge funds, investment banks, private equity, mortgage lenders are all kind of doing the same sort of thing. We should be regulating based on what you do.

VELSHI: Amanda, you make a similar point though about investments that while the administration has got to figure out how to regulate without strangling, but to actually make people believe in the marketplace again and that's central, the responsibility still lies ultimately with the investor?

AMANDA GENGLER, WRITER, MONEY: As an investor it is -- for the regular person, it is mind-blowing that you would ever have money in something and you did not know exactly what it was. You should get a statement that not only says a dollar value, but how your money is invested. VELSHI: Although arguably, Telis, as you said, there were people getting statements from Bernard Madoff that were just made up.

What scandals have done so much is they have done so much to hurt the American dream, that dream of prosperity.

When we continue, the American dream is in jeopardy, but it can be rebuilt.



PETER CABRERA, IREPORTER: My father is -- he's retired early. After working so hard his whole life. And he's watching his 401(k) disappear. That -- -- that terrifies me because, you know, he may very well end up now having to work until the day he dies.


VELSHI: That's iReporter Peter Cabrera practically in tears at the prospect of losing something we've all taken for granted since the Great Depression; the notion that if you work hard and play by the rules, you will with able to retire and enjoy the fruits of your labor. They even call it the American dream.

The question now -- is it dying? And if it is, can it be revived? So much of this American dream has been involved with our ability and our notion that you can borrow -- you can pay for something tomorrow that you get today. It's not just a personal problem, it's something that our employers have done and it's something that our governments have done.

Take a look at this. Take a look at our national debt and how it has grown over the years starting from 1979. We're looking at a lot of things over a 30-year period; $826 billion back then up to a projected deficit of more than $10 trillion.

Back in the old days when we had a national debt, the national debt is held because you issue bonds and you pay interest on those. Mostly those bonds were issued to American citizens. We owed our debt to ourselves. But increasingly, we owe that debt to other countries.

Take a look. We owe money in terms of bonds to Russia, for instance. We owe money to Brazil, to the United Kingdom. We owe a lot more money to Japan, one of our biggest trading partners; I'll just show you that it's more money. And we owe a great deal of money to China; in fact, China is the biggest holder of U.S. national debt.

What's the problem with this? Not much. We pay them interest to lend us money. But ultimately when you owe countries so much of your debt, it's kind of like having a firm conversation with your banker. They're not really all that compelled to listen to you because they control your financial well-being. How much of a problem is this for our life style, for the American dream? How dangerous is it for the American dream that none of us, from ourselves to our companies to our country, have our lending under control?

GERGEN: Well, listen, to paraphrase Daniel Patrick Moynihan from some years ago, we've borrowed billions upon billions of dollars and had a big party in recent years. And that became the new dream. That dream is over. We're not going back there.

Go back to what Jeanne said at the beginning of the program. If we go back to the dream we once had, that if you work hard, if you save, if you really -- you know, you're willing to take some sacrifices, your children would be better off. They would have a better crack in life. That dream can still be still restored.

That's one of the big questions hanging over us right now. Are we going to be willing to go through some wrenching changes over the next five to ten years, to endure some sacrifices for our children and grandchildren?

VELSHI: Jeanne what do you think? You studied this very closely.

SAHADI: I think the long-term debt problem has to be addressed in the next few years because here's what we face otherwise. The government choice has become limited.

They had their firm conversation with the premier from China. He tells us what to do, not that directly but in influence. We need to raise taxes and we need to cut spending. We're still going to be issuing debt and people will not buy our debt unless we give them a higher interest rate because they look at the debt that we've got and like, "you're not going to be able to pay that back."

VELSHI: Just like an individual whose credit line is too high, the bank says if you want more money, you're a bigger risk, it's going to be more expensive.

SAHADI: That's right.

VELSHI: Stephanie, you've studied so much of our relationship with the rest of the world financially. Are we in danger of these countries that own so much of our debt ever doing anything bad to us.

STEPHANIE MEHTA, ASSISTANT MANAGING EDITOR, FORTUNE: I mean, I think it's interesting and I'll be eager to get David's thoughts on this. I think it adds a new component to what Hillary Clinton and the state department are going to have to contend with. There's a diplomacy issue here.

The U.S. reputation in the world has been destroyed by a lot more than just our financial dealings in the last few years. There were a lot of issues that the United States needs to think about as we lookout side of our borders. But you know, there's no question that there's going to have to be some sort of diplomacy component factored into the conversations that we have with our creditors.


Amanda. GENGLER: I think that consumers had a big lesson here. And that was while we understood that maybe credit card issuers didn't have our interests at heart and would let us borrow more than we could afford. We thought the bank down the street would only lend us a mortgage that we could afford. And we thought maybe the car dealer would give us a mortgage and wouldn't extend it out so many years that we would end up upside down on the loan.

There's been a real shift in terms of we have to take more responsibility for our borrowing and spending. But, if you look how we spend our money today, or at the peak of the boom, I should say, in 2005, and then if you look to how we spent it in the early '70s, it's the big-ticket items. We're spending more on our mortgage, our health care, our education costs, our child care.

We're still okay with the little things. You don't have to feel like you're pinching pennies all the time. It's okay to go out to dinner every once in a while or go on a weekend getaway after you worked really hard. And I think that's a good lesson for consumers to understand.

VELSHI: You're not shutting us down entirely which is good.

You know, Katie, I got a phone call the other day on air from a viewer who said we're about to give up our car. We've already lost our home. How do I save my credit rating so I that can continue to spend and do a good job for the economy?

They still felt that was a priority. You're saying a fundamental shift to savings. People think they that have to spend to hold up the economy. To some degree, it's true.

BENNER: Well, first of all I think we're exacerbating the problem by calling American citizens consumers. We're citizens first and that's what we always should have been. And over the last 20 years we made a shift. We decided to be consumers instead of citizens and that's a huge problem.

But I think, hopefully, with the Obama administration and with a desire to be in government again and be involved in political life, we can change that here.

GERGEN: I think in the next few years we're going to be spending a lot of time, Ali, not only worried about how do we restore ourselves internally. But this question of America within the world is also very important.

When most of us were growing up, we as Americans were the biggest creditor nation in the world and it gave us a lot more power in international affairs at state department and elsewhere. The Suez crisis -- we could get the Brits and the French out of the Suez because we were their creditors. We said get your tails out of there, we're cutting you off.

Now we've become the biggest debtors in the world. It does give China more power vis-a-vis the United States. And it's something -- part of the American dream is going to depend upon us being the most innovative people in the world and remaining at the forefront and saving and becoming innovative at the same time.

SERWER: Ali, think about how it's all connected too. We send $700 billion by some estimates, probably less than that, importing oil in to this country, foreign oil -- probably a couple of hundred billion dollars. That's to put in our very expensive SUVs. That whole business is going away.

Now we need to develop new technologies, new kinds of cars then we don't have to spend all that money overseas. That helps our trade imbalance. So it's really all connected and the government needs to step in and play a part in that transition.

VELSHI: All right. So we have a lot of things for this government to do. They're considering the very same things that we've been discussing here.

Thank you to all of you. These are the kinds of answers that the administration is going to have to be looking to. Some answers, I think, and maybe some useful questions for the days ahead -- Anderson.

COOPER: Ali, thanks.

We're going to be talking more as this crisis unfolds and we all try to rebuild.

I'll see all of you on "360" and online at Thanks for watching.