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Beyond the Fiscal Cliff; Rebuilding America; The Upside of Fear
Aired November 25, 2012 - 15:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
ALI VELSHI, CNN ANCHOR: For months I have warned you about the economic storm, of the dangers of going over the so-called fiscal cliff. The one Washington created. It seems with the noise of the campaign behind us, Washington is listening, which means that after several months of harping on the dangers that you face, I am ready to make a big switch to telling you about the opportunities that lie ahead.
I'm Ali Velshi and this is YOUR MONEY.
Look, the threat of the fiscal cliff remains real. I will not drop this issue until it's settled. And right after that we've got the brand new debt ceiling debate. Remember how much fun the last one was? But there is life after Washington induced catastrophe. And frankly, it looks like a pretty good life.
If all goes according to plan, 2013 could be a big turnaround year for the U.S. The start of a recovery that feels real. Most of it will have very little to do with Washington policy, though your state and federal government will have to step in to make it happen.
Let me explain. First, there's an energy boom under way in the United States right now. Fueled by the joint forces of hydraulic fracturing or fracking of natural gas out of shale and by more drilling for oil. Natural gas is currently cheap, abundant and is increasingly used not just as a fuel source direct to home and businesses but as a source for electricity generation.
As for oil, well, you don't need me to explain the value of America producing more of it. But it's not just about cars and homes, more domestically produced energy will also help fuel a resurgence in U.S. manufactured goods, combined cheap and abundant electricity with rising labor costs in China and other countries and already high shipping costs and you make made in America more attractive to Americans and to buyers abroad, and that's good for U.S. jobs.
Finally, housing is already making a comeback. It started to turn around in 2012 with existing home sales rising for the first time in years. Construction is starting to pick up. And historically low interest rates now averaging below 4 percent for a 30-year fixed mortgage will only fuel a rebound next year.
And remember, a house will still be the most important asset for most Americans so a rebound there makes Americans feel better about their financial situation and ready to spend a bit of money. Stephen Moore is a senior economics writer at the "Wall Street Journal" as well as a member of its editorial board. Michelle Girard is a senior U.S. economist at RBS and Daniel Gross is a columnist and business editor at "Newsweek"/"Daily Beast."
Daniel, let me start with you. My thesis restated is that Washington is now likely to avert the worst of a fiscal cliff, unleash some of those animal spirits. We have things going on that are going to lead quite possibly to an American economic renaissance starting right about now.
Am I wrong?
DANIEL GROSS, GLOBAL BUSINESS EDITOR, NEWSWEEK AND THE DAILY BEAST: Well, I don't share your optimism about us not going over the fiscal cliff. But I also don't think it will matter. What we've seen in the last couple of years, the recovery we've seen has been largely in spite of government, not because of it. It's not just those factors that you cited with, energy, manufacturing, housing finally coming back -- housing starts up 40 percent in October year over year.
Our exports are at their highest level ever, even in this world that is growing more slowly. Our goods and products have a big audience overseas. And the American consumer that was so down-and-out in '08 and '09 is back. Consumer confidence, highest level since prerecession.
More people are working now at payroll jobs than at any time since January 2009. Their incomes are rising. Everybody is doing a much better job keeping up with financial obligations, like credit cards, mortgages, et cetera. All that means this could be actually a pretty decent shopping season.
VELSHI: Stephen Moore, you and I don't share views on everything. We share views on wanting America and the world to be prosperous.
STEPHEN MOORE, EDITORIAL WRITER, WALL STREET JOURNAL: Sure.
VELSHI: And we've been riding the same gloomy wagon for a little while. Would you like to come and join me on the happy wagon?
MOORE: I do.
VELSHI: Do you find my argument that a renaissance is a foot compelling?
MOORE: I love the theme of this American renaissance. There is nothing more I'd like to see. And you are exactly right, Ali. There is so much right in America. Now you and I disagree pretty profoundly on a lot of policy issues. But when it comes to some of these industries that you talked about, I am right are with you. I love the American energy story. You know, we can be the Saudi Arabia of oil and natural gas production. And don't forget coal. We've got hundreds of years of that. We can have -- we can -- and by the way, you're exactly right. Because we now have access to cheap and abundant energy in this country, that has real peripheral effects with respect to manufacturing. I love the manufacturing story because our electricity and energy costs are now lower than the rest of the world.
I agree with you on housing. You know, we haven't built any housing in this country in five years. With these low interest rates you could see a renaissance in housing continue. So you and I agree on those things. But I do it -- I do think policy matters. And it's not just solving the fiscal cliff, in my opinion, it's solving it in the right way.
VELSHI: Who are you and what have you done with Stephen Moore?
Stephen, hold on right there.
Michelle Girard, let me ask you. Any recovery -- and Daniel alluded to this. Any recovery depends on American consumes. Here's the interesting thing. American consumers have been telling us for months that contrary to lots of other economic evidence and indicators, things are looking and feeling better for them. And guess what, Michelle? They have never, ever been wrong. Every time the American consumer says we're going down, we go down. When they say things are getting better, they're getting better. They feel OK.
MICHELLE GIRARD, MANAGING DIRECTOR, THE ROYAL BANK OF SCOTLAND: And I think it gets back to just like you said, the housing turnaround. I think that that's helped to get the consumers to feel much better about their own financial positions and, of course, the fact that the equity market through the summer was doing, you know, we've seen a rebound, certainly not in the last month. But part of that.
I mean these things coming together I think have certainly bolstered consumer confidence. Although I will say, in the end, you know, so much of how the consumer will do is tied to jobs.
GIRARD: And that's why you do get back to business. And that's what Stephen said is so important, how do you resolve this fiscal cliff --
GIRARD: -- is incredibly important in terms of businesses not only having uncertainty removed, but actually feeling like they'll be a better environment going forward. If that happens, then you could finally see more hiring and more investing and ultimately that's what gets the economy going at a rate that we haven't yet enjoyed so far in this recovery.
VELSHI: So why? Why then, Dan, are we -- are we feeling this way? Because you share the view that we are not -- you're not -- we're not done with the fiscal cliff. We're not going to suddenly solve our fiscal problems. We're not -- we certainly haven't been talking enough on the spending side. We've agreed -- we haven't agreed. But there seems to be movement toward the idea that some people's taxes will go up at the high end. The middle class probably won't see much of a tax increase.
Why the optimism? Are we justified?
GROSS: Well, I think the typical consumer is not like you and me, and our other guests here. The typical median income is about $60,000 a year for a family. They are not getting a lot of money from capital gains and dividends. So they are not freaked out at the prospect of those going up. They're concerned about what's in their paycheck and paychecks have been more steady than they had been at any time the last few years. Wages are going up a little bit.
And of course the biggest asset that anybody owns is a house. And we've finally seen it's not just the value of sales rising and construction but home values. And so with every passing week, you know, a certain number of people who are underwater on their mortgages are now in positive territory.
GROSS: And that contributes to what we call the wealth effect.
GROSS: People feeling more confident. They're more likely to spend. And it's very -- I call it -- it's pro-cyclical.
GROSS: When things are going in the right direction, that forces to propel them further in the right direction.
VELSHI: So let me bring Stephen into this.
Stephen, I -- again, you feel very strongly that tax rates should go down, certainly not go up. But these pro-cyclical things, the idea that, A, the price of your house could be going up. If you're stuck with a house and you might be able to sell it. Credit marginally becoming a little bit easier. Jobs are coming there and ultimately you're more interested in the paycheck than you are in the taxes that you pay on that paycheck.
VELSHI: Do these things outweigh -- so let's say we see a little tax increase. Does it outweigh it? I'm not asking you to give up your position.
MOORE: Yes, right.
VELSHI: You will always be here arguing your position that taxes should be lower. But does it outweigh your on going concerns that taxes are going to cripple us? MOORE: Yes, I think we can grow through this despite the fact that I do think if we raise those taxes our growth rate won't be quite as high. I want to make two quick points on this.
MOORE: One is that I think Michelle is right. It all starts with jobs.
VELSHI: Yes. Agree.
MOORE: Because if people don't have jobs, they don't can't the mortgage.
VELSHI: They don't buy houses. Yes.
MOORE: They can't buy houses. They can't buy -- the second point I made is to stay on this optimistic theme, I guess maybe it's because it's Thanks giving weekend.
VELSHI: Sure. That's exactly.
MOORE: But you know, I made this point before on your show. You know, it comes to America relative to the rest of the world. We're the least rotten apple in the cup, right?
VELSHI: Yes. Yes.
MOORE: And that gives us a huge advantage in terms of investment coming to the United States.
MOORE: Building new businesses. And that's why I'm -- you know, I'm somewhat optimistic despite the fact I don't like -- the direction Washington is headed.
VELSHI: Yes, well, we were always the least rotten apple but it had a worm in it. And maybe this fiscal cliff discussion will remove the worm.
Michelle, what does Washington have to do to not reinstall the worm into the apple, to not get in the way of this consumer -- this feeling that things are getting better?
GIRARD: Bottom line is that I do -- I do think that we are kind of talking about an economy that is going to be able -- if we can do the right thing, to grow 2 percent and if we can get some longer term --
GIRARD: -- certainty in terms of a grand bargain and, again, release the constraints this economy and businesses have faced in terms of uncertainty, I think we can look at an economy that could grow better than trend for the first time in this recovery.
VELSHI: I look forward it to. I just want to reach out and hug all of you. Thank you. Good discussion.
Look, it's Thanksgiving, it's a useful time to at least point out some of the good things. We spent a lot of time pointing out the bad things. We'll continue to do that as necessary, however.
Dan Gross, great to see you.
Dan Gross is the global business editor for "Newsweek" and the "Daily Beast." Michelle Girard is the managing director of RBS and the senior economist there. And Stephen Moore is an editorial writer with "The Wall Street Journal."
Thanks to all of you.
All right. Coming up, we just touched on it. The globalization has chipped away at U.S. manufacturing jobs over the last few decades. But there are signs that some of those jobs are coming back. Certainly manufacturing is. Don't expect to wear overalls and a tool belt to the job site, though. We're going to look at the manufacturing jobs of the future when we come back.
You are watching YOUR MONEY.
VELSHI: Made in America. It's one of the keys to an economic renaissance and it's the backbone of the middle class. Or is it? The economy is adding jobs but the jobs the U.S. is adding aren't the same ones that it has lost. Take a look at this. Jobs in leisure and hospitality. One of the big growth areas over the last few years. Pay on average $13.35 an hour. Retail, another area that we've been growing, pays more, $16.43 an hour.
But neither of these pay as well as manufacturing with an average hourly rate of about $24 an hour. Since January of 2010, the U.S. economy has added 508,000 manufacturing jobs. That's during -- you know, since the beginning of the recession.
That's a blip, by the way, compared to the last 25 years. In fact, since 1987, take a look at this, the U.S. has lost 5.5 million manufacturing jobs. But in the same time, America's manufacturing output has increased by 84 percent. We've increased our output as we've employed substantially fewer people. Technology, automation.
Scott Paul is the executive director of the Alliance for American Manufacturing, a research and advocacy group. My friend, Will Cain, conservative CNN contributor.
Scott, we are producing more with less. Manufacturing looks promising in the U.S. as an industry. But do manufacturing jobs look good?
SCOTT PAUL, EXECUTIVE DIRECTOR, ALLIANCE FOR AMERICAN MANUFACTURING: Well, and that's the real question, Ali. I do think that there's a good future for manufacturing jobs in this country. No, we won't have factories that are employing 10,000, 20,000 people like we did in the hay days, in the '50s or the '60s. But there's lots of reasons to believe that we should invest in manufacturing, that we can actually add jobs on. And that it's a viable career path for young people today.
First of all, we have an aging manufacturing workforce. Second, energy costs and other costs of production are coming way down in the United States. You're seeing firms that are re-shoring jobs. You're seeing Lenovo open up a laptop manufacturing facility in North Carolina. These are things you couldn't have imagined a decade ago.
VELSHI: Let me bring Will into this conversation.
Will, listen carefully to this.
WILL CAIN, CNN CONTRIBUTOR: OK.
VELSHI: President Obama, as you know, during the campaign promised, and people say all sorts of things during campaigns, that he was going to create a million new manufacturing jobs by the end of his second term. He also wants to tax the rate on manufacturers. He wants to lower the tax rate on manufacturers, provide incentives for companies that re-shore or bring jobs back to the United States.
And you say exactly the opposite of what Scott just said. You said this is a policy that takes us back to the '50s.
CAIN: Well, listen, everything -- President Obama's list of things you just put up on the TV screen, that's the fly in the ointment. I actually don't disagree with much of what Scott said. We've seen somewhat of a small manufacturing renaissance over the last decade. And bravo. So why does manufacturing need special tax rates, incentives, tax subsidies, so forth? Why does it need special treatment?
PAUL: Yes, there's a good answer for that. And yes, it does deserve special treatment. First of all, there is no other sector of our economy that has a higher multiplier effect. That is when you create a job at a factory, you create spinoff jobs. The logistics, the cash going to the economy creates jobs at the grocery store. The opposite is hardly ever true.
Second, we now know that manufacturing production and innovation are linked together. When those two are separated by an ocean, it doesn't work very well. And that's what firms are discovering. In fact, some of the leading researchers at MIT and Harvard have included the same thing, is that if you actually want to have innovation in the economy that's going full freight, you need to have production --
VELSHI: So let me ask you, Scott. Let me ask you, Scott.
PAUL: And finally exports as well. Let's not forget exports as well.
VELSHI: Let me -- let me hold it -- we'll get to exports in a second. Let me just hold up an example, though. Apple, you could make the argument, managed to innovate very successfully and manufacturing everything an ocean away.
PAUL: Yes, Apple is the out liar. They have a very risky manufacturing strategy that's depending on 250,000 workers in China that are working in deplorable conditions as we know. There's a smarter way to do it. And, yes, it would be highly automated but they could be employing thousands of engineers in California, making those products.
The -- it wouldn't raise the cost of an iPhone more than a couple of bucks. But the returns for our economy would be fabulous. It'd be great.
CAIN: But here's the deal, Scott. Here's why I disagree with you, and that is if those benefits are all -- all exist, as you lay them out, the innovation and manufacturing need to be geographically linked in order to fully be optimized, won't the companies themselves realize that benefit? Why do they need government to step in, and provide for them special benefits to realize that goal? If it's there, it will be self evident and the company will choose that path.
PAUL: Well, Will, that's a good question. Here's the reason. You know, manufacturing is in the tradable sector. We have global competition. Hospitals don't. Retailers don't. Other sectors of the economy don't necessarily have that. Manufacturers do. And every other country out there has incentives to attract manufacturing. Whether it's the low road like China or the high road like Germany.
If we're not in that game, we're going to be sitting on the sidelines, we're going to lose jobs. And we've seen that. Our manufacturing goods, trade deficit has gone up.
CAIN: And my response to you is, while that might be true that some play dirty, why don't we as well? The risk then becomes that we encourage mal investment. That all the things -- made the United States unique and special over the past 100-odd years in the -- in the economy and that's innovation, and that's resilience, had to do little with subsidies. Little with special treatment but rather an equal playing field. So let's not corrupt what's made us special to play dirty to keep up with the dirty players.
PAUL: Although I'm not suggesting we play dirty. And I disagree with your economic history a little bit. Every successful industry that's been incubated in the United States has been subsidized like semiconductors, and you can go back to the days of the telegraph and find that. So I think we have a differing view of economic history.
But what I'm suggesting is this, someone is going to make cars for consumers in the United States. I'd like to see them made here. Japan, Korea, China, Germany, they all have manufacturing strategies. If we don't have one, and I think -- I don't think it should be a dirty one. I think it should be smart and I think it should be sophisticated. And I think it should be based on incentives and based on what the private sector wants.
But you can attract that manufacturing. It's why Ford is bringing manufacturing of the fusion back to the United States. That's why GM is bringing back some of the R&D functions from India to Michigan. That's why you've seen Lenovo move laptop manufacturing from China to North Carolina.
If you have the right kind of incentives, manufacturers will respond because there's an -- American manufacturers have a great workforce as you pointed out, Will. We have great energy costs and we can successfully complete -- compete if we're playing that game but we've got to play that game.
VELSHI: Hold that thought, Will. Because until I get the 90-minute version of this show where we can discuss whether anybody anywhere in the world should be providing incentives for manufacturing or for anything else, because I know what your response is going to be, that nobody should doing it.
But excellent discussion. Love having you two guys on talking about this. I think we have to do this again.
Scott Paul is the executive director for the Alliance of American Manufacturing. Will Cain is a CNN contributor who said something very uncharitable about my suit, by the way.
What did you say?
CAIN: I just said when you take pictures of Ali Velshi make sure to note that this is not Colonel Sanders. Right? It's tan, not white.
VELSHI: Good to see you as always, Will.
All right. Coming up next, an energy boom. Will alluded to this. Is that bringing jobs back to the heartland in America? Fracking is putting Americans back to work even as environmental concerns grow. I'm going to squeeze some energy out of this topic right after we pay the bills.
YOUR MONEY is back after this.
VELSHI: For the first time in a long time I am seeing past the dangers of the fiscal cliff. And things are looking up in this economy, particularly when you look at the energy sector in the United States.
A new report from the International Energy Agency predicts that the U.S. will become the world's largest oil producer by 2017. Temporarily surpassing Saudi Arabia. The same report projects the U.S. will be nearly energy sufficient by 2030. These are loaded terms. You heard in the campaign talking about North American energy independence. That, of course, includes Canada and Mexico, which are big oil producers. But all of this business was something that was unthinkable not too long ago. There is an oil shale boom in the United States, new drilling methods are driving the growth and creating jobs. 1.7 million jobs have already been created. That number is expected to grow to nearly 2.5 million jobs over the next three years. Could reach 3.5 million jobs by 2035.
It's unconventional oil and natural gas production through a process called fracking. Hydraulic fracturing is the full name. It sort of like -- take a look, it involves pumping water, sand, and chemicals into the ground at high pressure to crack rocks open. There's gas in them rocks. It's a costly process. There are environmental concerns. Some people even say they cause earthquakes.
Stephen Leeb is the chairman and chief investment officer of Leeb Capital Management. He's the author of "The Oil Factor" and several other books.
Stephen, welcome. I'm -- let's get to the -- I don't want to ignore the environmental concerns. We'll get to that in a second but first, I want to just ask you this. According to the U.S. Energy, Information Administration. That's the Department of Energy, they say between 2008 and 2011 crude oil production in this country jumped 14 percent. Natural gas production climbed more than 10 percent in this country. Tell me what you think of this.
STEPHEN LEEB, CHAIRMAN AND CIO, LEEB CAPITAL MANAGEMENT: Well, I think that's basically a good thing, Ali. But I would not get that excited. I mean I'm thrilled. And I didn't know that number about the number of jobs created. I think that's wonderful. But I hope this country has the sense to realize this is a temporary phenomenon. This is not anything resembling a long-term answer to our energy problems. I mean one point I have to make is the same agency that is telling us we're going to surpass Saudi Arabia about five or 10 years ago was telling us Saudi Arabia was going to produce 20 million barrels of oil a day. So this agency, IEA, tends to be a little optimistic.
LEEB: They're a little sarcastic.
VELSHI: And your other worry -- well, you and I have talked about this for many, many years, is that with more energy production, it's -- there's a disincentive to use energy properly or the concern.
LEEB: This so true. And what you're seeing now is no one is making money, fracking. I mean you may see profits on the bottom line.
VELSHI: Right. But gas -- natural gas prices have plummeted?
LEEB: Natural gas prices had plummeted. But even in the oil area which is very interesting. The Bakken shale formation. You have this company -- the biggest player, Continental Resources, producing great earnings. But once you subtract out how many rigs and the cost of those rigs, guess what? Negative, negative cash. VELSHI: Wow.
LEEB: They have to continue to borrow because the depletion rates on these wells are so great. So it's basically a short-term fix. I mean, definitely I think oil production will continue to go up maybe for another year. Maybe for two years. I don't think the IEA will be right. But it will allow us to buy time, to really develop other kinds of energy sources. And I really, you know, I'm not a green guy or anything else. I'm a resource scarce guy. I mean there is just not that much of it.
VELSHI: Right. It makes you seem green but the fact is --
LEEB: Right. I am not green.
VELSHI: You want it for the same reasons.
VELSHI: You wanted to say let's have resources for energy production that are renewable and always going to be there.
LEEB: Right. Right. I give somebody the argument that we don't understand what's going on with the environment. They could be the sun. It could be the hydro -- I've given them that argument. But the argument I won't concede is that resources are getting ever scarce.
LEEB: And that we have abundant sun, abundant wind. Let's spend the money. Let's roll up our sleeves, take advantage of this little hiatus, this little gift of time --
LEEB: -- that fracking has given us and develop what will sustain us in the 21st century. That's what China is doing. I don't want to be beaten by China.
VELSHI: Stephen, always good to see you. Thank you, sir.
LEEB: Thank you, Ali.
VELSHI: Stephen Leeb is the chairman and -- chief investment officer at Leeb Capital Management and the author of a very important book called "The Oil Factor."
All right. Coming up, we can't have an economic renaissance in this country without a recovery in housing. As home prices improve and mortgage rates hit record lows, you might finally be able to sell your house but should you be buying a new one? Report after report says the housing market is back. I'm convinced. But not everyone else is.
VELSHI: Welcome back to YOUR MONEY. Look at me for a second and then look up. Look at that. You can start to see the clouds part and the sun break through when it comes to the U.S. economy.
I am not done hammering away at the fiscal cliff. It is still the most immediate threat to the country's financial well-being and I will not stop until there's a deal signed on the dotted line. But today I'm going to venture beyond that cliff and look at the possibility of an economic renaissance.
One of the brightest rays of sunshine, what I've been calling the golden lining on that storm cloud is the housing market. This week we got even more encouraging news. Existing home sales rose more than 2 percent in October. After sagging earlier in the year they are trending higher. Now with sales of homes picking up, the number of homes on the market, the inventory, is falling.
Inventory, look at that. This is all the way back from December of 2002. This is for the last 10 years. Inventory is at its lowest level since December of 2002. And that low inventory is putting upward pressure on home prices. The median sales price, that's the price at which half of all homes sold for more, half sold for less. It's not an average. The median home price for existing homes, used homes, if you will, rose more than 11 percent in October compared to last year. Look at that. $178,000 is the median price.
Home building, by the way, is at a four-year high. Housing starts jumped 3.6 percent last month compared to September. Housing starts. That's the number of new homes that are starting to be built. So is the recovery real?
Warren Buffett, the celebrated investor and one of the world's richest men says, yes.
(BEGIN VIDEO CLIP)
WARREN BUFFETT, CHAIRMAN, BERKSHIRE HATHAWAY: We have a large real estate brokerage firm. We have building supply companies. And we're seeing prices moving up somewhat. We're seeing demand improve. We're seeing the overhang of houses diminish. So we're coming back.
(END VIDEO CLIP)
VELSHI: On the other hand, the former Federal Reserve chairman Alan Greenspan told me don't get excited yet.
(BEGIN VIDEO CLIP)
ALAN GREENSPAN, FORMER CHAIRMAN, FEDERAL RESERVE: What's happening is real. It's slow. But we can exaggerate how big it is. But it's going -- and they're certainly going in the right direction.
(END VIDEO CLIP)
VELSHI: Joining me now is Chris Mayer. He's a professor of real estate at Columbia Business School. He's the one on the right. Jonathan Miller is the president and CEO of estate appraisal and consulting firm Miller Samuel. Jonathan, let me start with you. Median home prices have risen for eight months in a row. The Case-Shiller 20 city index up is five months in a row. You say don't look at these prices so much.
JONATHAN MILLER, PRESIDENT AND CEO, MILLER SAMUEL INC: Well, I think looking at -- housing prices are probably the worst thing to look at. I think you want to look at activity levels. The reason why we're seeing prices uptick, number one, is we're seeing foreclosure activity at a lighter level than it would have been. We had the robo-signing scandal a couple of years ago. Banks discovered during the process while they held back on foreclosures short sales were the way to go.
We have a lot less distressed property in the mix right now and it's skewing the metrics.
VELSHI: Isn't a market still a market, though? If prices are up, doesn't that mean people are willing to pay more for houses? Does it mean it's better?
MILLER: I guess I take issue with the word recovery. Because when I was at school, the word recovery meant getting better. I think the word recovery now means not getting worse.
VELSHI: Not getting worse. Stable.
All right. Let's me ask you, Chris. Not only -- Jonathan takes that view. Alan Greenspan says slow down. We also heard from Ben Bernanke this week. Listen to what he said.
(BEGIN VIDEO CLIP)
BEN BERNANKE, FEDERAL RESERVE CHAIRMAN: Unfortunately, while some tightening of the terms of mortgage credit was certainly an appropriate response to the developments of earlier excesses, the pendulum appears to have swung too far, restraining the pace of recovery in the housing sector.
(END VIDEO CLIP)
CHRIS MAYER, PROFESSOR OF REAL ESTATE, COLUMBIA SCHOOL OF BUSINESS: I completely agree with Chairman Bernanke. I think the housing recovery is going on despite problems in the mortgage market, not because of them. The Fed has been very critical about tightening of credit. But -- that may well be at least potentially a cloud that could open a little bit in the coming year.
VELSHI: You know, Jonathan, I've made the argument for well over a year that this combination of relatively low prices and low interest rates is probably a confluence you're not going to see for a long time. Now the only thing I've been wrong about is these interest rates have actually gone down lower. But now with the Fed saying their rates, which are largely connected to mortgage rates, will stay low until mid-2015 before starting to go up, it does take that urgency out of my argument that you better buy a house now.
MILLER: Absolutely. I think that's one of the key issues and if you -- if you look at all the sort of what you call -- you alluded to earlier -- happy housing news, all the metrics that we're seeing that are favorable generally are influenced by credit being tight. The Federal Reserve Senior Loan Officer Survey basically is saying that credit hasn't eased for mortgage lending since Lehman. Listing inventory is falling because credit is tight. Sellers --
VELSHI: Explain that to me. Listing inventory is falling. So in other words, you don't have as much inventory because some people are not --
MILLER: Some people -- people forget that sellers become buyers.
MILLER: So if you can't qualify to trade up on your house, doesn't mean you're underwater on your mortgage.
VELSHI: Just means you're not going to get out of your house. You're not going to --
MILLER: Why do you sell you? Wait.
MILLER: And that's --
VELSHI: So if you're -- let me just pull that out. If credit became more lenient, if more people were able to get credit, more people would want to buy homes. Some of those people would be sellers. So you'd see more inventory.
VELSHI: I see.
MILLER: I think you look at it at that end. You also look at new construction. New construction is clearly seeing an uptick.
MILLER: Although --
VELSHI: Small part of the market, though.
MILLER: Very tiny part of the market. Clearly seeing up. But part of it is because we have lower distress sales in the pool.
MILLER: And we have lower existing home listings in the pool as well. So it's creating demand because remember we have record low and seemingly every couple of weeks a new record low.
MILLER: Mortgage rate that's pushing people through despite how tight credit is.
VELSHI: Let me ask you about that. Distress sales, foreclosures, smaller part of the pie now. What -- but there's still foreclosures. Is that a substantial drag? I mean if we got to the end of foreclosures, if we got to a historically normal level of foreclosures.
VELSHI: What would happen to this market?
MAYER: Well, I think the foreclosures are actually part of why we have sales volume that is around five million as opposed to where it would be which would be much lower. I would take a more positive spin on some of the things that Jonathan talked about which is I think it is quite possible to see a very hard trade-up market where people who want to sell a home and trade up to a new one have a challenge.
First-time homebuyers coming in, if they can clean up their credit, I --
VELSHI: Affordability if very low.
MAYER: I'm completely in your camp. This is a wonderful time to buy.
VELSHI: It's a good time to buy. If you're selling and just getting close to not being underwater, is this the time to sell or do you hold on?
MAYER: Well, the problem for people who are selling is, you're going to have to put cash in to buy another home. So, you know, 45 percent of homeowners with mortgages according to a recent Zillo study have less than 20 percent equity or negative equity in their homes. That's tens of millions of households who are really having a hard time trading up.
So what you're seeing is the new construction market, the home, you know, first-time homebuyers using FHA loans, which are the rock bottom three and a half, but might be four and a half --
MAYER: You know, with the insurance premium. And for those people relative to renting where if you go in and try and rent a home from one of these private equity guys, you're going to pay 12 percent to 14 percent of the home value. Borrowing at, you know, 4.5 percent is a bargain.
MAYER: Well, it is useful for my viewers to have your divergence of opinion, guys.
Thanks very much for being with us, always a pleasure.
MAYER: My pleasure. VELSHI: Jonathan Miller is president and CEO of Miller Samuel, Chris Mayer is a professor of real estate at Columbia Business School.
All right. Superstorm Sandy is over. Now the U.S. has an opportunity to rebuild its infrastructure better than before. I'll tell you why that can protect us from storms like Sandy and why it's the best thing to do to protect America from economic storms as well.
You're watching YOUR MONEY. We'll be right back.
VELSHI: Superstorm Sandy reminded America of the fragile state of its infrastructure. The storm left eight million homes and businesses without power, it flooded New York's 100-year-old transit system and it shut down parts of Washington and lower Manhattan for days.
America's infrastructure was in a sorry state even before Sandy hit. The American Society of Civil Engineers gave it a D grade in 2009. They said then that it would take $2.2 trillion over five years to bring it up to scratch. The investment never came.
Now we already know that investing in infrastructure can help protect us from storms like Sandy. But it can also be the best investment we can make to protect us from economic storms. Because investing in infrastructure creates construction jobs in the short term but it makes the U.S. a more attractive place to do business over the long term.
But the U.S. has been slow to invest in its infrastructure. In 2005, Hurricane Katrina destroyed parts of New Orleans. Now they have a $14.6 billion flood protection system. In 2007, this bridge in Minneapolis collapsed. That bridge was rebuilt but many of our nation's bridges are still in a sorry state. And it takes extraordinary events for us to upgrade our infrastructure.
Well, I spoke to infrastructure enthusiast and my colleague Fareed Zakaria. He's the host of "FAREED ZAKARIA GPS" here on CNN.
VELSHI: When we talk about infrastructure projects, there are still many people in this country who feel that it is stimulus, it's government spending, it's ineffective, it's decorated with all sorts of favors for everybody and pork.
How do you convince people that there's a way to spend that $2.2 trillion that the American Society of Civil Engineers says we need to spend and get a payback?
FAREED ZAKARIA, HOST, FAREED ZAKARIA GPS: Actually a very smart idea about how to do it, which is it was co-sponsored by John Kerry, a Democrat, and Kay Bailey Hutchison, a Republican, which is create a national infrastructure bank. Have the federal government seed it with capital but then get a lot of private sector money. Have the projects -- and this is the key. Have the projects awarded by a meritocratic board, a group of technical experts that evaluate the projects on their merit rather than congressional --
VELSHI: What district they're in.
ZAKARIA: Now guess who doesn't like this? Most congressmen. Most --
VELSHI: Because they want to be able to reward these things.
ZAKARIA: But the truth is, they don't want an infrastructure bill that is based on merit and not based on pork. They talk about how they hate pork. But then they want the bridge back home. Then they want the baseball field back home.
ZAKARIA: So -- but this is where presidential leadership can come in. This is where bipartisanship can come in. Because you do have broad agreement -- you know, infrastructure is something everyone agrees the government has to be involved in.
VELSHI: What of these deals are profitable and what part are not? In other words, if there is an infrastructure bank, does that end up as a net cost to Americans? And yet it does things like I just said, it increases trade and it increases, you know, protection from storms, or can these things actually be generating a profit?
ZAKARIA: No, no. They can easily generate a profit. They can generate a return. So for example, ports, airports, the simplest one where we do it is airports. You've seen it. You walk through an airport. You notice that the fanciest airports are the ones with the most retail in them.
ZAKARIA: Right? So that's a win-win. The private sector makes money because they figured out a way to lease those shops and allow people to -- you know, sell goods there. But we also get good runways, we've got updated technology and all that kind of thing. The same applies with ports. The same could apply with train stations.
VELSHI: You and I both travel to a lot of places, high growth countries where the idea of either an infrastructure bank or public- private partnership exists and flourishes. What's the issue with that in the United States? It's interesting because the United States is such a free marketplace and yet we don't take advantage of this.
You used airports as an example. It's probably the best example of public-private partnerships. It doesn't exist the same way in the United States as it does in other places.
ZAKARIA: It's a fascinating question, Ali. We do infrastructure in a socialist way. Compared with most countries in Europe.
ZAKARIA: We think of Europe as being the socialists.
ZAKARIA: But, in fact, we -- we believe that infrastructure has to be paid for by the government, run by the government, the projects have to be, you know, executed by the government. That's not how they build roads or trains in Europe. They have a lot of it is private sector done. In Asia, they privatize roads, they privatize railroads. And the result is they get much faster movement, often much higher quality.
It's just partly a mentality shift that we need to take here. But if we were to do it, very important thing you pointed out is there is a huge payback. We used to spend a whole percent of GDP more on infrastructure in the 1960s than we do now. So if you look at the American economy, the big thing we stopped doing, you know, taxes, regulations, they're roughly the same as they were 30 or 40 years ago. Some have gone up, some have gone down. The big shift in the American economy is we have stopped investing.
ZAKARIA: We've stopped investing in infrastructure and other things as well. But here's the important thing. This is also the best short-term thing we can do. The area of the American economy, which has the highest unemployment rate is construction.
ZAKARIA: It is still 12 percent. Down from 16 percent. But if we could start rebuilding the roads, airports and things like that --
VELSHI: Could be years of work.
ZAKARIA: -- we also make a huge dent in this huge problem we face of unemployment in America.
VELSHI: And we'll stay on top of the discussion about infrastructure and an infrastructure bank.
Hey, you're probably concerned about the fiscal cliff. I'll help get your money in the right place regardless of what happens in Washington.
VELSHI: You smell that? That's the smell of fear in the stock market. It's a stench that's been getting stronger and stronger since about November 7th in an otherwise strong year in the market.
November 7th, by the way, the day after President Obama was re- elected. I don't think it's his fault, but the perception that he would not be able to work with Republican members of Congress to avert the fiscal cliff has caused investors to run for the hills. Take a look at the S&P 500 over the past two weeks. The S&P 500 probably resembles some of your investments, by the way. We don't know what might be included in a deal to raise revenue instead of raising tax rates. You're probably going to see taxes on the rich going up. But it's giving investors the heebie-jeebies. Investors have a lot of questions and their instinct is to sell stocks when they don't know what's going on.
What are they worried about? Well, they have a lot to do -- these concerns have a lot to do with the expiration of the Bush tax cuts, which could be painful for investors.
Here's a quick summary of what could happen. Capital gains taxes rise from 15 percent to 20 percent for most people who file taxes. Taxes on -- taxes on dividends rise from 15 percent to your top income tax rate, which could be, depending on how much you earn, as much as 39.6 percent.
Now given that a lot of people rely on those dividends for their income, it's no surprise to see some of the highest dividend yielding stocks get slammed in the past few weeks. Take a look at some of those. But as I have been saying, today, if we can get past this fiscal cliff standoff, there are going to be a lot of opportunities for businesses to blossom and for investors to make some money. Even if there are higher taxes on the horizon.
Mike Holland makes money for his clients. He's the chairman of Holland and Company, runs one of its funds.
Mike, good to see you. Welcome to the program. I haven't talked to you for a while. Tell me about this drop from November 7th, first of all. How much of that is fear of the fiscal cliff? How much of it is people who don't like Obama? What is -- what was that?
MIKE HOLLAND, CHAIRMAN, HOLLAND AND COMPANY: It's all the above. You used the word heebie-jeebies before.
VELSHI: That's right.
HOLLAND: That's a good professional description of what is going on. But it's an extension of what we've had since 2008. People have had a negative psychology and a fear psychology which is only exacerbated by the November 7th time that you talked about. We actually have had Ben Bernanke say what you said before, and that is if we get by these negotiations referred to as the fiscal cliff in the next few weeks, next several weeks, we could actually have, according to Ben Bernanke, a very good year in the coming year.
VELSHI: Right. We've spent the show talking about housing, about energy, about manufacturing, about infrastructure -- the things that could really --
HOLLAND: They will. VELSHI: You know, light a fire under the economy here. Let's say some of this goes right, not all of it, but some of this stuff we've been talking about goes right. What does my viewer do about that from an investment standpoint?
HOLLAND: They should be prepared for a surprise to the upside rather than the downside. With the fear psychology of the last several -- last few years has been one that we don't want to lose any more money. Let's get out of stocks, let's --
HOLLAND: Let's hide the stuff under the mattress. Under the mattress includes money market funds which yield virtually nothing.
HOLLAND: Or -- nothing. So if there is a surprise to the upside, just any one of the few that you talked about, how about all of them could happen?
HOLLAND: Stocks and some other things will be going up in price. And you probably want to have some exposure to that. I'm not suggesting for people who sold all their stocks or their mutual funds several years ago, that they take all that money they took out and put it all back in, but they should be prepared for a surprise to the upside.
VELSHI: Right. So don't point out that your stuff is all in the house somewhere that you wanted to invest. I heard people say they sold all their stocks and they're buying properties. I'm relatively bullish on properties, but you may be able do better.
Let's talk about China. New government there. Some of the tension between America and China dissipated post-election because you don't have that heated campaign talk. There's been a slowdown in China because of Europe. There's some sign that it's stabilizing. Still growing at 7 percent. What do you tell your clients about China and Asia generally?
HOLLAND: Well, I've been -- as you know, I've been going over there for many years and investing over there for many years, they -- the government -- said back in 2008, we are going to stimulate our economy. They did it, they did an incredible job. Very indifferent than what we had here, in fact to the point of being so hot that they had to pull it back which they said a year ago they were going to do.
HOLLAND: They weren't successful --
VELSHI: So it's all been predictable.
HOLLAND: They said they were -- they said -- you can look it up.
HOLLAND: And so now they said that this third quarter where they just did the 10-year handover of the leadership.
HOLLAND: That this will be the time when we bottom out at 7.5 percent growth, which is incredible for the world's second largest economy. They said we will be growing in a very controlled way in the future, and that's what the companies -- I was over there in Taiwan a few weeks ago, that's what the companies were telling us as well.
VELSHI: Mike, great to see you as always. Mike Holland is the chairman of Holland and Company.
Well, do you believe in this economic renaissance in America that we've been talking about? The economy may be on its way, but there are some hills to climb before we get there. I'm going to put it all in perspective when we come back.
VELSHI: Well, I gave you some things to be hopeful about today. The American economic renaissance is a viable possibility, but a lot depends on the men and women you voted for to do what's right for the country. It starts with avoiding the fiscal cliff, but it sure doesn't end here. This country has debts and deficits that need to be addressed. Twelve million of you are still unemployed and many who have a job want a better one.
When you look overseas, it's even worse. The situation in the Middle East remains volatile, China presents a complex problem that won't be solved overnight, and Europe stands as a tough reminder of the direction this country could go in if we don't get our fiscal house in order.
But I'm an optimist when it comes to the U.S. economy, and I hope this week I've shown you some of the bright spots in what seems to be a darkening economic picture.
Thanks for joining the conversation here. We're here every Saturday 1:00 p.m., Sunday at 3:00 p.m. Find me on Facebook at Facebook.com/alivelshi. Or tweet me, my handle is @AliVelshi. I'll be reading your tweets momentarily so tell me what you're hopeful about or what you fear right now. Have a great weekend.