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YOUR MONEY

Government Shutdown Looms; The Deal with Tapering; CEO Pay vs. Worker Pay

Aired September 21, 2013 - 09:30   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


CHRISTINE ROMANS, CNN ANCHOR: America's economy facing another eminent and self inflicted threat. I'm Christine Romans. This is YOUR MONEY.

How does this play out and what are the risks to you and your family? In a moment I'll be joined by Candy Crowley, CNN's chief political correspondent and Muhammad (INAUDIBLE) whose company runs the biggest bond fund in the world. We got a long-term debt deficit problem, but the bigger problem seems to be the folks in charge of fixing it.

Welcome to Washington. A city where politicians agree on one thing. Disagreeing.

BARACK OBAMA, PRESIDENT OF THE UNITED STATES: I cannot remember a time when one faction of one party promises economic chaos if it can't get 100 percent of what it wants.

ROMANS: Without an agreement on spending, the federal government shuts down midnight on October 1st.

STAN COLLENDER, SENIOR PARTNER, QORVIS: It's hard to imagine how thinking anything positive comes out of this unless a shutdown is avoided.

ROMANS: So what's driving Washington to the brink of a shutdown again?

UNIDENTIFIED MALE: Obamacare is shutting down America.

ROMANS: Some Republicans pushing for a repeal of President Obama's Affordable Care Act. The president says he won't negotiate.

The last federal government shutdown started in 1995, well before Obamacare and the Tea Party.

BILL CLINTON, FORMER PRESIDENT: Republican leaders in Washington have put ideology ahead of common sense and shared values.

ROMANS: Leading the Republicans at the time, CNN "CROSSFIRE" co-host, Newt Gingrich, who served as speaker of the House in a Republican- controlled Congress.

NEWT GINGRICH (R), FORMER SPEAKER OF THE HOUSE: He has to try to create a phony argument about fantasy cuts that do not exist in order to frighten people about problems that aren't real.

ROMANS: The result of the stalemate, 800,000 federal workers stayed home for five days. Federal offices and national parks closed.

UNIDENTIFIED FEMALE: That's just really makes this mad. Real mad.

ROMANS: After Congress failed to extend a short-term spending measure, the government shutdown again in December. That shutdown lasted 21 days. The final cost? $1.4 billion.

Senator John McCain warns Republicans today to remember who the voters held responsible.

SEN. JOHN MCCAIN (R), ARIZONA: Rightly or wrongly, Congress gets blamed. And we've seen the movie before. Just some of them were not around at the time. I was.

ROMANS: And the most recent CNN/ORC poll shows history is likely to repeat itself. Fifty-one percent of Americans say congressional Republicans will be most to blame for a shutdown, 33 percent would blame President Obama.

With the world's biggest business operating without a budget since 2009, there is not much optimism on either side.

(END VIDEOTAPE)

ROMANS: And this is no way to run a business.

I want to bring in Candy Crowley and Mohamed El-Erian.

Candy, this fight does not seem to be between the left and right this time around. Listen.

(BEGIN VIDEO CLIP)

SEN. TED CRUZ (R), TEXAS: We will do everything necessary and anything possible to defund Obamacare.

SEN. HARRY REID (D), MAJORITY LEADER: It would be good political theater to watch them self-destruct, and that's what they're doing, if there were not so much at stake.

(END VIDEO CLIP)

ROMANS: Candy, is the GOP at war with itself?

CANDY CROWLEY, CNN CHIEF POLITICAL CORRESPONDENT: Sure. It has been for some time. Because you have -- especially on the House side, conservative Republicans and then the more moderate Republicans. So they are. But they lack a -- if you will, a party leader in the sense that the president leads the Democratic Party. Excuse me.

So basically, yes, they are and this happens to the party that doesn't own the White House. But it all really boils down to the House not even the Senate and what John Boehner can deliver and what he's going to need Nancy Pelosi to deliver.

ROMANS: A report from the Congressional Research Service finds that even if the government shuts down, Obamacare would go ahead, the implementation of Obamacare, but you would still be affected.

Based on the last shutdown in 1995 here's what's -- what could happen. Many if not most federal offices and programs would shutdown. National parks and museums close. You would see federal contractors rely on government departments to issue paperwork. They could see their projects delayed.

Now parts of the government that provide critical services would stay open. Think air traffic control, food inspectors, national security and border protection. Maintenance of the power grid, critical there in disaster relief.

Anything considered essential to the banking system also. That means the government will still issue bonds and yes, you do need to pay your taxes.

Now the Postal Service would still deliver mail. And the government would pay out Medicare and Medicaid and Social Security benefits because those are considered mandatory. They are not affected by a shutdown. But the government workers who process them would be affected, although it's unlikely.

Again, we don't know for sure. The president, his appointees, members of Congress, anyone else working during the shutdown would get paid, although their paychecks could very well be delayed. And the furloughed federal workers may get their backpay after the government starts up again. But again it's not guaranteed.

In a shutdown, federal contracts slowed. Workers wouldn't get paid on time. They wouldn't spend.

Mohamed El-Erian, how long until all of that, all of this, drags down the economy?

MOHAMED EL-ERIAN, CEO, PIMCO: If it happens, Christine, it will have a negative impact pretty quickly. So in addition to everything you cited, which is the direct impact, there are three indirect impacts if this happens.

First, it increases uncertainty, which makes companies less willing to invest in new plants, equipment and hiring. Second, it forces the Fed to continue with experimental policies, the impact of which are uncertain. And third, it lowers our standing in the global economy. So that all the immediate direct effects and that is a whole set of indirect effect of what is critically as you said is self-inflicted problems.

ROMANS: But, you know, Mohamed, since the beginning of all of this debt drama, what, 18 months, stocks have gone just up. There are people who say, look, you know, I'm not going to worry about this Washington craziness. It's not going to affect my money because look, stock markets are doing great. Even with the dysfunctional Congress. What do you say to that?

EL-ERIAN: So I say they are right in the sense that the assumption in the markets is it's not going to shutdown. The assumption is that at the last minute, once again, they're going to find a compromise. But let's remember the summer of 2011 when they got so close to a technical default that they actually ended up by really undermining the economy and markets.

So the assumption in the market right now is at the end of the day, these would be like just games and they're going to sort it out. But if they don't, if they get too close and they can't pull back, then the markets will get hit really hard.

ROMANS: So, Candy, you heard that, I mean, the markets are assuming that there are grown-ups working in Washington right now. Meantime, we continue to see kind of these games. Right? OK. So the House has voted to repeal Obamacare more than 40 times. Even though it hasn't worked, they just keep doing it over and over again.

It has virtually no chance of making it through the Senate. The president is not going to sign away his signature law.

Could this -- is this a fundraising exercise somehow? I mean, what are they doing here?

CROWLEY: Well, understand the makeup of the House. They are not elected statewide. They are elected within their district. So conservatives and Tea Party members on the House side and on the Republican Party will say to you, this is what my constituents want. This is what they expect me to do.

And they argue that the biggest single drag on the economy is actually Obamacare. The businesses are laying off workers or moving them to part time in advance of the registry and going on and forcing folks into some sort of health care. So the fact is that in the House side, these conservatives are doing what they believe their constituents want them to do.

At the same time, Speaker Boehner, who's the leader of the Republican Party, and Nancy Pelosi, who heads up the Democrats, both understand the price to be paid if the government shuts down. You have to think of the votes for the next couple of weeks not as final, but as a part of the process. And it's real ugly to watch as we've all watched it before.

As you said, we've seen this movie before. But in the end, when you look at who has what to gain and lose, the leaders on both sides understand the stakes.

ROMANS: Yes.

CROWLEY: And I think that's why people think, you know what, that's that Washington game. We'll pay attention when it gets serious.

ROMANS: Yes. The biggest loser is the American people who want jobs. That's still the number one thing here. People want jobs and that's some big debt drama. But you only have the Fed. The only grownup in Washington is the Fed. I mean the people who stand to lose is American people.

All right. Coming up, the taper. It's not any of these three things. Five little letters that mean more to your job, your health, your investments than anything else right now.

(COMMERCIAL BREAK)

ROMANS: Taper. The word of the week on Wall Street. Maybe the word of the year, too. Everyone was ready and then the Federal Reserve didn't do it.

I love this headline in CNNMoney this week. "Keep Calm and Taper On."

What is the taper? To understand that, you need to know what we're tapering. Fed chief Ben Bernanke and company are pumping $85 billion a month into the economy. $85 billion a month. But you're benefiting. How? First your money. The Fed started this latest round of stimulus in September, what, of 2012. Right? Since then the S&P 500 is up 20 percent. It'd given a boost to your 401(k), your mutual funds, your ETFs, even individual stocks you might own. So you can thank the Fed for that.

Next, your home. Have you refinanced lately? The Fed had a lot to do with those savings. Mortgage rates hit record lows earlier this year so why have rates been rising over the past few months? Well, in anticipation that the Fed would slow down. Taper its bond-buying program.

Even if you haven't refinanced, the Fed is still helping you out. Low rates, increased demand which raises the value of your home. Prices are up 12 percent over the past year.

Finally your job. Over the past year since the bond buying program started, two million people have been hired. A lot of those are part- time, I know. Low wage positions. We're worried about that. But it is the largest gain over a 12-month span since before the recession.

The Fed says it needs to see a lot more evidence of a stronger economy overall before it tapers. Guaranteeing you will keep hearing this increasingly irritating word.

(BEGIN VIDEOTAPE)

ROMANS (voice-over): Hollywood has "it" girls. Wall Street has "it" words.

KEITH MCCULLOUGH, CEO, HEDGEYE RISK MANAGEMENT: He's got to stop with the bond buying and start to taper.

ROMANS: Taper is the latest "it" word on Wall Street.

DAVID LETTERMAN, HOST, "LATE NIGHT WITH DAVE LETTERMAN": Ladies and gentlemen, this is tonight's top 10 list.

ROMANS: It won't make Letterman's top 10 list.

UNIDENTIFIED FEMALE: The taper?

UNIDENTIFIED MALE: The taper?

UNIDENTIFIED MALE: Yes -- which I'm -- I don't know.

UNIDENTIFIED MALE: The politics?

UNIDENTIFIED FEMALE: So what is the taper?

ROMANS: It's not a zoo animal or a CNN anchor or a way to wear your jeans. It's Federal Reserve chairman Ben Bernanke's toughest job yet. How does he taper down from historic stimulus? It's likely the final challenge for this chief.

OBAMA: He's already stayed a lot longer than he wanted or he was supposed to.

ROMANS: And he's done what no Fed chief has done before. Basically he's holding a fire hose. Spraying $85 billion a month straight into the economy.

It can't go on forever. Taper as unlikely Wall Street lingo joins a list that includes quantitative easing, fiscal cliff, sequester. Remember TARP.

If he were a little rascal, he'd ne this guy, throwing money from the window. The dilemma for the Fed, take away the training wheels too soon and the economy could crash. But fail to taper and this economy may not take flight on its own.

(END VIDEOTAPE)

ROMANS: Tapering this massive stimulus will likely be someone else's job. Fed chief Ben Bernanke is expected to step down at the end of the year. Though he said he's not ready to announce his plans.

Next, the former Treasury secretary, Larry Summers, removing his name from the list of successors. This woman, Janet Yellin, is now the odds-on favorite to replace Bernanke, but billionaire investor Warren Buffett says he wouldn't pick either as the next Fed chair. He wants Bernanke to stay, telling CNBC this week, quote, "When you have a 400 hitter in the lineup, you don't take him out."

We found out this week that when Ben Bernanke does nothing, stock markets hit record highs. So what happens to your money when he or whoever the next Fed chief is starts to take their foot off the gas? That's next.

(COMMERCIAL BREAK)

ROMANS: All right. More than 800 points this month alone. The Dow September surge has been unbelievable. Wednesday, the S&P 500 and the Dow hit, you know, record highs after Fed chairman Ben Bernanke announced he would do nothing. Investors thought the Federal Reserve might pull back on the $85 billion a month in bond purchases he's been making since last September, but oh they were wrong.

(BEGIN VIDEO CLIP)

BEN BERNANKE, FEDERAL RESERVE CHAIRMAN: Well, I don't recall stating that we would any particular thing in this meeting.

(END VIDEO CLIP)

ROMANS: No, the Fed is not doing anything particular, but just keeping the pedal to the metal by flooding the bond and mortgage market with $85 billion a month for the past year. Stocks have soared. Mortgage rates have remained relatively low but job creation and economic growth have pretty much stalled. And that's exactly the opposite effect the Fed intended.

Albert Einstein's famous definition of insanity, doing the same thing over and over again and expecting different results. My next guest says the Fed and Ben Bernanke should take heed.

Keith McCullough is the CEO of Hedgeye Risk Management.

Keith, the market is up. Come on. Why is any of this bad news for America?

(LAUGHTER)

MCCULLOUGH: Well, anytime you get a central planner, it could be now, Christine, it could be 200 years ago. And it's been happening for 200 years and more. Any time a central planner starts to devalue the currency of the people that's not a good thing. So at the end of the day what I like, and I've been very, very bullish on stocks all the way up until this week, what I really liked was this concept of letting the purchasing power of the American people, god forbid, go up, which is of course the value of the U.S. dollar.

And alongside that rising interest have also been very bullish. Unfortunately, Ben Bernanke completely disagrees with that, and he's pandering to an entire community of slow growth, non-savers that I don't think is going to play out so well. So I think that what he did this week was borderline un-American.

ROMANS: And you call him a central planner, but I'll tell you, at least someone is planning in Washington, because no one else is, Keith.

(LAUGHTER)

MCCULLOUGH: Yes, exactly.

ROMANS: And that's the truth. So look, what happens now?

MCCULLOUGH: Well, from here, I think, you know, now you're in a really tough spot, because, of course, now what Ben Bernanke really did was he put a huge systemic level of risk into the bond market because if you're not going to taper now or you're not going to tell us or you're not going to go with what the market actually expected -- in other words, Ben Bernanke's decided not to respect the market, which is a very difficult position to take, I think -- I think all of a sudden into October you get that taper talk again.

So whether it's called the October taper or whatever people make it out to be, that become as big risk, Christine.

ROMANS: Yes.

MCCULLOUGH: So, you know, for us, I think it's a great spot. I mean, if you've been long stocks, it's a great spot to sell some.

ROMANS: Keith McCullough, nice to see you. Have a great weekend.

MCCULLOUGH: Thanks.

ROMANS: All right. Well, investors are jumping into the U.S. stock market. One big-name endorser could be jumping out of the U.S. shoe market.

Here's "The Score." Boston Celtics point guard Rajon Rondo is -- well, reportedly dropping Nike and joining Chinese apparel maker Anta. The "Boston Globe" says after his Nike contract ends, Rondo will join former teammate Kevin Garnett as an endorser. A lot of attention will be on Rondo's new shoes this season. He's coming from surgery to repair a torn ACL.

Also in Boston this week, the Red Sox let fans into Fenway Park for $1 if they had a beard. Beards are somewhat of a tradition among Red Sox players. Now it's the fans' turn to grow one, draw one, or wear a fake one. The $1 ticket sold out quickly. The promotion reminded us of this picture of CNN anchor and that diehard Red Sox fan John Berman. Isn't he cute? He would have bought a ticket with that beard. That attempt at a beard. But he was too busy working here at CNN.

All right. Staying with baseball, this is Marcus Stroman. He is a top pitching prospect in the Toronto Blue Jay system, but we love him for paying off his mother's mortgage. He's posting a video of her reaction on Instagram this week.

(BEGIN VIDEO CLIP)

UNIDENTIFIED FEMALE: Marcus, what did you do?

(END VIDEO CLIP)

ROMANS: Stroman included the caption, "Wouldn't be where I am today without my parents," #familyfirst. My three little boys are watching that segment.

All right. And the Cleveland Browns are still looking for their first win of the season. But some fans will be losing for months to come, that's because six of the players featured in the team's official 2013 calendar are no longer with the team. Running back Trent Richardson is the most high profile name to leave. He was traded to the Colts this week. Does this look a little strange to you? Mark Zuckerberg traded in his hoodie for a suit this week when he visited the Capitol Hill. We'll tell you where else the Facebook CEO was causing a stir. That's next.

(COMMERCIAL BREAK)

ROMANS: The poverty rate has barely budged in three years, and the rich are richer than ever before. Are we one America with two economies? Headlines this week certainly seem to make that case. More than 46 million Americans live in poverty, 15 percent of the population. It has been four years since the recession ended, but the poverty rate virtually no improvement, because wages fell last year.

At the same time, wealth among the 400 richest Americans is climbing. The annual "Forbes" list finds their combined net worth hit a record $2 trillion. That growing wage gap between the rich and the poor coming to the forefront this week. The SEC, the Securities and Exchange Commission, wants companies to open their books and show exactly how much their top executives make compared to the rest of their staff.

Our Zain Asher joins me now with the details.

It will be a really interesting look under the hood of companies. Usually you see their earnings, you see their revenue, but you would see the disparity between the average worker and the CEO.

ZAIN ASHER, CNN BUSINESS CORRESPONDENT: It's going to be very interesting. Yes. So this is originally part of Dodd-Frank. But yes, the SEC has come out and unveiled its pay ratio proposal. So under the new rules, corporations are going to have to reveal three things.

Number one, how much that CEO makes. Number two, the salary of the average worker at that company. And number three, probably the most interesting, the ratio between the two.

You know, Christine, we talk about, you know, the wealth gap between the rich and the poor and how the wealth gap has actually risen during this recovery. Let me give you some numbers, OK? The average CEO in America makes roughly $12 million. The average worker, wait for it, $35,000.

You know, a huge disparity between the two. I'm actually going to throw out some names for you right now. Larry Ellison, for example, CEO of Oracle, makes $96 million, Elon Musk of Tesla, $78 million. And Mike Jeffries of Abercrombie & Fitch, for example, reportedly makes 1600 times his average employee.

Now this is obviously controversial because some people are saying, you know, is this information really that useful? Number one. Number two, what is the point of this other than to publicly humiliate corporate CEOs?

And people are saying, you know, this information is going to be really difficult to compile. Some companies have workers, you know, spread out across the globe. And what might be the repercussions? You know, even if we do know the wealth gap, what is the government going to do about it?

ROMANS: Very interesting. Just another piece of information, for sure, about companies and their workers.

Zain, thank you so much.

All right. For more on the stories that matter to YOUR MONEY, give me 60 seconds on your clock, it's "Money Time."

(BEGIN VIDEOTAPE)

ROMANS (voice-over): College enrollment falling. Student debt soaring. The result? Some private colleges are slashing tuition by as much as half in some cases. If that's not enough of a deal, Wharton's elite MBA program can be yours online for free. You won't get the degree, but you will save 200 grand.

Of course, college isn't for everyone. Harvard dropout Bill Gates heads "Forbes" list of the richest Americans for the 20th year in a row. Harvard dropout Mark Zuckerberg makes an appearance in the top 20 thanks to Facebook's rising stock.

A new study finds more Americans are ruling out retirement. Nearly one in six workers plan to spend their golden years at the office.

The late fashion designer Gianni Versace's mansion sold at auction for $41.5 million. It will become a hotel. Versace was shot and killed on the doorstep in 1997.

After a deadly wreck almost two years ago, the Costa Concordia finally upright. It's no small task, requiring massive pulleys, cables, and a 500-person crew. The total price tag? $800 million.

And is a big endorsement deal enough to cheer up this grumpy cat? The Internet sensation is now the spokescat for Friskies.

(END VIDEOTAPE)

ROMANS: All right. I'll be back with a brand-new YOUR MONEY at 2:00 p.m.

Coming up next in the CNN NEWSROOM, the rainfall in Colorado has been called biblical. A 500-year flood that's left damage that's truly unbelievable. So who picks up the tab? FEMA or private insurance companies?

We're going to tell you what you need to know if a disaster like this strikes your home.

That's next in the "CNN NEWSROOM."