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Tea Party Politics; Slashing the Budget; Why Asia's Economic Growth Is Good For U.S. Employment; The Future of U.S. Energy With T. Boone Pickens and Bill Richardson; To Buy or Not to Buy?; Investing in College Housing; The Future of Flying
Aired April 2, 2011 - 13:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
ALI VELSHI, HOST: Creating jobs, cutting spending, and balancing the budget. Tea Party anger propelled certain Republicans to victory and had a big part in the shifting balance of power in the House, but now a growing divide between Republicans in the establishment and the Tea Party Movement over the economy could spell trouble for the GOP.
Welcome to YOUR MONEY, I'm Ali Velshi.
Coming up, a conversation that you don't want to miss on the future of energy policy in the United States. T. Boone Pickens will be here as will former Energy Secretary Bill Richardson.
Let's begin with the national debt; we're a week away from a possible shutdown of the U.S. government. Benjamin Barber is a distinguished senior fellow with Demos.
Ben, from your perspective, are these Tea Party positions on the budget the absolute need to cut money out of the budget, are they too extreme when it comes to balancing the budget in the short term or dealing with our long-term debt?
BENJAMIN BARBER, DISTINGUISHED SENIOR FELLOW, DEMOS: They're great positions if what you're doing is trying to argue pure principle. If you want to argue that the U.S. governments too large, the budget's too large, we've got to cut back, that's just great. And if you're sitting somewhere in Michigan or Texas and making the argument it's a great place to make it.
But when you go to Washington, you're talking not just about principle but about politics. In a democracy, politics is about the art of compromise. Realizing you don't represent the whole country, you represent part of it, and your job is to do as much as you can to get your part on the agenda. That means cutting deals that means making compromises.
The problem right now is that the regular old-fashioned Republicans know that politics is about the art of compromise. The Tea Party folks think it's about talking only about principle and in the end; they will lose both the politics and the principles if they don't understand politics.
VELSHI: Let's put that idea to Dana Loesch, she is a CNN contributor as well as an organizer within the Tea Party. Dana, take a look at these numbers. A new CNN Opinion Research Poll shows steady decline in the Tea Party's popularity over the last 14 months. In January of last year, just one in four Americans had an unfavorable view of the Tea Party. Today, nearly half of those surveyed have an unfavorable view of the movement.
By the way, that puts you in good company with the other major parties. No question that the Tea Party helped a number of Republicans in the recent midterm victories. What do you think of Ben's comments, though, that maybe the position is too extreme to actually be effective at this point.
DANA LOESCH, CNN CONTRIBUTOR: Well, I disagree with that, just one thing on the polls, though, really quickly. There are two other polls that were released in relatively close time proximity to this one that kind of say the opposite. There was a Gallup Poll that was released that say seven out of ten Americans actually believe the Republicans should implement, they should strongly consider and implement the Tea Party ideas.
But in terms of the Tea Party being extreme with how they want the budget to be reduced, how they want spending to be reduced, I don't think its extreme, considering that what they want, what the movement wants, is completely reflective of what is authorized in the constitution. I think the problem is that we've gotten accustomed to big spending, and people have been apathetic.
Conservatives especially have been incredibly apathetic over the past eight years when Republicans, which created the Tea Party, because of their huge spending, when Republicans were doing it. And I think now it's they want a lot really quickly, and it's a lot for the establishment to kind of get on board with, because they're used to having a blank check.
VELSHI: Quick question. I hear you, and Ben makes the point that it's a fantastic principled position, which you're making. Is it politically effective or is it a little too extreme?
LOESCH: Well, when you look at the exit polling from November 2nd I think it's very politically effective. When -- after November 2nd everybody leaving the polls, they said that the economy was their chief concern. And people were more scared about the economy now than they were four and five years ago. And they wanted to see a reduction in spending. Of course voters didn't outline how they expected to see that happening. If they wanted to see reduced spending --
VELSHI: That obviously is the trick. Everybody wants to see reduction in spending until you start asking them exactly what they want to reduce spending on.
LOESCH: Painful cuts.
VELSHI: The Tea Party held a rally this week and the message to Congressional Republicans were worried about a government shift check out was pretty clear.
(BEGIN VIDEO CLIP)
KATHY DIRR, TEA PARTY ACTIVIST: I say to the Republican leadership, take off your lace panties, stop being noodle backs, and take a strong, bold, unwavering stand for and with the American people.
(END VIDEO CLIP)
VELSHI: Wow. Will Cain is CNN contributor.
Will, Tea Party, helpful or hurtful at this moment in time. Not what Dana was talking about, November 2nd. We all got that message. At this moment in time, helpful or hurtful?
WILL CAIN, CNN CONTRIBUTOR: Both. Is that a non answer? Let me say this. Are they extreme? If you're morbidly obese is it an extreme suggestion to just cut out Twinkies or that you should go on a starvation diet and run nine miles a day? The Tea Party, I agree with Ben on one thing, it is a principled position, but the reason at whether we should cut 30, 60 or a 100 billion is not a good idea. It is not because of politics but because of priorities.
Essentially 30 billion a 100 billion is nothing, it has nothing to do with the deficit, and it's a drop in the bucket. If you want real deficit reform, the Tea Party and Republicans need to concentrate on entitlements. Eighty percent of the budget is in Social Security, Medicare, Medicaid and defense.
VELSHI: Which really nobody has committed to doing anything serious with. We are trimming around the edges. So here we go, Will. As a conservative, as a conservative, do you agree that this is the right time in our nation's recovery to be doing what the Tea Party is asking Republicans to do?
CAIN: Now, look. I get it. I get that it's a principled position and that you have to show your voters that you heard them and that you're principled. But no I don't think it's the right thing to focus on right now. I don't think cutting $60 billion and threatening government shutdown over something so small is worth it. I want the conversation on the 80 percent of the budget. That's where I want it to focus.
VELSHI: Ben, I want to ask you this. This conversation helps Democrats right now. Is it going to help Democrats to start to do the right thing with respect to spending and the budget? Is it strengthening those who say we shouldn't cut anything?
BARBER: It's not about helping Democrats or helping Republicans it is about helping the country. I'm glad to hear Will say and I think he's right, that we've got to concentrate on the 80 percent of the budget that right now is fixed and nobody wants to touch. You got 20 percent in Medicare and Medicaid, you got 20 percent in Social Security, you got 20 percent in defense, and you got about 8 percent in interest on the national debt.
None of that we say can be touched, and then you've got salaries you can't touch either like the president and the Congress's salary. That leaves about 15 percent to 20 percent of the budget as, quote, discretionary. If you try to get $30 or $60 billion from that little bit of the budget, you're going to end up limiting half or all of those programs. You can't put that burden on programs in education and on health. Americans also have no idea of what the real weight is.
Americans think we give 10 percent to foreign aid. It's less than 1 percent. Americans think that we give to teachers like 10 percent. It's about 3 percent. Americans think that public radio and public television is 5 percent of the budget. It's one, one hundredth percent of the budget. So even if you got rid of them, you wouldn't begin to deal with the obesity in the budget.
So we're going to have to, I think is exactly as Will says, we're going to have to look at are we going to cut defense spending, as we're talking about right now cutting. The president is about to spend $1 billion a month in Libya. Is that helping us? I don't think so.
VELSHI: We have a good team of you here. Why don't we do this, you all stay here.
When we come back, let's take a very specific look at how we balance the budget. Before we blame politicians for failing to balance it, let's look in the mirror. Up next, why the spending cuts that you want probably won't solve the problem.
VELSHI: Great discussion I've been having with my panel. One of the points we have been discussing is that if you ask Americans what should be cut to balance the budget, the answers come easy. Actually, not as easy as you think.
Let me give you an example. A majority of Americans say to cut foreign aid. They estimate that foreign aid makes up 10 percent of the federal budget. The actual figure is less than 1 percent according to data from the Office of Management and Budget for the 2010 fiscal year. I will give you another one; nearly half of Americans say to make cuts in public broadcasting. They believe 5 percent of our federal budget is tied up there.
But the reality, .01 of one percent goes to public radio and television. Where does that money go? Well more than 20 percent of the budget, as Ben said, goes to things like Social Security. When it comes to cutting Social Security, as Dana said, 87 percent of Americans don't want it touched.
The bottom line is, simply cutting unpopular programs isn't going to make much of a dent. Dana, is it time for Americans to accept that the only way to deal with our burgeoning federal deficit is to actually make tough cuts in programs that we like? Or conversely raise taxes?
LOESCH: Right. I mean, they're going to be painful. This isn't going to be easy. And for a lot of conservatives out there, sometimes I want to go, so how conservative are you? Because you realize that a lot of these cuts, they're going to affect you. One of my -- one of the things I like to say when someone asks me, what would you cut, my favorite answer is to say everything that is not listed in article one section eight.
Of course we could go down the line and look at various departments, Departments of Agriculture, transportation, urban housing and development, all of that. Education all of this, there's a ton of places where cuts could be made. And I do want to make the point too that when you take 5 percent here, 5 percent there, 1 percent here, 1 percent there, after a while it does start to add up. And I think it's a good step in the right direction. But so much more needs to be done. Because $33 billion, that's like 1 percent. It's nothing.
VELSHI: Will, let me give you another poll. We asked Americans which side has the better approach to handling the budget. Evenly split between Congressional Republicans and President Obama. Look at that. 46 percent say it's the president, 45 percent say Congressional Republicans. Do Republicans lose their mandate from midterm voters or did they not have one to begin with?
CAIN: Well, I don't know if they had one to begin with. We are talking about why. You know that poll is interesting. I also have statistics that show over the last century Americans have voted in a way that suggest they want subsidized retirements, subsidized health care, everything they can get and about 10 percent in taxes. That's what they suggested by the people they keep electing. So I don't know if Republicans did have a mandate. If they did, if the Tea Party is for real and is willing to look at these entitlements, then that's going to be one of the first times in history.
VELSHI: Is it fair to say that in some strange way all three of you are agreed that we do have to, whether it's now or later, manage the deficit on the way to managing the federal debt? Otherwise, there will be economic problems. There are consequences to having a debt as large as the one that the United States has.
BARBER: I think just about every American and every member of every party agrees with that, but the devils in the details and the question is how do you do it? You can means test Social Security or Medicare, you can start really --
VELSHI: Meaning it's not entitlement that everybody gets.
BARBER: Depends on what your income is. There are people who are cutting coupons for $100,000 a year who are still collecting $20,000 a year in Social Security; they may not need all that, even though they earned it. I do believe it belongs to them. You can start looking at defense. We have about half of our budget in keeping up our old nuclear missiles and that stock, which has nothing to do with security today. We're still doing that.
We're about to go into Libya, we are in Libya; we're spending up to $1 billion a month. If we stay, we're dumping into other places; we've got to think seriously about that. You can't make noises about caring about the deficit and then saying Americans we're the world's policeman and going in everywhere and do just about everything.
So the question is what you cut, how do you cut it and now we come back to the original question, politics is not about polling. Politics is about figuring out what can be done to get at least part of your principles on the table in Congress. And there I think the Tea Party is doing a bad job. Because instead of trying to work for their principle and make deals that will get at least part of it represented, they're in effect saying, all or nothing, we're willing to close down government. That would be a disaster both for the budget and for America.
VELSHI: All right. Dana, let me put that to you then. If you put aside the principle discussion, again one of the things that I think all three of us agree upon is that the best way to toward economic growth is going to be about getting more Americans back to work. We saw an encouraging number on Friday, but the reality is what do you think? What do you and others in the Tea Party think is the best way to create jobs right now, or more jobs than we're creating?
LOESCH: Right. Well, I don't speak for the whole movement, I speak for myself, but I think a lot of people within the movement agree with me, that you have to get government out of the way. That's the reason that we see such a decrease in the amount of jobs. That's a reason we see such high unemployment, is because government has gotten so involved. You have high taxes, you have the government spending money that it doesn't have, money of our next generation. That's -- I mean, that's the reason.
If you get out of the way and allow of the fair market to do what it's supposed to do, allow small businesses, the engine of our economy to create jobs, then you'll have it. I'm the wife of a small business owner, so I see immediately how the policies from Washington, D.C., not only affect my husband's business, but the employees that work for him. I see how he's not allowed to, because of their regulations and the taxes and the health care mandate and everything else, how he's not going to be able to create more jobs, or pay better wages or provide better benefits.
I see how this immediately happens and I think more Americans -- everybody sees this, but that's the problem. Big government, big spending.
VELSHI: Let me ask Will Cain. Will, we need specific ways in which we're going to get Americans back to work. Because if Americans are back at work we're not supporting them and they're paying taxes. What's the best answer for conservatives?
CAIN: You're not going to like my answer. So here it is. Government does not create jobs Ali; government creates the conditions for job growth. In order to do that, I do agree with Dana, you have to cut back on the government's influence in our lives and its reach into the economy. That being said, one of the best things to set conditions for job growth would be tax reform.
To look at what the Bole/Simpson/Obama approve the Deficit Commission Panel did, which is reduce tax brackets for 20, 25 percent and get rid of the loopholes. Make the tax code simple. I think that kind of clarity will lead to unprecedented job growth and you'll raise revenue.
VELSHI: It was simple once it got complicated. Thanks to the three of you, what a great discussion. We hope some of it will come to pass in solving some of economic problems.
Hey listen, one of the things we talk about a lot is China and India, you've heard about all those American jobs that have headed overseas. Now stick around to find out why Asia's economic growth could actually mean more jobs here in the United States.
VELSHI: Every month on this weekend, the first weekend of the month, we discuss the unemployment report for the month before. This is when we get the new numbers. We have them for March. Let me just show you have the chart for the last year.
The picture has been improving lately. This was a year ago. We were building; we were creating all sorts of jobs and then look at what happened in the summer. We started losing jobs and it's been uneven since then.
But in March we created a net 216,000 jobs in the United States. Now, 230,000 jobs were created in the private sector, but we lost jobs in government. That's been happening a lot. Unemployment rate down just a smidge to about 8.8 percent.
This isn't a half full story, this isn't a half empty story, and it's a half full story. The fact is we've actually started creating a good number of jobs. But Christine Romans is here, host of "YOUR BOTTOM LINE."
Christine, there is a segment of society not insignificant segment of society was not prospering out of this job market.
CHRISTINE ROMANS, CNN BUSINESS CORRESPONDENT: The 99ers. When quite frankly when we talk about the encouraging headlines, which is what economists say these are, the 99ers say, it's not so encouraging right here. When you dig within these numbers and you look at the tables from the Labor Department Ali, the length of time out of work has now grown to 39 weeks.
Think about it most of you out there, most of us don't have enough money saved to be able to get that long, particularly if your House has lost its value. So for people who have recently lost their job, things are much, much better. You're going to have a better time finding a job. For people who have been out of a job for a very long time, it's the same old story.
VELSHI: You refer to the 99ers, just as a group of people unemployed for probably two years or more, exhausted all state and federal unemployment --
ROMANS: Which is 99 weeks. VELSHI: Its 99 weeks that is why we call it the 99ers.
Interestingly enough a trend we have been seeing lately is an uptick in manufacturing jobs. Something that has been disappearing for years and years and years. I want to bring in Michael Schuman he is Times Asia business correspondent, joining me now from Hong Kong.
Michael, Americans continue to fear the loss of their jobs to China and India. But you have written about the fact that the growth of those emerging markets, and it is robust growth, could actually mean jobs for Americans here at home. Explain that.
MICHAEL SCHUMAN, ASIA BUSINESS CORRESPONDENT, TIME: Well, you know there's a couple of ways of looking at the rise and shine in India, one is that it is a threat to American jobs, American competitiveness, and, of course, there's an element of truth in that. The other way of looking at it is that you've got 2.5 billion people who are getting richer and richer and richer every day. That means they're able to afford things they were never able to afford before, whether it's cars, whether it's steaks, iPads, iPhones, all kinds of stuff. That has a ripple effect through the entire global economy. It's a source of new customers and entire new source of demand for American companies and that can create jobs back in the U.S. and around the world.
VELSHI: All right. Let's talk about this. U.S. exports to China, we always talk about how there's this imbalance, this trade imbalance. We import a whole lot from China, we don't export. But take a look at this. U.S. exports of goods to China reached $92 billion in 2010. That's a 32 percent jump over the year before. Could we reach a point, Christine, where demand for U.S. exports, things we make in the United States, could bring back manufacturing jobs that we've lost in the past?
ROMANS: Well there's some skilled manufacturing, there's definitely and definitely need for. But you look at that number; you can't really look at that number in isolation. Because what do we import from China, $280 billion, four times as much or five times as much. So the question is, are you going to be able to -- grow your exports and shrink your imports a little bit to get rid of these imbalances that the Treasury secretary and a lot of economists have said are still a problem in the global economy.
When you talk about being worried about China and India and our jobs going there, I think that's a story of ten years ago. I think the story right now is the worry that companies have reached a new normal, where they don't need to add a lot of jobs in this country. Even if there is growth from Asian markets, American companies are comfortable with their U.S. head count as it is.
VELSHI: Let's talk about this, Michael. One of the things we discuss with India and China and other growing economies is the fact that we're going to see a huge influx in the United States of business travelers and tourists from those countries. Could we benefit more on the service side, of providing the Chinese, the Indians, the other Asians with services and things here in America than manufacturing jobs?
SCHUMAN: Well, tourism is one of the great unforeseen parts of the global economy that creates a tremendous amount of money. And the more the richer Chinese get, the more they're going to travel, both as businessmen and as tourists and the more they're going to spend their new money around the world. Chinese tourists already spend more than Japanese tourists, Canadian tourists; it's a big source of money for the world.
And also I think as you said, service is a real strength to the U.S. economy. There's some challenge to that from India which is also a source of services and have seen their service industry in social and IT and business services grow very quickly. But you know the U.S. has the IBM's and firms like this that provide incredibly advanced specialized services in finance and IT and all kinds of R & B work, that's a huge potential source of growth for the U.S. going forward.
VELSHI: And a potential source for our viewers who are still looking and may see the need to retrain themselves.
ROMANS: If the jobs stay here.
VELSHI: If the jobs stay here. That is a good point. Michael good to see you as always, Michael Schuman is TIMES Asian business correspondent.
SCHUMAN: Thank you.
VELSHI: Joining us today from Hong Kong. Christine, you stick around.
Between risk skyrocketing, gas prices and the nuclear crisis in Japan, lots going on about the future of energy in the United States. We've got two people who you want to hear from on the subject. T. Boone Pickens and former Energy Secretary Bill Richardson join the debate next.
VELSHI: President Obama outlined an energy plan this week to cut our nation's imports of foreign oil by one-third over the next 15 years.
(BEGIN VIDEO CLIP)
BARACK OBAMA, PRESIDENT OF THE UNITED STATES: The United States of America cannot afford to bet our long-term prosperity, our long- term security, on a resource that will eventually run out.
(END VIDEO CLIP)
VELSHI: T. Boone Pickens, you know him. He's a legendary oil man, founder of BP Capital.
Boone, you have long asserted that when it comes to oil, our country is forced to do business with enemies.
But let's just talk about this. You have made a lot of money on oil. You continue to be invested in oil and make money off of oil. We all love oil, despite what we say. Can we achieve what the president has laid out?
T. BOONE PICKENS, FOUNDER, BP CAPITAL: We can do better than that. One-third, we're importing 13 million barrels a day and we're going to cut off one-third of 13, five of the 13 comes from OPEC, I consider that oil from the enemy.
That five could be cut out in 10 years and so -- you remember, the president said when he received the nomination in July of 2008, he said in 10 years, we will not import any oil from the Mideast. I'm working on that plan and I think --
VELSHI: And the most practical way to get there, Boone?
PICKENS: You've got to get on your own resources. You've got to get on your own resources and I'm all American. You cannot bring up anything on fuel energy in America that I'm not for and -- but anything is better than OPEC oil.
VELSHI: All right, Bill Richardson is former governor of New Mexico. He was the energy secretary under the Clinton administration.
Governor Richardson, there really is and has been a criticism out there that despite the talk that Boone was talking about when President Obama was candidate Obama we still do not in this country have a really comprehensive energy plan for the nation. What's your take on this?
BILL RICHARDSON , FORMER GOVERNOR OF NEW MEXICO: Well, the president has gone in the right direction, so has Boone Pickens. I think he's absolutely right that we're to cap the fossil fuels, especially from OPEC.
The political will has been lacking to develop new sources of energy that are the most promising, renewables and natural gas. I believe that fossil fuels, yes, they're part of the mix, but our commitment to a renewable portfolio standard nationally so that at least 20 percent, 30 percent is from solar and wind, a commitment to develop natural gas has not happened.
I think nuclear has to be part of the mix, but it's going to have problems, especially now with the tragedy in Japan.
RICHARDSON: But we don't have a comprehensive energy plan and we need to have it. The reason we don't have it is lack of political will.
VELSHI: And Boone, you tried to fix that. You tried during the last presidential election back when oil was over $140 a barrel, you tried to get everybody lined up on this idea. That if we can switch some of our transport vehicles over to natural gas we can switch some of our energy production, our electricity production over to solar and wind, where do we stand with that?
PICKENS: OK, but Bill Richardson and I have been on this subject together for, gosh, how long, Bill?
RICHARDSON: A long time, Boone.
PICKENS: Yes. We've been drinking the same stuff and it's -- we're the only country in the world that does not have an energy plan, and we use 25 percent of all the oil produced in the world every day, and we only have 4 percent of the population.
Now, that's absolutely insane, that we don't have an energy plan. But I think we're coming up on it. But natural gas is the fuel to use for the heavy duty. A battery won't move an 18-wheeler. So you don't even have a discussion on that point.
So you use natural gas where we have 4,000 trillion cubic feet of natural gas in America. That is huge. We're the largest of all nations on natural gas reserves. We're bigger than Russia. We're bigger than Iran.
We have the most natural gas of anybody and we've got to use it. It's cleaner, it's cheaper, it's abundant, and it's ours. We've just got to get started.
VELSHI: Governor Richardson, you talk about this political will. Where does it come from? Where do we get it? We all talk about it when oil is above $100 a barrel.
But where do we actually make the long-term and financial commitments to change over the way we generate energy in this country because it's expensive?
RICHARDSON: Well, as a nation, we seem to only act when there's a major crisis, and I believe we've had another one in Fukushima. So I think this is the time when all of our mixes in energy, fossil fuels, renewable, clean coal, and the advocates in the regions for these areas need to come together.
And I think the fact that Boone Pickens is a very successful oil man is basically saying that we need to shift away from imported oil, that we need to shift towards natural gas, which is clean and cheap, that we need to push for wind and solar energy.
I think the good news is in the next five years you're going to see an explosion in America of the use of natural gas and wind and solar. That's the good news.
VELSHI: Governor, that assumes that we keep a high price of oil, right? I start to think that once oil starts to get down to $70 and $60 a barrel if it happens in the near future, we start to forget this discussion. RICHARDSON: Well, that's the unfortunate political side. Go ahead, Boone.
PICKENS: Well, the thing that's going to carry us, and I hate to say this, it's not because it's patriotic, not because it's clean and all, it's cheap.
Natural gas on gasoline gallon is $1 to $1.50 cheaper than diesel and gasoline, and so when you look at one MCF of natural gas is about $5.
PICKENS: And it's equal to seven gallons of diesel, which is $25. That is not sustainable. You cannot have commodities doing the same job and be that far apart on price. So natural gas is going to move up on price, but when it does, it then triggers your wind.
PICKENS: You cannot have a wind project because it's priced off the margin, which is natural gas.
VELSHI: So you need natural gas to cause people to -- you need oil prices to cause people to use more natural gas, which then puts pressure on natural gas prices, which cause people to get into wind and solar?
PICKENS: Yes, but you've got to have $6 natural gas to finance a wind project. So when that happens, then you'll go back to work on the wind.
VELSHI: And, Governor, do you think -- and I know you know Boone's plans very well. Do you think that is the direction we can go in?
RICHARDSON: Yes, and I was the first public official, I believe, as a governor, to sign on to Boone's plan and I believe that.
PICKENS: That's right.
RICHARDSON: President Obama is heading in the right direction, too. It's just that we lack the political will in the Congress, Republicans and Democrats need to face these issues and act on them.
Now, individual states are moving in the right direction. My state went renewable, California, but it takes leadership from the federal government and the Congress.
And I think the president is saying we've got to do this and somehow the Congress again, the lack of bipartisanship, the lack of political will, just hampering us from acting and we need to act.
VELSHI: And finally, Boone, are you still investing in oil?
PICKENS: Sure. But, Ali, I don't know anything but this industry. I got out of school in '51 as a geologist, and I've been practicing geology for the last, what is it, 100 years now?
But it's a long, long time. But I'm about five feet wide and 50 feet deep on one subject, which is energy. Yes, that's where I put my money.
VELSHI: We need experts like that, and we should all look so good 100 years after graduating from college. Boone, great to see you as always.
T. Boone Pickens is the founder of BP Capital and of course, Governor Bill Richardson, former governor of New Mexico and the former secretary of energy of the United States.
I want you to take a look at this cover from "Fortune" magazine in 2002. It's a picture of a House on an edge of a cliff. The title is, "is real estate next?"
Take a look at this, "Fortune" magazine now, from the magazine that predicted the housing crisis long before the others. What you need to know about the return of real estate, up next.
VELSHI: They say a picture is worth a thousand words. So let me show a picture, in the case of the housing market, it might be a little bit of a darkening picture.
Let me show you about - well, this is worth not just 1,000 words, maybe thousands of dollars to homeowners, one in four mortgages in this country are under water.
Let me show this. This is from 2004 to 2010. This isn't House prices. This is the change in House prices year over year. So you can see back in 2004, 2005 home prices were going up 8 percent, 10 percent, 12 percent and 2006, things started to soften.
You see that, all of a sudden they weren't increasing at all, then they were decreasing down into 2008, back up at the beginning of 2010 and big rebound actually and then look what started to happen, started to go down again.
Here's where we are today. We have home prices lower than they were a year ago. Now, I want to talk to my two friends, Christine Romans, host of "YOUR BOTTOM LINE" and Shawn Tully from "Fortune" magazine.
Because, Shawn, you've got a cover article right here on "Fortune" magazine talking about the return of real estate. You're saying that things are actually OK. This is a good time to buy. Talk to me about that.
SHAWN TULLY, EDITOR AT LARGE, FORTUNE: You always want to buy the product or in this case housing when prices have come way down, and then have you to decide whether they've come down enough.
So in the case of housing, how do you know when they're both affordable and you're not going to get stuck with further price decreases.
TULLY: Typically that's when the cost of owning and the cost of renting come into the same relationship. So you can move out of a rental, you own a House for about the same amount.
TULLY: That balance has been restored now in most of the markets across the country. Now, most of the numbers we're looking at are quite lagging, for example, the Case-Schiller numbers, which are excellent numbers, but they take into account they're two-thirds weighted toward 2010.
We're going to see further declines in those numbers, but again, they're weighted toward the past over the next couple of months. With those declines factored in, we're looking at very, very affordable prices going forward for the first time in a very long time. Now the second element is rents are going up.
TULLY: It's the same relationship you have with stocks. When earnings are going up, it's a positive for stock prices, unless stocks are just hugely overvalued and so overvalued even with the earnings growth they've got to come down. That was the case with housing. It's no longer the case. Housing is correctly priced and rents are rising.
VELSHI: Christine, talk to me about this affordability thing. This is the point that you're making, this isn't about speculators, this isn't about whether you can buy a House today and sell it for a lot more next year. It's the combination of lower values for homes and still low interest rates even though we're seeing them creep up.
ROMANS: And on paper that should be the perfect, I don't know, the perfect elixir to try to buy a House. But what's happening here is people who have a mortgage, 50-some million mortgages in this country, a quarter of them are under water.
ROMANS: So people don't want to sell their House. They can't get out of their House because they owe more on it than it's worth and the person that wants to buy it doesn't want to pay what you think that House is worth.
On the other side of the equation, you have people who want to buy a House, but they don't have money in the bank, they're worried about a high bill or they can't get the loan. So there's a lack of confidence, there's a lack of sort of, I would say, fluidity between getting in and out of mortgages and this is where we are right now. Something's got to break to change that.
VELSHI: Let me ask you this, Shawn. What a lot of people look at when they're thinking about buying a House, even though most Americans buy on a mortgage, 15 or 30 years long, is they look at that price.
So if I'm going to buy a House for $200,000 and I'm worried that it's going to go down 10 percent in the next year, maybe I won't buy it. Is the interest rate threat, so this be more of a motivator that interest rates will not stay that 5 percent range for a long time?
TULLY: Well, certainly it's a good time to buy and lock in a rate right now, but I agree, rates will not stay in that range. They're way below historic norm norms. They've got to go up, but a lot of times when rates go up, they go up also because your income goes up.
Now if you have a little more inflation, you're going to get a bigger raise. If growth rates come back, more people are working. That's going to also help incomes. So some of the increase in rates is really going to be offset by increases in the way people feel, their paychecks will go up.
So typically when you are in a strong growth period you do have rising rates but that does not cut home prices. That helps home prices.
ROMANS: The action right now has nothing to do with mortgages and mortgage rates, though, 32 percent of sales are people paying cash. So people are making money in housing. Make no mistake.
We look at those pictures on the wall and talk about the tens of thousands of dollars of value people have lost in their home, there are a lot of people right now making an awful lot of money in real estates.
TULLY: That's true and if you look at Orange County, foreclosures are selling in a month and a half. Foreclosures in short sales are the hottest product in Orange County.
TULLY: You see this in a lot of markets because they're so far below replacement cost and they're so cheap. Investors are buying Houses in bulk and then renting them.
Often back to the people who lost their Houses, good credit risk but just couldn't afford the mortgage and they have to rent. They don't leave the Household group. they just go from being a buyer to a renter.
VELSHI: It's not the worst thing in the entire world. Everybody should read this article. Shawn Tully is editor at large at "Fortune," and responsible for the cover story on "Fortune," and Christine, great to see you as always.
There's one area of the housing market that has already taken off, and I'll tell you how you can invest in it coming up next.
VELSHI: All right, whether you believe the housing market is coming back or not, clearly that's up for debate. But one thing is for sure, home builders have been taking a big hit, why build homes in an environment where there's still too much housing out there?
However, investing in housing is more than just purchasing a home or buying the stock of a home builder. Stephen Leeb, a good friend of ours, the president of Leeb Capital Management.
Stephen, a lot of investors think this is just not the time to get back into housing, but you identified a particular part of housing where the demand continues to increase.
STEPHEN LEEB, AUTHOR, "GAME OVER": Well, yes, and prices are low. It's actually - this is -- American campus communities are in a unique position. They can pay low prices for land and with college admissions rising, everybody wants to go to college now because of the employment situation and the differences between the college degrees and the non-college degrees and high school degrees is a huge difference with unemployment rate, salaries, everything else.
VELSHI: We inverted everything over the last 25 years. You now need college degrees for most jobs.
LEEB: Absolutely. So the demand for colleges and college housing is going up so take a company like American College Communities. They have been growing very, very rapidly and their margins are increasing.
They're one of few housing place that actually has pricing power. I mean, they have been able to raise prices faster than the rate of inflation, which is, you know, everything is going for them.
VELSHI: What is the magic of this industry? I guess at a time when the colleges continue to feel the pinch of the economy, they've got somebody else building their housing.
LEEB: Right. I mean, I think the magic of the industry, again, is just the demand for housing in this particular sector continuing to increase at the same time that land outside these colleges is actually done nothing, if probably gone down.
So they have basically as many tailwinds as you could possibly have. Their stuff is in great demand. Their company, ACC (American Campus Communities), pays a dividend, 4 percent, but they have been going out buying other, you know, establishing their positions in colleges.
Every college, and this is important, every college that they have a position is a franchise. They control the housing, the off- campus housing for that particular college. It is an investor's dream.
I mean, you know, there are other companies that will grow faster, but in terms of, you know, decent dividend and decent yield and secure situation, it is really a very, very special situation. I think, you know suitable for everyone from, you know, 21 to 91.
VELSHI: Excellent advice, Stephen. Good to see you as always. Stephen Leeb, a good friend of our show and the head of Leeb Capital Management.
Listen, the future of flying. Richard Quest's conversation with a major airline CEO about rising gas prices and other issues that could affect the price of your next flight coming up next.
VELSHI: My good friend Richard Quest, host of CNNI's "QUEST MEANS BUSINESS" joins us now from London. Richard recently sat down with the United Airlines CEO Jeff Smisek to discuss the integration of Continental and United, and the impact of higher gas prices on the price you pay for your airfares.
Richard, what did he tell you?
RICHARD QUEST, HOST, "QUEST MEANS BUSINESS": Well, Jeff Smisek is busy putting together Continental and United to make the world's largest airline. It's now been several months and there are many more months to go because of the complexities of doing this.
But what is really interesting is what is for the future. Smisek basically says that the U.S. network of the airline will to some extent shrink because the main future for United is, of course, in the higher revenues, higher yielding and higher profits to be made on international flights.
That doesn't mean to say United will disappear or that there will be job losses within the United States. But, if you want to know where United is going in the future, it is international.
(BEGIN VIDEO CLIP)
JEFF SMISEK, CEO, UNITED AIRLINES: Well, the domestic U.S. is a very difficult place to make money, low bare to entry, high bare to exit, brutal regulation and over taxation. It is very hard to make money domestically.
That is why our growth has been international. Even this year as we were originally going to grow between 1 and 2 percent this year and because of high fuel prices, we brought that back to flat. But even there that flat is comprised of shrinking the domestic system and growing international systems.
(END VIDEO CLIP)
QUEST: Smisek also points out that because United and Continental did not have much root overlap, it's unlikely there will be further job losses within the United States.
If you look at the U.S. airline industry though, Delta and Northwest, the other airlines are all trying to bulk up, too. Jeff Smisek may be the largest with United, but he is under no illusion for what that means for him and his competitors.
(BEGIN VIDEO CLIP)
SMISEK: When we're done with this integration in about 18 months, we've got that all behind us. We're going to be a potent competitive force. They are very scared of us and they should be.
(END VIDEO CLIP)
QUEST: I just love that phrase, Ali. We are going to be a potent force. They will be afraid of us and they should be.
VELSHI: Tell me what our viewers want to know. Should I be afraid in terms of what will happen to my airfares?
QUEST: Airfares are going up. They're going up across the board and most importantly, the raises that they've managed to do in the last few weeks and months have stuck.
QUEST: And that is something that is very different now than in previous times. What frequent flyers want to know, of course, is what the new United will be like. Once again, very little ground given there. Apparently, we'll know before the end of the year what it means.
VELSHI: Richard, always a pleasure to see you. Keep flying the friendly skies. Richard Quest in London. Thanks for joining the conversation this week on your money.
We are here every Saturday at 1:00 p.m. Eastern and Sunday at 3 p.m. Eastern.
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Have a great weekend.