[Piers Morgan:] Tonight, roaring back, stocks soar 400 points. But are we out of the woods yet? I'll ask the experts what it means for you and your money. Also, Barney Frank and what he said is really to blame for America's downgrade. And
[Morgan:] Good evening, on a busy news day around the world. Thousands of police on the streets of London and other U.K. major cities are finally getting the upper hand on the fourth night of the appalling violence there. We'll have the report from the scene in just a few minutes. Meanwhile, on the other side of the world, Asian markets reacting to the day of wild gyrations, ending with the Dow up, that's right, up nearly 4 percent. What it means for your money is Leigh Gallagher from "Fortune" magazine; Diane Swonk, chief economist from Mesirow Financial; and personal finance expert Carmen Wong Ulrich. Let me start with you, Diane Swonk. A crazy day in the market. At one stage, it looked like we're heading for yet another day of the Dow falling. And then the rally at the end ends up nearly 400 points plus up. What do you make of it all?
[Diane Swonk, Chief Ecomnomist, Mesirow Financial:] Well, it was really, the financial markets were having a hard time figuring out exactly what the Fed said in a really unprecedented statement. There was a lot of information to digest. But essentially to distill it down, the financial markets figured out that Ben Bernanke, although with a bit of resistance from some of his colleagues within the FMC, was going to stand by the statement the G-7 said and that was to do anything it could to shore up this economy and provide liquidity on the face of what happened in the last weeks. The economy is weaker than what they thought it was. The debt ceiling crisis dealt a blow to the U.S., and then the downgrade by S&P.; All of that, along with downward revisions to GDP sowing the U.S. economy almost stalled out. The Fed said we're just not going to let that happen. And, finally, the financial markets, at the end of the day, once they read through everything, believed the Fed.
[Morgan:] So, you had me curious. I was watching this whole thing unfold live, and certainly, the market's immediate reaction was pretty negative. So, what you're saying is that they waited to really grasp exactly what Ben Bernanke was saying and realized it may not be bad news.
[Swonk:] Exactly. They certainly said I mean, I think there was a bit of a shock of how much the Fed acknowledged that the economy was weak by saying in an unprecedented statement that they could keep interest rates at their zero target on the Fed funds rate until mid- 2013. They actually put a date on it. That's just not done by the Federal Reserve. There were some members of the Federal Reserve that also dissented on that. I think we're all a little fatigued from the dissent and the debate in Washington. And there are some people that just weren't sure, does this mean more indecision. But, frankly, Ben Bernanke has a pretty good record of corralling the cats within their own corral, and even when they're mountain lions within the Fed. He gets them to go where he wants them to go. And I think that's very important, the history. And also, Ben Bernanke said, you know, we could do things with our balance sheet. We're still not done. We're not out of bullets yet. And I think when all was said and done and financial markets finally digested this massive amount of news and unprecedented statement by the Feds, they said, you know what? Maybe that means we won't have a double dip recession now. We might not stall out. We'll still sputter along. That's the bad news is we'll sputter along. It's also the good news. We're not going to stall out.
[Morgan:] Leigh Gallagher, do you agree with this? Are we now avoiding the prospect of a double dip recession? Has the Fed run to the rescue here? Is Ben Bernanke, the hero cast of the hour?
[Leigh Gallagher, Assistant Managing Editor, Fortune:] Well, it's interesting. What's as interesting as what Bernanke did say today is what he didn't say, which is, with the committee said, which is the Fed was widely expected or hoped by the portion of the market that he would do another round of bond buying and intervention what's it done twice already. And that's sort of the salvation from above that the market was hoping for. And that didn't happen. On the other hand, the Fed basically came out as Diane said a clear statement, for the first time, put a target date on how long it's going to keep interest rates, the target rate towards zero. And I think that, you know, led to a kind of collective sigh of relief. OK. We know we can expect interest rates for the foreseeable future. The other thing is that I think the fact that the Fed didn't do the massive intervention maybe led people to think, OK, maybe it's not that bad. That's sort of the last thing that it could have done. And Bernanke has said in the past that things wages have to be falling really fast and prices have to be falling significantly for the Fed to go and do that again. And it didn't. So, maybe things could be worse. And I think the market took that as a sigh of relief.
[Morgan:] Carmen Wong Ulrich, it's been a roll coaster few weeks now. What is the overview here? Where is the American economy in reality? Cut for all the Washington political speech here. Where do you think we actually are?
[Carmen Wong Ulrich, Finance Expert:] Well, the thing is that for those who have been saying, you know, be calm, carry on through all of this you know, feel a little bit of "I told you so" today. Here's the thing. Markets do what markets do, which is go up and down. But for regular American consumers, for folks who invest in 401 [k] s, this is not the time to panic. But there's a real crisis of confidence here. The American consumer is not where they should be or where they want to be right now. And they've taken all of this mess really to heart and they're saying we are not confident this economy is going to get better any time soon. And that's very dangerous because what you're talking about is consumer spending is 70 percent of this American economy and consumer confidence and consumer spending do a dance together. And when one dips, the other goes down. And that's what's going to happen, which means less growth in the economy, that means corporations are not going to be hiring. It means job numbers are not going to improve. And until job numbers improve, the American people are not going to feel better and feel confident in this economy?
[Morgan:] I want to put all three of you on the spot here and ask you: where should the average American put their money now. I'm going to start with you, Diane. You can only answer less than 10 words. Where should an American put their money right now?
[Swonk:] Well, I'm not an advisor, an investment advisor. I still bet long on the U.S. economy and U.S. equities. So, I'm long in the stock market. And we're seeing the opportunities in the stock market to do a double dip. When they dip, they do allow us to double down. That wasn't 10 words.
[Morgan:] So, you would buy which kinds of stock? You've used way past your limit but what kind of stocks quickly?
[Swonk:] I'm still very bullish on exports and multinationals, manufacturers and that sector.
[Morgan:] OK. Leigh Gallagher, can we try the 10-word rule with you?
[Gallagher:] I'll try. I'm an editor. So, it might work. I would agree with Diane. I think that the worst thing you want to do all right this already seven is to you pull out, because then you have to be right twice. You have to be right when you pull it out right and then you have to be right when you put your money back in. So, I think equities are still, you know, a long-term thing. You have to think for the long term though, you absolutely have to.
[Morgan:] And, Carmen, I mean, I would be tempted to shove it in a bag under my mattress at the moment. Are you heading that way? Is gold an option? Are you still sticking to treasury bonds? Where are you going?
[Ulrich:] No, no. When folks start talking about mattresses, it's actually when there's a bargain sale going on and you probably should be buying more. In my 10 words or less, it's consider time frame, know where your money is, and calm your stomach. Was that 11?
[Morgan:] I think you actually did that in under 10 words. That was good.
[Gallagher:] It sounded like a haiku.
[Morgan:] Very impressive.
[Ulrich:] I'm a former editor, too.
[Morgan:] Ladies, thank you very much.
[Swonk:] Thanks.
[Gallagher:] Thank you.
[Ulrich:] Thank you.
[Morgan:] All right. Representative Barney Frank is ranking member of the House Financial Services Committee. And he says that it's time for President Obama to face up to liberals over budget cuts. And Barney Frank joins me now. Mr. Frank, thank you for joining me. What did you make of a Fed statement today?
[Rep. Barney Frank , Massachusetts:] Well, I think it was appropriate. I think Mr. Bernanke and his colleagues have been doing the right thing, which is to the extent they can, offsetting some of the negative tendencies. In fact, it's interesting that Ben Bernanke, a George Bush appointee originally, warned Congress not to do too much cutting in the short term, the last time he testified. He said we've got a longer term deficit problems. He said, look, we have a longer term, deficit problem and you've got to deal with that. In the short term, these cuts that you're talking about, he said they were headwinds against the economy. So, the thing now, I think, is he's doing everything he can. But we need to do now something on the fiscal front. And I think it is now overwhelming, Piers, that we're going to borrow from your country's history. The late '40s, Clement Atlee was prime minister. He called Harry Truman and said, look, I am facing a terrible economic crisis post- war. I cannot continue the international efforts to maintain the British remnants of empire. If you want to do it, fine. The time has come for us to recognize the terrible crisis here with the economy and to withdraw from Iraq, withdraw from Afghanistan, tell our good friends in Europe that the Cold War was long since over. They are well able to defend themselves. It is time for us to substantially reduce our worldwide military commitment, put some of that to deficit reduction on the longer term, but spend some of it immediately to help state and local governments recover the employment they've lost, to get some construction done. The notion that they've come in the situation, and the same time, the president has talked about staying in Iraq longer than George Bush wanted frankly appalls me. And I think the time has come people say, you got to get real. You got to understand some constraints. Well, the biggest single area where we can do that is to cut, I believe, $200 billion a year on our military expenditures which go not for our own security but for our role as a kind of worldwide policemen. You know, almost all of our allies, our wealthy allies, spent far less as a percentage of that product that we do on the military. The time has come for us to recognize that we can't afford to do that and I believe we'll suffer no loss. We will suffer no loss in security.
[Morgan:] An interesting point because the trouble being that the world's policemen, as America has been for the 50, 60 years, it's a lonely place and you end up as America found itself now getting hardly any credit from anybody.
[Frank:] Oh, absolutely.
[Morgan:] If the expenditure you're laying out is so vast, there is a pretty good argument to say, you know what? As the Chinese do, for example, look out for number one here and bring it all back to America.
[Frank:] Well,
[Morgan:] The devil's advocate position is that if you look at Afghanistan, the reason that al Qaeda was able to ferment its operation there was precisely because no one was there keeping an eye on it. I guess the counterargument to what you're saying is there are lots of areas in the world that were unstable where if America reduced any presence, you could see that situation recurring.
[Frank:] Exactly.
[Morgan:] And that in itself, that would provide a yes, but that would an attack to American national security in the homeland potentially.
[Frank:] Except if you don't if we shut it down in Afghanistan, then they're in Yemen. If you shut down in Yemen, they're in Somalia or they're in Sudan. We can't plug every rat hole in the world. Now, we did do with significant amount against al Qaeda. And remember, in Afghanistan, major battle now is with the Taliban. George Bush became president. The Taliban was running Afghanistan. They were destroying Buddhist statues, and were mistreating people. They were outrageous. But America can't be the one that solves every wrong in the world. If we did, we'd go out and shoot Mugabe, who's a terrible abuser of people and others. In terms of national security, we dealt with al Qaeda, we have killed Osama bin Laden. We can protect ourselves back home. And if you look at the $120 billion we're spending in Afghanistan, plus the billions that I think we're wasting and the Pakistanis who are playing a great double game, a small percentage of that use back home would make us more secure than what's happening in Afghanistan.
[Morgan:] Congressman Frank, thank you very much.
[Frank:] Thank you, Piers.
[Morgan:] The wild gyrations in the markets are a problem, not just in this country but around the world. Joining me now is James Fallows, national correspondent for "The Atlantic," who surprisingly says that China may be on America's side in all of this. James, interesting position you're taking because if you listen to some like Donald Trump, I mean, he foams at the mouth at the mere mention of the word China. He believes they're an enemy to the American national interest. Why do you believe that they may be a friend?
[James Fallows, National Correspondent, The Atlantic:] I think I was talking about the immediate crisis, the financial crisis going on now despite all of the bombasts coming from the Chinese side about how America needs to pull up the socks and behave better and similar bombasts in the U.S. side, fundamentally, their interests are the same as ours at the moment. The two big threats to the Chinese economy are: number one, they won't be able to sell things to a largely American market. So another recession here would hurt them. And, second, that their extensive holdings in the U.S. treasuries and U.S. dollars will be at risk. So, for the time being, their interests like ours are avoiding recession and having some kind calm return to both U.S., the U.S. economy and U.S. financial markets.
[Morgan:] Secretary Geithner spoke to Vice Premier Wang today. How do you imagine that conversation went?
[Fallows:] I would imagine it would be a little different from the public discourse. The editorials in the Chinese state papers for the last couple of days have been strong on the finger pointing at the U.S. for all of its bad behavior. But I imagine that these two financiers from major countries got past that. And I would imagine, the main concern of the Chinese side would be what the U.S. was planning to do, what weapons were still in the financial arsenal to calm things down in the U.S. and, therefore, world markets and to avoid the onset of another recession. Probably the thing that the Chinese fear the most is the same thing the Obama administration and most Americans fear, which is another plunge back into greater unemployment and slowing economic activity. That's the threat to them as well.
[Morgan:] Is it healthy or unhealthy that China holds so much of the American debt right now?
[Fallows:] It's a "compared to what" question. I think, fundamentally, it's unhealthy for both economies and they've been distorted in their relationship with each other to the degree they have been, for the last 15 years, at least especially the last 10. China has depended on the U.S. market to provide demand for their own factories, all of the peasants going to the cities and having manufacturing jobs. At the same way, Americans have depended these last 10 years and having the low-cost goods from Chinese suppliers the Chinese surplus being invested here or lent here to keep our tax rates down and to keep our mortgage rates down. In the long run, it's not wholesome for either country, in the short run, it'been beneficial to both. And we're going to be uncomfortable on both sides process and trying to redress the balance less reliance on borrowing here, less reliance on over-exporting there.
[Morgan:] I worked in America and China. And it seems to me the fundamental business practice difference is in bureaucracy. You know, things in China get done quickly without the mountain of red tape. Everything in America now seems consumed by. Is it time for America Incorporated to revisit this whole area, do you think?
[Fallows:] Well, there are aspects of China's performance which are more and less impressive when you're there. There are certainly things whether it's the Beijing Olympics or the high speed rail project, which obviously is now a sort of double edge situation that the Chinese can get done with great speed that they want. But I think the recent tragedies in the high-speed rail projects, the fatal crash and the evidence of corruption suggests that the Chinese approach has its problems, too. There's a lot of un- coordination at the regional level and there's been this huge overhang of these white elephant projects that have kept demand up going in a short run. But you rode to these remote cities and there are giant airports, giant shopping malls with nobody in them. So, I think that the Chinese approach has its advantages. But it can be romanticized from the out of our frustration with the bureaucracies in the
[U.s. Morgan:] James Fallows, thank you very much.
[Fallows:] My pleasure, thank you. Coming up: London calling 16,000 police on the streets. Can they restore order?