captioning sponsored by wpbt >> paul: federal reserve policymakers start a two-day meeting tomorrow with one thing on their minds, but investors have three things they want to know. tonight, what to expect from the fed when it comes to interest rates and a possible economic recovery. >> susie: speaking of the economy, should americans be optimistic, pessimistic or somewhere in between? we'll ask leading economists mark zandi of moodyseconomy.com and harvard university's ken rogoff. >> paul: while the health care reform debate has mostly been about increasing medical coverage, tonight we shift our focus to medical malpractice and why doctors say this issue deserves more attention.

>> there are some real, real opportunities, some real money to be made over the next three to five year time frame. >> susie: tonight's of mutual interest details where this father-son investing team thinks those opportunities are. >> paul: i'm paul kangas. >> susie: and i'm susie gharib. this is "nightly business report" for monday, august 10. "nightly business report" is made possible by: this program was made possible

this program was made possible by contributions to your pbs station from viewers like you. thank you. >> susie: good evening, everyone. recession or recovery? that's a key question that fed policymakers will be debating this week. they begin a two-day meeting in washington tomorrow, to decide what's next for the economy and interest rates. many economists have already declared that the recession is over and that the u.s. economy is on the path of recovery. but as scott gurvey reports, even the experts have lots of questions about the central bank's next move. >> reporter: fed watchers would like answers to three questions when the central bank concludes its august meeting on wednesday. first, they want to know abo plans to raise interest rates. second, they want to know if the

fed thinks the economic recovery is real. and finally, they want to know if chairman ben bernanke will be re-appointed to a second four- year term. well, answers to two out of three isn't bad. first up, there isn't a snowball's chance in a very warm place that the fed funds rate will be raised from its zero to .25% range this month, or, according to jim o'sullivan of u.b.s., anytime soon. >> most likely they'll repeat the language, indicating that the funds rate's going to stay exceptionally low for an extended period. in addition, we would expect the wording to be a bit more optimistic sounding on the outlook for growth. this is consistent with the idea that the economy is improving slowly. which brings us to the second answer: bond traders are anticipating higher rates as soon as the fourth quarter. but bob brusca of fact and opinion economics says we will not read that the fed believes the crisis is over. >> once the fed goes for business as usual, then it needs to start taking out the excess reserves, getting rates back up into a more neutral framework,

and that's where i don't think we are yet. as to the final question, the future of the chairman who has taken a lot of political heat in recent months in washington. wall street will get no information whatsoever in the fed statement, and be left guessing as to his reappointment chances. >> it's certainly being talked about, and i think i've seen polls on this. and the vast majority of economists support bernanke being re-appointed, and i certainly agree with that. >> the easiest decision that obama has is re-appointing bernanke. other decisions will expose him to much more risk than he needs to deal with. and frankly, he's got enough tough decisions to wade into than this one, this one is easy. >> reporter: it's hard to find anybody on wall street who thinks bernanke should go. his term expires in february. scott gurvey, "nightly business report," new york. >> paul: investor caution ahead of that upcoming fed meeting and profit taking from last week's rally on wall street sent stocks lower today. 30 minutes into trading the dow fell about 40 points and the

nasdaq was down five points. the modest losses helped the market stabilize throughout the mid-session hours, but a pickup in selling in the steels and timberland sectors had the dow off as much as 70 points until some late buy programs trimmed the losses. the dow jones industrial average closed off 32.12, at 9337.95. the nasdaq lost 8.01 to 1992.24. the s&p 500 fell 3.38 to 1007.10. in the bond market, the ten-year note climbed 21/32nds to 94-24/32nds, putting the yield at 3.77%. >> susie: more analysis now on

the outlook for the economy. joining us, two prominent economists with different viewpoints: kenneth rogoff, professor of economics at harvard university; and mark zandi, chief economist at moodyseconomy.com. >> thank you for joining us. >> thank you. >> suzanne: one thing we can agree is the worse of the financial crises is over but are we still in a recession or a recovery. mark, what do you say to that? >> you know i think the recession is just about over. this has been a very severe downturn but i think just about at the end of its tenure, i think it's going to be a bit of a slog over the coming year but the good news is this long dark period is just about done. >> susie: ken, do you agree with that. >> well, i do. the i mean i think we're not falling off a cliff and jobs are still going down and probably will for a while longer.

but we'll get for recovery. the question's what's ahead. >> susie: and what is ahead? >> well i think we're looking at five years of much slower growth than we saw before the financial crises. there's so many challenges. home prices. i don't think they're bouncing back. i can i consumption is going to be a weak for long time and with this debt taxes is going to have to go up. with all these new programs taxes are going up and that's not good for growth either. i see a period much slower growth leaving us vulnerable to a recession down the road sooner than we might normally expect. >> susie: so mark, will you tackle some of those whether it's housing or growth. >> i agree with ken over the next 6-12 months the economy is going to struggle coming out of recession but growing slowly. i'm more concerned about the longer term in 2011 and 2012 the

empediments to growth will stay away. the financial system is serious but we will overcome them. the policy efforts is quite god and other instoons will extend more credit. in hard sectors of the economy like housing and the vehicle industry the level of activity is incredibly low. the housing construction is at a post world war ii low as are vehicle sales. you can't keep those levels of activities that low for very long. demographics are going to compel much higher levels of construction in vehicle building, and that will drive a lot more growth as we make our way into the early part of the next decade. >> susie: a real critical part about growth is that what's happening in the job market. now some people are saying that unemployment rate that notched down a little bit we saw on friday is a statistical fluke and as long as people are still unemployed and there are a lot of people without jobs, they are not going to be spending so we cannot get growth. ken, what do you say to that in terms of the outlook for the job

market. >> well it's certainly challenging. i mean i think the unemployment rate is going to get over 10% before this is over. i mean it depends on how many people get discouraged and pull out of the labor force. but i think the big pediment is housing prices are not going to come down for a long time, two years maybe seven years and that's going to cause people to spend less. that's 70% of our gnp. that's a big factor of demand. that's going to be tough to replace it with anything else. >> susie: is the housing market in that crises yet? go ahead, mark. >> well, i was just going to say one reason for optimism is that everyone was so pessimistic. am i think if you go back to the even of last year the financial system was collapsing, people panicked, consumers business people investors completely panicked and businesses slashed investment, they slashed pay roles and i think they overdid

it and i think they realize come this time next year they'll realize the coast is clear and will start hiring much more aggressive. ken's right, the unemployment rate is going to rise before it falls but by the time it starts falling in 2011 and 2012 we'll see more job growth than anyone anticipates at this point. >> susie: let's say consumers start getting their jobs back. will they spend like they did in the most. can we still think of the u.s. economy, the engine of growth is going to come from the consumer or has that changed through this financial crises? ken? >> i don't think it's going to be the same. i mean i don't think housing prices are going to come back. i don't think credit's going to be the same. i hope it's not going to be the same. i hope they're going to do some regulation. they are being very soft now but they have to reigning it in. we have to depend on exports and more on the government. i think eventually there will be

another stimulus package, eventually there will be higher taxes. >> susie: mark? >> yes, i think we're at a point with respect to consumer spending. u.s. consumer power is growth. the global economy really for the past quarter century that's evident in the declining rate. and i think u.s. consumers will do their part and no more than that going forward. but the good news is we are seeing much stronger and will see much stronger growth from overseas in many emerging economies, india, china. those consumers will spend more. their spending rates will come down and we will have the goods and services to sell to them. >> susie: let's hope they do buy things made in the usa. gentlemen both thank you so much for coming on the program. we really appreciate it. >> thank you, thank you. >> susie: kenneth rogoff of harvard university and mark zandi of moody's economy.com.

>> paul: health care reform is the hot topic for congressional lawmakers on august recess and for their constituents. today, the insurance industry's lobbyist told reporters the battle over reform will be decided this month. the debate has centered on how to best cover uninsured americans. but a key issue: medical malpractice has been largely ignored. as stephanie dhue reports, some doctors say it shouldn't be. >> reporter: for capitol orthoapedics, apparently on the bottom line. the practice spends nearly a quarter million dollars each year on malpractice insurance premiums. dr. stephen rockower says the fear of being sued also leads to defensive medicine. >> i order a lot of tests that i

know are not really necessary, but i have to do it to cover my rear end because i'll be criticized if something goes wrong. health care reform has focused on providing insurance for all americans and bringing down the spiraling costs. but largely left out of the debate is the issue of medical malpractice reform. neither the house nor senate bills mentions the issue. dr. rockower says that's a huge oversight. >> if they're not factoring that in, then they are not really taking care of entirely of what goes into the medical economics of running an office. >> reporter: in a speech to the american medical association this spring, president obama said he wanted to work with doctors to scale back the practice of defensive medicine. but he stopped short of endorsing the groups key solution, limiting jury awards in malpractice cases. i want to be honest with you. i'm not advocating caps on malpractice awards, which i personally believe can be unfair

to people to have been wrongfully harmed. >> reporter: trial attorneys and patient advocates oppose capping damages. and trial lawyers contribute generously to democratic candidates. dave levinthal of the center for responsive politics says that gives them clout. >> when you have a group that has donated 75% to 80% democrat, they're your friends, they're you're allies and you're going to perhaps listen to them. >> reporter: and not everyone agrees what problem malpractice reform should solve, whether it's the high cost of premiums, medical errors or the random nature of jury awards. that makes likely the issue to be kept out of a national bill and at the state level for now. stephanie dhue, nightly business report, washington. >> paul: now, let's take a look at some stocks in the news tonight.

>> paul: and those are the stocks in the news tonight, susie. >> susie: paul, given the weak economy, these days most investors don't have much of an appetite for transportation and retail stocks. but don and craig hodges, the father and son co-managers of the hodges fund, pride themselves on betting big on stocks others avoid. the fund is up 20% this year, soundly beating the s&p 500. but last year was a different story. the fund lost nearly 50%. in tonight's "of mutual interest," erika miller talks to the hodges. she began by asking don hodges whether 2008's poor returns changed the fund's investment strategy. >> i can't say that we're changing our approach from the standpoint of what we use in making our decisions. what we have done is cut back on the number of stocks that we

own. and we've gone over the last couple years from having around positions in the portfolio to probably about 45 right now. and the reason we're doing that is to get more impact on the recovery from our favorite stocks. and it is working. >> susie: craig, what is your market outlook? how optimistic are you that the recovery is in place in terms of stock market rally? >> i think the worst is behind us. the way we look at things, the market could go sideways for a while but we don't look for the market to continue to go straight, straight up. and it doesn't need to. we can find opportunities in a sideways market. there are some real real opportunities out there, real money to be made over the next three to five years we feel. >> susie: where do you see the best opportunities these days? >> the best opportunities i think from a two to three year standpoint are some of the contrarian plays.

we've always done well by buying stocks that are out of favor because when they do return to favor, they make substantial moves. we think there's a lot of opportunity in retail. we think there's a lot of opportunity in airlines, transportation in general. >> susie: one of the most interesting aspect of your fund is the father-son dynamic. do you consider that an advantage. >> i think it's a great advantage. i bring experience from the standpoint of some of the traditional investments that have been out there for years and years. and i think craig brings much more perspective to current technologies and things that i'm just not nearly where he is. so i think we work very well together. >> susie: and craig, let's hear your perspective. how does it change the office dynamic to be working with your father. >> we've worked together for 22 years now so it's gone real well. we've never had any kind of big

disagreement or anything like that. we get along real well. and he's great. >> susie: but disagreements are inevitable. how do you handle them. >> he's always right. [laughter] >> i can't really say that we've had any. >> susie: oh, come on. >> i'm serious. i can't remember us having any kind of an anger disagreement at all over that period of time. >> susie: it's not just the two of you, there are two other siblings that are also in the business. >> i think all of us feel very honored to work with him. and of course he's 75 years old and is not even nearing a temptation to retire. >> susie: is part of that, don, the desire to go out on top? is it important to you to see the fund recover back to its highs? >> it's very important. but deeper than that, i love working, i love what i do. there's never a dull moment. it forces you to learn new things every day. and it's just an engaging occupation. and so i feel like if i make it

to 90, i will still be interested in the market. >> susie: for a patient investors. it may be worth the wait. morningstar, the mutual fund research firm, notes the hodges fund's impressive long term record. however, morningstar gives it only two stars out of five because of volatility and above average expenses. >> paul: general motors is trying new ways to sell cars. tomorrow, it launches a trial program with online auction giant e-bay. the partnership will let consumers place online bids for new vehicles from about 225 g.m. dealers in california. buyers will be able to choose between the two standard options currently offered on e-bay, negotiating a price with a dealer through the site or purchasing immediately at a fixed price. and speaking of g.m., tomorrow we talk with c.e.o. fritz henderson as the automaker shows off its 2010 models to consumers. >> susie: a warning today from one of the world's biggest institutional investors: "state street. in a regulatory filing, the boston firm said it's burned

through more than two-thirds of a $625 million fund created to handle legal claims. it may need to raise more money. some customers sued, saying they believed they were being sold low-risk investments. but instead they lost money from subprime mortgage exposure. >> paul: the swiss government took a break from its summer vacation today, to hold a special meeting over banking giant u.b.s. the bank is negotiating with the i.r.s. on handing over the names of u.s. clients suspected of evading taxes by hiding money in secret u.b.s. accounts. the swiss cabinet won't release details until a deal is reached. on wednesday, both sides will update a federal judge on their on negotiations.

>> susie: tonight's commentator wants regulators to increase the capital requirements of banks. he's richard dekaser, president of woodley park research and the former chief economist of national city corporation. >> reporter: most people would agree that it makes sense to set aside money during good times to weather the bad ones. that's why 90% of state governments have rainy day funds and 60% of american families save some of their income. but bank regulation needs to do more in this regard. as things now stand, banks are required to hold capital at around 10% of assets to protect

depositors, taxpayers and investors from their insolvency. but when the economy turns down and losses increase, capital disappears. then, banks have two options to maintain their capital ratio: raise more capital or reduce assets. because times are tough and investors are skittish, raising additional capital is expensive when possible at all. so instead they opt to reduce assets, which means less lending and tighter credit precisely when the opposite is required. moreover, when banks dump assets en masse, as we saw last year, the rush for the exits depresses asset values, further increases losses and a vicious cycle takes hold. this cycle works in reverse during good times, by the way, which is one reason we've had this recurrence of lending booms and busts. now there is a better way. if regulators require banks to increase capital ratios during good times, then there's more of a cushion to draw on when times are tough. and by allowing capital ratios to decline during tough times, we can reduce the risk of a credit crunch. and that, in turn, would moderate the business cycle to

the benefit of us all. i'm richard dekaser. >> susie: and that's nightly business report for monday, august 10. i'm susie gharib good night, everyone. and good night to you, paul. good night, susie. i'm paul kangas wishing all of you the best of good buys. "nightly business report" is made possible by: this program was made possible by contributions to your pbs station from viewers like you. thank you. captioning sponsored by wpbt captioned by media access group at wgbh access.wgbh.org