captioning sponsored by macneil/lehrer productions >> brown: a legal challenge to arizona's tough new immigration law made its way to the nation's highest court today. good evening, i'm jeffrey brown. >> ifill: and i'm gwen ifill. on the "newshour" tonight, marcia coyle of the "national law journal" tells us what happened inside the supreme court. >> brown: then, judy woodruff examines allegations that walmart executives in mexico may have violated a u.s. bribery law. >> ifill: in our latest "american graduate" installment, john tulenko reports on an indiana school that's turned to technology to get dropouts back on track. >> in n this classroom at a local college, high school students in danger of dropping out can make up the courses they failed and take new ones on

computers. >> brown: we continue our look at the aftermath of the financial meltdown: what's changed and what hasn't on wall street? >> ifill: and from liberia, special correspondent steve sapienza partners with a local journalist to ask why the government hasn't solved the country's water crisis. >> one recent world bank study found coax-- and indicator of widespread fecal contamination-- in 58% of water sources across monrovia. >> brown: that's all ahead on tonight's "newshour." major funding for the pbs newshour has been provided by: >> and by the bill and melinda gates foundation. dedicated to the idea that all people deserve the chance to live a healthy productive life.

and with the ongoing support of these institutions and foundations. and... this program was made possible by the corporation for public broadcasting. and by contributions to your pbs station from viewers like you. thank you. >> ifill: the u.s. supreme court heard arguments today over arizona's immigration law. the justices appeared skeptical of the administration's claim that the state had overstepped federal law. following the arguments, supporters and critics of the measure made their case outside the court. >> this law is a paradigm of cooperation with the federal government. the law mirrors federal law so we drafted the arizona statute so that it uses the exact terminology, the exact phrasing of federal law. so all it says is that if some behavior is prohibited at the federal level then we're going to make it a state crime as well. that is mirroring and supporting the federal government. when the justice department sued

arizona that was an unprecedented thing in american because never before has the justice department sued a state for trying to help. >> it is clear that in america we should not have laws in which 50 states have 50 different ways of treating immigration policy. especially laws that can only be enforced by making judgements on whether you have dirt on your boots, the color of your skin, the accent of your voice, or your last name. that is no way to make law enforcement in the united states of america. >> ifill: for more on how the arguments played out inside the court today, we are joined, as always, by marcia coyle of the "national law journal." marcia, in some ways, last time we had a big case at the court it involved health care and it was a rematch of the lawyers involved in those two cases but it couldn't have been more different. >> absolutely. arizona was represented by paul clement, who's a former solicitor general during the bush administration and the united states was represented by its top lawyer, solicitor

general donald verrillly. the two men have very different styles. solicitor general verrilli is soft spoken, deliberate, cautious. mr. clement speaks quickly, very confident aggressive and at the end of today's argument the chief justice complimented both of them on good arguments. >> let's talk about this case. the law we're talking about in arizona has four distinct parts under challenge. let's walk through them one by one. there's one about warrantless arrests, being able to arrest people without showing proof. >> that's right, the provision says that if the police officer has probable cause-- which is a higher standard than, say, reasonable suspicion, but probable cause to believe that

somebody that she has stopped has committed in an offense that could result in deportation from the united states that officer doesn't need a warrant to arrest that person. >> ifill: was that argued at all. >> there was virtually nothing on that provision. >> so that maybe would stand because it wasn't being challenged because... >> i wouldn't read the tea leaves on that. is s that immigrants-- legal or illegal-- carry i.d. >> two of the provisions create new arizona crimes and that provision, that section says if an undocumented alien in the country fails to follow federal immigration registration laws-- that is register with the federal government and carry registration document, it's a crime punishable by jail time and possibly fines as well. >> ifill: and there's another one about job seekers having to prove... >> that's right. and that one also is discussed during arguments briefly and

that makes it a crime for an undocumented alien to work or attempt to solicit work in any way. >> ifill: but at the heart of this argument today really, and what the discussion many the court was was about this question of suspicion and under what circumstances a law enforcement official can actually stop and arrest someone. >> yes, section 2b of the law authorizes law enforcement officials when they stop a person, if they have reasonable suspicion to believe that the person is in the country illegally then the law enforcement officer is authorized to do an immigration status check and that means give the name to federal authorities to run through databases to see if the person is here illegally. there was concern by some justices such as justices sotomayor and justice breyer about the duration of this kind of a stop. some of the concern is that, okay, maybe you're stopped for going ten miles over the speed

limit. how long will you be stopped if the officer wants to do an immigration status check because you may be a citizen as well as you may possibly be an illegal immigrant and mr. clement tried to reassure the justices saying "this status check takes somewhere between ten and 11 minutes." mr. verrilli countered "well, yes, the actual check may take that long but first you're put in a queue for about an hour before the check runs." so there is that disagreement there. >> ifill: but it seemed that more of the justices were raising questions about the federal government's challenge of this law. >> that's right. a number of the justices-- including justices sotomayor and justice breyer-- seemed to feel that this was basically a notification law. the police officer has the status of the person stop checked and notify it is federal government. >> ifill: the chief justice said as much. >> he did. he said it looks to me like it doesn't interfere with the federal government's enforcement

priorities. in fact, he said to mr. verrilli "it seems to me that the federal government doesn't really want to know who's legal and who's illegally in this country." >> ifill: is it possible to strike down some portions of this law, uphold other portions of it? >> absolutely, gwen. in fact, my sense of the argument was that they are going to parse each of the four provisions challenged here and one may withstand scrutiny and some of the others may not. the registration provision, for example, justice ginsburg pointed out that it appeared to her that congress had enacted a comprehensive registration scheme for aliens in this country and that may well show that the arizona new crime conflicts with that law. >> ifill: and there are other states who've tried to mimic arizona who are watching this very closely. >> there are about six states. some have even enacted tougher laws. so whatever the court says is going to mean a lot to them. but i think in general what we've seen here is this... this is going to be a very important

decision for how far states can go in terms of enacting immigration-related statutes. but it's also even larger case in this sense that we'll see what the boundaries are between federal and state power. >> ifill: and no matter what it won't be a 5-4 decision because there are only eight justices. >> that's a good point. justice kagan refused herself from the case, probably because when she was solicitor general she had some involvement in the lower court litigation. >> ifill: okay, marcia coyle, "national law journal," thank you. >> my pleasure, gwen. >> jeff: still to come on the "newshour": allegations of bribes in mexico; an indiana school tackles its dropout problem; wall street after the financial crisis and the demand for clean water in liberia. but first, the other news of the day. here's kwame holman. >> holman: the u.s. economy is growing at a moderate pace, but still is at risk from weakness in europe. the federal reserve gave that assessment today, after a two-day meeting. it also held firm to its plan to keep short-term interest rates low, at least through late 2014.

fed chairman ben bernanke said the fed is not planning any further stimulus, but it is keeping close watch. >> we remain entirely prepared to take additional actions if necessary to achieve our objectives. so those tools remain very much on the table and we will not hesitate to use them should the economy require that additional support. >> holman: on wall street, stocks made new gains, powered by strong earnings from apple and other major companies. the dow jones industrial average gained 89 points to close at 13,090. the nasdaq rose 68 points to close at 3,029. britons got the grim word today that their economy has fallen back into recession. economic output slipped at the start of the year, for the second quarter in a row. that left conservative prime minister david cameron to defend his deficit cutting, under sharp criticism from the labor party.

we have a report from tom bradby of "independent television news." >> it's the brave action of this government that has lifted our economy out of the danger zone. >britain's economy is out of the danger zone and recovering. today britain is out of that danger zone and able to grow sustainably. >> reporter: many wondered if mr. cameron would come to regret those words uttered at various points in the last two years and so it has proved as the men from the office of national statistics sat down this morning looked pretty miserable and it didn't take long to work out way. >> there's a preliminary estimate for gross domestic product in the first quarter of 2012 is that output fell by 0.2%. >> reporter: it was an economic statistic but also a political bombshell. in some, we are back in recession. the tory's entire strategy is built on the idea they are putting us through this pain in order to fix our economy. >> the reality is this is a

recession made by him and the chancellor in downing street. over the last 18 months, since his catastrophic spending review, our economy has shrunk and this is now a slower recovery from recession even than the 1930s. >> there is not a single business organization or serious commentator or international body that thinks these problems emerged in the last 24 months. >> even his own backbenchers are saying the complacent arrogant porch boys just don't get it. >> whether it is the proper regulation of the press, whether it is cleaning up our financial system, whether it's dealing with our debts, i don't duck my responsibilities! what a pity he can't live up to his! >> holman: for all the shouting, government officials said britain is being hurt by recession across europe that cuts demand for british goods. media baron rupert murdoch

dismissed claims today that he's had too much sway over british politicians. murdoch appeared before a media ethics inquiry. he dismissed what he called myths about his influence and ability to swing elections. and, he said, "we don't have that sort of power." the media inquiry was spawned by revelations of phone hacking by employees of a murdoch tabloid. the u.s. senate has voted to slow down service cuts at the ailing postal service. a bipartisan bill that passed today would block plans to close thousands of post offices and continue saturday mail delivery for now. connecticut senator joe lieberman said it also includes $11 billion dollars to pay off debt and offer buyouts to 100,000 employees. >> this great american institution which still delivers over 560 million pieces of mail every day, and helps to support eight million jobs throughout our economy, cannot be allowed to spiral downward into bankruptcy.

>> holman: republican >> holeman: a bill circulating in the house would circulate a commission with the power to snap no layoff clauses in postal employees contracts. republican presidential candidate mitt romney consolidated more of his party's support today, after sweeping all five primaries on tuesday. the party's national chairman reince priebus formally declared romney the presumptive nominee. and in cramerton, north carolina, newt gingrich signaled he will formally end his campaign next week. >> i am committed to this party. i am committed to defeating obama. we will find ways to try to be helpful. i do think it's pretty clear to governor romney is ultimately going to be the nominee and we'll do everything we can to make sure he is, in fact, effective. >> holman: meanwhile, president obama argued romney will have to defend the conservative views he embraced during the long primary campaign. in an interview with "rolling stone" magazine, the president said, "i don't think that their nominee is going to be able to suddenly say, 'everything i've

said for the last six months, i didn't mean.'" the president also pressed congress again to maintain low interest rates on student loans. the rates will double in july, unless congress acts to prevent it. last night, senate democrats called for taxing privately held corporations to pay for the cost nearly $6 billion. today, house speaker john boehner offered a republican bill to take the money out of funding for the health care reform law. he scheduled a vote for friday. the secretary of homeland security janet napolitano said today she doubts the secret service prostitution scandal was part of a pattern. a dozen agents were implicated. eight have been forced out, one lost his security clearance, and three were cleared of serious wrongdoing. napolitano told a senate hearing she'd be surprised if there was a larger problem. >> a full and thorough investigation is under way to determine exactly what transpired and actions we need to take to ensure that this kind of conduct doesn't happen again.

let me be clear. we will not allow the actions of a few to tarnish the proud legacy of the secret service. >> holman: 12 members of the military are also under investigation in the scandal. pentagon officials briefed senators but republican john mccain complained they provided appallingly little new information. in syria, a damascus suburb came under heavy mortar and machine gun fire for a second day. amateur video from douma showed explosions as well as streets filled with rubble and vehicles ablaze. activists said government troops kept up the fire despite a visit by u.n. observers. elsewhere, the opposition reported rocket fire killed at least a dozen people in the city of hama. nato reported the deaths of four troops in afghanistan today, bringing the month's toll for the alliance to 31. two were killed in separate attacks in the south.

the others died of non-battle injuries. for the year, 122 coalition members have lost their lives in afghanistan. a u.s. military judge has refused the request by army private bradley manning's defense to have the charges against him thrown out in the wikileaks case. he's accused of transmitting hundreds of thousands of u.s. government documents to the anti-secrecy website. today's ruling came at a pre- trial hearing at fort meade, maryland. manning faces a court-martial in september. those are some of the day's major stories. now, back to jeff. >> brown: and we turn to the still unfolding story of wal- mart and allegations of bribery in mexico. judy woodruff has more. >> woodruff: with more than 2,000 stores throughout the country, mexico is an important foreign market for wal-mart. but a "new york times" investigation has raised troubling questions over wal-mart's dominance there and how it came to be. among some of the findings: former executives for the company orchestrated a campaign of bribery to obtain

construction permits and build stores more quickly during the past decade. a paper trail of bribery documenting payments of more than $24 million. and top executives of the company seemed to shut down an internal investigation until recently. wal-mart is now conducting an inquiry into whether employees may have violated the foreign corrupt practices act, a federal law that makes it a crime for american companies to bribe foreign officials. bloomberg news also reports the company is the subject of a criminal probe by the u.s. justice department. we look more closely at the law and potential violations with joseph hoffman, a professor of law at the indiana university maurer school of law. we thank you for being with us. >> thanks for the invitation. >> woodruff: first of all, professor hoffman, tell us more of what is in the foreign corrupt practices act. what does it say?

>> so, the f.c.p.a.-- foreign corrupt practices act-- was enacted in 1977 in the wake of a number of corporate bribery scandals, including the lockheed scandal. and the act has two major provisionses, one of which prohibits a variety of corporations and individuals within u.s. jurisdiction from paying bribes to foreign government officials. and the other provision, major provision, requires issuers of u.s. stock, stock issued through the u.s. securities and exchange commission procedures, requires those corporations to maintain transparent accounting records so that bribes can be identified. >> woodruff: and based on the reporting by the "new york times," a story that came out a couple days ago, what parts of the law is it that wal-mart is allegedly supposed to have violated. >> well, of course, we won't know for sure until the justice

department completes its investigation and actually decides whether to go forward with an enforcement action, but the "new york times" allegations conceivably could go to both parts of the f.c.p.a. in other words, what the "new york times" reports are that wal-mart de mexico was paying bribes to obtain permits and other approvals from mexican government officials and in addition that the accounting used by wal-mart's mexican subsidiary was specifically designed to hide these payments, just the opposite of the kind of transparency that would be required by the f.c.p.a. accounting rules. >> woodruff: now, explain the difference between a payment in order to get business or in order to get a permit or a license-- a payment that's legal and one that's considered a prescribe. how is that defined in the law? >> well, basically, any payment made to a foreign government

official in an effort to try to get them to do something that is either against the rules of law of that country or an effort to get them to exercise their discretion to allow an american company to expand or to do business or even to maintain business in that foreign country would be classified as a bribe. now, there's a specific exception for what are called facilitating payments. these are generally described as payments that are made to facilitate or to speed up the issuance of a permit that would already being something that the company would be entitled to get under raw. or, for example, to turn on the utility, like the company wants to get the electric turned on or the water. these are facilitating payments and they are not considered to be bribes. but if you read the "new york times" story carefully, a number of the allegations go way beyond

anything that could reasonably be described as facilitating payments. for example, payments to get zoning approvals. these are not automatic. they're not something that the company's entitled to. they involve exercises of discretion by local government officials and payment to get those zoning approvals would be a bribe. >> woodruff: so in other words there's a clear distinction in the law between what would be considered within the boundaries of what's legal and what would be beyond. >> i wouldn't describe it as a clear distinction, judy. i think actually's a pretty good case to be made that the distinction can get pretty fuzzy at times but some of what's allegeed in the "new york times" story, if it turns out to be true, will clearly be over that line, as fuzzy as it may be. >> woodruff: now what about... in talking to you earlier today you indicated one potential problem the government could have, the justice department could have. is the statute of limitations, that there's a five-year limit. explain knew could come into play here.

right. so the "new york times" story does not specifically identify any actions such as bribes paid or coverups of... in the accounting sense that took place any later than 2006 and, of course, that's more than five years ago as of right now. the statute would normally preclude the government from starting an enforcement action for activities that took place more than five years ago. but there are ways to get around that. and one of those ways is if the justice department can allege and prove that there was a conspiracy within wal-mart to not only pay the bribe bus also to cover up the bribes that were being paid in mexico. if there was a conspiracy and if there was any action taken in furtherance of that conspiracy within the past five years, that could be something relatively minor like an e-mail saying "have you taken care of those books? have you taken care of those

records?" anything like that that happened within the past five years would open up the whole thing to a conspiracy charge that would get around the statute of limitations problem. >> woodruff: just finally-- and, again, acknowledging all this is hypothetical-- this is now based on a news report, there is an investigation under way but it's not known. but if it were proven what is allegeed in the article, give us a sense of the size of the penalties for punishment. >> you know, it's really hard to put a maximum dollar figure on that. in the past few days i've seen estimates ranging from the tens of millions up to billions of dollars. the statute and related statute prose ride is as a criminal matter wal-mart could be fined twice the amount of profits that they expected or sought to gain from the payment of the bribes. that's a pretty substantial figure. that would clearly... if all of

the allegations in the story were true, that could clearly run into a very significant sum of money. but obviously we have to wait and see what the investigation brings out. >> woodruff: professor joseph hoffman, indiana university school of law, we thank you very much. >> you're welcome. >> ifill: our latest story about the dropout crisis and efforts to keep students in school comes from the midwest. special correspondent john tulenko of learning matters television profiles one school district that altered its whole approach toward at-risk students. it's part of our ongoing "american graduate" project. >> reporter: in shelbyville, indiana 17-year-old kayla owsley lives a very grown up life- caring for her two-year-old daughter, bailey. >> at the end of 7th grade, that's when i found out that i was pregnant. and it was hard to think that i could even be a mom, but i am

and i'm a good one. >> reporter: she stayed in school and in 10th grade began working to support her daughter, but it all became too much. >> i was exhausted. i could barely wake up. i was starting to drag myself. my grades were slipping and i could see that, like, a lot. i was scared i wasn't going to be able to graduate high school, go to college. i was scared that what i wanted to be i wasn't going to be able to do it. >> reporter: michael maupin was worried about his future too. >> i'm a slower learner. moving at other people pace, it just makes it that much harder. i got bored of hearing teachers talk all the time. i was making straight "f"s. i mean there was no "d"s, "c"s "b"s. it was just straight "f"s. >> reporter: just teenagers, both michael maupin and kayla

owsley were at a crossroads: on the verge of joining the roughly half-a-million students who each year dropout of high school. it's a life altering decision. dropouts are far more likely to be unemployed, on public assistance, and even incarcerated. but now, school districts like shelbyville have made fixing the dropout problem a top priority. shelbyville's wake up call first came six years go, when this quiet community of 19,000, its streets lined with modest homes, unexpectedly became the poster for the dropout crisis. the high school, with its roughly 75% graduation rate, was the subject of this 2006 cover story in "time" magazine. >> it was a conversation starter in a lot of arenas and i think that was beneficial. >> reporter: tom zobel had just become the high school principal. it was a time when schools

looked the other way and even encouraged some students to dropout. >> there was an emphasis on discipline in schools and so we've got to get these students who aren't going to behave in school not to be in school anymore. >> now it just seems like wow they really didn't care but i was like one of them problem children they wanted to get rid of. >> reporter: shelbyville high school expelled tequila robinson in 9th grade, for skipping 32 days of school. a few years later while working fast food, she caught a glimpse of her future. >> a year and a half into waffle house, there was a woman who worked there for 26 years, and i was like wow, i have got to go back to school. i do not want to be like that. >> life has been hard for them and they tell us that. you know, you'll run into one or two or three here in the street, see them in the store, and they'll say biggest mistake i ever made. i wish i'd have stayed in school.

>> reporter: tequila went back and just earned her g.e.d. now she's studying to be a nurse. shelbyville high school learned its lesson too: the time magazine story helped spark a dramatic shift in attitude. >> it is now much more of okay lets sit down and talk, what kind of things can we do to help you, what can we do to make sure you're going to get graduated in four years. >> here's the board. >> this is it. >> reporter: more attention is being paid to identifying the students at risk of dropping out. >> these are kids right here that i am most concerned about graduating. >> reporter: assistant principal: andy hensley. >> i call this the watch list. so i'm watching them. i'm checking their grades. my eyes are on them constantly. >> what gets a student on this list? >> if they are behind credit wise. they may have to, what i call, run the table where they have to get every credit possible, for every period.

>> reporter: watch lists have proliferated in high schools, owing largely to no child left behind. the federal education law penalizes schools that fail to raise graduation rates. to get its potential dropouts back on track, shelbyville turned to technology. in this classroom at a local college, high school students in danger of dropping out can make up the courses they failed, and take new ones, on computers. melissa lakes runs the program. >> it's at their own pace. it doesn't nag at them for not getting it right the first time around. it's whatever they need. >> reporter: nationwide, school districts seeking to raise graduation rates have embraced this alternative approach, called online credit recovery. shelbyville runs three hour classes, five days a week, with afternoon sessions for busy students like kayle owsley.

>> used to be i would take my daughter to school at like six in the morning. now i can spend the whole morning with her. feed her breakfast. i can feel how much more relief i have off my back. i'm not so stressed out all the time. >> it's a lot better than regular high school. >> reporter: michael maupin has been in the program for two years. >> here you can listen to music. you don't have as many people bugging you. and you don't have your teacher talking the whole class period. >> most of these kids just 50 minutes bell, 50 minutes bell, class to class, they just stop listening after second period. they're not engaged. they're not getting a lot out of it. every kid learns differently and it's okay. we just have to find a way to reach that kid. >> reporter: inside shelbyville's original red brick school house, the district

created another dropout prevention program. this one aimed at students who've been suspended or expelled. now, they too can take their classes on computers. jason west directs the program. >> this allows them to stay on track. catch back up. and graduate on time, hopefully with their class. >> reporter: at each of the computer centers, students track their own progress. every time they pass a course, they tear a tab off these sheets and the tabs go quickly. >> here your work is a lot easier. >> reporter: easier, what do you mean? >> how do i put this, well, out here you can get a credit in half a week, a couple of days. >> it took me only like two weeks to get one class done. >> reporter: have you seen kids move through the material quickly? >> i have. >> reporter: what are we talking about? >> i'd say like a month, month and a half, for a credit. >> reporter: it's quicker advocates say because it breaks

with the traditional model of schooling, which requires everyone to sit through semester long courses even though some students can master the material faster. computer-based courses cost shelbyville $32,500 a year. reports of students earning easy credits in other places have prompted questions about whether schools are getting their monies worth. >> reporter: for folks who might look at this and think, this looks like a scam. what do you say to those folks? >> i think the work is real. it's based on state standards. these kids are given an option, an alternative. the traditional classroom didn't work for them. now does that mean we should write them off, what life do they have for the next 50 years? they're willing to put in the work, and this is a great opportunity for these kids. >> reporter: since starting its dropout prevention programs in 2006, shelbyville has raised its graduation rate from 75% to 90%.

>> ifill: "american graduate" is a public media initiative funded by the corporation for public broadcasting. we've posted a blog online about strategies for keeping students in school, including more from our interview with the teacher who runs the computer program. >> brown: we continue our look at what's changed since the financial meltdown of 2008. our focus tonight: wall street in the wake of laws passed to regulate it more tightly. the biggest change in the wake of the financial crisis: the so- called dodd-frank regulations, passed with mostly democratic support and signed into law by president obama two years ago. intended to prevent future meltdowns, the law created new oversight agencies, including one to examine financial products for consumers and another to reduce systemic risk

to the banking sector from institutions considered too big to fail. it also imposed new capital requirements on banks to limit their exposure to debt and avoid costly bailouts; brought risky shadow banking activities onto open exchanges, under the watch of government regulators and placed restrictions on banks making bets with their own money while engaged in consumer lending, known as the volcker rule. but the new regulations have had critics from the start, including financial institutions that argue the restrictions are excessive and are having a negative impact on even solid banking practices to the detriment of the overall economy. so what's changed? and what hasn't? we hear from lynn stout, professor of corporate and business law at cornell university. mohamed el-erian, c.e.o. of pimco, a global investment management firm and the world's largest bond fund. and peter wallison, senior fellow for financial policy at the american enterprise

institute. he served in the treasury department in the reagan administration and as general counsel at the treasury department and as a member of the financial crisis inquiry commission. lynn stout, i'll start with you. so whe when you look at the prae of financial institutions, do you see good or bad from a few years somethat that. >> oh, we only wish we saw big changes it has... there have certainly been some changes, but the really fundamental problems have not been grappled with. there there seems to be a denial on the part of the industry that there was ever anything wrong in the first place. so what we're seeing is marginal tweaks, a a little retrenchment. but the structural problems that drove us into the 2008 crisis are still there. brown pwoup we'll come back to some specifics but first, peter wallison, a denial? what do you see? >> i don't see denial. i think the industry is disspirited, maybe demoralized, they've been blamed for the

financial crisis. i'm not one who believes they that they caused the financial crisis. but they've been blamed and they made some serious mistakes, certainly, and as a result of that they're not the aggressive industry that they were in the past and that is a shame because this was one of the areas where the united states was dominant in the world: that is financial policy and financial institutions coming from the united states were dominant and i think that is beginning to recede. brown brown how would you see it changing? >> well, the regulatory framework is still a work from n progress. two, the institutions themselves are slowly adjusting so old habits die hard. third, because finance is so globally interconnected across borders you need good

international coordination. we don't have that. and finally and most importantly the outlook remains unusually uncertain to use chairman bernanke... so think about it in the following way, jeff. you've had a major accident on the freeway, you recognize you have to redesign the freeway but the plans aren't complete, the cars haven't been modified and it's foggy. the result is suboptimal outcome. >> brown: lynn stout, you started by giving us an depressing picture of things that haven't changed. give me an example. in terms of the regulatory system not kicking in or banks ignoring it? what are you seeing? >> what we're dealing with here is the fact that the banking industry and the financial industry changed fairly dramatically over the past 20 or 30 years, and not in a healthy direction. 20 or 30 years ago banks and investment banks were primarily involved in the capital-raising

business. they helped connect up savers with entrepreneurs who were building new projects, building new companies. that was a very socially valuable activity. but over the past '80s, '90s, and into to 2000s, the financial sector increasingly moved away from its basic and important capital-raising function and became a trading center where people were just passing securities back and forth, trading bits of existing businesses or even trading derivatives on businesses and that's not a business model that can sustain itself. it was great for a short-term party where a lot of people got rich for a while but at the end of the day when you're just trading things back and forth and you make your money by trading in an advantage relative to the other person, that's a zero-sum game. that's not a way to... toward sustainable growth. and eventually wall street cannibalized its own customer base.

there really aren't people out there with the money to spend and the interest and trading this will that there used to be. i think the wall street firms are having a real problem adjusting to the idea that trading isn't their lifeblood and can't be in the long run. they have to go back to their old capital raising function and they're having a problem doing that. >> brown: peter wallison, you were listening and shaking your head. you don't see that broader picture of a large-scale change in the business model? >> well, there has been a large-scale change, but that's because the world has changed, because of technology and for other reasons the world has gone from a world in which loans were made by banks or capital was raised by banks through selling shares for companies to a world in which most companies are now accessing the capital markets to finance themselves. and once they've started to do that, it's necessary for those who invest in those companies and the companies themselves to change their portfolios, to

modernize their portfolios, to change the investments that they're holding in order to meet changes in demands and conditions. so we here in a different financial world than we were and people who expect us to go back to lending and helping companies sell shares are thinking of a world that no longer exists and could never exist. >> brown: and in that world you're one of those who's argued that these new regulations are hurting the system. >> yes, these new regulations are made by people who believe that we should go back to the old system. >> brown: mohamed el-erian, first, do you see this broader new world we're talking about and where do the new regulations fit into that: helping or hurting? >> so both views can and should be reconciled. there were a number of very important innovations that facilitated the financing of productive investments. and that created a great age. not great in the terms of

wonderful but great in the sense it went too far. it was an age of leverage, it was an age of debt and credit entitlement and it went too far. i'll give you a simple example. we now talk about the financial industry, but that's not what it used to be called. it used to be called the financial services industry because it was always thought of as serving the real economy. and what happened in this great age is not only that financial services grow but they try to outgrow the real economy and that's where the problem occurred so i think we have to resize and rescale it but not swing the pendulum too far. and that's the fundamental challenge facing our leaders in washington, d.c. today. >> brown: and where do you see it? where is the balance right now? >> i think right now the pendulum is swinging toward more regulation. i think that's correct. i get a sense it's going to go too far. these things tend to go too far so, again, go back to the crash on the freeway, the initial reaction is to lower the speed

limit and the risk is you lower it too much but at that stage what society wants is soundness, not efficiency. and i think we have to respect that that's the reality of the world today. people want safety and stability rather than efficiency. >> brown: well, lynn stout, so how do you maintain... what do you suggest in this balance of regulation that allows for a certain amount of risk-taking and investment activity but keeps it from going too far? >> i think we definitely need more regulation. i wouldn't say we have too much regulation, but i would say we have the wrong kind of regulation. we have a... we've created a very unhealthy regulatory system because what dodd-frank did was not pass basic rules like setting speed limits. what it mostly did was give government agencies-- treasury, the commodities futures trading commission, the securities and exchange commission-- the

authority to set different speed limits for different people instead of being asked to enforce relatively simple laws. the ability to write the laws was delegated to these agencies. and that's a problem because it subjected them to enormous lobbying pressures from wall street firms to try and create particular loopholes that will favor particular industries or even individual companies. and those loopholes are actually now being created left and right, but it's all going on at a level where the public is not aware of it. it's not happening in the form of law that gets reported if the newspapers, it's in the details of all these regulations that make most people's eyes glaze over. >> brown: what about that, peter wallison, you're here in washington and worked in the treasury and with people in the financial sector. this nexus of politics and finance and lynn scout is suggesting that that doesn't allow for the kind of regulation... the right kind of regulation. >> well, when we talk about regulation we really is to talk about the amount of regulation

and the kind of things that regulation is requiring. if we look at one particular legislation that has gotten aa lot of attention, that's the volcker rule. that is completely with the idea that a capital market system can be run by a series of financial institutions. it's telling banks and other financial institutions that they have to get out of the capital markets, they're no longer permitted to engage in proprietary trading in those markets. now, that will interfere substantially with the way these markets are... had been run in the past and should run in the future because we're talking about... >> brown: but isn't it the idea that it should interfere? >> yes, of course, that's the idea. that's why i said these rules were made by people who don't understand the capital markets and they have made inconsistent rules that will make it difficult for the capital markets to function the way they should. >> brown: mohamed el-erian,

last word for you in our last minute. where do you come down on this question? >> i think there are inconsistencies in the sense that different agencies are doing different things and they're not coordinated and the inconsistencies get even bigger when you go globally. i think the most important thing, jeff, is to get a set of rules in place so that the system can operate. what's happening is that people are going back to the sideline and waiting and waiting and at the end of the day that is going to starve the system of credit. so there is a middle path that has to be struck but let's not make the best the enemy of the good. >> brown: mohamed el-erian, lynn scout and peter wallison, thank you all three very much. and there's more in our "after the fall" series. you can see last night's discussion of the housing crisis on our web site. also there you'll find a link to "frontline"'s documentary "money, power, and wall street." >> ifill: finally tonight, a west african country struggles

to recover from years of conflict and aims to provide its citizens with very basic needs, including safe drinking water. special correspondent steve sapienza has another of his collaborations with african journalists covering the continent's water issues. his story was done in partnership with the pulitzer center on crisis reporting. >> reporter: since 1980, the west african nation of liberia has been through a cycle of bloody civil war that has claimed over 200,000 lives. reporter teecee boley survived the turmoil and is now pushing the government to tackle a water crisis that arose during the war years, a crisis that is still claiming lives today. radio journalist teecee boley wants to know why a reliable supply of clean water to monrovia's slums remains outside the reach of government and aid agencies. i met teecee at the liberia women democracy radio station on the outskirts of the capital. her drive to report about liberians daily struggle to find clean water was undoubtedly shaped by growing up in a war zone.

during the war, tens of >> the water source itself, when we went to that community, you see there is a hole dug around during the war, tens of thousands of liberians fled the violence in rural areas in search of food and shelter in the capital. a decade later, monrovia's slums remain badly overcrowded, and those who eluded war, now face new dangers. >> there's a high demand for clean water now in these areas because the population overstressed the already limited services. >> reporter: at the randalls road slum, a group of war amputees tells teecee that their pump hasn't worked in over one month. a heavy burden to those living on less than a dollar a day. >> the water source itself, when we went to that community, you see there is a hole dug around the well. that means that someone who is physically challenged cant get there to get the water. >> to get water here is hard.

i have to pay someone to get to the well and buy the water and bring it to us so we can get water to take bath. >> reporter: 18% of all deaths here are caused by waterborne illnesses like diarrhea, malaria and cholera, according to the world health organization. one recent world bank study found e. coli, an indicator of widespread fecal contamination, in 58% of water sources across monrovia. these are sobering statistics for president ellen johnson sirleaf, who is recognized internationally for her work on water issues. she pledged in 2008 that water access would double in four years. achieving this target is the job of the liberia water and sewer corporation and its managing director, nortu jappah. >> i visited a community yesterday and i want to know why the water supply to that community is irregular? >> okay, i think i've talked about the issue of our capacity issue. we ration water. most of our infrastructure is have lived their useful lives,

and most of it needs to be replaced. and we've had constant breakdowns of machines and pumps, and so once we have some of these technical issues reckoned with we will be able to get water to monrovia in its entirety. how soon can we expect to see? >> i would assume just by the end of the year. >> reporter: as proof the government was on target, mr. jappah cited a recent project. >> for the past 21 years there has not been water on somalia drive. just recently the president and i, we dedicated or opened the first water main since 1990, so people along somalia drive now have pipe-borne water. >> reporter: curious to see if rhetoric matched reality, teecee left the interview and went straight to somalia drive. after hours of fruitless searching, she found no evidence of water flowing from city pipes to local taps. since the war, it only came once.

teecee did find a local man profiting from the water shortage by re-selling bags of water. but he also had seen no proof the city was pumping water to his neighborhood. >> before the war there was water all around here, but now we don't know what is the problem. >> reporter: kulah borbor fled heavy fighting in the interior during liberia's civil war and came to west point, one of monrovia's largest slums. she arrived with husband and four young children, only to face another battle. >> when we get here, we started drinking good water, it went bad with a bug that hit our stomach, so he didn't make it. >> reporter: when cholera took kulah's husband, she thought about going back to her village. but she stayed, and now teaches her neighbors how to purify water and prevent deadly diarrhea in infants. this is lifesaving knowledge in a slum of 60,000 people, where most residents buy suspect water from vendors or fetch water from dirty wells. >> how do you feel when you save someone's life with that solution? >> i feel happy because i don't want people to be like me.

because when i lose my husband i suffer with my children. the president said there are water supply to a community like west point. and clearly we went to west point and there is no piped water there. the people in west point have to buy a five gallon container of water. >> reporter: unfortunately, the rising urban population and waterborne illnesses are spreading faster than city pipes. >> some of these people who work in government they have people who are working under them in the various departments and they come back and paint a picture that everything is fine. and actually they are not fine and i think the bosses themselves have to go on the field and see the reality. >> reporter: teecee's reporting is exposing the gap between the liberian government's claim it has addressed critical water problems, and the actual conditions faced by monrovia's residents. until the government solves the problems, many more liberians who fled the war, leaving their towns and villages behind, risk

losing their lives to a new foe: unsafe water. >> ifill: you can learn more about west africa's struggles to get access to safe drinking water. there's a link to the pulitzer center's stories on our website. >> brown: again, the major developments of the day. the u.s. supreme court heard arguments over a legal challenge to arizona's tough new immigration law. and the senate voted to delay service cuts at the postal service, including plans to close post offices and cancel saturday mail delivery. online, you can join a live chat : and the economy is still growing at a moderate pace but is at risk from weakness in europe. online, you can join a live chat with my anchoring partner tonight. kwame holman explains. kwame? >> holman: at 1:00 p.m. eastern thursday, gwen will be fielding your questions on politics and more. find the details on the washington week-hosted chat on our homepage. also, we start a three-day series on women in the sciences with a look at the gender gap in engineering and computer science.

that's on our science page. and ray suarez filed a post on his experience speaking with new mexico students struggling to finish high school. that's on the rundown. all that and more is on our web site: newshour.pbs.org. jeff? >> brown: and that's the "newshour" for tonight. on thursday, we'll look at the senate's move to solve the i'm jeffrey brown. >> ifill: and i'm gwen ifill. we'll see you online and again here tomorrow evening. thank you and good night. major funding for the pbs newshour has been provided by: >> citi turns 200 this year. in that time, there have been some good days and some difficult ones. but through it all, we persevered. supporting some of the biggest ideas in modern history. so why should our anniversary matter to you? because for 200 years, we've been helping ideas move from ambition to achievement.

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