the scorched earth partisan politics in washington could push america over a fiscal cliff and quite possibly into a recession if congress doesn't act. economists now say that the so-called fiscal cliff has now overtaken europe as the biggest threat to the u.s. economy. in other words, our home-grown storm has a bigger chance of causing a hurricane here than the actual hurricane that's blowing our way from europe. i've been berating congress on this show to pass legislation now to head off a series of tax increases and spending cuts mandated to take effect on january 1st. because congress couldn't come up with a better deal to raise the nation's debt limit last year. i am not alone in my calls. the federal reserve chairman and the international monetary fund are warning congress to act before it's too late. if you get hit by another recession, you'll join me in pointing my finger directly at the political partisanship that sr. has poisoned your path to economic stability and to prosperity. now, if i were a politician, i would not want to be party to anything that pushes the united states in to a recession. but many of your elected politicians don't have the political will to compromise and to reach across party lines and agree on measures to reduce our debt. in the this close to a national election. not a chance. that's not enough to persuade you, take the most recent snapshot of the economy. if there is one thing i understand, i understand the economy. 34,000 more people filed for unemployment claims last week. 12.6 million of you are out of work. housing prices are flat. and gas prices are up 11 cents in the last two weeks. we've got enough problems to worry about without going over a fiscal cliff. christine romans joins me now, the host of "your bottom line." tell our viewers what this fiscal cliff is. >> it is something that's replaced europe as the biggest threat to the recovery. "the washington post" says the main threat to the u.s., what we are doing to ourself. huge automatic tax increases. on january 1st next year the alternative minimum tax, the bush tax cuts, expire. also if you do nothing, that means if nothing changes, your taxes will likely go up. at the same time medicare doctor pay will also go down. on top of those tax increases, at the very same moment, massive cuts to federal spending. if current law stays in place, the government must slash $1 trillion over nine years from federal spending. half from defense, half from non-defense departments. the bipartisan policy center says it will cause a million jobs over two years, jobs in the private sector, many from contractors working from the government. right now they are trying to figure out how to prepare those lay-off notices. the economy is barely growing right now. 1.7% if you average out the first half of 2012. the second half of 2012, 2.5%. some say it might be too optimistic. if the economy goes off the fiscal cliff, the congressional budget office says gdp will shrink at a rate of 1.3% in the first half of the year. that's unless we back away from the fiscal cliff. that is a recession and it is uncharacteristic of the cbo to make a call like that. fed chairman ben bernanke again warned congress this week about this potential. what makes it so scary, it is all happening in an election year. no one expects congress to deal with any of these big issues until after november 6th. also approaching the debt limit limit again, we could hit that early as december. all of this is on congress's to-do list in an election year. >> when people say they want smaller government, you brought out a good point, particularly in defense spending. it is not government employees. it is government contracts to private sector workers in many cases. christine, don't go far. this is a hot topic. what would that recession look like? cnn contributor and conservative commentator will cain joins us now and bill gross, founder and co-chief investment officer of pimco. the world's largest investor in bonds. bill, i'll get to you in a second. will, i have investigated the origins of your name. it turns out that will cain is gaelic for ostrich with head in sand. because you think we should do nothing. >> i don't think we should do nothing. i think the obviously of your call for action on the nis cal cliff is clear to everyone regardless of their political ideology. i don't want you to be near-sighted. because right around the corner from the fiscal cliff is another problem. in fact it is a problem exacerbated by avoiding the fiscal cliff. if i can, may i show you? >> you have a graphic? >> tlaert. from t that's right. this shows the united states debt-to-gdp ratio, this blue line extending from the green, our current situation, shows what happens to our debt-to-gdp ratio should we avoid the fiscal cliff. that is tax cuts are extended and spending cuts avoided. within 30 years we soar to 200% above gdp. if we go over the fiscal cliff -- you go those are numbers, that's debt-to-gdp, that's long term -- a frequent guest to this program, has said high levels of government debt to gdp has a depressing effect on the economy, as much as 24%. reducing gdp over 20-year period. you're feeling that. you will feel that. all i'm saying is the conclusion is, lord make me chaste, just not yet. >> i don't really want to discuss your chastity on television. bill gross, a very compelling discussion about how you want to keep debt to gdp ratios at a -- in a tight relationship -- except that you can have low debt and low gdp as well. you look at this. you are investors in bonds, the u.s. is still got the advantage of borrowing money very inexpensively. give me your picture on this. >> well, i think will has a point, but i think i'm on your side and christine's side in terms of the need to sort of go carefully. the american economy, like a drug addict, has become hooked on credit and debt in both public and private xhis. but edaddicts can be cured cold turkey. so you need to describe some methadone both from the standpoint of the federal reserve and from washington's fiscal policy which is what you speak to. that to me means gradually reducing deficits from 9% to 8% to 7% of gdp every year with a focus i think on shifting from consumption to investment spending. >> i don't even see the incremental approach here. that's what's interesting to me. it is all or nothing. it is either the fiscal cliff or it is 200% get to gdp ratio. we need policymakers who can signal to the world and signal to americans that they get it and they're going to try to fix it slowly and responsibly. i don't think anybody has heard that. right? >> no. of course. that is the call here. the call is to get out there as voters and look for and support those people who are running in your districts, not because they are democrats, not because they are republicans, not because they say get your hand off my entitlements, but because they are prepared to come up with a middle ground which is going to be the only solution. will cain accuses me of coming up with a new problem as i solve the most immediate problem and i wonder whether you ever played asteroids. when that asteroid is coming at you, you've got to shoot it. it is irrelevant that there are 86 more asteroids coming. i would love to not live in a world where we are playing with asteroids. >> the issue is what is the middle ground? how do we get from my long term solution to your short term emergency measures. >> let's short them both out. >> i would suggest we know the path. >> bill gross, let me ask you this. if we have this middle ground, this approach where we reduce debt over time or we have some indication we reduce debt over time, yet we engage in measures that will increase economic growth -- which is code for creating jobs. that's exactly what we need to do generally speaking. how will the bond markets react? the fear that people have is that at some point everybody's attention is going to turn to the united states, it's been busy with europe. they're going to say you guys have unsustainable debt and your interest rates are going to go way up. >> i think that's a possibility. at the moment treasures are being bought by not only the federal reserve but by the chinese and others with the confidence that, as we call it, the united states is the cleanest dirty shirt in the world. to a certain extent, if we continue to run 8%, 9%, 10% deficits as a percentage of gdp, then as will points out, at some point our debt to gdp rises to levels of greece. >> hold that thought. we're getting to solutions now. we'll pick off where we leave off when we come back. later i'll tell you about another part of the storm you need to know about -- the people who should be watching out for you are not and that makes you want to keep your money in your mattress and that holds you back from achieving all the economic prosperity you can. when i come back, i'll tell you about how safe you aren't two years after the passage of the biggest financial regulation in 75 years. ♪ ♪ [ male announcer ] its lightweight construction makes it nimble... ♪ its road gripping performance makes it a cadillac. introducing the all-new cadillac xts. available with advanced haldex all-wheel drive. 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customers didn't like it. so why do banks do it ? hello ? hello ?! if your bank doesn't let you talk to a real person 24/7, you need an ally. hello ? ally bank. no nonsense. just people sense. i am rejoined by cnn contributor and conservative will cain, as well as bill gross, founder and co-chief investment officer of pimco. christine romans is with us as well. i want it pick up where we left off. christine, surprising amount of agreement. this is actually not that surprising. i think everybody in america -- with maybe a very few exceptions -- understand we need tax reform, we need debt reform, we need to solve the jobs problem. i don't think anyone would like us to go over the fiscal cliff. why is this problem not getting solved? >> the honest part of this is everyone's got to give something up. when you have tax reform. some people give up some of their retirement benefits -- i don't even know what's all on the table to give up but no one wants to give anything up. in a way it is like america is living the me more now bubble era. no one wants to pay for what we've already spent. >> i reject your premise. fiscal cliff will be avoided. calvin coolidge said if you see ten problems coming at you, chances are if you stand still, nine will fall in the ditch. in the meantime, while we're putting it off until december, will it havegativeconomic ef eep playing asteroids, we'll never focus on the long-term problem, the entitlement reform -- >> bill gross is the smart money on this, he deals with the people who buy the bond. christine could be right, i could be right, but ultimately the bet is made in the world in which bill operates. >> i think the long-term is the threat, ali, in terms of the u.s. bond market. that means long term bonds. to the extent that we continue to run deficits at 8% and 9%, that means higher inflation and ultimately that's a negative for those 20 and 30-year treasuries, what an investor would want to do to protect himself or herself is to buy shorter term securities, buy three to five-year securities so inflation couldn't erode their principal so quickly. there is a defense mechanism for bond holders and i think that's gradually taking place not only in the united states but elsewhere around the world. >> ultimately, bill, what is it that the people who lend us money, the bond holders, the people who keep america solvent through this crisis, what's the best thing they need it see in your opinion? this is confusing because right of after we got the downgrade, money got cheaper to borrow in the united states which got puzzling for all of us. what do they need to see to keep our borrowing rates low long enough for some of us to repair the damage we've gone through? >> two main things. one, low inflation. inflation is an enemy of the bond holder so deep low. but at the same time, bond holders want growth. that's typically associated with the stock market, but as we see in greece and spain and other countries in euro land, to the extent that you move negative in terms of growth, then your bonds are subject to default so that's a delicate combination, low inflation, relatively attractive growth. i mean 1% to 2% minimum growth in terms of real gdp at a min p minimun. so let's have some growth, let's have some low inflation. that combination results from gradually reducing deficits over time as opposed to cutting them immediately and producing that recession that washington is warning about. >> bill gross for congress. we need more people like that. will cain, cnn contributor and our good friend, christine romans. coming up next, the woman who took on wall street and washington to protect you. she became a target for the banking industry and its republican defenders in the senate. when things got too hot, the obama administration sacrificed her. she couldn't fix the system from the outside so now she wants in. elizabeth warren right after the break. 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[ male announcer ] febreze eliminates odors and leaves carpets fresh. ♪ [ male announcer ] febreze. eliminates odors and leaves carpets fresh. ♪ i tell mike what i can spend. i do my best to make that work. we're driving safely. and sue saved money on brakes. now that's personal pricing. it used to be that there were three ways you could find financial prosperity. you could work your way up the ladder, get regular raises, buy a home. but with almost 1 million people officially out of work in the united states, job stability is uncertain, growing your income as a path to prosperity is even less certain. so scratch that from the list. option two. you get rich off of your home. the home, by the way, that used to go up in value year of after year after year, that bubble burst when we overborrowed and gorged ourselves on cheap credit. when we learned the hard way that home prices don't always go up. when prices fell, they took a big pile of american wealth down with them. if you can afford a house today, if you have the down payment and credit score and steady job. well, low mortgage rates make it a great time to buy but you will not get rich off your house any time soon. so what's left? the only remaining legal way to change your economic situation for most people is investing, buying stocks, bonds, mutual funds, exchange traded funds or any other tradable security. anything other than keeping your money in cash which earns you nothing. investing in a smart way was once a potential path to a better life, even if you did it relatively passively, through your 401(k) at work or your pension plan or your i.r.a. money invested was money you could generally county on to grow over time. until 2008. the financial crisis and its aftermath proved that the game was rigged. the deck was stacked. the house held all the cards. banks inflated profits. they made risky bets that blew up in our faces, nearly taking down the global financial system. and the government bailed them out, and they went back to making billions of dollars for their investors and executives. and, surprise, surprise, the banks are still behaving badly. look at the $6 billion in trading losses that jpmorgan chase, america's biggest, and thought to be safest, bank. or the admission by british banking giant barclays that it, along with other banks, manipulated libor, the base rate around which trillions of dollars of loans worldwide are set. hsbc, asia's most respected bank says it's sorry for laundering money. two guys are in jail for insider trading, but most people who gamble with your hard-earned money walked free. they lose a little pay, their employers get a fine that they can probably pay with money that comes out of their vending m ii machines. for every year i can give you why to invest, you can give me nine nor why you shouldn't. remember elizabeth warn, best known as an advocate for financial reform in america. her willingness to go head-to-head with wall street is why the obama administration brought her in two years ago to get the consumer financial protection bureau off the ground. she is now the democratic candidate for senate in massachusetts. i asked her what she sees as the strengths and weaknesses of our financial system. >> the strength is the consumer financial protection bureau. and the reason it's the strength is it has a very clear mission that is to mow down the fine print in credit cards and stop the cheating on mortgages and to level the playing field and make it easier for families to see what something costs and for make direct comparisons and to pick the one that's the cheapest. and it has political insulation. it's set up so it can do its work in a professional manner on behalf of the american people. give them a real voice in washington. i think that's the strongest part of dodd-frank. i think the places where there are problems under dodd-frank are when dodd-frank, quite reasonably, said we're going to give it back to the agencies like the economic futures trading commission, to work out particular regulations to figure out how to regulate dlif tieriv, so on, so forth, how to get them on to a market. the problem is they did that, and then the republicans in congress started attacki the regulatory agencies. >> that's where your problem came in. they said that they can't have you running this body that has this absolute ability to make decisions about -- without what they call congressional oversight. they did let someone else be confirmed. they did let richard cordray be confirmed. it was a watered-down version of what you wrote, but is it helpful? >> i do want to say about the consumer agency, as it is set up right now, it's pretty insulated from political influence. and so it's really getting out there right now. it's established a consumer hotline so that people who have a problem with a financial institution or credit card, a mortgage, can call in and get somebody on their side. it's writing the regulations to ma