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updated 8/10/2008 12:24:43 PM ET 2008-08-10T16:24:43

MR. TOM BROKAW (Beijing):  Our issues this Sunday:  All eyes on Beijing as the 2008 Summer Olympics get under way.  The United States and China, where do they go from here?

And back at home, the economy, the stock market, the housing crisis--all challenges for this man, our guest here in Beijing, U.S. Treasury Secretary Henry Paulson.

Then, jobs and the economy also front and center in the race for the White House.

(Videotape)

Narrator #1:  (From political ad) Barack Obama, a new vision for our economy.

(End videotape)

(Videotape)

Narrator #2:  (From political ad) Life in the spotlight must be grand.  But for the rest of us, times are tough.

(End videotape)

MR. BROKAW:  Plus, will an offer to speak at the Democratic convention be enough to ease tensions between the Obama campaign and the Clintons?  And former presidential candidate John Edwards admits to an affair.  Our political roundtable weighs in from Washington:  Washington Post columnist David Broder; the anchor of CNBC's "Street Signs," Erin Burnett; Washington Post columnist E.J. Dionne; and The Wall Street Journal's editorial page editor Paul Gigot.

But first, good morning from Beijing, where it is now a kind of stormy Sunday evening.  And here at the Olympic Games, I sat down with Treasury Secretary Hank Paulson yesterday to talk about all the momentous economic news and the future of U.S./China relations.

Mr. Paulson, thank you for being here.  I, I know you're on a family vacation, so we're very grateful for you taking this time.

SEC'Y HENRY PAULSON:  Tom, it's good to be here with you.

MR. BROKAW:  Let me also say I know you're a sports fan of a certain age. Remember the old Joe Louis line about one of his opponents, "He can run, but he can't hide"?  You can come all the way to Beijing, but you can't escape what's going on at home.  So I'm going to share with you and with our viewers some of the more tough news that we've heard this week.  Freddie Mac lost $821 million in the last quarter, and then Fannie Mae reported a loss of $2.3 billion.  These are the government-sponsored mortgage agencies.  On July 20th of this year, you told my friend Bob Schieffer on "Face the Nation," "Well, I think it's going to be months that we're working our way through this period. Clearly, months.  But remember, the long-term fundamentals are very solid." After what we heard from Freddie Mac and Fannie Mae this week, have you changed your mind about how long it's going to take to get out of this?

SEC'Y PAULSON:  No, I think what, what I said to Bob Schieffer is, is, is consistent what I, what I believe today.  I, I believe that we, we have got some serious issues we're dealing with in our economy, and, as I said to him, I believe that it's going to take us well beyond the end of the year to work through the housing--all of the housing problems.  But I think the key question is when will the largest part of this housing correction be behind us?  Because until the biggest part of the housing correction is behind us, we're going to continue to have turmoil in our capital markets.  And I think the housing correction is really at the heart of our economic problems as a, as a nation right now.  So, again, I think given that Fannie Mae and Freddie Mac are solely involved in housing--that's their sole business--and given the magnitude of the housing correction we've had, it, it, it's not a surprise to me to, to see those, those losses.

MR. BROKAW:  You have the ability now to insert money into Freddie Mac and Fannie Mae.  Do you think that that's going to become necessary, given the size of these losses?

SEC'Y PAULSON:  Well, we have no plans to insert money in, in, in, in either of those institutions.  I, I think it was very important that we get these temporary backup facilities because Fannie and Freddie are very important to our capital markets broadly.  There's $5 trillion of securities that they have outstanding--$3 1/2 trillion in the U.S., a trillion and a half outside of the U.S.--and they're responsible for funding about 70 percent of the mortgages in the United States today.  And so a key to our getting through this, this housing situation, this housing correction and getting some stability is that we continue to have mortgage financing available.

MR. BROKAW:  Those two agencies were not well known to most taxpayers in this country...

SEC'Y PAULSON:  Yeah, yeah.

MR. BROKAW:  ...until the housing crisis hit.

SEC'Y PAULSON:  Right.

MR. BROKAW:  But we also know that they were caught in some significant accounting irregularities.  They changed the management at the top; now they're both hemorrhaging money.  You do have the authority to bail them out if it becomes necessary.  But a lot of taxpayers are saying, "Why should I have to foot the bill for this?" I mean, there are wealthy investors who bought these bonds knowing that the government would not back them.  Now, suddenly, they've got a fail-safe arrangement with the Treasury secretary.

SEC'Y PAULSON:  Well, I've heard a lot of those same comments, and what I say to all those who make the comments to me is I say to them, you know, this was not a pleasant task for me to go to the Congress and ask for these backup facilities.  Matter of fact, it was a very unpleasant task.  But it was an easy one because it was better than the alternative.  These institutions are right now critical to the stability of our capital markets, and they're critical to us getting through this, this housing situation.

And I would like to point something else out.  In addition to these backup powers we have, these backup authorities, what we have now is a legislation calling for a strong new regulator with real powers to deal with, with capital adequacy, to deal with systemic risk.  And the issue we've had, Tom, is, for some time, people in Washington have looked at these government-sponsored entities and on one side people have said they are really significant risks. Others said there weren't significant risks, and for, for, for many, many years nothing was done.  And we now have a new regulator with very strong powers.  The Fed is going to have a seat at the table.  And so, in addition to working through this period of turmoil, we're in a position where the country will now be able to focus looking ahead at the systemic risk, and I, I think it's going to be very difficult for someone to argue there isn't systemic risk.

MR. BROKAW:  But will those two agencies have to be fundamentally reorganized in a completely different way?  Some people were saying we just ought to nationalize them and forget the idea that they're kind of a semi-public or semi-private agency.

SEC'Y PAULSON:  Tom, I've heard a lot of that, and, and some of these ideas are--involve enormous changes.  And I think that the focus today needs to be on stability, getting through this period of turmoil, getting through the housing correction.  But there will be discussions when, when, when--with a new regulator in place and looking at systemic risk, there will be discussions about structural issues, and while, while there should be looking ahead.

MR. BROKAW:  At Freddie Mac, the risk manager in 2004 went to the chairman, Richard Syron, and said, "Look, we've overextended ourselves here." Sent him a memo in fact.

SEC'Y PAULSON:  Yeah.

MR. BROKAW:  Syron said, "I have no choice but to continue with this." Now the other day when he reports these big losses, he said, "Well, we were just caught in the market downdraft," or words to that effect.

If Mr. Syron were working for you in your old job at Goldman Sachs, would he still have a job?

SEC'Y PAULSON:  Well, I, I, I don't think I should hypothesize.  What, what I should say is that these organizations, for some time, people have looked at them.  And people, really, in, in both parties have looked at them and said, you know, "They're an odd construct." And, and Dick Syron has said that. They've got on one hand responsibility to their shareholders, on the other they're government-sponsored entities.  They haven't had an regulator with the necessary powers.  So I would like to look forward and say we can take some satisfaction in, in the fact that we now have a regulator that is going to be able to begin to deal with these systemic issues.

And to the American people, all I can say is that the stability of our capital markets is very important to you.  What's going on in our economy is, is going to be determined to, to a large extent by the speed with which we get through this housing correction, and when we see--when we begin to see more stability with regard to home prices.  And it's very important that Freddie Mac and Fannie Mae continue to play their very important role they're playing right now in funding so much of the mortgage financing in this country.

MR. BROKAW:  I think what, I think what puzzles a lot of people, Mr. Secretary, is that how so many smart people can not have seen some of this coming.

SEC'Y PAULSON:  Right.

MR. BROKAW:  Here's a quote from you in April of 2007.  "I don't see subprime mortgage market troubles imposing a serious problem.  I think it's going to be largely contained." That was a year ago at this time.

SEC'Y PAULSON:  Right.

MR. BROKAW:  The former chairman of President Bush's Council of Economic Advisers has been critical.  Said, "This looks like the Fed and Treasury were lurching form crisis to crisis, when much of this was forecastable."

SEC'Y PAULSON:  Well, let me say this.  Hindsight's 20/20.  A year ago, it was August, we were in the middle of capital markets, dealing with the turmoil of the capital markets.  I think from the time I came to Washington, I began to prepare to deal with turmoil in our capital markets.  With regard to Freddie Mac and Fannie Mae beginning in, in--right after I arrived in 2006, I, I got permission from the White House to begin to really engage in trying to get reform.  There were people--there were two camps.  There was one camp that said, "We need reform," and there was another camp that said, "You're not going to get reform," and there was no compromise.  And so I started working in late 2006, started working with the House.  And, Tom, I think I've been very consistent throughout this housing problem in saying to Congress, you know, the--as important as some of the other legislation is, that these two agencies, the need for reform here is an order of magnitude more important than, than any of the other housing issues.  We need stability in that marketplace, and we need a strong--and, and, and a strong regulator.  So I, I believe I'm essentially playing the hand that I've been dealt in terms of Fannie Mae and Freddie Mac.  This problem has been going on for many, many years, and it's my lot in life to deal with it in a way in which is going to, I think, provide stability.  And our capital markets have put us in a position to deal with systemic risk going forward.

MR. BROKAW:  Beyond Freddie Mac and Fannie Mae, President Bush, in an unguarded moment recently--he thought the cameras were off, he was talking at a fundraiser in Texas.  Here's what he had to say about how Wall Street got in trouble.

(Videotape)

PRES. GEORGE W. BUSH:  There's no question about it.  Wall Street got drunk. It got drunk, and now it's got a hangover.  The question is how long will it sober up and not try to do all these fancy financial instruments.

MR. BROKAW:  Listen, I know personally that you're a teetotaler, so you may not approve of that metaphor, of Wall Street gotting--getting drunk, and you're an old Wall Street guy yourself.  But isn't it--not just for Wall Street, but for the entire country, we were on a binge?

SEC'Y PAULSON:  Absolutely.  There's a lot of truth in what the, what the president said.  And in terms of Wall Street, there is too much leverage in the system, and more leverage than was appropriate, and more than, than people recognized because the leverage came in, into the system in the form of highly complex, structured products which were difficult to understand.  So there is excess leverage, excess complexity.  And, Tom, one of the things we've been working on with, with the president's working group on financial markets, and that's a group that I chair where we have all of the regulators--we have the Fed, the OCC, the SEC--we have, of course, one priority, getting through this period with as little damage, as little negative impact as possible on the economy.  But, but the second part is to take steps to reduce the likelihood of, of these sorts of things happening in the future.  And so we have a number of recommendations to deal with hoping that these things working so that these problems won't happen again.  And, for instance, we have a regulatory system that is very outdated.  It was put in place many years ago, and...

MR. BROKAW:  There's going to have to be more modern regulation...

SEC'Y PAULSON:  Yes, absolutely.

MR. BROKAW:  ...of Wall Street across the board.

SEC'Y PAULSON:  Across the board.  More modern regulation and more authorities.

MR. BROKAW:  Tough for a Republican who comes from Wall Street to say that?

SEC'Y PAULSON:  Well, I've got to say, it's not tough for me.  I understand the importance of regulation, and I also understand the importance of moral hazard, market discipline.  Because we need to be in a, in, in a position where organizations are not considered too big to fail.  We need--and in order to be in that position, we need to be--to have authorities that allow us to unwind a financial institution if it fails and it is not a bank with Federal deposit insurance.  And so we're going to need those kinds of authorities, and we're going to, to also need to do a lot of work to get the system in balance.

MR. BROKAW:  Mr. Secretary, this goes well beyond the shores of the United States, obviously.

SEC'Y PAULSON:  Right.

MR. BROKAW:  The Financial Times had a long analytical piece recently, and the bottom line was, in effect, when the United States gets sick, the rest of the world now gets flu.  Here's what they had to say.  "The world economy is in trouble, poised between the rock of recession and hard place of overheating.  It will take a remarkable resumption in global policy co-ordination and a huge dose of luck to avoid one or the other." At a time in the United States when we have a lame duck president, a Congress running for re-election and concentrating on that primarily, and two candidates running for president who don't want to talk about inflicting pain on any of the consumers or the taxpayers in the country, is it hard for you, then, to generate that kind of global coordination that is necessary?

SEC'Y PAULSON:  I, I--Tom, I think we've got excellent global coordination. What I explained to so many of my friends from the private sector, although we have a regulatory system that is out of date, and although the architecture we have globally is out of date, we have good people in the seats, and I think in some ways, that transcends the financial architecture because there's great communication, and we've worked very closely with the G-7, with the financial stability forum on the policy prescriptions to, to avoid these problems going forward.  We've worked very, very closely together, and I know the Fed has worked very closely with their counterparts around the world to, to deal with the financial turmoil.  So we're working closely together.  I would say that in the first signs that the economy was slowing down in December, the president asked me to work with--closely with Congress on the stimulus bill. And, again, this was enacted very quickly, and if you look at the numbers for the second quarter, you can see that, although it was a tough second quarter, there was, there was growth.  And when you look at consumption and you look at consumer spending, I think that that, that program is working the way it was, it was intended to work.  So we've, we, we've got a lot we're working on right now.

MR. BROKAW:  I know you had a conversation recently with the Democratic candidate for president, Barack Obama--we presume he'll be the nominee. There's been a lot of speculation that you may stay on, whoever's elected president, as Treasury secretary, because you're midstream in some profound changes.  Would you like to stay on?

SEC'Y PAULSON:  No, Tom, I wouldn't.  I'm, I'm, I, I care a lot about this country.  I'm going to run right up until the end.  I'm very, very focused on doing the right thing for the United States of America.  And whoever the next candidate is, whether it's John McCain or Barack Obama--the next president is--I will do everything I can to make for a smooth transition, to work closely with my successor in Treasury to do everything I can to help out.  But I'm, I'm, I'm focused on getting everything done I can get done between now and January 19th.

MR. BROKAW:  That's a firm denial that you would be interested in extending?

SEC'Y PAULSON:  Yeah.  It couldn't be any firmer.  I, I've--you know, when I came down to Washington, people said to me, "How could you want to do something for just two and a half years?" And I said, "Two and a half years sounds like a long time to me, and I'm going to--I, I'm going to define my job expansively.  I'm going to do everything I can to step up to any problems that, that are going to face the country." But again, I, I look forward to doing other things, you know, next year.

MR. BROKAW:  I want to ask you about what may be additionally necessary to get this economy going again.  The tax rebates that were sent out earlier this year had about as much effect as a BB gun on a bear, it turns out.  Do you think we'll need additional stimulus from the federal government?

SEC'Y PAULSON:  Well, Tom, I'm going to take exception with the BB gun on a bear, because I, I believe what we did with, with, with, with the tax rebates and the business incentives, we got them out very quickly.  And they're still, you know, they're still having an impact.  So I think if you look at the second quarter numbers, that's what people--when we put that plan in place, people were worried about negative growth in the second quarter.

Now, in terms of a second stimulus, which is, which is your question, we sized that program to say, "How could we do something that would be meaningful this year but not so big that it would jeopardize some of our long-term priorities and our fiscal priorities in balancing the budget?" So, again, my view would be let's see how this program works in the third quarter.  And the biggest issue we're dealing with right now is housing.  And so we, we've got housing legislation.  We're working with Freddie and Fannie.  We have this Hope Now Alliance where the industry's come together to avoid preventable foreclosures. And I think that's where our priorities should be.

MR. BROKAW:  Let's talk some about China.  You've made more than 70 trips here, both as a public and as a private citizen.  Chinese government has a huge investment in the United States.  They're holding what, $400 billion worth of, of bonds in Freddie Mac and Fannie Mae alone?  Here's a quote that you offered to BusinessWeek recently.  Your counterpart in this country, the vice premier, Wang Qishan, said, "We've been listening a lot to you and now we find out our teacher has problems." You said that you responded to him, "Learn from us and you can avoid some of our mistakes." There's a prominent American businessman who is here this week, who met with some Chinese officials.  They were very concerned about Fannie Mae and Freddie Mac.  And he said their attitude is they're going to sit on their money.  That doesn't help us, does it?

SEC'Y PAULSON:  Well, I, I, I would say this, Tom.  We have had, I believe, great support from investors around the world.  And part of the reason why I was--when, when I talked with Congress about the need for these backup authorities with regard to Fannie Mae and Freddie Mac was I emphasized this is about our capital markets, and investors all around the world need to know that we understand the importance of these organizations to our capital markets and to, to housing.  But the--you're, you're right that, that, that, that the period of turmoil we're going through in our capital markets today is different from some of the periods we've had in the past in that the, the root cause took place right in the United States of America rather than outside of the United States of America.  So, in some ways, that's humbling.  But I still believe that the long term--and I think most of the people I talk with, whether it's the Chinese or whether it's in the Middle East, I think just about every investor outside of the United States looks at the U.S. and says, you know, relative to any other developed or industrial economy, that the long-term fundamentals--economic fundamentals of the United States compare very favorably.  And, and let's not forget that.  We've, we've got our problems, but when we have a problem, we shine a light on it, we move quickly to clean it up, and I can't think of any other nation that, that doesn't have more problems than we do longer term.

MR. BROKAW:  Let's talk about China and energy and pollution.

SEC'Y PAULSON:  Yep.

MR. BROKAW:  The World Bank now estimates that 750,000 Chinese die annually...

SEC'Y PAULSON:  Right.

MR. BROKAW:  ...from the effects of pollution in this country.  It's a big interest of yours...

SEC'Y PAULSON:  Yep.

MR. BROKAW:  ...I know.  They are building one coal-powered plant a week.

SEC'Y PAULSON:  Yep.

MR. BROKAW:  They're going to add 20,000 cars a day.

SEC'Y PAULSON:  Yep.

MR. BROKAW:  They'll have 400 million people moving to the city between now and 2025.  How do they resolve the conflicting realities between managing that population mass and economic growth and doing something about energy and pollution?

SEC'Y PAULSON:  That is the 64,000 question, and when we--as you know, Tom, I spend a lot of time with our strategic economic dialogue and engaging with China, and this is one of the issues we spend a lot of time on.  And, as you so rightfully said, economic growth is an imperative to China.  They need to keep growing, and the energy consumption--they use about one third of the, the world's coal.  They burn two billion tons of coal a year in, in, in China. And so our efforts here, and we, we, we've launched this 10-year energy and environmental framework in which a big part of our effort is going to be developing and deploying cleaner technologies, which is going to be very important.  We can't solve our environmental issues, the world can't solve its, its environmental issues without engagement with China and without helping them and all of us working together to solve the issues.

MR. BROKAW:  Let me ask you, as well, about issues that have been getting a good deal of attention during these Olympics.  You wrote in the Foreign Affairs Quarterly in a long analysis of what's going on in China, "Beijing has recently realized some of the unpleasant implications of working outside the global economic system." They take a lot of oil out of Sudan...

SEC'Y PAULSON:  Right.

MR. BROKAW:  ...and, therefore, because they've got a huge investment in Sudan and a need for it, they don't put any pressure on the Sudanese government about what's going on in Darfur.  It's hard for a lot of people to see how, even though they may have realized some of the unpleasant consequences, that they're doing anything about it.

SEC'Y PAULSON:  Well, Tom, listen, there's more they can do in a number of areas, and we, we, we, we clearly need to see more progress here.  They, they can make a real difference in Sudan.  Now, they have--I will point out that they've, they've come a ways.  They've got a company of engineers right there working with the U.N. mission, but I, I, I do think that they could put more pressure on the regime in Karthoum to, to, to work for peace.  And I, I think the other thing that, at least in my perspective, I think the Chinese are increasingly saying that there's a cost to making investments in places like Sudan and Iran, because there's a, a--an increasingly large political backlash that goes with those investments.

MR. BROKAW:  There's another big issue here this week, and that is Tibet. The Dalai Lama has extended an olive branch fairly significantly to the Chinese government, saying he hopes that these games go well, that he admires the Chinese civilization.  They can continue...

SEC'Y PAULSON:  Right.

MR. BROKAW:  ...their communist system.

SEC'Y PAULSON:  Right.

MR. BROKAW:  But he hopes that they can have a dialogue.  So far there's been no response to that.  And it's part of the reason that the Chinese government, in the eyes of a lot of people around the world, remain suspect, don't seem to be a member of the family of nations.

SEC'Y PAULSON:  Right.  Well, the president has had a lot to say on that, and I guess what I would say is that there are plenty of policies that the Chinese government has that we, we don't agree with, and I don't think that's really the relevant question.  I think the relevant question is, what can we do to encourage China to continue on their path of reform, to continue to move to open up and to expand human rights, expand freedoms.  And they've come a long way.  You know, I've been--you and I were talking earlier.  We've both been coming to this country for a long time, and the differences are startling. Not just in terms of the economic situation of the people in China, but some of the freedoms now that they enjoy, and their access to information and their access--ability to move around.  And so they're on the right path.  And so the question is, how do we get them to move quicker to open up?  And I think the answer there is, is engagement.

MR. BROKAW:  You were in that stadium for the opening ceremonies...

SEC'Y PAULSON:  Yeah.

MR. BROKAW:  ...which, by anyone's description, can only be described breathtaking and dazzling and a little terrifying in a way, because you realize how much they've done, and this is the country that you're going to be competing against in the short-term future.  A lot of people ask me, "What do you think will happen to China after these games?" I don't have an easy answer.  Do you?

SEC'Y PAULSON:  I have no easy answer, but the one thing I can say to you, Tom, is that those that think that we need to contain or counter China's economic growth, or that we should be concerned that they're going to overtake us are worried about the wrong thing, that the best thing that could happen to the United States would have China continue to grow and continue to progress and continue to reform.  And the worst thing that could happen would be for China to seriously stumble.  And so, again, I looked at what I saw there at the stadium as a symbol of all of the progress China has made as they're attempting to do something that is really breathtakingly difficult, to move a billion people from a developing country to a developed country.  And, you know, we push them all the time to move quicker, to open up quicker, to expand, you know, human liberties quicker and, and, and so on.  But I think it's easier for us to, to, to have impact with them if we recognize how far they've come and we engage with them on that basis.

MR. BROKAW:  Mr. Secretary, thanks very much for being here.  I hope you have a great family vacation here at the Olympics.

SEC'Y PAULSON:  Tom, thank you.

MR. BROKAW:  Coming up next, David Gregory will lead our political roundtable this week with Wall Street journalist Paul Gigot, syndicated columnist E.J. Dionne, David Broder of the Washington Post, and our own Erin Burnett of CNBC.

(Announcements)

MR. DAVID GREGORY:  Our political roundtable from Washington right after this brief station break.

(Announcements)

MR. GREGORY:  I'm David Gregory back here in Washington, where we are joined this morning by Paul Gigot of The Wall Street Journal, E.J. Dionne of The Washington Post and David Broder of The Washington Post, as well as Erin Burnett of CNBC.

Welcome to all of you.

Well, the concentration on the economy, you heard it with Tom Brokaw and Secretary Paulson, and it's a situation, Paul Gigot, that is likely to change a great deal even beyond Election Day.  A housing crisis, trepidation in the debt markets, a ballooning deficit, job losses, oil prices really affecting people in the pocketbook.  This is how BusinessWeek described the situation facing the next president:  "Politics, the weak economy, and the reality of the ballooning federal budget will all limit the next President's room for maneuver.  McCain's low-tax strategy could well be chewed up in a Congress that is likely to be even more Democratic than it is today.  Obama's lofty plans could be undone by the hefty costs of his health-care plan and other programs.  ...

"The 2009 economy will offer tough conditions for a President set on bold new policies.  ...  This year [the] gap between promise and reality may be even larger than usual.  `Whoever wins will face a big wake-up call as soon as the election is over,' says Daniel Clifton, head of Washington policy research for the investment group Strategas Research Partners.  `Many campaign promises will need to be scuttled.'" How much room will there be?

MR. PAUL GIGOT:  Sounds like why, why would anybody want to win?

MR. GREGORY:  But how much room will there be to maneuver for the next president, given this economy?

MR. GIGOT:  Well, I think he's going to have to focus on getting growth back. The stimulus, I think, the short-term stimulus that Hank Paulson talked about has failed.  There's nothing on the horizon that's going to restore growth, at least nothing we see right away.  Housing prices, we don't know when they're going to hit bottom, probably some time next year.  Oil prices are down from their peak but not much at $120 a barrel.

MR. GREGORY:  Right.

MR. GIGOT:  Still horrible.  So I think the real danger for a president next year is we've got some inflation in the economy.  If the Federal Reserve has to raise rates next year to break inflation, which I think they will, particularly then a tax increase, which Barack Obama is promising to finance so many of his ideas, I think is going to be very difficult to pull off.

MR. GREGORY:  And, Erin Burnett, Obama's also talking about additional stimulus to the economy.

MS. ERIN BURNETT:  That's right, and that's the big question.  It's interesting, Paul, what you say, talk about the stimulus package.  I mean, it cost almost $200 billion, and it did help us.  You heard Hank Paulson, it helped us last quarter.  But it was sort of, I think Tom described it well, BB guns at a--BB gun bullets at a bear.  It didn't really do much over the longer term.  So now you're starting to hear more and more talk about whether we need a second stimulus package, and do we get checks or do we do an infrastructure package?  But all of it's going to cost money.  And what I think both candidates have in common is that neither one of them have really talked about how they're going to fund a lot of the planned spending that they want to do.

MR. GREGORY:  Particularly with a ballooning deficit.

MS. BURNETT:  Absolutely.

MR. GREGORY:  David Broder, there is a political dynamic that's in play here as well, and that is how much can or should the government be involved in backstopping the economy?  We've got for Fannie Mae and Freddie Mac a potential bailout if that becomes necessary.  JPMorgan was backed up with plenty of cushion as well as they took over Bear Stearns.  And the energy debate focused on what the government should be doing to try to increase production or domestic supply.  How much...

MR. DAVID BRODER:  I think...

MR. GREGORY:  ...should and can the government do?

MR. BRODER:  Well, inevitably, the government is going to be more involved because the market system has become unbalanced.  That's what we're dealing with in all of these, these issues, whether it's energy or the, the Fannie Mae and Freddie Mac, all of them reflect failings of the pure market system.  And when you have that, the government has to step in.  Where else are you going to look?

MR. E.J. DIONNE:  But the...

MR. GREGORY:  E.J.?

MR. DIONNE:  Well, you know, Bill Cohen, former moderate Republican senator, once said that "government is the enemy until you need a friend." And I think what David said is exactly right.  What you're seeing is the collapse of a certain kind of pure, free market situation.  When you've got the Republican Treasury secretary talking about the need for new kinds of regulation of the financial industry, you've really had a sea change in economic thinking in the country.  And I think that's going to be the case no matter who wins the election.  But in terms of next year, I was talking to two Republican investment bankers, and one was laying out this awful scenario for next year, and the other Republican investments banker said, "You know, maybe this should be a great four years to give to the Democrats." And that's kind of how it feels.

MR. GIGOT:  But there are real limits, there are real limits as to how much you can put on the taxpayer.  I mean, you know, we've got Bear Stearns was bailed out, we've got Fannie Mae and Freddie Mac, which are huge liabilities. Now Detroit is coming up, and their politicians in Detroit, I think, is going to come up and become an issue because a lot of Democrats in Michigan and the Obama campaign--he's talked about it--say, "Well, maybe we can put John McCain on the spot by saying, `Well if you bailed out Wall Street, why can't we offer loans to Chrysler and GM and Ford?'" So--but, but there are limits.  How much--you want the government to nationalize everything?

MR. DIONNE:  No, but some of this is not about taxpayer bailout.  Some of this is about having rational rules.  I mean, we sort of had a kind of deregulation, the financial industry, that was fundamentally incoherent and created these openings for the kind of crisis you have now.

MR. GIGOT:  We, we had a mania fueled by easy credit from the Federal Reserve.  And Wall Street went wild with it, no question about it.  They used their genius to develop all these, you know, these vehicles, some of which turned out to be pretty lousy.

MR. GREGORY:  From, from the economy to big news this morning from overseas, and that is what's going on in the former Soviet Republic of Georgia.  The Russians have moved in; they are at war.  There are estimates of anywhere between 800 and 1500 civilians killed in this conflict.  The White House has weighed in.  Both the presidential candidates have hurried to get statements out and to be on top of this issue as well.

David Broder, is this a 3 AM moment in foreign policy for these candidates?

MR. BRODER:  It is, and it's particularly a moment where John McCain can claim to have been prescient, because in his basic foreign policy speech two months ago and in an interview that I did with him last week, he draws a very sharp line when it comes to Russia, says these people are being aggressive and imperialist.  There is no confusion in his mind about the character of the Putin/Medvedev government.  And he is prepared, I think, to make the case that this is a demonstration of exactly what he has been arguing for.

MR. GREGORY:  And it is another case, Erin, where the debate on the campaign trail may be completely distinct from what the next president has to deal with in terms of a huge foreign policy crisis...

MS. BURNETT:  Mm-hmm.

MR. GREGORY:  ...even as we're talking about Iraq and Afghanistan.

MS. BURNETT:  It's true.  And you know what's interesting about this, too, is it goes to show you too how complicated these scenarios are.  You hear some headline from Georgia which may sound somewhat esoteric to a lot of Americans, and people may not realize the significant oil pipelines that run through that country.  When you think about oil prices and what people are paying at the pump, Georgia's actually a crucial part of that equation.  So things that seem far away and small can become much, much broader than people realize.

MR. GREGORY:  And a resurgent Russia is something that is very much a part of the landscape for the next president.  This relationship with George Bush and Vladimir Putin went south in the course of his administration.

MR. GIGOT:  Yeah, Bush really misjudged Putin in so many ways, there's no question about it.  He's tried to do retrieve it, even I think it was last year, bringing him up to Kennebunkport to, to have a one-on-one.  It hasn't worked.  This is a resurgent Russia, and I think that whether Obama or McCain is president, they're going to have to deal with it.  The good news is, they'll probably have a united Europe.  Europe has kind of figured out--they have some experience with a imperialist Russia, and I think he can--whoever the next president is--can unite them and maybe fashion a tougher foreign policy.

MS. BURNETT:  David, too--I'm sorry--to your point earlier, it's interesting, though, in a sense we're in bed with all of these people, though.  When you talk about Fannie Mae, Freddie Mac, you talk about who owns all of these American liabilities, who owns our mortgages, who's going to help pay for our stimulus plan.  It is China; it is Russia.  So does that hamstring us perhaps a little bit in what we're able to do on the foreign policy front?  It's a key question.

MR. GREGORY:  The, the big question as well on the campaign trail is readiness to lead, to handle a crisis like this.  And the readiness issue has been a huge theme of the attack ads that Senator McCain has launched against Senator Obama.  It's been something you've seen in, in all of the ads.  Let's show clips from each of some recent ads to drive that point home.  Watch.

(Videotape)

Crowd:  (In unison) Obama!  Obama!  Obama!

Narrator #3:  (From political ad) Is the biggest celebrity in the world ready to help your family?

He's the biggest celebrity in the world.  But is he ready to lead?  Not ready to lead, that's the real Obama.

(End videotape)

MR. GREGORY:  E.J. Dionne, is it working?

MR. DIONNE:  Well, first of all, John McCain had no really coherent campaign until he started these attacks, so that I think at least there's a theme now to the, to the McCain campaign.  I, I think there's a cost here, which is that John McCain was a special kind of guy.  He wasn't your usual politician. These are so typical as political ads.  Secondly, there have been some real truth problems in these ads.  You know, "Obama will raise your taxes," when, in fact, Obama's got a bunch of middle class tax cuts.  So has McCain found a certain voice here and did he create a certain defensiveness on the side of the Obama people?  Yeah, he did that.  But I think the long term cost of this to McCain could be quite significant, and Obama's started to come back.

MR. GREGORY:  But let's remember, Paul Gigot, that McCain is picking up where Senator Clinton left off on this readiness question.  And whether people laugh off the use of Paris Hilton and Britney Spears, there is a fundamental question, which is the question mark over Barack Obama's head to a lot of voters, is he really ready?  Does he have enough experience to take on the issues?

MR. GIGOT:  I think ads are working because they're helping to define Obama before most of the country actually gets to hear him.  I mean, a lot of the Democrats have heard him, but there's still a lot of doubts out there--E.J., I think you'd agree with this--about who he is, whether he has the experience. And this is defining him.  But where I do agree--and that's, that's helping McCain.  But where I do agree with you is I think McCain, if he's going to win, particularly in this environment, he's got to offer a positive vision. He's got to say, "This is what I would do," because it's one thing to knock down Obama, and that'll work for a time.  But, in the end, they're not going to vote for McCain unless McCain says, "This is what I do."

MR. GREGORY:  And, you know, Dave, I, I, I was reading recently about what Reagan said in 1984, the notion that America is back and standing tall.  Has McCain really said where America is seven years after 9/11?  And should he?

MR. BRODER:  He said in a statement last week that we are worse off now than we were four years ago, which is a remarkable thing for the Republican nominee to be, be saying.

MR. GREGORY:  Right.

MR. BRODER:  But I think as time--as he moves toward his own convention, McCain increasingly will try to separate himself from the legacy of the Bush years.  That's, I think, his only way of having any kind of a shot at winning. But there is a point, I think, E.J., about where these events in the real world, in Georgia and Russia, leave Obama.  Obama's basic message on foreign policy is it's better to talk to our enemies than to get ready to fight them. And here's a case where, clearly, talking did not dissuade Russia from this act of violence.

MR. DIONNE:  Right, but I also think that the--first of all, under President Bush, the situation deteriorated.  But secondly, it's a rare time where I agreed with an excellent editorial in The Wall Street Journal yesterday.  If we are going to move forward to confront Russia and say, "You got to stop doing this," as Paul said, we're going to have to do this in concert with the Europeans.  So the core argument that Obama has been making for a long time, and other Democrats, that you need stronger alliances in a difficult and dangerous world, I think, is proven out by this terrible thing that's happened in Georgia.

MR. GREGORY:  Beyond the issues, we're dealing with the tone of the campaign. And, David Broder, you spoke this week with both candidates, and you write in a column this morning about how they feel about one another.  We'll put it on the screen.  "McCain and Obama ...  entered this campaign as relative strangers, and now - as the sniping builds to a steady staccato - each of them has acquired a strong sense of grievance about the other." What is it?

MR. BRODER:  Well, in McCain's case, he's angry because the--Obama's either implied or said that he was monitoring a--mounting a racist campaign.  What Obama is really angry about is this--that line that McCain used, that he would rather lose a war than jeopardize his chance of winning an election.  And there is a lot of bad blood.  McCain, in addition, has a real sense of disappointment that Obama would not come on to the platform and start debating with him this summer.  He believes--and I think with some basis--that if they were facing each other side by side they would be--have--conducting a much more civil campaign.

MR. GREGORY:  And yet, Erin, as was discussed here, the idea that McCain did need a narrative for his run, needed to find a way to define Barack Obama, does that risk it all, this maverick image, the guy who promised in the spring of this year that Americans don't want any of this negative campaigning in their election?

MS. BURNETT:  Well, it's fascinating, too, that, that it--when we talk about what is defining John McCain, and what's defining John McCain is pointing the finger at Barack Obama and talking about Barack Obama, that is that really seeding, in a sense, the dialogue?  Every time Barack Obama says something, it gets coverage.  For, for whatever that reason might be, he does sort of have that public imagination.  It has been much harder for John McCain to come out with an idea of his own or a specific proposal of his own that gets the same pickup as Barack Obama.  So maybe, in a sense, it's a little bit of desperation, of trying to, "Well, you got to get out there somehow."

MR. GREGORY:  Paul Gigot, one factor for Obama here is not just McCain, but it's former President Clinton, who this week seemed to be echoing John McCain when he, he wouldn't answer whether Obama's really prepared to be president. He certainly has been willing to say that, that other Democratic nominees, including his wife, were ready to be president.  How much work does Obama have to do to not just bring Republicans and Democrats together, but to bring the Clintons back into the fold?

MR. GIGOT:  I don't know that he can ever bring Bill Clinton back into the fold.  Bill Clinton's having a real hard psychological time getting his, getting his head around the fact that his wife lost.  But I think he has to get her--him--her supporters back.  And if I were him, I would not fight about whether you have a roll call at the convention.  I would go ahead and say, "Let's put her name in, let's have a vote, let's let them get up and scream and shout on her behalf." And that's a good way, I think, the, the former first lady used the word catharsis in, in one meeting to describe what it might be like.  Why not?  That's the best way to do it.  The Clintons--Bill Clinton, I think, still believes that Barack Obama's going to lose this campaign.

MR. GREGORY:  Mm-hmm.

MR. GIGOT:  And I think he--that's one of the reasons he's not totally on board here.  But he's got to get him on board.

MR. GREGORY:  E.J., how--what kind of impact is Bill Clinton having on Barack Obama?

MR. DIONNE:  I don't think right now a big impact, but I think that, with the Clinton case, I agree with Paul that with sort of--there are only--200 Clinton delegates is all it would take if they really wanted to be difficult, to make a mess at the convention.  So I think you're going to see a lot of conciliation with the Clinton people.  I think Bill Clinton does have to go out there eventually, because like it or not, Democrats want to look back at parts of the Clinton legacy and say, "Hey, the country was better off then." And I think that's really hard for Bill Clinton, partly because of the charge of racism.  And if there's anything that was important to Bill Clinton, it was his identity as a friend of--to African-Americans and a supporter of African-Americans.  Meanwhile, African-Americans say, "Wait a minute, we had your back"--as one talk show host said, "We had your back on--during the impeachment, and then look at what you said about Obama." So this is very personal and difficult, but it's got to be solved for the Democrats.

MR. GREGORY:  Let us turn to the Democratic politician who is making headlines but is no longer in the race, and that is John Edwards, who made public, finally admitted to the fact that he did have an extramarital affair back in 2006.  This, after a long string of denials as he was running for the presidency.  Watch.

(Videotape, October 11, 2007)

FMR. SEN. JOHN EDWARDS (D-SC):  The story's false.  It's completely untrue. It's ridiculous.  I've been in love with the same woman for 30-plus years, as anybody who's been around us knows.  She's an extraordinary human being--warm, loving, beautiful, sexy, and as good a person as I have ever known.  So the story's just false.

(End videotape)

(Videotape, July 23, 2008)

FMR. SEN. EDWARDS:  I, I don't talk about these tabloids and, you know, the--that are tabloid trash that's full of lies.

(End videotape)

(Videotape, Friday, ABC News/"Nightline")

FMR. SEN. EDWARDS:  In 2006, two years ago, I made a very serious mistake, a mistake that I am responsible for and no one else.

(End videotape)

MR. GREGORY:  So many reactions.

Paul Gigot, your paper editorialized it this way:  "While no one disputes Mr. Edwards' assertion that he is `the dumbest man in America,' those who supported his candidacy - with their time, money and beliefs - clearly thought him worth their commitment.  It is an egregious failure of judgment and character to let so many people work so hard for a candidacy that Mr. Edwards knew was at high risk of destruction.  Ambition made him run.  Blind ambition brought him to this." He could have been the Democratic nominee right now.

MR. GIGOT:  I congratulate, congratulate the Democratic electorate on their wisdom in not nominating him because, if they had, they would be in desperate straits right now.  I, I, I agree with David Bonoir, his former campaign manager, who said--John Edwards' former campaign, campaign manager saying, "He betrayed us.  He betrayed all the people who supported him."

MR. GREGORY:  Did...

MR. DIONNE:  You know where would we'd be...

MR. GREGORY:  Yeah.

MR. DIONNE:  ...right now if John Edwards had won the Democratic nomination? We would be sitting here talking about an open convention.

MR. GREGORY:  Right.

MR. DIONNE:  We'd be talking about rebellions among Edwards' delegates.  It would be an absolute mess.

MR. GREGORY:  Real quick, David Broder, are there ripple effects to this story beyond the rise and fall of John Edwards?

MR. BRODER:  Yes, because he's not really very important in American politics now.  But I'm afraid this will just deepen the cynicism that the American people feel toward politics and politicians, and that's going to be a terrible problem for the next president, who's going to have to ask for sacrifice from the American people.

MR. GREGORY:  Does it impact the VP search?  Something we haven't talked about a lot today.  Will that accelerate the process in the more personal area?

MR. BRODER:  They will be checking out all of these people, but they'd have done that in any case.  And I never thought that there was any likelihood that John Edwards would be on the list for Obama.

MR. GREGORY:  OK.  Before we go today, somebody around this table is celebrating their 400th appearance on MEET THE PRESS.  And I think I speak for everybody when I say congratulations to Erin Burnett on, on all these--no, it's actually David Broder...

MS. BURNETT:  The blink of an eye.

MR. GREGORY:  David Broder, 400 appearances on this program.  Your first appearance, we just happen to have the videotape.

MR. BRODER:  Oh, no.

MR. GREGORY:  July 7th...

MS. BURNETT:  Oh, this is going to be fun.

MR. GREGORY:  ...1963, talking about President Kennedy.  Let's watch.

(Videotape, July 7th, 1963)

MR. BRODER:  In 1960, as you recall, the Republicans told the people of this country that the White House is no place for on-the-job training.  I take it that you believe that President Kennedy's record so far bears out that warning?

MR. JOHN TOWER:  I would say that President Kennedy, Kennedy's record certainly does bear out that warning and has proved the point.

(End videotape)

MR. GREGORY:  Four hundred appearances, Mr. Broder.

MR. BRODER:  With the late John Tower, who was there because he had just launched the "Draft Goldwater" movement.  And that's--I hate to say it, but that's a long time ago, David.

MR. GREGORY:  Is this as momentous an election as you've covered, looking back?

MR. BRODER:  It's the best election I've ever covered.  I always thought that 1960, which was my first, was the best campaign, but all of the good parts of that came after Labor Day.  And we've had so many wonderful and unbelievable moments already in this one, and we're not even to the conventions yet.

MR. GREGORY:  All right.  Well, it, it's also a poignant moment not just for this milestone, but we think about our friend Tim Russert, and how much it would have meant to him to have marked your milestone and your contributions to this program.

MR. BRODER:  Thank you, David.

MR. GREGORY:  So congratulations.

We will leave it there.  Thanks to everyone around the table this morning. And we'll be right back.

(Announcements)

MR. GREGORY:  That's all for today.  We will be back next week, again at a special time in some areas due to coverage of the Olympic Games.  Please check your Web site or local listings for airtimes.  If it is Sunday, it's MEET THE PRESS.

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