updated 10/13/2008 12:29:09 PM ET 2008-10-13T16:29:09

Guest: Walt Monegan, Robert Reich, James Bamford, Ana Marie Cox, Doris Kearns Goodwin, Michael Isikoff

RACHEL MADDOW, HOST: Thanks, David. Appreciate it.

And thank you for staying with us for this next hour.

This Friday night, a big breaking news, as David Shuster was just saying, the committee investigating whether Sarah Palin abused her authority as governor by firing the state's Public Safety commissioner, has found that she did. Another wild day of news to cover.

(voice over): Anger and frustration turns to hate on one side of the presidential campaign.

(BEGIN VIDEO CLIP)

SEN. JOHN MCCAIN, (R-AZ) PRESIDENTIAL CANDIDATE: Who is the real Barack Obama?

UNIDENTIFIED MALE: Terrorist.

(CHEERS)

(END VIDEO CLIP)

MADDOW: How does McCain explain their dissent into questions (ph) in lion's territory? By blaming Obama, of course. It would almost be funny, if it weren't so scary. McCain, today, finally, calls for respect to be shown.

(BEGIN VIDEO CLIP)

MCCAIN: We want a fight and I will fight, but we will be respectful.

(END VIDEO CLIP)

MADDOW: Ana Marie Cox from Time.com and "Radar" magazine reports what she's seeing from the crowds at McCain-Palin rallies. And, Doris Kearns Goodwin assesses just how dangerous this all could be.

Whiplash in the stock markets here at home follows a meltdown worldwide. How does this crisis end? How soon does it end? And, will our government make another drastic move this weekend to try to end this? Former labor secretary and economist, Robert Reich explains.

And a funny thing happened on the way to the NSA not invading Americans' privacy. They did stuff like record troop's sweet nothings to their honeys back home and gathered around to laugh about it. The man that broke the gross news, James Bamford, is here tonight on the Bush administration's massive embarrassing domestic spying dragnet and what they are leaving the next president to clean up.

THE RACHEL MADDOW SHOW starts now.

(on camera): We will have much more to come on the breaking news out of troopergate tonight with live reports expected from Walt Monegan, the Public Safety commissioner who's firing is at the center of that scandal, as well as live reports from Michael Isikoff, a reporter who has been covering the story ever since Sarah Palin got named as the vice presidential nominee of the Republican Party.

But tonight, there's a figurative fire-burning and the man around whom it is burning, who's campaign may have set it, has finally try to put it out. The question is: Can he or anyone tamp down the flames at this point?

We have just completed a week in which the following epithets were heard at American political rallies-"terrorist," "treason," "off with his head," "kill him"-ugly divisive, dangerous words directive to the man, who, for the time being, stands as the front-running candidate for the highest office in the land-words that appear to be the byproduct, wittingly or unwittingly, of a new strategy being employed against him, a strategy aimed not just defeating Barack Obama, but at defining him as enemy of the country, an alien to the country, a danger.

And tonight, we add a new incident to the list-an incident that caused John McCain to say, finally, "enough." It happened just hours ago at a McCain rally in Minnesota.

(BEGIN VIDEO CLIP)

UNIDENTIFIED FEMALE: I got to ask you a question. I do not believe in, I can't trust Obama.

MCCAIN: I got.

UNIDENTIFIED FEMALE: I have read about him and he's not-he's a

he's an Arab. He's not.

MCCAIN: No.

UNIDENTIFIED FEMALE: No?

MCCAIN: No, ma'am. No, ma'am. He's a decent family man, a citizen, that I just happen to have disagreements with on fundamental issues and that's what this campaign is all about. He's not, thank you. Thank you.

(APPLAUSE)

(END VIDEO CLIP)

MADDOW: The anger and fear and violent inclinations toward Barack Obama being expressed at McCain-Palin rallies now seems to be spilling over into local political races as well. The "Associated Press" reporting that during a debate in Georgia last night between Republican Senator Saxby Chambliss and his Democratic challenger, Jim Martin, Chambliss' supporters on the crowd offered a sustained booing every time Senator Obama's name was mentioned, one woman then yelled, quote, "Bomb Obama."

Bomb Obama-you mean like in Jacksonville, Florida? On Christmas night in 1964 when Harry Moore, the executive secretary of NAACP and his wife were murdered by a bomb set off underneath their bed?

You mean like on 16th Street in Birmingham, Alabama, in September 1963, when that fire bomb at that church killed those four little girls? You mean like October 12th, 1958, when 50 sticks of dynamite blew off the north side of the Temple on Peachtree Street, the oldest Jewish congregation in Atlanta?

Or do you mean the word "bomb" figuratively? Maybe you're talking about the rioting that killed two people after James Meredith attempted to integrate Ole Miss in 1962 under the protection of federal troops and the U.S. Marshals?

What do you mean really when you say "Bomb Obama" in America with our history?

Campaigning in Ohio, today, Senator Obama addressed the growing anger directed at him from the other side.

(BEGIN VIDEO CLIP)

OBAMA: Nothing is easier than riling up a crowd by stoking anger and division. But that's not what we need right now in the United States. The times are too serious. The challenges are too great. The American people aren't looking for someone who can divide this country; they are looking for somebody who will lead this country.

(APPLAUSE AND CHEERS)

(END VIDEO CLIP)

MADDOW: Anger and division may not be what we need right now, but they are certainly what we have right now. The ugly campaign rhetoric led to a scathing editorial today in the "Baltimore Sun" by Republican author, Frank Schaeffer, who writes that he worked to get Senator McCain elected in 2000.

Schaeffer writes, quote, "John McCain, if your campaign does not stop equating Senator Barack Obama with terrorism, questioning his patriotism and portraying Mr. Obama as 'not one of us,' I accuse you of deliberately feeding the most unhinged elements of our society, the red meat of hate and therefore of potentially instigating violence. You are doing this in wartime. You are doing this as our economy collapses. You are doing this in a country with a history of assassinations."

Asked about the increasing vitriol being skewed at their rallies, McCain campaign senior advisor, Nicolle Wallace, offered no regrets, instead, throwing (ph) her rhetorical fire back on Obama, saying, quote, "Barack Obama's assaults on our supporters is insulting and unsurprising. These are the same people Obama called "bitter" and attacked for "clinging to guns' and faith. Attacking our supporters is a new low for the campaign that's run more millions of dollars of negative ads than any in history."

Hours later, the candidate himself modulated the message a bit for the first time, urging his supporters to tone it down, to their audible disappointment.

(BEGIN VIDEO CLIP)

MCCAIN: We want a fight and I will fight, but we will be respectful. I admire Senator Obama and his accomplishments. I will respect him. And I want.

(CROWD BOOING)

MCCAIN: No, no. I want everyone to be respectful. And let's make sure we are.

I want to be president of the United States, and obviously, I do not want Senator Obama to be. But I have to tell you-I have to tell you, he is a decent person and a person that you do not have to be scared as president of the United States.

(CROWD BOOING)

MCCAIN: Now, just-now, look-if I didn't think I would be one heck of a lot better person, I wouldn't be running, OK? And that's the point. That's the point.

(END VIDEO CLIP)

MADDOW: Just an incredible piece of tape from today. So, John McCain did take that stand today. Does he acknowledge that how his campaign is being run is stoking what he is now standing against? Will his supporters listen?

The increasing anger and venom among McCain-Palin supporters now generating concern among Republicans as well, including former McCain top strategist, John Weaver, and seven-term Illinois Republican Congressman Ray LaHood, who criticized Governor Palin during a radio interview today for inciting this type of anger.

(BEGIN AUDIO CLIP)

REP. RAY LAHOOD, ® ILLINOIS: Look it, if this doesn't befit the office that she's running for, and frankly, people don't like it.

(END AUDIO CLIP)

MADDOW: The historical implications of all of this with presidential historian, Doris Kearns Goodwin just a little later on.

But first, joining us now from Minnesota is "Time" magazine contributor and "Radar" magazine's Washington editor, Ana Marie Cox. She's been traveling with the McCain campaign.

Ana Marie, thanks very much for joining us tonight.

ANA MARIE COX, TIME MAGAZINE CONTRIBUTOR: It's good to be here.

MADDOW: I know you have been talking to McCain aides, what are they telling you about these outbursts among their crowds?

COX: Well, you know, it's really interesting. Until pretty late this afternoon, senior McCain aides were unwilling to really engage on this issue. And when you went to them, or specifically, I went to them and said, "Don't you have some kind of responsibility to distance yourself from this people."

I'm willing to buy their argument that they have no control over this crowd, OK? I mean, we can disagree about that, but if that's the argument they want to make, OK, fine, say you don't have control over this crowd. But, can't you tell them and make clear to them that this kind of behavior is unacceptable?

And aides were just sort of turn that question around and say, "Well, why aren't you asking this question of Obama?" And I'm like, "Well, I'm not on the Obama plane. So, I'm asking you." So, that was happening up until 5:00 o'clock today, let's say. And then Mr. McCain or Senator McCain was at that rally and you could feel the kind of energy that had been developing in other rallies in Albuquerque and in Wisconsin. And it tripped a switch.

It was like going back in time to 2007 in New Hampshire when I used to watch McCain get very sort of aggressive questions about immigration and he would back them down. He would tell-he would tell the racist who asked about, you know, our open borders, and how the secret NAFTA highway, that we were all God's children and that we had to respect one another. That McCain came back today. It was good to see him.

MADDOW: Did you get a sense from the campaign that there is a split between McCain himself and his campaign? Is there recognition that some of their tactics recently, some of their rhetoric recently maybe what is stoking these reactions they're getting from the crowd?

COX: I think there is some self-awareness among some of the senior staff. And, I think that it is just-it is difficult to generate energy for a Republican candidate in this environment. And I think it's probably with a sort of a genuine-is there such a thing as genuine wishful thinking? To say that-I think the hope was that this energy was a byproduct of excitement, you know, it was a byproduct of excitement about McCain.

And then, I think, today it became clear that some of that energy was not a byproduct of excitement about McCain at all, it was a byproduct of-let's say it-I mean, of hate and fear. And I think, to sort of turn around and have to acknowledge that is a very sobering prospect for McCain. But, I think, that was something that, at least, he, himself, recognized today.

MADDOW: I guess, looking forward to find out how big a development this was today when McCain, essentially, turned the tables, totally on this crowd reaction. I guess, what we need to know is whether they think this specifically has derived from them going with the William Ayers line and using the word "terrorist."

They've got ads out now. The RNC has ads out now. The McCain campaign itself has ads out now. Sarah Palin is still driving down that road very fast.

Are they attributing it to that line of attack specifically and will they stop that line of attack?

COX: I think the answer is no and no. I think that-they, at least the people I talked to, really feel that the Ayers thing is, for them, a legitimate issue. And it's about, they say, again, I'm sort of translating, that it's not about the terrorism so much, it's about Obama being open about what his past ties had been.

I think that going forward-well, this is my concern. I think the hate and fear that comes from the crowd isn't necessarily something that the McCain people have consciously try to put out there, but rather, that's all McCain has left.

MADDOW: Yes.

COX: You know, that the wingnuts are the only people left to come to these rallies. In fact, actually, some colleagues of mine and I, we went out to the crowd after this rally today, and I can tell you, after covering McCain for a year and a half, usually you will get-here's some crazy people, there's always crazy people at rallies, that's what they do, right? They go to rallies. But, you would only find a few of them.

And today, every single person that I talked to, and a majority of people that my friends and colleagues in the press talked to were of the belief that, you know, Barack Obama is a Muslim. Barack Obama is not American. It was kind of crazy. And now, you know, McCain has lost the pitchfork wavers now. I don't know who he has left.

MADDOW: Ana Marie Cox, "Radar" Washington editor and "Time" magazine contributor, thank you for your time tonight. It's great to hear from somebody who's been there. Appreciate it.

COX: Thank you.

MADDOW: Whether or not Senator McCain can calm down his crowds, the trend toward venomous hate on the campaign trail is frightening, when you consider American history.

Joining us now is presidential historian and NBC analyst, Doris Kearns Goodwin.

Dr. Goodwin, thank you very much for joining us.

DORIS KEARNS GOODWIN, NBC ANALYST: Well, I'm delighted, Rachel.

MADDOW: Is there tons of precedents sort of the kind of venom we're seeing right now on the campaign trail and I'm just forgetting it because it seems very extreme to me?

GOODWIN: Now, I'm afraid there is some precedent and it's pretty scary at one level. I mean, you think about the 1930s when economic anxiety was even deeper than it is now, worldwide, and that anxiety turned to rage in Europe and what you saw was scapegoating Jews, you saw Hitler came into power in Europe. And at the same time, you saw in the 1960s when people felt their stable world was falling apart with the riots and the civil rights revolution, and the anti-war demonstrators, and Nixon was able to conduct a successful campaign of the southern strategy which was really racism cloaked as law and order.

So, we've seen it before. But, on the other hand, if you want to be a little more positive, we saw also in 1930s that FDR as a calm leader, was able somehow to steer a middle ground between fascism and communism and make people looked toward his leadership with hope rather than fear. You now see these Republican establishment figures coming out, denouncing the tenor of the campaign.

Miss Palin, who's been the chief stoker of much of this, is losing some of her luster. And maybe McCain has finally come down to understand. Stevenson once said something great, that the hardest thing about any campaign is not how to win, but how to win without proving you're unworthy of winning.

And maybe his honor and his sense of reputation in the past will finally come to the floor. He's going to have to do it in a more vigorous way than he did today. He should get out there and scream into them and say, this is not the country that I fought for. This is not the campaign that I signed for. We cannot go down in this flaming way. And maybe, at least, it will restore him even if not win the election.

MADDOW: I see the agenda, the past forward for McCain, the honorable past forward, in much the way that you've described it. That seems very clear to me. The past forward for Barack Obama here seems less clear to me. How can candidates who have historically faced this sort of venom in political opposition, how have they successfully handled it in the past? You mentioned FDR as an example. But what are other examples of how candidates who have faced this have dealt with it?

GOODWIN: Well, I think the problem in the Democratic memory lane is that those candidates did not face it in a clear enough way. We saw what happened with the Swiftboat attacks against John Kerry. And the feeling is if he had only been more venomous in return, that maybe he would have won the election.

And I think, for Obama, by turning on the Keating Five incident against McCain at that point, that was a way of tit for tat. Even though I suspect that he didn't like having to do that. He knows that McCain apologized for that. McCain has said that's going to be in my tombstone. He knows that that's over.

And Obama is the kind of person who knows that once you acknowledge an error, then you have to turn the page but they felt it's necessary to do that. So, I think, he's doing it, but still not in a really bad, venomous way. I think he's retaining his calm. And that's the best way to do it because he's not going to look like a radical as they're trying to portray him if he remains as calm as he's been through this entire campaign. It's hard to imagine him screaming and yelling. He just doesn't do it.

MADDOW: You don't have to make the argument that you're not screamer if you make that argument without screaming, OK?

GOODWIN: Well said. Exactly right.

MADDOW: Doris Kearns Goodwin, presidential historian and NBC analyst, thank you so much for your time tonight. I really appreciate it.

GOODWIN: Oh, you're very welcome.

MADDOW: Breaking news from the Alaska Legislative Council investigating troopergate up in Alaska has found that Sarah Palin abused the powers of her office by dismissing the state's Public Safety Commissioner Walt Monegan, who has been a guest on this program in the past. He will hopefully be rejoining us again this hour tonight. We'll have details on that. We'll have hopefully have reaction from the commissioner who's firing is at the center of that storm.

And, stomachs churned again today as the stock market bungee-jump dropped. The Dow ended up in places it hasn't been in five years, then, it rebounded a little bit.

Coming up: Former Labor Secretary Robert Reich will tell us if the government has a plan to get us off this crazy thing.

(COMMERCIAL BREAK)

MADDOW: First, there was Nebraska; now, it's West Virginia. Sarah Palin is again making a last minute hastily planned campaign swing to a traditionally deep red state, as the McCain campaign again tries to shore up what should be a sure thing. One new poll shows Obama pulling eight points ahead in West Virginia of all places. Yes, that is the same West Virginia where Hillary Clinton beat Obama 67 to 26 in the Democratic primary. Remember when Sarah Palin was supposed to win over all those angry Hillary supporters?

(COMMERCIAL BREAK)

MADDOW: We've got breaking news in the Sarah Palin troopergate investigation. According to findings of the Alaska Legislative Council, released just moments ago, Governor Palin, quote, "abused her power in firing Alaska's Public Safety commissioner."

The report concerns Sarah Palin's dismissal of Walt Monegan. He was a former chief of police in Anchorage. He was Alaska's Public Safety commissioner. Palin allegedly fired him because he refused to fire a state trooper who was her former brother-in-law with whom she was engaged in a sort of family feud. His name was Mike Wooten.

The report found that Palin violated the state's Executive Branch Ethics Act, which says, quote, "Each public officer holds office as a public trust, and any effort to benefit a personal or financial interest through official action is a violation of that trust."

This is breaking news. Let's go right now to "Newsweek" investigative correspondent, Michael Isikoff, who joins us on the phone.

Mr. Isikoff, thanks you for joining us.

MICHAEL ISIKOFF, NEWSWEEK (through phone): Thank you, Rachel.

MADDOW: So, here's what I understand thus far, the report says Palin abused her power. But it also says this, quote, "Governor Palin's firing of Commissioner Monegan was a proper and lawful exercise of her constitutional and statutory authority to hire and fire executive branch department heads." So, it's an ethics violation, but also legal? How does this square?

ISIKOFF: Well, the ethics violation is not the decision to fire Monegan. It's the pressure, according to the report by Stephen Branchflower, the special counsel, it's the pressure that the governor, her husband, Todd Palin, and her top aides put on subordinates to get Mike Wooten, the state trooper who was her former brother-in-law, fired.

That the finding by Mr. Branchflower is that this created impermissible pressure was placed on subordinates to advance a personal agenda, the personal agenda by the governor to get Michael Wooten fired. I'm reading from the report now. And he goes on to say: such impermissible and repeated contacts-that is the pressure that was put on subordinates to fire Wooten-create conflict of interest for subordinates and employees who must chose to either please a superior or run the risk of facing that superior's displeasure.

So, that's the violation. It wasn't the firing of Monegan. It was the pressure that was put on him and others to fire, to can Mike Wooten.

MADDOW: And in terms-I'm sorry, Mike-in terms of moving forward, that seems important from an evidence perspective because the documentation of the pressure being applied to Monegan is not in dispute. There are actual tape-recorded phone calls and there are, and as far as I know, Todd Palin, the first dude, has admitted to having to put pressure on Monegan and on others around this issue.

And so, from an evidence perspective, they have not denied that they did put that pressure, that they did exert that pressure. And that exertion of pressure is itself the ethics violation, they, in essence, already conceded the facts of the most serious allegation here.

ISIKOFF: Well, that's actually a very interesting point. Now, there are key evidentiary matters in dispute here. And, in fact, Branchflower challenges the credibility of Todd Palin, implicitly, and the governor, herself, explicitly on some key issues.

For instance, Sarah Palin has said repeatedly, you know, Mike Wooten, the trooper, who was the ex-brother-in-law was a threat to her and her family. They were worried about their safety and then he points out, in a very interesting passage, that the governor had dismissed her own security detail shortly after she takes office and orders a substantial reduction in manpower in here protection detail in both Anchorage and Juneau and pointing out that's kind of inconsistent if they were really worried about safety, why would she be dismissing her security detail?

He also points out that, you know, if anything, getting Wooten fired would have only increased the potential threat to her family. So, he challenges the basis for what the governor has said was the reason she was so exorcised about Mike Wooten.

MADDOW: Mike, in terms of this ethics violation, is this a criminal matter? Is this a matter for which she could potentially be impeached? What sort of violation is an ethics violation in Alaska law?

ISIKOFF: Well, it is-it is a violation of the law. It also could be a matter that the state legislature could take up as a basis for censure or, theoretically, impeachment. I'm not sure the votes would be there to do that in a Republican-controlled legislature. But, it is certainly, a-you know, it's a finding that, you know, could be the basis for further action. It is a state law, so there is potential liability there.

MADDOW: Mike Isikoff from "Newsweek," thank you so much for joining us. He's (ph) an investigative correspondent for "Newsweek" magazine. Your reporting has been really helpful to me in figuring this all out. Thanks a lot, Mike.

ISIKOFF: OK. Thank you.

MADDOW: Coming up next, we're going to have more on this breaking troopergate news. We're going to actually be speaking to the man at the center of this whole controversy-Walt Monegan. He was the former chief of police for Anchorage. He was the Public Safety commissioner for Alaska. He was he man who's dismissal and the pressure on him to dismiss a state trooper is at the very heart of this entire investigation which has resulted in this dramatic finding from the Alaska State Legislature.

Also, after the worst week in the history of Wall Street, Treasury Secretary Hank Paulson announced the government would buy stock in financial institutions. Once again, the government haters are being bailed out by the government. Now would be a good time to buy stock in irony. Former Labor Secretary Robert Reich will be along soon with the details.

(COMMERCIAL BREAK)

RACHEL MADDOW, HOST: We are back with more breaking news in the Sarah Palin troopergate investigation. A dramatic finding today - the Alaska Legislative Council says that the governor did abuse her power, when she, her husband and staff pressed former Public Safety Commissioner Walt Monegan to fire her former brother-in-law from the state's police force.

Joining us now on the phone from Alaska is Walt Monegan who is the former public safety commissioner who's at the center of the controversy. Chief Monegan, thank you so much for joining us today.

WALT MONEGAN, FORMER PUBLIC SAFETY COMMISSIONER (on the phone): Thank you, Rachel.

MADDOW: The first finding of the Branchflower report which has just been released, reading from it directly, "For the reasons explained in section 4 of this report, I find that Gov. Sarah Palin abused her power by violating Alaska statute 39.5.110A of the Alaska Executive Branch Ethics Act which provides that the legislature affirms that each public officer holds offices of public trust, and any effort to benefit a personal or financial interest from official action is a violation of that trust."

In essence, the investigator, Branchflower, has found that Gov. Palin's actions toward you to try to get Trooper Wooten fired in her official capacity as governor were an ethics violation. Do you feel vindicated?

MONEGAN: You know, actually, I do. But it's also a little bit of a mixed thing. It sounds odd, but when all this happened, the irony through the entire course of my tenure working and as this issue kept resurfacing, was I'm trying to protect the governor from this exactly happening and in a nut, it just didn't work out.

In regards to the feelings of my beliefs and opinions of why I was terminated, to that I do feel vindicated. And hopefully now that the truth squad they have up here, they won't harp on that so much.

MADDOW: The political operatives who are in Alaska, essentially trying to spin the investigative process into this entire controversy have been very aggressive toward you, essentially trying to claim that you were some sort of rogue official that Sarah Palin righteously got rid of because of your actions.

Investigator Branchflower - the Branchflower report finds Gov. Palin's desire to have Trooper Wooten fired was likely a contributing factor to your termination as commissioner of public safety. One of the things that have been really on trial here is your reputation. Do you feel like this report - now, these findings, will put the assaults on your reputation to rest? Or do you feel like there is still so much spin going on that you've still got more work to do to defend yourself?

MONEGAN: Well, actually, that's a good question, because I think in time, that will come out. I mean, it will be interesting to see what happens next week. It would be nice if they turned on and just kind of dropped their barrage of the rogue and the acting out of accordance of policies and whatnot because that didn't happen. It never happened.

And actually, when they first brought up that thing, I thought it was odd because, like I mentioned before, these are the ones that have all the paper trails. They have the testimonies. And everyone complaining that wasn't the case. So Rachel, everything that they had done subsequent to my termination basically had pointed back to Wooten was - in fact - I think I've said before, he was the major factor, if not the factor of why I was terminated.

MADDOW: We were just speaking with Michael Isikoff, a reporter from "Newsweek" who has been covering this scandal recently about what may happen next because of this finding, this ethics law violation. This is an investigation - this was an investigator who was appointed by the state legislature.

This is actually an investigation that was instigated by Republicans. It was a unanimous bipartisan vote to start this investigation. Today's report is the result of that. There's a lot of efforts to try to tar this investigation as being somehow a partisan witch hunt. This investigation was in fact started by Republicans.

But now that there is this finding, the legislature, I imagine, have to decide whether to proceed with an effort to censure the governor for this ethics violation, potentially to impeach her. Would you support moves like that from the legislature?

MONEGAN: You know, honestly, one of the things that working in government - even as a police chief for a lot of years, I certainly respect the separation of powers. It is for them to decide. That's why the people elected them. They make the choice. They're just like - it's no different from me being a defendant, so to speak, and let someone else make their findings, their choice based on what the facts and evidence that are taking in and adopted.

So, I trust them to do whatever the proper course of action is. And as far as my termination, I do feel somewhat more at ease, all the way around because it wasn't just me imagining it.

MADDOW: Just one last, quick question. Not to press the point, but if there were to be further actions by the legislature, if they were going to proceed with a type of investigation that might lead to impeachment or to censure and wanted you to testify, would you cooperate with that sort of a process, at least?

MONEGAN: Absolutely. I mean, as a public official, and having information or evidence, I'm technically a witness or maybe victim, depending on your point of view. I cooperated with the investigation with Branchflower and if there were further actions or whatnot, I would feel compelled. That was what I've been doing for 35 years.

MADDOW: Walt Monegan, former Alaska public safety commissioner, long time chief of police in Anchorage, I know this has been a heck of a trial for you. Thank you for taking time to talk with us about it. I appreciate it.

MONEGAN: Thank you, Rachel.

MADDOW: Today, the stock market finally didn't drop 500 points. Thank heaven for small favors. More on the wild ride Wall Street has taken this week, next, with former Clinton Labor Secretary Robert Reich.

(COMMERCIAL BREAK)

MADDOW: Looking for reassurance as you watch the value of world equity markets melt away like cotton in a rainstorm? If you need to be reassured of our Dow losing 18 percent of its value in the last this week, Japan's Nikkei losing 25 percent of its value in the last month. The entire nation of Iceland, of all places, may be going bankrupt. If you need to be assured, I suggest put your finger in your ears when John McCain's campaign manager, Rick Davis, talks about this situation.

(BEGIN AUDIO CLIP)

RICK DAVIS, MCCAIN CAMPAIGN MANAGER: There's very little a candidate for

president, and frankly, after watching today, very little even the

president can say about what's happening in the stock markets other than to

hope that, you know, they correct themselves and -

(END AUDIO CLIP)

MADDOW: OK, here's the thing about hope. Hope is nice. Hope can be a very positive political thing when a politician inspires hope in people. Hope, however, is not a reassuring strategy for stemming a worldwide financial crisis. Better to offer the people hope, in other words, than to ask people to muster hope. In the face of crisis, asked today by NBC's own Norah O'Donnell why neither McCain nor Palin have been mentioned in the stock market on the campaign trail, their campaign manager, Mr. Davis said this.

(BEGIN AUDIO CLIP)

DAVIS: I don't know if you really want to turn a campaign into a, you know, CNBC news show on the stock market. I mean, it doesn't mean we don't care and aren't trying to do something about it. It's just that I'm just not exactly sure what you'd say every day.

(END AUDIO CLIP)

MADDOW: Not exactly sure what you say every day? Nothing to do but hope things get better? You know, if that's what my campaign manager had to say about the economy, I guess I would be running ads about Bill Ayers, too. Today, after a swing of a thousand points, the Dow closed down 128, which was , I guess, good news, relatively speaking. The market being down 128 is starting to feel like a good day. Down 100 is the new up 300. Nationalizing the banks is the new in the black.

In the midst of today's wild day on Wall Street, the White House was forced to say that there is no plan to close U.S. financial markets amid rumors to the contrary.

Wow. President Bush spoke publicly, again, today to reassure anxious Americans. The word "feckless" comes to mind. His financial team is set to meet with G7 finance ministers, Saturday, tomorrow, in Washington, to discuss a potential, global economic meltdown, and a potential global financial response.

After the markets close tonight, Treasury Secretary Hank Paulson announced that the U.S. Government will buy stock in financial institutions. Remember, fellow taxpayers, that's our money, public money. The two men who are probably now reconsidering how fun it might be to take over the presidency in January - those two candidates each offered up new elixirs to ease what ails us. Barack Obama proposing a new set of tax cuts and loans as part of a small business rescue plan.

(BEGIN VIDEO CLIP)

SEN. BARACK OBAMA (D-IL), PRESIDENTIAL CANDIDATE: We won't grow government. All we're going to do is work within the small business administration to keep folks afloat, to keep these businesses open while providing tax cuts to lift the tide. It's what we did after 9/11. We were able to get low-cost loans out to tens of thousands of small businesses.

(END VIDEO CLIP)

MADDOW: So, that's Obama's pitch today. Here is John McCain's.

(BEGIN VIDEO CLIP)

SEN. JOHN MCCAIN (R-AZ), PRESIDENTIAL CANDIDATE: Current rules mandate that investors must begin to sell off IRAs and 401Ks when they reach age 70 and a half to spare investors from being forced to sell their stocks. At just the time when the market is hurting the most, those rules should be suspended.

(END VIDEO CLIP)

MADDOW: Concrete, specific pitches from both candidates for which both win style points, at least, from me. But what's going to happen at the big international meeting this weekend? Some new big dramatic move by our government? Will this Paulson public buying of stock plan just announced make a dent?

Joining us now is Robert Reich, secretary of labor under President Bill Clinton. He's now a professor at the University of California at Berkeley. He is also a Barack Obama supporter. Mr. Secretary, thank you for joining us.

ROBERT REICH, FORMER SECRETARY OF LABOR: Hi, Rachel.

MADDOW: So the week that ended July 22nd, 1933, had a 17 percent drop in the stock market. This week had a more than 18 percent drop in the stock market. It's very scary.

REICH: Well, it is very scary. I wish - you know, I'm tempted to say we have nothing to fear but fear itself. But the trouble is fear itself is pretty scary.

MADDOW: Yes. I mean, is it true though that the disaster in the stock market, specifically, is more of a symptom now than the actual illness? Are there other indicators we should be watching that may be better indicators with what's really going on than the stock markets?

REICH: Well, almost every indicator right now, Rachel, unfortunately, is heading downward. The credit markets are freezing. They have been freezing for some time. And obviously, the reason Barack Obama was talking about small businesses today is the small businesses are the major generators of new jobs.

And if you can't get credit to small businesses, if they can't borrow, then there are not going to be new jobs. In addition, though, we ought to be watching the unemployment figures. We have lost in this country in the private sector, so far, this year, about a million jobs. And if unemployment continues to rise, we are in deeper trouble because people cannot - can no longer pay their bills.

MADDOW: What's your initial assessment of this new plan somewhat unexpectedly announced today by Secretary Paulson, the idea that the fed will buy stock in financial institutions?

REICH: Well, I think it is wise to give financial institutions more money as long as taxpayers do get shares of stock so that if there is an upside to this, when and if financial institutions ever recover, taxpayers, as shareholders, will get some of that upside gain as well.

But there is an irony. You mentioned the word "irony" before. There is an irony here - this is an administration, after all, that came into office, dedicated, it said, to the free market. And now, here we are, taxpayers owning big chunks or are about to own big chunks of Wall Street.

MADDOW: Robert Reich, former secretary of labor, current professor of the University of California at Berkley, Barack Obama supporter, I have a feeling we're going to be talking to you a lot in the coming days to explain this stuff. Thanks for joining us.

REICH: Thanks, Rachel.

MADDOW: Ready for your Orwellian shiver of the day? The National Security Agency, the NSA, have been listening in to your phone calls, phone calls made by Americans abroad, calling home to talk to family and friends. Investigative journalist James Bamford has written a new book telling a bunch of the NSA secrets. He will be here next.

(COMMERCIAL BREAK)

MADDOW: A little bit of breaking news - furthering breaking news in the troopergate investigation. We've just received the response from the McCain-Palin campaign. Their response to the findings today - to remind you, the findings are that Gov. Palin did abuse her power as governor when she pressured the public safety commissioner in Alaska to fire a state trooper with whom she had a family feud.

This is the statement from the McCain-Palin campaign, quote, "Today's report shows that the governor acted within her proper and lawful authority in the reassignment of Walt Monegan. The report also illustrates what we've known all along. This was a partisan-led inquiry run by Obama supporters and the Palins were completely justified in their concern regarding Trooper Wooten given his violent and rude behavior. Lacking evidence to support the original Monegan allegation, the legislative council seriously overreached, making a tortured argument to find fault without basis in law and fact. The governor is looking forward to cooperating with the personnel board and continuing the conversation with the American people regarding important issues facing this country."

Just to recap, just so you know, the findings of the Stephen Branchflower(ph) investigation, the legislative investigation released today, found that Sarah Palin knowingly permitted Todd Palin to use the governor's offices and the resources of the governor's office including access to state employees to continue to contact subordinate state employees in an effort to find some way to get Trooper Wooten fired.

The report further found that Gov. Palin knowingly permitted a situation to continue where impermissible pressure was placed on several subordinates in order to advance a personal agenda. In summary, they have found that she is guilty of abusing her power. That is an ethics law violation in Alaskan state law.

All right. Moving on now, let us take a trip in the old time machine, shall we? Way back to two years ago, 2006. It's pretty clear by now that mission was not accomplished in Iraq. Gas prices were in the middle of a meteoric rise and the political capital President Bush earned from that mandate from his win over John Kerry in '04 have dissolved into a sad, little puddle of then record low approval numbers.

To make matters worse, Mr. Bush had been doing battle for months with pesky legal scholars, privacy advocates, members of Congress and regular carping Americans who have a thing about the constitution. Those of us who think the warrantless spying program he started at the National Security Agency might not be legal.

(BEGIN VIDEO CLIP)

GEORGE W. BUSH, UNITED STATES PRESIDENT: I authorize the National Security Agency to intercept the international communications of people with known links to Al-Qaeda and related terrorist organizations.

(END VIDEO CLIP)

MADDOW: OK. Sounds reasonable. But what about the average Americans who have no links to Al-Qaeda, who could also be caught up in this surveillance program?

(BEGIN VIDEO CLIP)

BUSH: The privacy of ordinary Americans is fiercely protected in all our activities. We're not mining or trolling through the personal lives of millions of innocent Americans. Our efforts are focused on links to Al-Qaeda and their known affiliates.

(END VIDEO CLIP)

MADDOW: Fast forward to this week. Two intercept operators, the people charged with listening to overseas phone calls, spoke out about what exactly they were intercepting.

(BEGIN VIDEO CLIP)

UNIDENTIFIED FEMALE INTERCEPT OPERATOR: Type of conversation like personal, private things With Americans who are not in any way, shape or form associated with anything to do with terrorism.

UNIDENTIFIED MALE INTERCEPT OPERATOR: I was told, "Hey, check this out.

There's something really - some good phone sex or there's some pillow talk.

Pull up this call, it's really funny."

(END VIDEO CLIP)

MADDOW: These two interceptors admit to eavesdropping on hundreds of Americans - soldiers, journalists and aid workers - Americans who were just trying to have private conversations with families back in the U.S. This is some "told you so," nobody ever wanted to have, right?

Basically the Bush administration has used the fourth amendment of the constitution to line its proverbial kitty litter box. But evidence that the government has been spying on personal calls and passing around phone sex audio is just one of the many scary bombshells in the new book "The Shadow Factory" which comes out on Tuesday.

The author is investigative journalist James Bamford. He's been covering the NSA for 25 years and he joins us now. Mr. Bamford, many thanks for joining us. Congratulations on the new book.

JAMES BAMFORD, INVESTIGATIVE JOURNALIST: Thanks, Rachel. I appreciate it.

MADDOW: If the point is to gather valuable intelligence on terrorists, isn't it counterproductive to sit around listening to soldiers talk to their wives and girlfriends?

BAMFORD: Well, that was one of the complaints I had. And I think one of the things that drove them to become whistleblowers because both of them protested both internally - and Adrianne(ph), the woman who is doing the intercepting, protested to Sen. Leahy on the Intelligence Committee and got nowhere. Nobody even went back to her to ask her about these things.

So they were very angry that they were eavesdropping on average Americans instead of going after terrorists, which is what they went into the military to do in the first place.

MADDOW: Why were these calls listened to at all? What was the strategy here? Was it a "vacuum up everything" strategy?

BAMFORD: Well, that was it. It's a "vacuum up everything." And then, they had an option of getting rid of the calls that weren't very useful, the calls to journalists, the calls to aid workers, pillow talk between the soldiers and their spouses back in the U.S. But they were told that they can't eliminate those telephone calls from the incoming mix. They had to keep them there.

And so every time a person called their spouse or every time a journalist called his source or called the editor or called his wife or husband, they were called - they were collected and then transcribed and also stored. The NSA is building an enormous facility in Texas to store all these conversations.

MADDOW: is it clear to you that this program is illegal?

BAMFORD: Well, it seems like it's illegal. The problem is that the Congress changed the Foreign Intelligence Surveillance Act so much it's hard to tell what's illegal and what isn't legal. But at the very beginning stages of this, you had the deputy attorney general, the attorney general, the FBI director and numerous other officials who are literally within days of quitting because they thought this program was so illegal.

MADDOW: James Bamford, author of the new book "The Shadow Factory," thank you so much for joining us tonight. I have to tell you I can't put the book down.

BAMFORD: Thanks, Rachel. I appreciate it.

MADDOW: We'll be right back.

(COMMERCIAL BREAK)

MADDOW: Thank you for watching tonight. We will see you when we're back in New York City on Monday night. Until then, you can E-mail us at rachel@msnbc.com . Have a great weekend. Good night.

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

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