updated 12/3/2008 10:24:55 AM ET 2008-12-03T15:24:55

Guest: Paul Krugman, Steven Pearlstein, David Ignatius, Ron Brownstein

DAVID GREGORY, HOST: Tonight, the president-elect and Congress hear the same plea-show me the money-from governors and CEOs in desperate need of help. How will the new president respond when he get to 1600 PENNSYLVANIA AVENUE? Forty-nine days until the inauguration of President-elect Obama. Welcome to the program. I'm David Gregory.The headline tonight, "Hat in Hand." Several sizeable hats were extended by many prominent hands today, thrust before the president-elect and Congress with high hopes that relief is on the way for state governments and an automotive industry that is feeling the crush of a collapsing economy. The nation's governors met with President-elect Obama in America's birthplace, Philadelphia, to plead for a dedicated portion of his upcoming recovery plan, a plan which aides say might carry a price tag nearing $700 billion. For so many of them, help in their states can't come soon enough. Forty-one states already looking at budget shortfalls this year and next. Obama challenged the old notion that beggars cannot be choosers, vowing to do more than consider their requests as he formulates his plan. He said he plans to rely on them for help in actually crafting it.

(BEGIN VIDEO CLIP)

SEN. BARACK OBAMA (D-IL), PRESIDENT-ELECT: But the partnership we begin here cannot and will not end here. As president, I'm not simply asking the nation's governors to help implement our economic plan, I'm going to be interested in you helping to draft and shape that economic plan. My attitude is that if we're listening to the governors, then the money that we spend is going to be well spent.

(END VIDEO CLIP)

GREGORY: In the spirit of cooperation, the president-elect brought a specific message to the Republican governors in the group-there is "... a time for campaigning and a time for governing," saying he offered his hand of friendship. He asked them to do their part in building a relationship that will help put the country on a path for long-term recovery. Meanwhile, Detroit's big three automotive industry CEOs headed back to Capitol Hill today, not via private plane this time. And they're there to issue a revamped request for an industry-wide bailout. This came on the same day that the November sales report shows sharp plunges for an already suffering sector. Light vehicle sales at GM and Chrysler plunged more than 40 percent in November, as Ford Motor Company sales dropped over 30 percent. Joining me now to weigh in on all of this is Paul Krugman, "New York Times" columnist and author of the "Return of Depression Economics and the Crisis of 2008," and this year's winner of the Nobel Prize in economics. Also with us, Steven Pearlstein, Pulitzer Prize-winning business columnist at "The Washington Post." Everybody's got a prize. I don't have a prize. Anyway, welcome to both of you. Paul, let me start with you. Such serious matters. You've got the governors hat in hand to the president-elect and the big three automotive companies. Do we keep redefining the full extent of the need in this country in the middle of this economy?

PAUL KRUGMAN, COLUMNIST, "NEW YORK TIMES": Well, I think we do because not a week goes by without numbers that were worse than you expected. I mean, this looks like an economy in free fall. It really-you know, the number have been just terrible, the anecdotal stuff is just terrible. This is-whatever you thought was big enough as a rescue last week has got to be bigger given what's happened this week. And that's been true week after week. So, no, this-we have not seen the full scope of this, even now.

GREGORY: Steve, how do we understand this? We've had this conversation in weeks past on this program. As Americans struggle to understand what role the government is playing, what good it is doing in trying to manage this? And yet, the need becomes greater, the shortfalls are greater, the distress seems more pronounced, almost on a daily basis, despite what you and others have said, which is it could be a lot worse, there's a lot that the government has accomplished.

STEVEN PEARLSTEIN, "THE WASHINGTON POST": Well, we don't exactly know because we don't know the counterfactual of how bad it would have been if we had done nothing. But it seems to me the government has two roles here. One is to act as a lender of last resort. And that's not just the Federal Reserve. The government can borrow money now for 10 years at, what, 2.6 percent, and lend it out to people at even more than that. And since a lot of other lenders, whether they be banks or bondholders, are unwilling to do lending. It's really the government's role at this point to step in and say, OK, if no one else will take those risks, people are willing to lend to us, the government, and we can turn around and lend to somebody else at a higher interest rate, maybe make a little money, and keep finance going. So that's one important thing that the government is doing.

GREGORY: Right.

PEARLSTEIN: And even when we talk about the automakers, they're asking for loans. And there's a lot of people who are asking for loans, rather than just outright spending. Then, of course, as Paul points out, the government has a good role to play in terms of just stimulating aggregate demand for goods and services when so many people are cutting back and so many governments are being forced to cut back on their spending.

GREGORY: Here's the president-elect talking about money today. Listen to this.

(BEGIN VIDEO CLIP)

OBAMA: We are not as a nation going to be able to just keep on printing money. So at some point, we're also going to have to make some long-term decisions in terms of fiscal responsibility. And not all of those choices are going to be popular.

(END VIDEO CLIP)

GREGORY: Paul, long-term fiscal responsibility, is that a political statement or is that a wise economic priority?

KRUGMAN: Well, it's both. I mean, in the end, you know, the United States is a big, rich country. And we can borrow a lot of money in an emergency. And this is an emergency. But we can only do it because people believe that in the end, the U.S. government will bring its spending and its revenue in line. So there has to be long-term fiscal responsibility. There's a little bit of-everybody is quoting St. Augustine these days. You know, "Grant me chastity and continence, but not yet." So we have to be fiscally responsible, but not next year, thanks, because this is an emergency. But look, the numbers that are being thrown around are scary-a trillion here, a trillion there. Soon you're talking about real money even for the U.S. government. But we do need to do this spending now. Now is not the time to be penny-pinching. But five years out? Yes.

GREGORY: So Steven, when we talk about the prospect of a stimulus that has real effect, what level do you think that has to be? And then what happens as a result of all that increased spending on stimulus? What has to give?

PEARLSTEIN: Well, I only won a Pulitzer, not a Nobel. So I'm not going to give you a number. I can't tell you what the right number would be. I would probably be a little more cautious than Paul in this respect -we have come through a period, and the reason we are here, or one big reason we're there, as I've said before on your show, is that we've been living beyond our means. Now we have to live beyond our means even more. But in doing so, and in framing the stimulus, I think we have to do things that don't exacerbate that original problem. So what does that mean? I think it means not giving out a lot of tax rebates to people so that they can think that they don't have to get their standard of living in line with their income. I think that's a bad signal to send to people. But it would be a good use of that money now to invest in public goods and in public infrastructure, and in human capital with long-term-good, long-term payoffs that we have been underinvesting in for the last 20 years. That, it seems to me, is a good use of that money. It has a stimulative effect, but it also has good long-term payoffs. And so you want to look for things that have that sort of double bang to it and not try to reinflate the bubble. hat's what I think you have to try to avoid doing right now.

GREGORY: How do you do that? How do you avoid that point?

PEARLSTEIN: Well, you can invest in infrastructure, but what you don't want to do is be doing things, for example, to try to put a floor under house prices.

GREGORY: I see.

PEARLSTEIN: You don't necessarily want to be giving people tax breaks so they go out and they say, OK, well, now I have a tax break. I can continue to go on vacations and go out to dinner that I can't afford to do.

GREGORY: Right.

PEARLSTEIN: You don't want to send those signals. And so you don't want to give breaks, for example, for college tuitions now so that those breaks wind up being captured by colleges that have been raising their tuitions too much over the years.

GREGORY: To this point, Paul, this is Governor Mark Sanford in the course of the meeting today from South Carolina, taking on this idea of the efficacy of a stimulus package. Listen to him.

(BEGIN VIDEO CLIP)

GOV. MARK SANFORD ®, SOUTH CAROLINA: We've been told for a long number of months that this stimulus, that stimulus, this stimulus, that stimulus would opportunity the economy around, and it hasn't. The ultimate stimulus package for the United States of America is the entrepreneur with a dream working on the project of tomorrow. The ultimate stimulus package is, again, that market-based economy, rather than a political economy wherein people come as simple plaintiffs to Washington, D.C., for yet more money.

(END VIDEO CLIP)

GREGORY: Paul, reaction to that?

KRUGMAN: You know, that's catastrophic. If that become the way the decisions are made, that's real know-nothing economics. That's just saying, oh, you know, we're going to-the reason that this market-based-total faith in the free market didn't work is that we didn't do it enough. We have a lot of experience here. We have the 1930s. We have Japan in the '90s. And we do know that government spending helps when you're in a big problem-when you're in a deep slump of this kind. It's, in fact, about the only thing we have to keep us from being in something that would look more like the Great Depression than we want to contemplate. This is a time that the private sector is pulling back. The private sector is pulling back because consumers are nervous, because the financial system is a mess. There's a huge hole in the economy. Government has to fill it, or we're going to look at double-digit unemployment.

GREGORY: Steven, can you explain-I'm sorry. Go ahead.

PEARLSTEIN: This is not one of those problems that entrepreneurship is going to solve. We have a great entrepreneur economy, but it's broken right now, and it will be broken for a while.

KRUGMAN: Yes, exactly.

GREGORY: Steven, can I have you try to explain this notion of an economy that is rebalancing, rebalancing to reality? What does that mean to people, to workers, to businesses, to major financial institutions, when that-I mean, deleveraging is one concept that we've been seeing that's been going on for several months in the financial industry, but an economy that is finding a new set of balance, if I'm using the right kind of vocabulary?

Can you explain how that's happening?

PEARLSTEIN: Well, it's happening because households are not being able to borrow money as easily and as cheaply as they used to, to maintain a standard of living that was beyond what their income was. And they thought they could do that because of their assets, their house or their stocks were worth a lot more. But it turns out that they're not. So how it is that we make this-you know, this is an adjustment that we have to make over the longer term, over the medium term. In the short term, we may need to do things that we don't really want to do. That is, borrow even yet more money in order to prevent the whole thing from collapsing.

KRUGMAN: But David, could I just say that this is...

GREGORY: Yes. Go ahead, Paul.

KRUGMAN: We really don't want to fall into this belief that we're all being punished for our sins. There were sins in the financial sector, but I think Steve agrees with me. There were thing that were wrong, but this doesn't mean that we have to all be unemployed, that we have to...

PEARLSTEIN: Right.

KRUGMAN: You know, consumers didn't behave that badly. Yes, they need to save more, but mainly, we have a screwed up financial system. Fixing it is going to take time, and we want to not have a depression while we're fixing it.

PEARLSTEIN: You know, one of the things...

GREGORY: But I understand, but can I just ask this question as a follow-up? Which is, that may be true that this is sort of sector-based, but you see companies that are healthy companies, tat are well-capitalized companies, that are falling prey to either a seizing up of lending which doesn't allow them to meet their overhead, or just irrational fear in the marketplace.

KRUGMAN: Yes. That's what happens when the economy is a mess, because, you know, one collapse of your banking system can ruin your whole day. I mean, that's what happened in the 1930s, and that's what happening, in effect, now. But this time we know what happened in the 1930s, so we have to take really strong measures to make sure it doesn't get that bad again.

GREGORY: All right. I'm going to have to leave it there. Steve Pearlstein, Paul Krugman, thank you both for being with me tonight. This is a conversation that will continue. Thanks to you both. Coming next, foreign policy challenges from Iraq to Iran, to India to Pakistan. Where does this new administration start? How does it assess its priorities? And what would success look like for Secretary of State Hillary Clinton? When 1600 PENNSYLVANIA AVENUE returns right after this.

(COMMERCIAL BREAK)

GREGORY: Back now on 1600 PENNSYLVANIA AVENUE. Secretary of State Condoleezza Rice preparing now to visit India tomorrow. International attention is focused on the future and how the next president and secretary of state will conduct foreign policy. Joining us now, a man who was initially a skeptic of putting Hillary Clinton at the helm at the State Department, David Ignatius, columnist and associate editor at "The Washington Post." David, welcome back.

DAVID IGNATIUS, COLUMNIST AND ASSOCIATE EDITOR, "THE WASHINGTON POST":

Thanks.

GREGORY: Good to have you here. Let talk about India, the terror siege on Mumbai, the extent to which this is part of the global jihad where there were different tactics involved. And this will be an immediate testing area in South Asia for a new security team that was put in place.

IGNATIUS: Well, this poses the issue of terrorism. In this case, Islamic terrorism acutely. This group operates from Pakistan. It has loose links with al Qaeda. It's a group that the U.S. has been watching for a long time. What's disturbing about this operation is it's reminiscent in some ways of September 11th. It began with a hijacked boat in this case, not hijacked airplanes. It was against multiple targets. It was extremely well coordinated. The people doing the operation planned it meticulously. They cased the sites they were going to hit beforehand. The key issue here is to avoid a blowup between India, which has been hit by the Pakistani-based group, and Pakistan. Obviously, the group wanted to inflame tensions between the two. Today Pakistan announced that it wanted to work jointly with the investigation of what happened. That's a good sign, but it's a very, very delicate, volatile situation.

GREGORY: And does this take attention away if you're Pakistan from fighting the terrorists in the northwest province, in the tribal areas?

IGNATIUS: I think what this terrorist group wanted to do at a time when Pakistan is deciding, our fundamental enemy isn't India, it's these terrorist groups lodged along our northwest frontier, was to redirect Pakistan's focus back to the traditional enemy, to get Pakistanis all riled up, to get Indians all riled up, and in that sense, to let the terrorists slip back into this very remote area and keep planning their operations. It was a very clever, clever plan.

GREGORY: Let's move on to the discussion of the national security team, that we expected it would come together that way, and it did. What did you take away from the president-elect's presentation of this team and some of his comments, particularly the emphasis about the buck stopping with him, he will set policy and expect his team to execute?

IGNATIUS: My takeaway, David, was that he was in charge, that this was his team. I had worried on comments on your show that having this superstar, Hillary Clinton, as the secretary of state would make it harder for him to be the kind of leader, the kind of new voice that the world really want to see from America. And I had less of that feeling watching him make the presentation. He was the dominant personality. He made clear that he'll make the decisions. Hillary Clinton seemed, you know, for her, deferential toward him. You had no doubt who was going to be the first among equals here. Or not equals, that he was going to be first. So I think that's a little bit less of a concern. I think the question is, can she operate effectively, smoothly...

GREGORY: Right.

IGNATIUS: ... with this White House? You know, it's easy for these big personalities to get in fights, even when they don't want to at the beginning.

GREGORY: Here's my question about this crowded inbox of problems on the world stage-ending the war in Iraq, trying to head off a nuclear Iran, pursuing peace between Israelis and Palestinians, and doing something about a freedom agenda that was initiated by President Bush. There's other big issues as well in and around the Middle East, South Asia. We've talked about some of them. How does this security team assess its priorities, especially when it's the economy, which his a worldwide problem, but it's certainly going to be his major focus?

IGNATIUS: Well, you've put your finger on what I thin is the biggest weakness of this team. The team has many strengths, but what it needs most of all is a strategist, a kind of secret emissary in the style of Henry Kissinger or Zbigniew Brzezinski, who can go out in the coming months and explore, perhaps in secret, in secret missions, this agenda of opportunities and problems.

The administration is going to have to decide fairly quickly what among the lists that you made-and you can add a half dozen other things to that list...

GREGORY: Sure.

IGNATIUS: ... what it wants to focus on. What is doable? And I think to make those choices, you can't send a secretary with a big press corps and a planeload full of reporters and get it done. So I think they need that person. Who will emerge in that role? I'm not sure.

GREGORY: I had a question today for our friend Martin Indyk at the Saban forum. He was here last night. When you talk about the Israeli-Palestinian issue, if a new president wants to engage an issue that doesn't appear to be ripe for engagement-and there's a real problem right now-what does a national security team say if the president says, let's be creative? Let's really be creative about this problem instead of just engaging so that we look like we're engaging? Is there a ready answer for that?

IGNATIUS: Well, I think, you know, a president who says, I don't want the same list of answers that I've gotten, that presidents have gotten before me, I want something new, come back with something new, keep working on it until you have got something fresh, I think that's the president who is a creative leader of a strong team. I sense that Obama has some of that in him. It was very interesting the way in which he and all the people in that tableau said pretty much the same thing, that we're going to add to America's enormous military power new tools of diplomacy. We're going to find ways to reconnect with the world. And I think, you know, if you take really tough problems like Iran, how are we going to figure out a way to talk to this country? It isn't sure it wants to talk to us.

GREGORY: Right.

IGNATIUS: And it's going to take a lot of thinking and very creative ideas. And some of the ideas aren't going to work. Take the Arab/Israeli problem. Both sides are resisting. They're just so hunkered down. How do we break through that? It's doable, it's been done before by American presidents, but it's going to take an exercise of will by the president himself.

GREGORY: All right. To be continued.

David Ignatius, thanks, as always.

IGNATIUS: Thanks.

GREGORY: Appreciate it. Coming next, Christmas comes to the Capitol and the Bush family has a special reason to celebrate. It's all coming up next inside "The Briefing Room," right after this.

(COMMERCIAL BREAK)

GREGORY: We're back with a look at what's going on inside "The Briefing Room" tonight. Georgia voters return to the polls today to settle a hard-fought Senate race between Democratic challenger Jim Martin and incumbent Republican Saxby Chambliss. Chambliss came up just shy of the majority on November 4th, triggering the runoff. Voter turnout is said to be light but steady today. Polls close at 7:00 p.m. Eastern. Stay with MSNBC to get the results as they come in. And it's officially the holiday season at the nation's Capitol, where just about an hour ago, Speaker Nancy Pelosi and members of the Montana Congressional Delegation flipped a switch and lit the Capitol Christmas tree. Why the Montana delegation, you ask? Well, this year's 70-foot fir came from their home state. In keeping with the ongoing commitment to save energy, the tree is lit with strands of energy-efficient LED lights. Finally, a week after undergoing emergency surgery on an ulcer, former first lady Barbara Bush is home from the hospital. Her surgeon reported that she's "... having an excellent recovery and is as vigorous as ever." And her husband, former President Bush, added that after being in "extraordinary agony," she is feeling much better. We certainly wish her well and a continued, speedy recovery. Coming next, could President-elect Obama's choice for attorney general face a confirmation grilling over a man President Clinton pardoned? And why is Rush Limbaugh praising Obama's choice of Hillary Clinton as secretary of state? Our panel gets into all of it when 1600 returns right after this.

(COMMERCIAL BREAK)

GREGORY: Back now for the back half of 1600 PENNSYLVANIA AVENUE. Tonight President-Elect Obama met with the nation's governor's in Philadelphia where he asked for the help of both Democrats and Republicans.

(BEGIN VIDEO CLIP)

OBAMA: I'm going to listen to you. I'm going to seek your counsel. By the way, I'm going to listen to you especially when we disagree. Because one of the things that has served me well, at least, in my career, is discovering that I don't know everything. And all of you, I think, will be extraordinarily important in keeping us on track. Not allowing Joe and myself to get infected with Washingtonitis.

(END VIDEO CLIP)

GREGORY: Lets bring in our panel of MSNBC political analysts. Now, Michelle Bernard, president of the Independent Women's Forum. Pat Buchanan, former Reagan White House communications director and Nixon speech writer. Former presidential candidate, of course. Richard Wolffe, "Newsweek's" senior White House correspondent and Lawrence O'Donnell, former chief of staff to the Senate Finance Committee. Welcome all. Pat Buchanan, what is going to be unique about the relationship between the nation's governors, Democrats and Republicans, and this new president? This administration that wants to stimulate spending across the country?

PAT BUCHANAN, MSNBC POLITICAL ANALYST: Well, I think what Barack Obama is going to do, I would hope he does do, is basically stimulate the national economy. This will benefit the state governments with the infrastructure projects, increasing unemployment insurance. What I hope he does not do, David, is direct funding of state budgets and really helping them balance themselves when they really ought to be downsizing, just as families are downsizing, corporations are having to downsize. I think if the stimulus package, I would hope, would stay at the national level.

GREGORY: Lawrence O'Donnell, he sounded at one point, did the president-elect like much more of a conservative today, saying there may be a lot of time when you want us, the federal government, to simply stay out of the way. How often is that going to happen when the states are in need of a handout?

LAWRENCE O'DONNELL, MSNBC POLITICAL ANALYST: Well, you know, he's done certainly since the election, everything he can possibly do to distance himself from that label of most liberal senator. Which he had to carry through this campaign. But the other side of that is that he is well known in terms of his liberal thinking and his liberal philosophies. So in terms of his public presentations he does have to present how willing he is to look in the other direction. And that's why he was making that point about I'm especially interested when I disagree with you. Even if that's not true, it is a very helpful part of shaping his reasonable man image now during the transition.

GREGORY: Richard Wolffe, as somebody who has been reporting on both the campaign and now the transition, how realistic is the Obama team about the singular focus on an economic stimulus plan that is going to crowd out some of these other priorities that are very expensive priorities?

RICHARD WOLFFE, "NEWSWEEK": Well, I'll not sure they are talking about crowding anything out. They are being incredibly ambitious about what they want to do. The kinds of things they're taking off the table frankly are not going to make much of a dent in overall spending. If it's just a matter of delaying some of the foreign aid budget, you are not really going to repair hole in the finances. I think they're going to move forward on a number of fronts. Where they are being cautious is saying, listen. The economic growth is not going to kick in for some time here. What those governors really need is economic growth. Yeah, the infrastructure spending is going to be helpful. And having two governors in the Cabinet is also going to be helpful. But in the end, they need to whole economy to pick up. Not just one piece of it.

GREGORY: And Michelle, the key thing here is, what he needs is time. He needs to be seen as doing a lot and then he just simply needs time for a response from the economy.

MICHELLE BERNARD, INDEPENDENT WOMEN'S FORUM: Absolutely. Starting with the three press conferences that he did last week on his economic team and then the national security team yesterday. I think one of the most important things he has started off this transition period doing is showing there is not just this vacuum in leadership that most Americans were beginning to feel. He will continue to sort of fill that vacuum between now and January 20. And then after January 20, I would suspect that one of the things he is going to need is for Congress to come in and pass a major piece of legislation that is on his agenda right away and then hopefully get the American public to have some understanding and be willing to wait to see when is going to happen. But some economic recovery has got to happen sooner, rather than later. There will come a point in time where people will begin to blame the Obama administration for any of the quote/unquote "sins" of the Bush administration.

GREGORY: Let me turn, Pat Buchanan, to a potentially troublesome areas for one of his designees for the Cabinet. And that of course is the attorney general nominee, Eric Holder who served, of course, as the number two in the Clinton Justice Department and got in a lot of trouble on this Marc Rich pardon that happen at the very end of the Clinton administration. On the last day. He's admitted mistakes. This is Richard Cohen today writing in the "Washington Post" the following. "A better attorney general nominee you're not likely to find, the pardon excepted. It suggests that Holder, whatever his other qualifications could not say no to power. Holder was involved passively or not in just the sort of inside the Beltway influence peddling that Barack Obama was elected to end." Number one, does this issue specifically come back up and is it part of a larger issue for Obama, about not living up to the sort of change that he promised on the campaign trail? Pat?

BUCHANAN: I don't think you can go so broadly as to say Obama hasn't lived up to the promise of change. I frankly think there is going to be some serious change in foreign policy and elsewhere. But this was a truly squalid event. That Marc Rich pardon, it was as seedy as they come. It was utterly undeserved. It was given to somebody who was a, an insider feeding money indirectly to the Clintons and the foundation and the library and the rest of it. And Eric Holder was a public office holder, an acting attorney general right in the thick of it. On this one I have to agree with Richard Cohen. I think it should be a disqualifying factor but it isn't going to be. He is going to sail through. The Democrats will stand behind him.

GREGORY: Lawrence, do you agree with that?

O'DONNELL: Well, there is a difference between is this going to be a problem in his confirmation hearing? The answer to that is yes. He is going to have some hard questions about this in his confirmation hearing. It will be a problem in the vote in the committee? Probably not. Is it going to be a problem in the vote from the floor? Probably not. The irony is the single biggest problem we have identified for anyone approaching the confirmation hearing in the Obama administration is a Clinton scandal problem. And it is not being attached to the Hillary Clinton confirmation process, as she moves forward. I mean, this was a very deeply scandalous period in the Clinton presidency where these pardons were going out the door and Hillary Clinton's brothers were involved in getting these pardons for people. And it is as dirty as we've seen since the Nixon administration. It is hard to beat the Nixon administration. But in those terms, we haven't seen anything worse. For it to be haunting Eric Holder instead of Hillary Clinton is really ironic at this stage.

GREGORY: We are going to take a break here. We'll come back and talk more about some of the big issues of the day. Including some new Nixon tapes that are seeing the light of day. And some thoughts from President Bush about the economy, right after this.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

BARBARA WALTERS, ABC NEWS: What do you think of Hillary Clinton as secretary of state?

RUSH LIMBAUGH, CONSERVATIVE RADIO HOST: I'm stunned that she took it. Hillary has always worked for herself. I think this is a brilliant stroke by Obama. You know the old phrase, you keep your friends close and your enemies closer. He puts her over at secretary of state. How can she run for president in 2012?

(END VIDEO CLIP)

GREGORY: We're back with the panel now talking to some of the big issues of the day in the transition. Michelle Bernard, such strong praise from Rush Limbaugh for this move?

BERNARD: Absolutely. I don't know what Rush is thinking about. I actually know him personally so I know he has a strategy behind what he has said to Barbara Walters and I know that my friend here, Pat Buchanan, probably agrees with him. It would be very interesting to see what happens, David. Over the last few weeks, I was a very vigorous opponent of this nomination by President-Elect Obama. But I have to tell you, after watching the press conference yesterday, it was very different. The body language, you know, part of the fear a lot of people had was that Hillary Clinton was going to upstage Barack Obama, upstage his presidency, and maybe even run a shadow government. Things were very different yesterday. He was clearly the president-elect. She was very clearly not only his nominee to be secretary of state but she demonstrated, I believe, characters just in terms of body language that showed that he is the leader. She will be following his demands and his requests with regard to foreign policy. And maybe Rush is right. If she were to start running for president while she is secretary of state, should she be confirmed, it would be disastrous. And I think that she would not win and it would look very bad for her legacy. So Rush is probably correct. This was a stroke of genius on behalf of the president-elect.

GREGORY: Well, look, Pat, the reality is that this president will be focused on the economy to such a degree that Hillary Clinton really is going to have the world as a portfolio.

BUCHANAN: I think it is a good decision in this sense, people talk about, he took her out of the game in 2012. She wasn't going to run against Barack Obama in 2012, beat him and then win an election. I think it is an excellent decision. Dick Morris made a very good point the other night. And I agree with it. Obama is running a parliamentary government as though all his members of his Cabinet are Members of Parliament. You take just as Blair took Gordon Brown and made him chancellor, she makes Hillary her rival, secretary of state. She puts Biden as vice president. She puts Richardson in Commerce. I think if John Edwards hadn't fouled his nest, he might have been attorney general. And I think it shows a certain strength on Obama's part. They both have a tremendous interest in working together, not letting the egos clash and accomplishing things. I think she does, I think he does. So I feel better about it. I think a lot of folks in the Democratic Party do, like I think Lawrence.

GREGORY: Let's talk about the current president, President Bush, Lawrence. And you can add something to Hillary Clinton if you want to do that. But this is the president speaking to ABC about the economy and how we got to this place.

(BEGIN VIDEO CLIP)

CHARLIE GIBSON, ABC NEWS ANCHOR: What were you most unprepared for?

GEORGE W. BUSH, U.S. PRESIDENT: I think I was unprepared for war. In other words, I didn't campaign and that, please vote for me. I'll be able to handle an attack. In other words, I didn't anticipate war. One of the things about the modern presidency is that the unexpected will happen.

(END VIDEO CLIP)

GREGORY: True enough. And the economy as well. He was asked about that. Listen.

(BEGIN VIDEO CLIP)

BUSH: When the history of this period is written, people will realize a lot of the decisions that were made on Wall Street took place over a decade or so before I arrived in president, during I arrived in president. I'm sorry it has happened, and of course. Obviously I don't like the idea of people losing jobs or being worried about their 401(k)s.

(END VIDEO CLIP)

GREGORY: Lawrence, response?

O'DONNELL: Well, David, I've never heard a president take full credit for things that have gone wrong during their watch. They will always reach back to history to say, this thing was coming in ways that I couldn't control before I was elected. So there's nothing unusual about the way President Bush sees his role in these. He sees himself probably as much of a victim of the economy and how it has rolled out than as someone who actually had something to do with getting us where we are today. But that's just absolute standard view of the world by the president of the United States. Fill in the blank of whoever that president is.

GREGORY: Richard, it is striking that the president might sooner be vindicated, if vindicated at all, on Iraq than he will on the economy. And it goes to the issue of what the government did when the economy took such a precipitous fall. And I mention Iraq the way do I because of a status of forces agreement with Iraq that has made it very easy potentially for a new president to end war the way he would like to.

WOLFFE: Well, certainly Iraq is in a lot better situation than anyone would have thought of a year or two ago. But that doesn't mean to say the decision to go to war was vindicated. I and I think that will still be debated vigorously by historians for many years to come.

GREGORY: Right.

WOLFFE: But on the economy, I thought that was an interesting response. One of the problems for President Bush throughout this period has been his absence, or his lack of empathy, as expressed from the bully pulpit about the economic plight for so many people. Now we know the recession has been going for a year and he didn't really try very hard to feel the pain of the regular American folks who are going through worst of this recession. And his lack of engagement with this issue is quite striking. He has often said, look, this is Hank Paulson's policy. Or Ben Bernanke says this is a crisis. He hasn't really got his arms fully around it. And that's curious for a guy who when he came eight years ago we thought he had Clintonian sort of qualities about how he could relate to regular voters.

GREGORY: Pat, quick comment here?

BUCHANAN: Yeah, David. What Richard said is exactly the problem his father had in 1992. I remember going up to New Hampshire. The place was a disaster. And they would say up there, how can he deal with the recession when he won't even admit there is a recession? He had never come over there. It was that sense of distance and no connection with what was happening to those people. I think it was responsible George H. W. Bush's defeat.

GREGORY: All right. We're going to leave it there. Thanks to our panel. When we come back, the political stars came out for the hotly contested Georgia Senate runoff where polls close in just a couple of minutes. We're going to get the latest from the Atlantic Media's Ron Brownstein right after this.

(COMMERCIAL BREAK)

GREGORY: We're talking about the Obama agenda as he pursues the administration. As his Cabinet takes place and what his priorities are. Joining me to talk about that, Ron Brownstein, director, of course, political director of Atlantic Media. Ron, good to see you as always. First let's talk about this run-off election down in Georgia which is going to be important legislatively to this new administration. How do you see it?

RON BROWNSTEIN, ATLANTIC MEDIA: Well, I think it is very difficult for the Democrats. This is a state that has become, like most of the Deep South, more and more Republican. Jim Martin got close on election day when Obama was able to generate an enormous black turnout. Not clear if you can replicate that.

He is within range but it is still an up-hill climb. As it is for Democrats in most of the South.

GREGORY: And we've noticed the president-elect has kept it at arm's length.

BROWNSTEIN: He has kept his distance from this both as a way of kind of symbolizing that he wants to reach across the party lines. Reach across the aisle but also because you don't want to invest too much in an up-hill contest.

GREGORY: Let's talk about his style so far, his leadership style which is something you and I have talk about repeatedly. You wrote here recently, "Obama's Declaration. Independence." You wrote this. "These first decisions could be read as a declaration of independence. They suggest that Obama feels unusual latitude to set his course without overly differing to his party's traditional power centers or even to the expectations of those who helped elect him." Who are you speaking of? Which parts of the team?

BROWNSTEIN: Look, I think if you look across the board at this team what is striking about it is how it does not follow conventional political designs in any way. There is not a balancing of the ticket in effect in the Cabinet by reaching out to different interest groups. There is no one among the major decisions so far, some of the second tier in the White House, who would be seen as a champion of some of the liberal interest groups. He's chosen people on the national security side who are in many ways a challenge to some of the interest groups that supported him along the way. Certainly I think many of the more liberal members of his primary coalition would not have been expecting a national security team of Hillary Clinton, Bob Gates and General Jones. But also, I think what is striking about this, is the way he is integrating people who were not in the fox hole from the beginning. Who were not part of the long march with those who were. He certainly has some of the long term campaign aides in the White House. Robert Gibbs, David Axelrod, Valerie Jarrett. If you look at people like Jim Jones was neutral at best through the general election, Peter Orszag, Timothy Geithner, these were not people who were part of the team, Rahm Emanuel, Larry Summers didn't come until the general election. It all suggests a lot of confidence that he can hold together a disparate administration and also that he has the freedom to maneuver. To basically full out a decision that he alone sees. I mean, this is a government that would not be put together by anybody else than this president. And I think that speaks to a lot of confidence about his ability to set a course and bring his party along with him after this election.

GREGORY: He got the liberal label of course in the course of the general election. It didn't stick in a meaningful way will he certainly earned his liberal bona fides on Iraq where he was to the left of Hillary Clinton. She paid the price for that. Has that liberal label been borne out beyond that? And is it borne out in his selections to his Cabinet?

BROWNSTEIN: I think in a president's governing strategy and style there are two elements. One is ideology and one is temperament. Ideology is where you start. Temperament where you end. Ideologically, Barack Obama on most issues is pretty conventionally liberal. Shirt more than Bill Clinton or Al Gore if you look at domestic and foreign policy. Probably even more than John Kerry in 2004. That's where he starts. Temperament is where he ends. What I mean by temperament, is he a deal maker? Is he someone who is inclusive? Is he somehow who wants to hear from a broad range of opinion. So far all of the signals that he's sending is that in fact, he does not intend to govern in a rigid and ideological way.

In some way, the model is Ronald Reagan. Who was ideologically conservative but temperamentally flexible. Where he ended up on issues like taxes or welfare or even dealing with Mikhail Gorbachev was very different from where he started. We'll to have see whether he follows that model. But it is a possibility of the way he approaches the presidency and something that is suggested by the kind of appointments he's making.

GREGORY: Is that a contrast to President Bush who had a difficult time temperamentally, when it was such an ambitious agenda that was a more conservative agenda on taxes, principally temperamentally winning alliances and governing in a way that brought people in the process in the way.

BROWNSTEIN: Absolutely. Bush was ideologically conservative and temperamentally rigid. He was not a dealmaker. What you ended up with was a very polarizing presidency that depended on massive party unity among Republicans to pass his agenda in Congress and massive turnout among Republicans to win elections. And then you saw in his second term, the cost of that. When the middle, in both 2006 and 2008 turned against Republicans, they lost independents both times. And you generated a kind of counter-reaction with this massive Democratic turnout. It is very hard to look at that model and where it has left the Republican Party and for Obama's team to say, yeah. I want to emulate that. In fact, I think they're at least suggesting through these appointments a very different governing style that would potentially be more inclusive and involve a broader range of opinion. But the rubber meets the road on policy. And the choices he will make on issues like health care and energy. Does he formulate his agenda in a way that solely speaks to Democrats? Or does he challenge elements of his own coalition in a way that allows him to reach out beyond it.

GREGORY: With a couple minutes left here, let's talk about how ambitious the agenda becomes. There is a crisis atmosphere in the government and it's about the economy. It is about the collapse of the banking system in the country. The need for a stimulus plan. That seem to be growing by the day. The need grows by the day. All the states need something. Does Obama trim his sails around that stimulus plan or do they seize on a crisis atmosphere to do more?

BROWNSTEIN: Rahm Emanuel told you everything you need to know when he said a crisis is a terrible thing to waste. Look, presidents come in and often talk about the reconciliation bill in the budget as being the great opportunity to move forward their agenda because it only requires 50 votes and can't be filibustered. This economic recovery package could offer Obama the same opportunity multiplied because he can use it as a down payment on many of the thing he wants to do. On promoting alternative energy. They talk about using it to fund the building of a grid that will make it easier to bring in wind and solar power. They can use it as a down payment on their infrastructure proposals and infrastructure bank. On modernizing health care. The competing pressure here is those long term investments versus the short term responses to need. You have governors talking about an increased federal match on Medicaid, mayors talking about helping balance their own budgets. Those are immediate needs that will compete against I think what will be their clear desire to use this as a foundation or a down payment on many of the things they'll want to do anyway and they will take longer to build a legislative consensus around.

GREGORY: We'll leave it there for tonight.

Ron Brownstein.

BROWNSTEIN: Thank you, David.

GREGORY: Thanks very much. That is going to do it for 1600 PENNSYLVANIA AVENUE for tonight. I'm David Gregory. Thank you for watching. Be sure to stay tuned to MSNBC tonight for full coverage of the Georgia Senate runoff results.

HARDBALL WITH CHRIS MATTHEWS comes your way next.

CHRIS MATTHEWS, MSNBC HOST: Is what's bad for General Motors bad for America? Let's play HARDBALL.

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