updated 2/20/2010 12:48:16 PM ET 2010-02-20T17:48:16

MR. DAVID GREGORY:  This Sunday:  Two major threats facing the U.S., terrorism and recession.  The country's top intelligence officials warn that al-Qaeda will attempt another attack against America within months as the administration is under fire for its handling of terror suspects, making national security a top campaign issue this year.  Our guest this morning, the president's top counterterrorism adviser, John Brennan.

Then, the economy.  A puzzling jobs report features a dip in the unemployment rate below 10 percent.  But where are the jobs?  And are deficits as far as the eye can see undermining America's power and influence in the world?  Our exclusive guests this morning discuss the present and the future of the U.S. economy:  former Treasury secretary and author of the new book "On the Brink" Henry Paulson, and former chairman of the Federal Reserve Alan Greenspan.
Finally, your politics fix.  Sarah Palin rallies the tea party Saturday night.

(Videotape)

FMR. GOV. SARAH PALIN (R-AK):  We need a commander in chief, not a professor of law standing at the lectern.

(End videotape)

MR. GREGORY:  Scott Brown is sworn in as the 41st GOP senator.  What now for the Obama agenda?  A jobs bill, financial regulation and health care.  With us, two former White House insiders, counselor to President George W.  Bush Ed Gillespie, and press secretary to President Bill Clinton, Dee Dee Myers.

But first, you can call it the winter of Washington, D.C.'s discontent.  The city at a virtual standstill this weekend, socked with the worst winter storm to hit the area in 90 years.  When all was said and done, nearly 20 inches of snow in the district, more than 30 inches in the outlying areas.  President Obama braved the blizzard, heading just a few blocks north of the White House to address the Democratic National Committee meeting.

(Videotape, February 6, 2010)

PRES. BARACK OBAMA:  Snowmageddon here in D.C.

(End videotape)

MR. GREGORY:  Others are calling it the snow, snow, "snowpocalypse" or "snow MG." D.C. is now digging out from this massive storm, hoping to get back to normal and back to work on health care, a jobs bill, and the difficult task of battling terrorism, which is where we will begin our conversation this morning.  And here now, the president's top counterterrorism adviser, John Brennan.

Welcome back to MEET THE PRESS, and thank you for braving the elements here to get here this morning.

MR. JOHN BRENNAN:  Thank you, David.

MR. GREGORY:  Very serious topic to discuss this morning in terms of the al-Qaeda threat.  The president was at the CIA, marking those who have fallen recently with the agency, and he spoke of the war about the war in Afghanistan to hundreds of employees, urging them to complete the mission and win the war. How does he define winning?

MR. BRENNAN:  The, the visit out to CIA headquarters was a poignant and somber reminder of exactly how determined the intelligence community, this U.S. government is to destroy al-Qaeda.  And as we move forward in Afghanistan and Pakistan and other areas, we are determined to destroy al-Qaeda the organization.  They have used areas of Pakistan and Afghanistan to ply their trade, to train their operatives, and we are moving forward in cooperation with the Afghan and Pakistan government to take away that safe haven, to take away their ability to train those operatives, to carry out attacks either there or here in the homeland.

MR. GREGORY:  We're up against a very difficult threat, as was underlined during testimony in front of the Intelligence Committee this week.  This is a portion of that question.
(Videotape, February 2, 2010)

SEN. DIANNE FEINSTEIN (D-CA):  What is the likelihood of another terrorist attempted attack on the U.S. homeland in the next three to six months, high or low?  Director Blair:

MR. DENNIS BLAIR:  An attempted attack, the priority is certain, I would say.

SEN. FEINSTEIN:  Mr. Panetta:

MR. LEON PANETTA:  I would agree with that.

SEN. FEINSTEIN:  Mr. Mueller:

MR. ROBERT MUELLER:  Agree.

SEN. FEINSTEIN:  General Burgess:

GEN. RONALD BURGESS:  Yes, ma'am, agree.

SEN. FEINSTEIN:  Mr. Dinger:

MR. JOHN DINGER:  Yes.

(End videotape)

MR. GREGORY:  First off, what can you say about the intelligence that's behind such a specific warning like that?

MR. BRENNAN:  Ever since 9/11, al-Qaeda and bin Laden have been determined to follow through on its earlier attacks here in the homeland.  We have destructed numerous attempts to carry out those attacks here.  They are continuing to train those operatives, they are using different areas of the world.  We see most recently with Mr. Abdulmutallab that Yemen has become an area where al-Qaeda in the Arabian Peninsula is attempting to launch those attacks.  So the intelligence is strong that they are continuing to focus on the homeland.  But at the same time, our counterterrorism successes take place every day.  It shouldn't have come as a surprise to anybody that al-Qaeda is attempting to carry out an attack.  They are continuing to have that as one of their priorities.  But we've been able to thwart their plans.
MR. GREGORY:  And how do you win against a threat like this, when CIA Director Panetta was saying that al-Qaeda is adapting its methods in ways that are oftentimes very difficult to detect?

MR. BRENNAN:  Well, we have to stay more than one step ahead of al-Qaeda, and I think we've been able to do that.  We have increased our security capabilities across the board.  We're working very closely with our partners. They are looking at new technologies.  We are enhancing our screening procedures in the aviation sector as well as other areas.  So we are continuing to look at the types of developments and evolution that they are going through so that we can thwart those attacks.  And we have been very, very successful.

MR. GREGORY:  Any credible threats against the Super Bowl today?

MR. BRENNAN:  Not that I'm aware of.  No, not at all.  I--people are very comfortable with the security measures that are put in place for the Super Bowl.

MR. GREGORY:  What, what kinds of attacks is al-Qaeda now interested in pulling off?

MR. BRENNAN:  Well, I think the Abdulmutallab attempt is a reflection of just how difficult it has become for al-Qaeda to carry out attacks.  He had an improvised explosive device in his underwear.  He was trying to bring down that plane, but it was a faulty device.  And it's because they're unable to carry out these large scale attacks that they are now opting for individual operatives to carry out these smaller scale attacks.  They recognize that they are in need of some type of demonstration of their capability that they have not been able to show.  Because of the tremendous work across the board, not just here in the United States between law enforcement and intelligence, but with our partners, with our Pakistani, Saudi, Yemeni partners.  This is going well from my perspective in terms of continuing to keep the pressure on al-Qaeda.

MR. GREGORY:  How worried are you about sleeper cells in the United States trying to pull off lower level, you know, what in the terrorist world they may call a single rather than a home run, whether it's attacking a shopping mall or this kind of attack?

MR. BRENNAN:  That's why we have over 100 joint terrorism task forces that the FBI runs here throughout the United States, to make sure that we have eyes and ears throughout this country in the event that there are some sleeper cells that are out there.  Very close collaboration between the FBI and local law enforcement.  We've been able to stop individuals.  Najibullah Zazi, we had David Headley, we have other successes of just over this past year.  So sleeper cells are something we're concerned about, but we have dedicated a lot of resources to uncover them.

MR. GREGORY:  Let's talk about this political fight over national security as well.  Scott Brown, now the 41st Republican senator, on the night he was--of his victory, when he was celebrating, he said this about the approach that the administration has taken.

(Videotape, January 19, 2010)

SEN. SCOTT BROWN (R-MA):  And the message we need to send in dealing with terrorists, our tax dollars--our tax dollars should pay for weapons to stop them and not lawyers to defend them.

(End videotape)

MR. GREGORY:  A lot of that criticism is about the handling of the Christmas Day bomber, Abdulmutallab, Abdulmutallab--sorry, it's hard to get that name right.  Why was he treated as an ordinary citizen for even the period of time that he was, providing some information, then getting a lawyer after he was given his Miranda rights?
MR. BRENNAN:  He wasn't treated as an ordinary citizen, he was treated as a terrorist.  He was immediately taken into custody, he was questioned under the public safety exception as far as Mirandizing an individual.  FBI agents were there on the ground, as well as with customs and border patrol agents.  We reacted very well to that situation.  He was then put into a process that has been the same process that we have used for every other terrorist who has been captured on our soil, whether they be U.S. citizens or non-U.S. citizens--Richard Reid, Ahmed Ressam, Amari and others.  They were brought into custody by law enforcement officials and then treated accordingly.  So there was no distinction.  And, in fact, the FBI's guidelines that they use, the FBI Domestic Investigations and Operations Guide, was the implementation of the attorney general guidelines that were finalized by Attorney General Casey in the last administration in December of 2008.  That is when those guidelines were put in place.  So the procedures and the protocols were exactly consistent with what we've done before.  Now, after this incident, the president asked us to take a new look and see whether or not those processes are ones that we are comfortable with and whether or not we can enhance and strengthen them.  And that's what we're looking at right now.  But those FBI agents and others acted appropriately.  And, quite frankly, I'm tiring of politicians using national security issues such as terrorism as a political football.  They are going out there, they're, they're unknowing of the facts, and they're making charges and allegations that are not anchored in reality.

MR. GREGORY:  Well, let's talk about one of those allegations.  Senator Kit Bond saying that members of the intelligence committee were told not to talk at all about the fact that, that he was now cooperating, that he was speaking to the FBI, and yet, then it gets leaked out to the press after that, saying that the administration was responsible for leaking classified data that they were told to keep under wraps.

MR. BRENNAN:  Again, inconsistent with the facts.  Senator Bond and other senior members of Congress were briefed on Monday about Abdulmutallab's cooperation.  They were told about the fact of that cooperation as well as some information that he was sharing.  During the subsequent day in the hearing it unfortunately came out that that intelligence was starting to flow from Mr. Abdulmutallab.  The press was all on it, this network went out right away and reported that, and so we then wanted to make sure that we were able to the networks and to the media the correct rendition of what happened and how instrumental Mr. Abdulmutallab's family was in getting him to cooperate. And it was a very successful activity on the part of the FBI, Department of Justice, and others, including the intelligence community.  So what we did was to make sure that the facts were out there as best they could be.

MR. GREGORY:  To those that say you have not shared enough information about how you intended to handle him, you say what?

MR. BRENNAN:  I say that there are sensitive investigations and operations under way, and we're not going to compromise our ability to follow up on that information and to disrupt further terrorist attacks.  And there have been instances when information's been shared with the Hill when we see it in the media the next day.  And we have to be very circumspect as far as what information's going to be shared.  The premium that this president puts on the work of the intelligence and law enforcement community is to disrupt future attacks and to protect the American people...(unintelligible).

MR. GREGORY:  When you brief some Republicans about what--how he was going to be treated, were they on board with the administration's decision?

MR. BRENNAN:  On Christmas night, I called a number of senior members of Congress.  I spoke to Senators McConnell and Bond, I spoke to Representative Boehner and Hoekstra.  I explained to them that he was in FBI custody, that Mr. Abdulmutallab was, in fact, talking, that he was cooperating at that point.  They knew that "in FBI custody" means that there's a process then you follow as far as Mirandizing and presenting him in front of a magistrate. None of those individuals raised any concerns with me at that point.  They didn't say, "Is he going into military custody?" "Is he going to be Mirandized?" They were very appreciative of the information, we told them we'd keep them informed, and that's what we did.  So there's been a--quite a bit of an outcry after the fact where, again, I'm just very concerned on the behalf of the counterterrorism professionals throughout our government that politicians continue to make this a political football and are using it for whatever political or partisan purposes, whether they be Democrats or Republicans.  In the last administration, Democrats I felt were speaking incorrectly about the progress that we were making on the terrorism front. The same thing is true today.  And I think those counterterrorism professionals deserve the support of our Congress; and, rather than second-guessing what they're doing on the ground with the 500-mile screwdriver from Washington to Detroit, I think they have to have confidence in the knowledge and the experience of these counterterrorism professionals.

MR. GREGORY:  And through that questioning that's now going on, what are you learning about al-Qaeda specifically in Yemen?

MR. BRENNAN:  We have known for a while that al-Qaeda in the Arabian Peninsula, which was a merger of al-Qaeda in Yemen and Saudi Arabia, had a number of senior operatives and individuals who were associated with Osama bin Laden in the past.  Their focus had been on carrying out attacks in Yemen against our embassy about a year and a half ago, in Saudi Arabia an attempted assassination against the senior counterterrorism official within the Saudi government, and that's where their focus was.  What has--what we are now learning is that they have been determined, because of individuals who have been speaking out--Mr. Awlaki and others--focusing on trying to carrying out those attacks in the West, including in the homeland here.  And we have had excellent cooperation from the Yemeni government, we're continuing to work very closely, and we believe we're now ahead of this curve.

MR. GREGORY:  Let me spend a couple of minutes on the proposed trial, civilian trial of 911 mastermind Khalid Sheikh Mohammed.  If it's not going to be in New York, then where?

MR. BRENNAN:  First of all we have to remember that the priority is to bring this murderer to justice.  That is what the victims of 911 and their families deserve.  Clearly, we have to take into account the concerns expressed by the state and the city of New York, as well as the sentiments of the Congress. But we are determined to bring him to justice.  We are working with those individuals within Congress who are responsibly dealing with the situation so that we can find the venue and making sure that we are able move forward as quickly as possible, because this individual deserves the full weight of American justice.

MR. GREGORY:  The, the, the attorney general has said, "Failure is not an option in this case." Do you have any doubt in your mind that he will ultimately be executed by the United States?

MR. BRENNAN:  I have no doubt that the American justice system will prevail despite the claims and criticisms of a lot of folks, including in Congress, that our judicial system is unable to handle these terrorists.  I believe that our system of justice here is strong.  And I'm not going to give al-Qaeda the victory of being able to overturn our system of jurisprudence here that is anchored in our Constitution and reflects our values as a people.
MR. GREGORY:  But are you confident he'll actually be executed?

MR. BRENNAN:  I'm confident that he's going to have the full weight of American justice.

MR. GREGORY:  But is he getting all the due process?  If the, if the attorney general says, "Failure isn't an option," other White House officials have said he'll be executed, is this really the shining example of American jurisprudence?

MR. BRENNAN:  It's going to be the shining example when he is brought to justice, and I'm just--I'm convinced and confident that Mr. Khalid Sheikh Mohammed is going to meet his day in justice and before his maker.

MR. GREGORY:  In my remaining couple of minutes, I want to ask you about China and the espionage threat.  China's got a very robust espionage program against the United States.  We've seen what's taken place between Google pulling up stakes from the country.  Dennis Blair, the director of National Intelligence, said, "The attack on Google's servers from inside China were a wakeup call." He's warned about a cyber Pearl Harbor.  How serious is this threat from China?

MR. BRENNAN:  The, the threats and the vulnerabilities within the cyber domain are serious and significant.  That's why President Obama has made it a primary focus of this administration.  We now have a cyber security on board within the White House, Howard Schmidt.  We're looking at these issues from the standpoint of espionage from governments, from different individuals, whether they be hackers or terrorist organizations.  The opportunities to create problems within the cyber sphere are significant and this government is taking steps.  It's a very complex and complicated challenge, but we are working very closely with the private sector.  We're working very closely with the different instruments of government as well as our foreign partners.

MR. GREGORY:  Is national security at risk here?

MR. BRENNAN:  National security is something that is at risk, and that's why what we're trying to do is to ensure that our networks, our government networks, our private sector networks, have the ability to withstand these attempts to hack in and to conduct activities, whether it's stealing intellectual property rights or whether it's trying to steal government secrets, or whether it's trying to cause problems or steal one's identity. And that's why this is a shared responsibility--government, private individuals and private sector.

MR. GREGORY:  We will leave it there.  Mr. Brennan, thank you very much as always.

MR. BRENNAN:  Thank you.

MR. GREGORY:  Coming next, the economy:  a puzzling jobs report and mounting deficits.  When will the recession be over?  Our exclusive interview with former Treasury Secretary Henry Paulson and former chairman of the Federal Reserve Alan Greenspan.  Plus, our roundtable delves into the impact of the tea party movement and other political news of the week.  Ed Gillespie and Dee Dee Myers are here.  It's only on MEET THE PRESS.

(Announcements)

MR. GREGORY:  Our exclusive interview with former Treasury Secretary Henry Paulson, former chairman of the Federal Reserve Alan Greenspan, coming up after this brief station break.

(Announcements)

MR. GREGORY:  We're back and joined now by Henry Paulson, the former Treasury secretary, and Alan Greenspan, the former chairman of the Federal Reserve.
Welcome, both of you, back to MEET THE PRESS.
Dr. Greenspan, here was the headline in The New York Times yesterday after that Friday jobs report, and it was this:  "Jobless rate falls to 9.7 percent, giving hope that the worst is over." Does this jobs report signal a turnaround?

MR. ALAN GREENSPAN:  It doesn't signal a turnaround, but what it does say is that the turnaround which has already occurred is moving but not in any aggressive manner.

MR. GREGORY:  And Secretary Paulson, if you look at the jobs loss since the recession began, 8.4 million jobs over that time horizon, the question is, what's going to cause a turnaround?  When do you see this, this jobless rate actually stay in the single digits?

MR. HENRY PAULSON:  Well, the economy is clearly recovering, and I have great confidence that we have such a dynamic private sector in this, in this country that they're eventually going to begin creating jobs.  Now, one of the factors, not the only factor, but one of the factors that will help is more certainty with regard to, to actions out of Washington.  And, for instance, certainty with regard to financial regulatory reform will, will, will help.

MR. GREGORY:  In, in, in terms of not just regulatory reform, what we'll talk about, Dr. Greenspan...

MR. GREENSPAN:  Yeah.

MR. GREGORY:  ...but also just the idea of the notion of what the government can do now with regard to a jobs bill or other things to bring down unemployment more steadily.

MR. GREENSPAN:  I think we have to start with the focus of economic activity. In other words, jobs are created by having something to do, so you can't put jobs before economic activity.  And I would therefore argue what would be most useful at this particular stage is cutting taxes on small business, because they are the big creator of jobs, but they won't hire anybody if they don't have any business.  So you have to get them to act in a manner which creates the types of economic activity which draw in an ever-increasing demand for labor.

MR. GREGORY:  And that is a question in terms of what's happening out there. Where, where is the impetus for businesses to start hiring again?

MR. PAULSON:  Well, again, I, I just believe so much in how dynamic our economic system is and our economy is.  The one thing I know for sure is that, with the economy recovering, ultimately the private sector will do what needs to be done and create opportunities and jobs.  I, I agree with Alan that the--that when you look at a jobs bill, the sorts of things that Congress should be focusing on are temporary incentives for business to, to hire.

MR. GREGORY:  And yet is that enough if there's not a business willing to take the risk too extend--expand?

MR. PAULSON:  Well, again, as I said earlier, part of it is confidence and psychology, what's going on inside the head of the CEO and how comfortable does he, he or she feel about the, the future.  But, again, it's very difficult to sit here and say, `Now, where is the economic activity going to come from, which area, which business?'

MR. GREGORY:  Hm.

MR. PAULSON:  But it always does come.  And it will come.  We have stable financial markets and a recovering economy.  It's going to take some time, though.

MR. GREGORY:  When is the recession over then?

MR. GREENSPAN:  The recession is over.  It bottomed back in the middle of last year.  And while it doesn't have the strong momentum I had hoped it would have, strangely, because of the fact that we had such a strong fourth quarter, which was essentially using up a lot of the latent power of events, which was the gradual reduction in the rate of decline in inventories.  We did it all in the fourth quarter, and we since--we shot our ammunition.  So it's going to be a slow, trudging thing, but I do think we're going to be moving forward.  And, as Hank says, the issue here is basically innovation.  Innovation by definition is not forecastable, so we don't know where the jobs are coming from.  We don't know how this market is exactly in terms of dynamics going to move forward.  But we know that this process is under way, and there's every reason to believe that it will continue to do so.

MR. GREGORY:  And you look at the stock market, the fact that it's been on a downward path for the past couple of weeks, down over 6 percent since January, what kind of warning sign is, is that?

MR. GREENSPAN:  Well, it's more than a warning sign.  It's important to remember that equity values, stock prices, are not just paper profits.  They actually have a profoundly important impact on economic activity.  And if stock prices start continuing down, I would get very concerned.

MR. PAULSON:  I agree with that, but I also never place too much emphasis on what the market does for any week or two.  You need to really look at this just like to you look at economic data over a period of time, and if you look at this over a reasonable period of time, we've, we've seen a, a, a, a very solid stock market.

MR. GREGORY:  Let me ask you about the president and about the president's team.  This is something you wrote in your new book, "On The Brink," about election night and a change in leadership.  "After the Democratic candidate was declared the winner at 11 p.m." you wrote "Wendy," your wife, "woke me up to tell me the historic news.  I went back to sleep comforted by the knowledge that our president-elect," of course, Barack Obama, "fully understood the threat our economy still faced." What do you say now after more than a year? Is that confidence still high in him and his team?

MR. PAULSON:  Well, what I, what, what I say is this.  The--I take a real comfort in the fact that the programs that were put in place to stabilize the economy were continued and much of, of what has been done has been a continuation or a logical extension of those programs.  I believe the, the financial markets are stable.  I believe the programs have worked.  They prevented the collapse of a--the financial markets, prevented a real catastrophe.  I think we could have had 25 percent unemployment if, if, if, if the system had collapsed.  And I believe that we're going to see that every penny that's been put in the banks is going to come back with interest.  So I think the money's coming back.  So--and that was what I was, what was talking about on election eve, because both presidential candidates had supported the TARP legislation, and I think that was critical.  If they hadn't, we would have been defenseless.

MR. GREGORY:  But you certainly seemed impressed, reading your book, with candidate Obama, frankly more so than Senator McCain.  Did you vote for Obama?

MR. PAULSON:  Well, who I voted for is between me and the voting booth.  But the, but the, but there's--I was very impressed that candidate Obama was very concerned with what was going on and was, was very supportive.  Candidate McCain, I will admit, gave me a few more anxious days and hours.  But I will also say that as he was falling behind in the polls, it would have been very easy for him to demagogue that issue, play to the populist card.  And if he had come out against what we were trying to do, we wouldn't have got it, I believe.  We wouldn't have had the TARP legislation passed, and we would have been left defenseless.

MR. GREGORY:  Dr. Greenspan, one more question about jobs.  So you think that unemployment rate goes up again before it comes down?

MR. GREENSPAN:  I'm not sure.  One of the reasons is the official data on unemployment is a sample and it fluctuates, and--as we observed in, in the January report.  If you literally took it seriously as to the exact numbers, there was 784,000 job increase in January.  Now, that didn't happen.  And so that what we can expect is a backing and filling.  I think we're going to stay at approximately the 9 to 10 percent level here for a goodly part of the rest of this year with the sole exception of that period when they start to hire a very large number of census workers.  Remember, this is the decennial census.

MR. GREGORY:  Right.

MR. GREENSPAN:  And that's going to have some positive effect.  But it's very difficult to make the case that unemployment is coming down anytime soon.

MR. GREGORY:  Let me ask you about housing.  A disturbing report on Wednesday in The New York Times talked about people underwater in their mortgages.  "The number of Americans," the paper reported, "who owed more than their homes were worth was virtually nil when the real estate collapse began in mid-2006, but by the third quarter '09 an estimated 4.5 million homeowners had reached the critical threshold, with their home's value dropping below 75 percent of the mortgage balance.  ...  `We’re now at the point of maximum vulnerability,'" that's according to "Sam Khater, a senior economist with First American CoreLogic, the firm that conducted the recent research.  `People's emotional attachment to their property is melting into the air.'"
Secretary Paulson, what happens if housing prices go down again when you've already got this kind of precarious situation?

MR. PAULSON:  It clearly wouldn't be good.  I'm not predicting that.  But what I, I, I think this issue is, is a, a critically important one because it's very difficult for governments to design a program that is going to be effective and going to be fair to taxpayers, a program to keep people in their homes if they don't want to stay in their homes.  And so a, a big part of what we focused on was bringing the private sector together to keep those into their homes that could afford to stay in the homes and wanted to stay there. Now, when you look at the crisis, I think part of the reason that so many experts and so many people didn't foresee housing as being the cause--and, and, and count me among those--was that if you look at our country since World War II, residential housing prices have generally gone up.  We haven't had nationwide declines, and mortgages have generally been perceived to be safe investments.  And so when you get the kind of decline we've had in housing prices, that really, really destroys wealth across the country, but it also changes behavior, because, historically, everyone that had a mortgage would claw, fight, do whatever it took to make the mortgage payment and avoid default.

MR. GREGORY:  Mm-hmm.

MR. PAULSON:  And, of course, when the home is worth less than the mortgage, behaviors tend to change.

MR. GREGORY:  What do you see?

MR. GREENSPAN:  Well, I am very much concerned if home prices decline from here.  I don't think they're going to.  In other words, they seem to be bottoming out.  The reason I am is that during 2005 and 2006, as I recall, there were eight million home purchases with so-called conventional conforming mortgages with the 20 percent down payment.  That down payment is gone, and we have this very large block of homeowners who are right on the edge of tilting down into that underwater category.  Fortunately, the evidence suggests that the vast majority, as Hank was implying, of these types of homeowners--that is, those with standard, conventional mortgages--do continue to pay on their mortgages...

MR. GREGORY:  Mm-hmm.

MR. GREENSPAN:  ...even if the value in the homes is below their--the, the, the market price.  Or rather, what worries me particularly is that there is a very large block that will be thrown on the market, I mean people starting to foreclose, if prices go down significantly from here.

MR. GREGORY:  Let, let me move on, I want to talk about the deficit and I also want to talk about taxes.  Here are the deficit projections from the president's 2011 budget.  And the numbers are, frankly, staggering.  If you look at the deficit for 2010, $1.56 trillion.  And through 2015, they estimate it comes down with 7-point--$751.9 billion.  How serious is this, Secretary Paulson, assuming, also, that tenure projections are often wrong.

MR. PAULSON:  Oh, I, I just have no doubt that it is by far the most serious long-term challenge we, as a nation, face.  All these other issues are--economic issues are minor compared to that, that the, that--and it's a generational issue, because it, it's--there's no way we're going to, to deal effectively with, with the deficit without reforming the entitlement programs--Medicare, Medicaid, Social Security.  And it, it doesn't have to be a, a crisis.  This is something that can be handled.  But one of the things I, I, I talk about in my book and one of the lessons that just hit me right between the eyes, being in Washington, is it's very, very difficult to get Congress to act on anything that's big and difficult and controversial if there's not an immediate crisis.  And so this--so what it's going to take to, to, to get leaders on both sides to come together and deal with this, I, I think is a huge question.

MR. GREGORY:  And, Dr. Greenspan, Larry Summers, one of the president's top economics advisers, has said in the past--he's asked a very provocative question, which is, how long can the world's biggest borrower remain the world's biggest power?

MR. GREENSPAN:  Not indefinitely, because there's no doubt that if the United States continues down the road that Hank has been correctly identifying, we're going to find that our ability to borrow is going to get restrained because, throughout our history, we have always maintained a capital cushion, a cushion between our borrowing capacity on the one hand and the level of debt on the other.  That is beginning to shrink.  And if we get to the point where we're having difficulty selling our security--our Treasury issues, then interest rates begin to move and our ability to move internationally, to essentially be the major currency, the major economy, the major economic power in the world is significantly diminished.  History tells us that great powers, when they've gotten into very significant fiscal problems, have ceased to be great powers.

MR. GREGORY:  The--part of the fix here, according to the budget, is--has to do with the issue of taxes.  Here's how The Wall Street Journal put it in a headline on Tuesday, and that is that the wealthy face a tax increase.  Those Bush-era tax cuts are going to be allowed to expire by this administration.

Secretary Paulson, is that a bad idea?

MR. PAULSON:  Here's how I look at taxes.  I believe what we need is broad-based tax reform, and the kind of tax reform where there--it doesn't discourage investments, savings or incentives for those.  Right, right now we have a tax system that, that is biased toward consumption.  It's--and we as, we, we as a people save too little, invest too little, borrow too much.  So I, I, I would like to see wholesale, broad-based tax reform.  And I, I think that's, that's clearly got to be one of...

MR. GREGORY:  My question is whether the Bush tax cuts expiring is a bad idea.

MR. PAULSON:  Well, I've got to say, anything right now that is going to, that is going to, in effect, be a, a, a tax increase has got to be--has got to be questioned.  And an expiring tax cut is a tax increase.  But I'm going beyond that, because I really do believe that we are going to need a--to take a different approach to a number of things--taxes being one of them, housing policies being another.

MR. GREGORY:  Dr. Greenspan, the tax cuts?

MR. GREENSPAN:  Well, I, you know, I, I agree with what Hank is saying.  I think the thing that disturbed me most in the last week or two was when the discussion was involved in, I believe, in the Senate on the issue of forming a commission--a congressionally-authorized commission, as I read it, there was a 97-to-nothing vote to exclude Social Security from the deliberations of that commission.  That said to me that we have gotten to the point in this country where spending is untouchable.  I have no doubts that we have to raise taxes in order to close this huge deficit.  But we cannot do it wholly on the tax side because that would significantly erode the rate of growth in the economy and the tax base, and the revenues that would be achieved would be far less than anybody'd expect.  We have to recognize the fact that one of the things that we have to do, as tough as it's going to be, is that benefits are going to have to be paired in conjunction with tax increases to resolve this very serious long-term budget problem.

MR. GREGORY:  In our remaining moment here, Secretary Paulson, I have to ask you about financial regulation, about bonuses on Wall Street.  Do you see real changes happening on Wall Street?  Are you frustrated by the level of bonuses we're seeing?

MR. PAULSON:  Well, you, you ask two questions, and so firstly, there's no doubt that, that compensation on Wall Street, I think, is out of whack and has been out of whack for some time.  And I understand why the American people are unhappy because, you know, in our system we, we expect those that take risk to, to, to, to really bear their own losses.  But I would like to see that, that frustration, that anger channeled toward regulatory reform. And I just think that's very, very critical.  And to me, one thing that is absolutely essential is that we, we, we get strong resolution authority so that, in the future, any type of financial institution, when it faces failure, that, that, that it is liquidated and liquidated in a way in which the taxpayer is not going to have to come up in again and prop up or bail out a financial institution.

MR. GREGORY:  All right.  We will leave it there.  But before I let you go, here's the picture of you back in the playing days at Dartmouth, here.  So I got to ask--we've got a couple of football fans, because I know, Dr. Greenspan, you are as well.  Super Bowl picks.  Secretary Paulson, you first.

MR. PAULSON:  Well, I'm going to go with the Indiana and Peyton Manning.

MR. GREGORY:  OK.

MR. GREENSPAN:  It's very difficult to go against Peyton Manning.

MR. GREGORY:  My view as well.  We'll make that the last word.  Thank you both very much.  I should mention we'll continue our discussion with Secretary Paulson and ask him some questions the viewers have submitted via e-mail and Twitter.  It's in our MEET THE PRESS TAKE TWO Web extra.  You can also read an excerpt from his book "On The Brink:  Inside the Race to Stop the Collapse of the Global Financial System." Plus, look for updates from me throughout the week.  All on our Web site, mtp.msnbc.com.
And up next, Sarah Palin rallies the tea party, and the 41st GOP senator is sworn in.  How will it all impact the Obama agenda and the 2010 elections? Our roundtable:  Ed Gillespie and Dee Dee Myers are here, only on MEET THE PRESS.

(Announcements)

MR. GREGORY:  We are back.  Joined now by Ed Gillespie and Dee Dee Myers.
Welcome both of you to the politics fix here at the end of the program.  So, big news this weekend besides the snowstorm here in Washington.  The tea party movement is in town--not in town, down in Nashville--with their convention. And Sarah Palin had a big showing there, sounding a lot like a presidential candidate, and here's part of what she said.

(Videotape, February 6, 2009)

FMR. GOV. SARAH PALIN (R-AK):  This was all part of that hope and change and transparency, and now a year later I got to ask those supporters of all that, how's that hopey, changey stuff working out for you?

(End videotape)

MR. GREGORY:  If there was ever a time, Ed, to question where is Sarah Palin going, it seems like this.  She sounded like a candidate last night.

MR. ED GILLESPIE:  Well, she was rallying the troops, very well received, obviously, and she has an incredible capacity to connect with people and with their concerns.  And I, I find myself, David, baffled by some of the consternation about Sarah Palin sometimes, because I find her to be a pretty compelling figure and someone who, obviously, resonated very strongly in that, in that room in Nashville.

MR. GREGORY:  But what role does she play in a Republican Party right now, Dee Dee, where the gains for Republicans in 2009 special elections were won by Republicans like Scott Brown or Bob McDonald in Virginia, or Chris Christie in New Jersey, much more moderate Democrats than the sort of brand of conservatism that she represents?

MS. DEE DEE MYERS:  Well, but that didn't stop her and the tea party movement last night from taking--for taking--from taking credit for Scott Brown's victory.  And it is interesting, because not only did she rally a conservative base that may or may not be Republican, she went out, out of her way to say her husband's not a Republican and to say that this movement is a warning to both Republican and Democratic officials that maybe they need to look at what they've been doing--how they've been doing business over the last few years. So I'm not sure this is exactly where this is going.  She's clearly positioning herself as a spokesman, if not the leader, of the tea party movement, but is it a third party?  Is it part of the Republican Party?  I don't think that's clear.

MR. GREGORY:  As a movement, what impact does it have for the midterms?

MR. GILLESPIE:  I think it's going to have a significant impact in the midterms.  Look, I think a lot of these people are new to the political process, and I think Dee Dee's right.  They, they are not Republicans or Democrats, many of them at this point.  They're leery of both parties.  But their overwhelming concerns are about debt and spending and government intervention in our economy and higher taxes.  And I think at the end of the day, as they look at the candidates for them in November, they're going to end up voting for the Republican candidate.  I believe that's what happened for a lot of folks in Massachusetts and other places.  So...

MR. GREGORY:  Right, but if you--but the question is, if a lot of these folks are motivated by the deficit, as we just talked about...

MR. GILLESPIE:  Yeah.

MR. GREGORY:  ...with Paulson and Greenspan.  This was what USA Today wrote on Friday in an editorial about that. "The Tea Partiers seem to be promoting more partisanship, not less.  Many are rejecting candidates deemed to be too likely to cross over and reach accommodations with Democrats.  That's a recipe for more debt.

"This isn't to say an uprising against Washington is not merited.  Lawmakers of both parties are simply ignoring the nation's drift toward fiscal suicide. Nor is it the case that populist movements can't serve constructive purposes. The last one - Ross Perot's presidential bid in '92 - forced both parties to focus attention on the deficits, which then turned into surpluses."
Is there a third way that's brewing here?

MS. MYERS:  I think it's unclear.  I mean, one of the things we know is that structurally it's very hard to create a third party, to get on the ballot in 50 states to run a credible campaign for president.  But it's not hard to force politicians to take a different position, and that's--I think that's the great question about the tea party.  There's no question that Ross Perot forced the country to take debt and deficit more seriously; and, as a result, President Clinton passed an economic plan that was a combination of tax cuts and spending cuts that really reassured the financial markets and put us on a path from a, you know, $290 billion debt under President Bush, H.W.  Bush, to a $127 billion surplus at the end of Clinton's term.  Can that happen again? We'll see.  Under George W.  Bush we saw the debt go from $5.7 trillion to--he added $4.9 trillion to that debt.  He nearly doubled it.  He nearly, in eight years, did what it took George Washington to Bill Clinton to do.  So Republicans have some 'splaining to do on this.

MR. GILLESPIE:  Well it's easy to explain.  We had the attacks of September 11 and the recession that was there when President Bush came in.

MS. MYERS:  That is--that's not...

MR. GILLESPIE:  Sure, that had a huge impact, Dee Dee, on...

MS. MYERS:  That, that's not fair.

MR. GILLESPIE:  Of course it's fair.  It had a huge impact on the economy that we had to recover from, it had a huge impact in terms of federal spending.  But the fact is President Bush's domestic discretionary spending, which President Obama made a big deal out of the freeze, was under one percent when he left office.  The--they increased it by--back to 24 percent...

MS. MYERS:  But he had huge new entitlements, among other things.

MR. GILLESPIE:  ...and have froze in place.  Huge new entitlements that are cheaper than the huge new entitlements that are proposed by Democrats.

MR. GREGORY:  But this, but this debate about deficits is part of what we're talking about...

MR. GILLESPIE:  Sure.

MR. GREGORY:  ...in terms of whether it fuels the third movement.
Let's talk about the president's agenda a little bit.  He--whether it was the, the winter meeting for the DNC here in Washington or speaking to Democrats and rallying them a little bit this week, he said he's not turning his back on health care.  But, at the same time, I spoke to a senior adviser this week who said we're trying to adjust to what the new normal is in Washington.  What is that going to mean for health care?

MR. GILLESPIE:  I think it means that health care--they may be able to get some things done where there's some common understanding that, that these are reforms that Democrats, Republicans alike can support, maybe things concerning pre-existing conditions, maybe even liability reform, although it's unlikely given the, the strength of the trial lawyers in the Democratic Party.  But there are some areas where you can get--find common ground.  But I think what it means is they've got to talk about jobs.  And the president got to it in the State of the Union, but it's been a year.  And they have burned a year talking about a massive government intervention in the private sector in terms of health care, and they finally realized more Americans out there are worried about their jobs or the economy in general, and they've got to get to that. And I think that's what you're going to see for the next year.

MR. GREGORY:  It's interesting because you also talk inside the White House. They say that the view is they've got to pass health care before they can effectively go out and win the argument about health care.  It makes it very difficult for Democrats who face re-election this year.  When the president met with some senators this past week, this is how the Associated Press summed up the meeting in part:  "Virtually all the senators who got their hands on a microphone face steep re-election challenges this year, and their moment with the president allowed them to give voice to public dissatisfaction with the economy and Washington.
"Senator Michael Bennet of Colorado:  `This place looks broken to the American people.'
"Senator Bayh of Indiana:  `What should the Democratic Party be trusted?'
"Senator Lincoln of Arkansas:  `Are we willing as Democrats also to push back on our own party and look for that common ground that we need to work with Republicans?'" The president's got Republican programs.  He's also got Democratic problems.

MS. MYERS:  Right.  There, there, there's no question this was--this is a difficult moment.  It's a bit of a "come to Jesus" moment for the, for the administration and for Democrats.  And I think that's why you've seen President Obama making a much more loud pitch for, for new job legislation. He's been talking about jobs.  He says that's priority one of his administration now.  And that's going to have to be a bipartisan bill, and the president has acknowledged as much.  It's going to include tax cuts, and we'll see if the Republicans will be for what they're for and vote for a bill that will help not just the country but might help Democrats.  Once you've passed a job bill, then you've got to do something about health care.  And I think the president has made clear he's not abandoning health care, he isn't going to go out there and, you know, be the leader, he's going to let Congress continue to do that.  But he's going to work behind the scenes, as he as, to, to try to push members to pass it.  If they don't pass it, I think the president has said, "What does that say about our ability to govern?"

MR. GREGORY:  And you get all the downside of this debate and none of the upside, is the view.  Is the Democratic majority in real jeopardy, as you look at the landscape?

MR. GILLESPIE:  Oh, absolutely, it's in real jeopardy.  I've felt for some time that the House majority is at great risk of, of going Republican in November.  And I think increasingly you're looking at significant gains in the Senate.  We just saw this week with Senator Coats declaring in Indiana against Evan Bayh.  We've seen now John Boozman going to run in Arkansas.  We saw Beau Biden say he's not going to run in Delaware where Mike Castle obviously puts it heavily in his favor.  So, across the board, we're seen opportunities for Republicans that we didn't seen, certainly, six months ago, and I think Scott Brown's election obviously has had a major impact on recruiting and, and decisions by candidates.

MR. GREGORY:  That, that assumes some level of support for Republican rule, which is certainly not evidenced in the polling.

MS. MYERS:  Right.  I mean, the Democrats' losses have not been Republican’s gains.  I think Democrats need to run like they're afraid of losing both houses of Congress.  But that said, I think you can make a strong argument about the economy, about health care.  You know, the president needs to do a better job of talking about what will happen if we don't pass health care. And then after health care passes, should it pass, he needs to remind people that their lives will be better because of it.  He's got to--you know, this isn't something that's going to--that Republicans are going to cede without a fight.

MR. GILLESPIE:  We’re not going to cede without a fight.  But let me make the point in terms of Republicans.  It's true that people aren't self-identifying as Republicans in big numbers right now.  It's also true that Republicans won the governorship in New Jersey, won the governorship in Virginia, won the Senate seat in Massachusetts.  And on the congressional generic ballot, when asked if you were likely to vote for the Republican or the Democrat come November, we have a 2 to 4 point advantage, which we haven't seen in over a decade.  So I think there's a real opportunity here.  And I do believe at the end of the day, if, if we get the opportunity to get the majority again and we demonstrate a commitment to fiscal discipline, you will see more people self-identify as Republicans.  But in the meantime, they're voting Republican. That's the most important thing in the short term.

MR. GREGORY:  All right, we're going to leave it there.  Ed Gillespie, Dee Dee Myers, thank you both very much.

Before we go, it is, of course, Super Sunday, and we all know what that means. Sid the Kid vs.  Alex the Great.  The Washington Capitals take on the Stanley Cup champions, the Pittsburgh Penguins.  It's the NHL on NBC at 12 Noon.  And yes, I'm so excited because I will be there.  Now, as for that other game, our executive producer, Betsy Fisher, would be angry with me if I did not say "Go, Saints."

That's all for today.  We'll be back next week.  If it's Sunday, it's MEET THE PRESS.

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