updated 10/16/2013 12:41:09 PM ET 2013-10-16T16:41:09

THE RACHEL MADDOW SHOW
October 14, 2013
Guest: Sheldon Whitehouse

RACHEL MADDOW, MSNBC HOST: Thanks to you at home as well for joining us
this hour.

Before the giant nuclear accident at Chernobyl in Ukraine in 1986, the
biggest accident before Chernobyl involving a commercial nuclear reactor
was the one at Three Mile Island in Pennsylvania. That nuclear meltdown
happened in March of 1979.

(BEGIN VIDEO CLIP)

TV ANCHOR: Good evening. A nuclear power plant near Harrisburg,
Pennsylvania, the cooling system broke down this morning. Some radioactive
steam escaped into the air. Radiation passed through the 4-foot concrete
walls and was detected a mile away from the plant.

REPORTER: It was shortly after 4:00 this morning at the Three Mile Island
nuclear plant when a valve in a water pump that cools the number two
reactor blew out. The blowout triggered an automatic shutdown of the
system, but before the plant was seal, some radioactive steam escaped into
the air.

REPORTER: Harrisburg Hospital, in case it has to move out, has cut its
patient load to 50 percent by limiting admissions to emergencies. Sue
Moses` baby, Joseph, was born at the hospital the day of the plant
accident. She`ll take the baby home tomorrow, but Mrs. Moses is still
thinking of leaving.

UNIDENTIFIED FEMALE: I would just as soon a little bit further away from
the activity that is going on right here.

(END VIDEO CLIPS)

MADDOW: Imagine having your baby right there in the middle of the Three
Mile Island meltdown. The meltdown at Three Mile Island happened at 4:00
in the morning on March 28th, 1979. That was a Wednesday.

They evacuated pregnant women and preschool-aged kids within five miles of
the plant. By two days after the accident, by Friday of that week, they
had extended the evacuation zone to a 20-mile radius around the plant.
More than 100,000 people were evacuated around Three Mile Island.

By that weekend, President Jimmy Carter was on the scene wearing funny
booties and touring the plant and trying to show that the situation was
being brought under control. Ultimately, the cleanup at Three Mile Island
took nearly 15 years and $1 billion.

But the scariest thing about that accident right when it happened was that
nobody really knew how bad it was or how bad it was going to get or what it
even meant in terms of dangerousness to have a large-scale nuclear accident
in this country.

So, that nuclear meltdown happened, the Three Mile Island crisis started at
the very end of March 1979. What was going on in Washington at the very
end of March `79? March 1979 in Washington, while Three Mile Island is
fixating the country.

In Washington they were having a huge debt ceiling fight. The president
was a Democrat, Jimmy Carter. The Senate was controlled by the Democrats.
Robert Byrd was the leader in the Senate. The House was controlled by
Democrats, too. Tim O`Neill was speaker of the House.

But even though Democrats had control of the White House and both houses of
Congress, the Republicans in the House had figured out a way to attach to
the debt ceiling an amendment to the United States Constitution. They
wanted to attach a balanced budget amendment to the Constitution and make
raising the debt ceiling contingent on passing that constitutional
amendment.

So, even though the Republicans were in the minority, they had figured out
how to do this, and they were convinced that this was a genius strategy and
that it would not only work, it would make the Democrats look terrible in
the process. The top Republican in the House at the time was Congressman
John Rhodes of Arizona, and he told "The New York Times" when all this was
happening, "I think the Democrats fear a balanced budget like the devil
fears holy water!" Mwah!

So, while Three Mile Island melted down in Pennsylvania, in Washington, in
Congress, they fought and fought and fought and fought and fought right up
until the deadline. Three Mile Island melted down on a Wednesday. The
debt ceiling deadline was the following Tuesday. Congress waited until the
day before the debt ceiling deadline to finally raise the debt ceiling.

And no, the Republicans did not get their balanced budget amendment. They
got some sort of meaningless, symbolic promises in that direction, but they
did ultimately raise the debt ceiling.

Turns out, though, they did not raise it fast enough. They got too close.
The fact that they waited until the very last minute had really big
consequences, and I think part of the reason that this has been sort of
lost to history is that nobody was paying attention to it at the time that
it happened, because there was something else to pay attention to. There
was a legit nuclear meltdown, a non-metaphorical nuclear meltdown on U.S.
soil at the same time.

So, this is what everybody was talking about and paying attention to at the
time. But looking back at it now from this distance, we can see that what
Congress was doing, while the country was freaking out about that nuclear
reactor in Pennsylvania, ends up being sort of an important lesson, an
important almost dry run in why screwing with the debt ceiling`s a really
bad idea.

There is only a couple of examples of screwing with the debt ceiling in
modern history. There`s 2011, of course. House Republicans under John
Boehner did force us in 2011 to get very, very close to the debt ceiling.
There was no actual default in 2011. We did end up paying all of our
bills, but because we got so close to the debt ceiling that year, we did
get our credit rating downgraded for the first time in history.

The Government Accountability Office crunched the numbers later and figured
that just that, without default, just getting close enough to have people
smell default, that cost the government about $1.3 billion that it would
not have otherwise had to spend.

So, that`s one of the two modern experiences we`ve had with getting close
to the debt ceiling with this kind of drama. The other one was that one in
1979, and that one was actually worse, even though people don`t much think
about it and it`s not really a hi-profile thing in our modern economic
history.

But in 1979, in the coincident with Three Mile Island debt disaster, we did
actually partially default on the debt. Congress acted the day before we
got to the technical debt ceiling, and they thought they had taken care of
it, they thought they averted the crisis. But in getting so close, in
getting within a day of the deadline, they actually got too close, and
treasury bonds that were due to be paid off on April 26th and on May 3rd
and on May 10th, all of the bonds that came due on those days didn`t get
paid back on time.

Sorry, glitch. We got too close. System overwhelmed. Software couldn`t
handle it.

We apparently didn`t know how to use those newfangled computing machines at
the time, and the Treasury was unable to make all of the payments it was
supposed to make on all of the debt that we owe. People who held those
specific treasury bonds did eventually get paid, but they got paid late.
They got paid up to a week late.

And those delayed payments do mean that we kind of sort of defaulted on
that debt for a few days. And because of that, investors sued the United
States of America, saying that the U.S. government had not paid what we
said we were going to pay. They tried to make the government pay interest
for the days when these investors should have had their money but they
didn`t because the U.S. was deadbeat and wasn`t paying when we said we
would.

Ultimately, that whole affair ended up hiking the interest rates. Sounds
boring, but it ends up being really expensive. The Treasury had to pay
higher interest rates on bonds that it wanted to issue thereafter, which
means we`ve got to pay people more money for the privilege of them lending
us something. Interest rights got hiked by a little more than half
percent, and it may not sound like much, but that hike in the interest
rates didn`t go back down when the crisis was averted.

We proved ourselves to be untrustworthy, and so the hike in the interest
rates stuck with us as a sort of penalty for having screwed up. And if you
add up the cost of all the extra interest payments we had to make because
of that screw-up, in the first decade alone after that little technical
just for a second glitchy default in 1979, we spent $12 billion that we
would not have otherwise had to spend because we did that.

So, people saying they were so concerned about debt and deficits made us
add $12 billion extra dollars to the debt for no purpose, for nothing in
return. You would have been better offsetting that cash on fire. At least
then it could keep you warm. In this case, it was for nothing.

So, today we are three days away from the debt ceiling. We are due to hit
it on Thursday. And aside from Fukushima, there`s no ongoing nuclear
meltdown to distract us from this one.

The White House today announced that it was asking the top Democrat and the
top Republican from both the House and the Senate to come personally to the
White House to talk to President Obama and Vice President Biden face to
face, just the six of them to try to work this thing out once and for all.
That was due to happen at 3:00 Eastern today. But at the very last minute,
that meeting was scrapped.

Senate Democrats and Republicans said that their own discussions were going
well enough that they thought it would be worth putting off the White House
meeting to see if they could get a little further on in their negotiations.
As everybody waited all afternoon to see when that postponed meeting would
happen at the White House, the Senate Republicans very late in the day
announced that, actually, they wanted to sleep on it. Apparently, not
enough Republican senators were in Washington for them to convene for a
meeting to discuss this stuff until tomorrow morning.

So, that means that the next potential meeting, the next opportunity for an
act of furtherance toward saving ourselves from economic catastrophe can
come no sooner than midday tomorrow, after Senate Republicans meet at 11:00
a.m.? Even if the Senate does work something out, of course, it will then
have to go through the House, where there have been even fewer signs that
progress is imminent, let alone possible.

Markets today were relatively stable, if a bit nervous, as the markets
hope, just as much as everything else, that something does get resolved.

But even if Congress does serve something up tomorrow, we will then be
within two days of hitting the debt ceiling. When we got within one day of
hitting the debt ceiling back in 1979, we did real harm to the country.
And yes, it was overshadowed only by a nuclear meltdown, but it did real
lasting and expensive harm to the country.

Hitting the debt ceiling would be bad. Getting close to the debt ceiling
is bad, too.

Are we close enough already to start worrying about the damage?

Joining us now is Senator Sheldon Whitehouse of Rhode Island. He`s a
member of the Senate Budget Committee.

Senator Whitehouse, thanks so much for being with us.

SEN. SHELDON WHITEHOUSE (D), RHODE ISLAND: Very happy to be with you.

MADDOW: So, growing up, my dad always told me, close only counts in
horseshoes and hand grenades. Does --

WHITEHOUSE: This is the hand grenade version of that.

MADDOW: Oh, I was going to ask, does close also count in debt ceilings?
Are we already in dangerous territory?

WHITEHOUSE: Yes, it absolutely does. There are two consequences of a
default from not raising the debt ceiling. One is if you actually don`t do
it, and then markets and interest rates adjust in probably unimaginably bad
ways. But even when you get close, other countries, bankers, people buying
treasury securities look around and think this security doesn`t seem quite
as secure as it used to. I think I`m going to have to charge a little bit
more in order to come in and be a buyer.

And because we pay the interest, that comes right out of the taxpayers`
pocket. So, it`s very irresponsible to drive too close to the debt limit
and to force all those costs on the taxpayers and to create all that
uncertainty in the economic world.

MADDOW: What is your understanding of the status of discussions right now,
both in the senate and also overall towards some sort of resolution? One
theory about why the markets are not freaking out too much already is that
there`s faith that a last-minute deal will be worked out. Is that your
sense that that`s true?

WHITEHOUSE: Well, you`ve heard the tone in the last day or so. Harry Reid
and Mitch McConnell have had nothing but nice things to say about each
other. There`s been a constant spirit, a tone of optimism.

And now, with the meetings scheduled for both caucuses tomorrow, I think
it`s logical to conclude that they have an agreement that they intend to
present and that we`ll then be voting on it tomorrow afternoon, and that
leaves Speaker Boehner back where he was at the very beginning, which is,
it`s his choice. Let them vote and this is over or not.

MADDOW: If the House does what it did before, the last time it was in this
situation, and John Boehner does not choose to bring up a measure that can
pass for a vote, are you of the belief that President Obama could act
unilaterally in some way, that there is any other option? Obviously, the
White House and the president himself have been very clear that they don`t
want to do that. They think it could cause maybe even more problems than
it might solve.

What do you think about that as a constitutional matter?

WHITEHOUSE: It`s a -- whether or not there`s a Article 2 or a 14th
Amendment constitutional option that the president has, even if there is
one, just set that question aside for the sake of argument. Even if there
is one, him going to it sends that same signal to the markets and to the
rest of the world that something really weird is going on in America, that
this particular issue of American debt has a cloud over it, has a question
mark around it, and that could have a very, very bad effect on markets and
interest rates, and that, in turn, comes home to hit Americans in their
pocketbooks.

MADDOW: Every time I have heard you talk about this issue, and whatever I
have talked to you about other issues, you have always seemed to me like a
very pragmatic and grounded kind of senator. That`s part of the reason I
wanted to talk to you about this.

Because of that and because you`re on the budget committee, I have to ask
you what it is like to try to negotiate and talk to your colleagues across
the aisle about this when so many -- seems like increasing numbers of
Republicans, even in the senate, even senators who you think would be the
experience to know better, are just saying this wouldn`t be a big deal,
wouldn`t be catastrophic to hit the debt ceiling. They deny that it could
really harm the country.

How does that affect your work?

WHITEHOUSE: You just kind of have to take your breath in and say, my God,
did he really just say that? What is he thinking? If you were to -- I
mean, the prevailing theory is, OK, so, we don`t allow the debt limit to go
up, but there`s still some money coming in and we can still pay off the
Chinese with that and everything`s going to be fine.

Well, sure, except the fact that you have to sell treasuries out into a
market, and the market is now looking around at a country that is maybe not
sending out checks on time to Social Security recipients. Maybe has gone
into a much deeper government shutdown because there is no liquidity at
all.

I mean, the consequences, even if you`re still paying the Chinese, are
terrible. Investors aren`t idiots. They can look across the table and see
what else is happening. It`s not just going to be the checks going to
them.

So, it`s like climate denial. It`s really hard to reconcile it with
reality.

MADDOW: Senator Sheldon Whitehouse of Rhode Island -- thank you very much
for being with us tonight, sir. It`s good to have you here.

WHITEHOUSE: Thank you.

MADDOW: All right. Over the weekend, there was something that happened in
Washington that on the one hand was kind of like, oh, I remember this, good
old days! On the other hand, it with was like, oh, I remember this, I
thought we were past this now. It all came rushing back in a flood of
stars and bars. That story`s next.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

REP. RANDY NEUGEBAUER (R), TEXAS: People have travelled with their family.
How do you -- how do you look at them and say how do you deny them access?
I don`t get that.

PARK RANGER: It`s difficult.

NEUGEBAUER: Well, it should be difficult.

PARK RANGER: It is difficult. I`m sorry, sir.

NEUGEBAUER: The Park Service should be ashamed of themselves.

PARK RANGER: I`m not ashamed.

NEUGEBAUER: You should be.

(END VIDEO CLIP)

MADDOW: That was from the second day of the government shutdown.
Republican Congressman Randy Neugebauer.

When the National Park Service is closed, you do not get to use National
Park Services facilities. It`s weird, right?

The monuments and parks maintained by the parks service get closed when the
park service itself has to be closed. That`s what the park service said
they would do in the event of a shutdown before the shutdown ever happened.
They posted their contingency plan online.

It`s a fairly simple thing. Effective immediately upon a lapse in
appropriations, the national parks service will take all necessary steps to
close and secure national park facilities and grounds in order to suspend
all activities except for those that are essential to respond to
emergencies involving the safety of human life or the protection of
property.

It`s not that complicated. If you shut down the service that operates and
protects the parks and monuments, the parks and monuments shut down. Tada!
This is not rocket science.

But in the more fevered corners of the American political right, the parks
and monuments are closed down right now not because the government is shut
down but because President Obama does not like those parks and monuments.

This is bizarre. It`s been brewing since Randy Neugebauer, right? It`s
been brewing for a while now, but this weekend, it burst forth in
Washington in full splendor, as the same Republicans who have been leading
the charge to shut down the government decided this weekend that they would
lead rallies to show their outrage that the government is, in fact, shut
down.

(BEGIN VIDEO CLIP)

SEN. TED CRUZ (R), TEXAS: Let me ask a simple question, why is the federal
government spending money to erect barricades to keep veterans out of this
memorial?

(END VIDEO CLIP)

MADDOW: Because the memorial is closed? Because all the memorials and
parks controlled by the parks service are closed because you led the charge
to close the parks service.

I know it was a rhetorical question, but there`s actually a really direct
empirical answer. Conservatives who wanted to shut down the government are
angry now that the government is shut down. And because of that, they held
a rally yesterday in Washington where, among other things, they yelled at
cops.

(BEGIN VIDE OCLIP)

UNIDENTIFIED MALE: We want my freedom! Your freedom is being walked on!
You need to throw those badges off. You need to go get out of the service
to the dictator of this country!

UNIDENTIFIED MALE: They all know it, too.

UNIDENTIFIED MALE: Come on, fight for your country, not against it?!

UNIDENTIFIED MALE: What are you doing? You`re going to stand there and
let your horse (EXPLETIVE DELETED) all over the road!

UNIDENTIFIED MALE: Make sure you guys clean this (EXPLETIVE DELETED) when
the horses get out of here. I don`t want it on our streets. These are our
streets, they`re not yours. He works for us. You work for us.

(END VIDEO CLIP)

MADDOW: The guy at the end there saying, make sure you guys clean the
bleep up when you get the horses out of here, we don`t want it on our
streets. These are our streets.

So, the police that are getting yelled at there are working without pay
while the shutdown goes on. They`re working without pay now includes
getting screamed at for being at work.

So, the protesters rally with the two Republican senators who led the way
for the shutdown. Mike Lee and Ted Cruz, expressing their outrage that the
things they want open are closed now because of that shutdown.

They then picked up the barricades that were around the closed World War II
Memorial and dragged the barricades over to the White House and hurled the
barricades at the White House, hurled them down in front of the White House
fence.

Then, the protesters went home, so the police, who through no fault of
their own are working without being paid, the police had to pick up those
barriers, drag them back to where they came from and keep working their
shifts without being paid because of the shutdown that these folks made
happen.

They got speeches from Ted Cruz and from freshman Senator Mike Lee from
Utah, the two most aggressive proponents of the shutdown. They also heard
from Congressman Kerry Bentivolio of all people who you may remember as the
personal fringe candidate who sort of accidentally won that seat in
Michigan as a Republican after Congressman Thaddeus McCotter got caught
forging all the signatures on his re-election petition, and he was the only
Republican left on the Republican line.

Kerry Bentivolio plays Santa Claus. At Christmastime, he herds reindeer
and did bit parts as an actor about a 9/11 truther movie about how really
it was George W. Bush who blew up the World Trade Center on 9/11.

So, speaking at the rally for the shutdown this weekend, it was Ted Cruz,
Mike Lee, Kerry Bentivolio, also, Sarah Palin.

Sarah Palin is back. She has a book coming out soon about I think the war
on Christmas? So, maybe that`s why she`s back. But she`s back. And it
was not a big list of speakers this weekend. It was just those four and
then this guy, who told the appreciative, applauding audience that
President Obama needs to put down the Koran and come out with his hands up.

Actually, I should just before play the clip, you should know that he was
trying to say, I think, come out with your hands up. And instead, he said,
come up with your hands out. But I think you could tell what he meant.

(BEGIN VIDEO CLIP)

LARRY KLAYMAN, FREEDOM WATCH FOUNDER: We are now ruled, quote/unquote, "by
a president --

UNIDENTIFIED MALE: Imperialistic president!

KLAYMAN: -- who bows down to Allah. I call upon all of you to wage a
second American nonviolent revolution, to use civil disobedience and to
demand that this president leave town to get out, to put the Koran down,
get up on his knees and figuratively come up with his hands out, up.

(END VIDEO CLIP)

MADDOW: Vaguely threatening but incoherent is a patented thing with these
folks. It`s never held them back, like say this guy, who brought the
Confederate flag to the rally to wave it in front of the White House. Yes,
an African-American family lives in that house now.

Beyond the menace of the Confederate flag, there was also the awkwardness
and thematic incoherence of waving the giant Confederate flag alongside the
other flag he was holding, which was the Marine Corps flag. That is a
particularly awkward choice, to be holding the Confederate flag and Marine
Corps flag at the same time, since the U.S. Marine Corps was part of the
fight against the Confederacy in the civil war.

But hey, I think the idea here was more about waving a Confederate Flag in
front of house where a black family lives than it was about anything
specific related to the marines. This weekend, at the railing against the
shutdown that they demanded rally, it felt less like anything specific to
our politics right this second and more like old times, kind of. The
crowds may be smaller now, and yes, everybody wonders now what Sarah Palin
is doing there. It`s no longer self-evident.

But with the Obama is a Muslim stuff and the totally unveiled racial stuff,
it kind of feels like the Tea Party heyday all over again, doesn`t it?
Who`s ready for another round?

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

ALAN SIMPSON, FORMER U.S. SENATOR: Tonight, an inside look at the Bush
White House. Our exclusive interview with Vice President Richard Bruce
Cheney. I`m Senator Al Simpson sitting in for Chris Matthews. Let`s play
"HARDBLL"!

(END VIDEO CLIP)

MADDOW: That really did happen. Obviously, the "HARDBALL" theme music has
improved immensely since 2001, but wait until you see this gem, this little
moment from later on in that show. This is back in 2001. That interview
with newly inaugurated Vice President Dick Cheney and "HARDBALL" guest host
Alan Simpson.

(BEGIN VIDEO CLIP)

SIMPSON: Dick, the -- we were talking about Tip O`Neill.

DICK CHENEY, THEN-VICE PRESIDENT: Right.

SIMPSON: Finish your remarks. This is a short segment.

CHENEY: Tip was one of those men, he respected everybody the House,
regardless of party. You didn`t get judged as being a lesser person in the
house because you were a Republican and, of course, that`s where I first
met Chris Matthews. And as a matter of fact, did battle with Chris on a
couple of occasions when he was the press secretary and aide to the
speaker.

But the speaker always had great respect and friendship with Jerry Ford,
for example, from their days together in the House. I must say, I like
Chris much better as the anchor on "HARDBALL."

SIMPSON: Do you watch this show?

CHENEY: I do watch the show very carefully. All of us who are political
junkies and involved in the business, "HARDBALL`s" an important part of our
routine.

(END VIDEO CLIP)

MADDOW: March 2001. Former Senator "finish your remarks, this is a short
segment" Alan Simpson filling in for the great Chris Matthews on
"HARDBALL," a show that Dick Cheney says he never missed. Hold that
thought. There`s more coming up.

(COMMERCIAL BREAK)

MADDOW: Republican freshman Senator Ted Cruz of Texas has a new favorite
way to close out his speeches. Listen to this. This is how Ted Cruz, Mr.
Shutdown, right, this is how he closed out his speech at the values voter
summit this weekend.

(BEGIN VIDEO CLIP)

CRUZ: As Ronald Reagan famously observed, freedom is not passed down in
the bloodstream from one generation to the next. Every generation has to
rise up and defend it, or one day, we will find ourselves answering
questions from our children and our children`s children, what was it like
when America was free?

None of us will ever have to answer that question, because together, the
American people, we are going to restore that shining city on a hill that
is the United States of America!

(END VIDEO CLIP)

MADDOW: Ted Cruz, quoting Ronald Reagan, misquoting John Winthrop, who
never said that the city on the hill was shining.

In 1630, John Winthrop said for we must consider that we should be city
upon a hill, not a shining city, just a city. Reagan misquoted Winthrop to
make the city shiny and it stuck for some reason and that`s why everybody
thinks it`s a quote.

Anyway, the other thing that Ronald Reagan said that Ted Cruz repeats in
his speeches now is actually quoting Ronald Reagan from the early `60s,
from before he was elected to any office, when he was just an actor and a
conservative activist. And he worked as a kind of spokesmodel with the
American Medical Association in a public campaign against a terrible new
Soviet-style communist takeover of the American health care system.

Actor Ronald Reagan in the early `60s warned about how this socialistic
health scheme would destroy this nation and grind our freedoms under its
totalitarian boot heel.

(BEGIN AUDIO CLIP)

RONALD REAGAN, FORMER PRESIDENT: This program, I promise you, will pass
just as surely as the sun will come up tomorrow. And behind it will come
other federal programs that will invade every area of freedom as we have
known it in this country.

Until, one day, as Norman Thomas said, we will awake to find that we have
socialism. And if you don`t do this, and if I don`t do it, one of these
days, you and I are going to spend our sunset years telling our children
and our children`s children what it once was like in America when men were
free.

(END VIDEO CLIP)

MADDOW: Ronald Reagan warned us. He warned the country that freedom
itself would cease to exist if America passed that terrible health care
program, and that terrible health care program made us into a Soviet
socialist republic where men were no longer free, that program, of course,
was Medicare. Turns out, America and freedom did survive Medicare.

And Ronald Reagan came around to it enough that by the time he was
president, he actually chose to expand Medicare, about which freshman
Senator Ted Cruz is not at all embarrassed, as he now quotes that specific
line from Ronald Reagan to raise the alarm over another federal health
program that is much less of a leap into the gaping Soviet maw than
Medicare ever was.

My beloved colleague and pal, Chris Matthews, has just published the best-
timed book ever about the real legacy of Ronald Reagan`s approach to
governance, specifically his contentious but civil working relationship
with the legendary Democratic Speaker of the House Tip O`Neill.

Joining us for an interview with the host of MSNBC`s "HARDBALL," author of
the new book "Tip and the Gipper: When Politics Worked," Mr. Chris
Matthews. It is great to have you here tonight. Congratulations on the
success of this book.

CHRIS MATTHEWS, "HARDBALL" HOST: Thank you. Thanks, Rachel.

MADDOW: So, when you hear Ted Cruz invoked President Reagan now, alluding
to Reagan`s crusade against Medicare, without saying that`s what it`s about
-- I mean, Reagan raised the debt ceiling 18 times as president. What is
it about the real history that is so dangerous to them that they have to
invent revisionist junk instead?

MATTHEWS: Well, fortunately, I kept a journal, President Reagan kept a
diary and there are records of what was the case. Ronald Reagan in his
mind when he went to bed at night or thought about things was Ronald Reagan
the commentator.

But Ronald Reagan, the governor, Ronald Reagan the president was a very
different kind of a fish. Ronald Reagan realized when he cut taxes too
much that he won he came back a year later and had the biggest tax increase
in history. That doesn`t get into the Ted Cruz record book. He realized
that Social Security was a very popular program, and after trying to mess
with it in `81 and `82, he came back in `83 with a very progressive fix for
Social Security that`s lasted all the generations since.

So, there was the Ronald Reagan in that record that he put out, that 78 RPM
record in the 1960s, but he got back down to reality, and thanks to Nancy
Reagan, his wife who I spent time with this weekend, and very much thanks
to Jim Baker, he was a practical conservative. He was more like a British
conservative, like British conservatives accepted national health after
they got back into power with Churchill in his second premiership.

They didn`t go back in time. They realized the public -- in fact, the best
quote on this was George F. Will, who said "Americans are conservative,
they want to conserve the New Deal," and that`s just a fact. We are that
way. And it is not communism, it is not dictatorship, it is very mild
social democracy.

And to say that there`s something wrong with that is to say all of Europe,
Australia, New Zealand, the entire modern world is somehow captive to a
system they don`t believe in. Americans like Medicare. They like the
prescription drug program of George W. Bush and they`re going to like this,
over time.

MADDOW: Chris, in terms of Reagan`s legacy, I think that -- I feel like, I
look back at his policy, particularly looking at him around issues of war
and peace and the scope of presidential powers and things around national
security, and I feel like he was a pretty radical guy. But what you`re
documenting here is a sort of tactical consideration, a sort of tactical
civility, a willingness to not tear down the government when you need to
get done what you wanted to get done, when you need it to enact your
program. Is that what`s missing, a basic expectation about process?

MATTHEWS: Well, yes, because with you know how he learned and developed.
When he met Gorbachev after tip had met him and said Reagan wanted to meet
you at a delegation and actually vouched for Reagan, saying he really is
sincere about reducing or eliminating nuclear weapons, who would you expect
to do this? It was Reagan who had warned against the Soviets, said you
can`t negotiate with them, they`re dishonest, who went in there in his
presidency and really made his place in history.

As we all know -- why do people ignore this? He was not some crazy neocon
hawk who kept invading countries. He was the guy in the end who signed the
peace treaty with Gorbachev, the minute he knew it could be done, he wanted
to end the damn thing. He hated mutual assured destruction, hated nuclear
weapons, and it`s all in the record if anybody chooses to see it.

Again, there is a difference between Reagan when he had responsibility and
when he was just out there hawking columns and radio commentaries, a big
difference.

MADDOW: How do we end up with a conservative movement now that has fully
embraced the guy on that `78 RPM record, fully embraced the ideologue but
not the governor?

MATTHEWS: Because we all embrace the winner. Look at the various
variations of Christianity, just to take a much larger notion. There`s
1,000 different versions of what Christianity stands for. Does it stand
for Constantine and war, in hoc signo vinces, how was it, in hoc signo
vinces, or is it for peace and love?

People find different ways to use an iconic person like Reagan.

MADDOW: Are you, though, in writing about his relationship with O`Neill,
trying to talk about -- so, Reagan has been rarefied, right? Reagan is
made into a saint.

MATTHEWS: Not by me.

MADDOW: But for conservatives, he has. So, are you trying to elevate into
their understanding of him, the part of him that saw Democrats as humans
and saw compromise as the way you get things done?

MATTHEWS: Look, in a country that`s probably in our lifetimes, and maybe
even your lifetime you`ll live longer, perhaps. I think you will. We`re
going to have a divided government. It`s what we have.

The country`s always going to be like the French, somewhere in the middle.
Like the French people are, they never go hard left or hard right. We`re
always going to have a mix of Democrat and Republican, probably. One party
will control maybe the presidency and one House the other and the other
House.

They`ve got to learn how to work together. There has to be compromise.
The only alternative is what, a military coup? There is no alternative!

Or absolute dysfunction. What I fear now, and it is something of a
coincidence the book came out just now, is the thing is, Tommy O`Neill,
tip`s oldest son said, what those two guys agreed on was total dysfunction
and stalemate was a disaster.

The American people have to know, when they go and vote, it`s going to have
a consequence. If they vote for Reagan, they`re going to get some of
Reagan, maybe all of him for a while, then the people will see the limits
of that. If they vote for Obama, they`ll get health care. They have to
believe that.

That`s what`s going now, respect for the voter. Obama was re-elected, he
was elected, he got his bill through the Supreme Court. He did everything
right and they went right back and tried to pull it back from him. And I
think they`ll learn a lesson, you can`t do that.

And this president, I hope, learns a lesson -- fear is better than love.
He has got to learn, that`s one thing Reagan could teach him, scare the
other guy so he won`t come at you.

MADDOW: Chris, when I look at the evolution of the two parties over the
last 30 to 40 years, I feel like the Democratic Party had some choices to
make, and essentially, in the Clinton years, and it`s continued with Obama,
they decided to be sort of a center-left party that basically defines
itself as technocratic.

The Republican Party, on the other hand, is still evolving in a way that I
can`t predict which way they`re going and people are now starting to talk
seriously about the idea that they may have a permanent schism with this
sort of Southern style libertarianism Tea Party thing that`s going on.

I feel like the Democratic Party has taken a much more predictable
trajectory over 30 or 40 years. Do you see it that way?

MATTHEWS: I think very incremental. The Democrats wanted to complete the
social safety net and everyone knew going back to Teddy Roosevelt, not just
FDR, that it was health care for all ages. They`re doing it.

As you know, in a modified way, no public option, just trying to do it so
everybody roughly gets coverage so we can establish the principle that
people who work for a living don`t end up in the E.R. That`s a very simple
principle I think the public does accept or will accept it completely.

The Republican Party has really gone off the other end. I think you`re
seeing in these people a tad, a very bad tad of a Joe McCarthy in this
thing that Cruz is up to, certainly a lot of Newt Gingrich, a lot of
revolutionary anger that`s unfocused, it`s free floating, and a lot of it
has to do with we have our first black president.

And if you don`t believe that, look at that Confederate flag you showed
tonight. What is that about? They wouldn`t have shown that if a white guy
was in there. There`s something that really bugs people about change
today, demographic change we know about.

And something that just riles them up against Obama that`s really something
different than politics. I think it`s hatred. I don`t think it`s
politics.

MADDOW: Chris Matthews, host of MSNBC`s "HARDBALL," author of the great
new book "Tip and The Gipper: When Politics Worked," which is already on
the best seller list and deservedly so. Chris, again, congratulations.
Thanks for being here, man.

MATTHEWS: Thanks to my colleague.

MADDOW: Thanks.

Shutdown or no shutdown, there is an important and surprisingly close
election for U.S. senate two days from now. Why is it on a Wednesday?
That`s part of the story. That`s going on.

Also, Virginia`s getting weird again.

And neither of those stories has anything to do with the shutdown or the
debt ceiling, and they`re both coming up. Stay with us.

(COMMERCIAL BREAK)

MADDOW: So, the threat of economic apocalypse does have a way of forcing
everything else in the news off the front pages, but there is a lot else
going on in the news right now, even just in politics news there`s a lot
going on. New Jersey`s U.S. Senate special election is this week. It`s
being held on Wednesday of this week, not on Tuesday, which is a more
normal day for an election. That`s apparently because New Jersey Governor
Chris Christie on the right side of your screen there did not want to have
his own re-election race next month on the same ballot as Democrat Cory
Booker`s race for the Senate seat.

So, governor Christie hand-picked this week, Wednesday, as the day that
Cory Booker is allowed to have his Senate race, and then New Jersey will
have to go vote again next month in the governor`s race. Weird, I know.

In the Senate race, Mr. Booker leads his somewhat eccentric Republican
opponent, Steve Lonegan by 10 points in the latest polling. Mr. Lonegan
this weekend had to fire a top campaign staffer for taking Steve Lonegan`s
previous allegation that Cory Booker is secretly gay and adding a whole
bunch of x-rated descriptors to the allegation.

But again, that U.S. Senate race this week is on Wednesday, will fill the
seat vacated by longtime New Jersey Senator Frank Lautenberg who died in
June.

Also for the record, Cory`s not gay.

Also this afternoon, we got word the alleged Libyan terrorist who was
scrubbed off the street by U.S. Delta Force last weekend has arrived in the
United States and is expected to be arraigned in New York City tomorrow.
He`s been under indictment for a decade in conjunction with the bombing of
the U.S. embassies in Kenya and Tanzania in 1998.

Since last weekend when U.S. forces went to Libya and grabbed him off the
street. He has been onboard the USS San Antonio where he was apparently
interrogated in international waters for some portion of the last week
without a lawyer present and without being read his rights. That means
anything he told the interrogators during that time on the ship is not
admissible in a criminal case against him.

But we are likely to learn more about a at the arraignment again in New
York City.

Also today, "The New York Times" published an interview with the man who
used to head up the group that won the Nobel Peace Prize last week. The
Organization for the Prohibition of Chemical Weapons is the international
agency that`s currently working to disabuse Syria of its chemical weapon.
They won the peace prize on Friday.

But on the occasion of that Peace Prize being given to the agency, the
former head of the agency who the U.S. forced out of the job in 2002 is
finally publicly explaining why it is that he got fired. Why it is the
George W. Bush administration got him fired and in the lead-up to the Iraq
war. He says his agency was making plans to do inspections in Iraq, to see
whether Saddam Hussein, in fact, had any chemical weapons. We now know, of
course, that Saddam Hussein did not have any chemical weapons, presumably
inspections would have shown that, and that would have been inconvenient
for the George W. Bush administration, which was busy arguing that we had
to invade Iraq and start a war there because of all those supposed chemical
weapons.

So, they figured out a way to fire the head of the agency which was about
to go do chemical weapons inspections in Iraq. No inspections means nobody
to disprove the allegations and then based on those allegations, which were
false, we invaded Iraq and then we stayed there 8 1/2 years.

And now you tell us how it happened.

(COMMERCIAL BREAK)

MADDOW: Working in the news business, the best thing about coming to work
on Mondays is that you get to dig up the stuff that got buried in a news
dump late on a Friday night. When it comes to governor ultrasounds and his
scandal in Virginia, it seems like a greater than usual proportion of the
news about his scandal and, say, whether or not he will be indicted. A
greater than usual proportion of the news about him seems to break on
Fridays, specifically on Fridays after 9:00 p.m. eastern.

Well, this past Friday night, it was news in the "Washington Post" about
what Governor Bob McDonnell is alleged to have promised a Virginia CEO in
exchange for over $150,000 of gifts and cash that the CEO paid to the
governor and his family.

E-mails obtained by "The Post" show that researchers at the man`s company
believe that their CEO`s friendship with the governor meant that the
governor was going to help the company get state funding for its research.
Whether or not the governor did arrange for state funding for the company
is irrelevant. Under bribery laws, if you tell somebody, hey, give me a
bribe and I will hook you up and you didn`t actually hook them up, you are
still guilty of taking the bribe. You`re just a liar as well as being a
crook.

The new scoop from Rosalind Helderman at "The Washington Post" is a trove
of e-mails showing that something went down between "governor give me a
Rolex" and the businessman that gave him the Rolex. Something went down
between that made the CEO of this company believed that the governor was
going to hook them up with state funding.

According to e-mails published by "The Washington Post", one scientist e-
mailed his university colleagues that the CEO who gave the governor all
those gifts, quote, "is very good friends with the governor and the
governor would like to sponsor these trials as evidence of Virginia`s
commitment to research and entrepreneurship."

Three weeks later, the company flew that same scientist in the company`s
private plane to a weekend seminar to an island resort on the Chesapeake
Bay. Also on the private plane going to the seminar, this is really
interesting, was the chief of staff to the Virginia first lady, the chief
of staff to Bob McDonnell`s wife.

Then the following month, that state employee, the first lady`s chief of
staff, she was there scheduling Governor McDonnell to host a launch party
for the company`s magic tobacco pill at the Virginia governor`s mansion.

So, "The Washington Post" asked the McDonnell administration about the
first lady`s chief of staff and what`s she doing jetting off to this island
resort with the head of this company who`s given all these cash, gifts and
lavish gifts of other kinds to the governor and his family.

What was she doing to help this company? Was this Virginia state business?
What was she doing there? She`s the first lady chief of staff.

Well, here`s how the governor`s office replied. They told the paper
whatever the chief of staff may have said or done on that trip, that was is
in her personal capacity, and not a representative of the governor`s
office. They suggested that maybe the chief of staff had been trying to
get a job with the company, but that in any case she definitely was not
working for the governor or his wife, which is who she worked for.

Governor McDonnell and his wife Maureen now have separate legal teams
trying to keep them from getting federally indicted in this scandal.
Blaming the staff seems unlikely to help at this point, nor does it matter
that the tobacco businessman`s dream of state money from his pal Bob
McDonnell didn`t pan out. If prosecutors find that there was a quid pro-
quo in this case, gifts for help, then a failure to actually deliver the
help will be no defense as long as it was prompt.

Prosecutors in this case are unlikely to announce their decision of whether
to press charges against Governor McDonnell until after the election, until
after Virginia chooses their new governor next month. The Republican in
the race has not led in the polls for nearly three months.

Ken Cuccinelli himself belatedly paid back the gifts that he received from
the same guy who gifted Bob McDonnell. But Ken Cuccinelli does still
appear to be far behind in this race that Republicans initially thought
they would win easily.

Even their poll numbers in Congress right now I can understand why they may
want to look to the states for a little good news on the electoral front.
I recommend that they look someplace besides Virginia for that good news.

That does it for us tonight. We will see you again tomorrow night.

Now, it`s time for "THE LAST WORD WITH LAWRENCE O`DONNELL."

Thanks for being with us.

LAWRENCE O`DONNELL, MSNBC HOST: Senate leaders say they are making
progress on a deal and Ted Cruz is making progress on destroying the
Republican Party.

(BEGIN VIDEOTAPE)

BARACK OBAMA, PRESIDENT OF THE UNITED STATES: This whole shutdown has been
completely unnecessary.

UNIDENTIFIED MALE: There has been progress.

UNIDENTIFIED FEMALE: All eyes are on the dynamic duo of Senators Harry
Reid and Mitch McConnell.

UNIDENTIFIED FEMALE: Senators Harry Reid and Mitch McConnell.

UNIDENTIIFED MALE: Negotiations are now focused on Senate leadership.

SEN. HARRY REID (D-NV), MAJORITY LEADER: Very optimistic. We will reach
an agreement.

SEN. MITCH MCCONNELL (R-KY), MINORITY LEADER: My good friend, the majority
leader.

REID: I appreciate my friend, the minority leader.

MCCONNELL: And I share his optimism.

UNIDENTIFIED MALE: Boehner could end this thing tomorrow.

SEN. LINDSEY GRAHAM (R), SOUTH CAROLINA: Do we really want to compromise
John Boehner as leader of the House?

END

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BE UPDATED.
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