updated 12/15/2004 3:45:49 PM ET 2004-12-15T20:45:49

Guests: Paul Krugman, Pete Peterson, Dana Priest, Russ Buettner, Beth Davis, Joseph Madonia

CHRIS MATTHEWS, HOST:  On the eve of the White House economic conference, interest rates are rising, the trade deficit is growing and Social Security faces a numbers problem.  What does it mean to you?  We‘ll ask some of the country‘s top economic thinkers.  And will Bernard Kerik‘s close friend and business partner, Rudy Giuliani, pay a political price for Kerik‘s aborted nomination for secretary of homeland security?

Let‘s play HARDBALL.

Good evening.  I‘m Chris Matthews.  Interest rates are up again today.  The Federal Reserve raised the key short-term interest rate a quarter point to 2.25 percent from 2 percent, where it was yesterday.  It‘s the fifth time this year that Fed chairman Alan Greenspan has hiked the rate.  And tomorrow, President Bush host a White House conference on the economy, where Social Security reform will no doubt get a lot of attention.

Tonight we have some of the top economic minds in the country to join us here on HARDBALL.  Brian Wesbury is chief economist of the investment bank Griffin, Kubik, Stephens and Thompson.  Paul Krugman is a “New York Times” columnist, of course, also a Princeton economics professor.  And Pete Peterson was secretary of the commerce in the Nixon administration.  He‘s the author of “Running on Empty: How the Democratic and Republican Parties Are Bankrupting Our Future and What Americans Can Do About It.”

Let‘s start with you, Secretary Peterson.  I‘ve got to ask you, are we really on the road to calamity with regard to our Social Security system?

PETE PETERSON, FORMER NIXON COMMERCE SECRETARY:  Well, I think what we ought to be doing is looking at about three interrelated problems, Chris—the budget deficit, which is scheduled to—which is not only large now but scheduled to be another $5 trillion or so over the next 10 years; the current account deficit, the foreign deficit, concerns me mightily.  It is now approaching the stratospheric level of 6 percent of the GDP, where we‘re borrowing $600 billion a year, heading north.  And I think we should be very concerned about whatever we do to build confidence in foreigners, so they‘re willing to lend us money, while we fix the fundamental problem, which is to increase savings.

MATTHEWS:  What‘s the No. 1 concern you‘ve got right now, Pete, the No. 1 economic concern?

PETERSON:  My...

MATTHEWS:  When you pick up the paper in the morning or you hear something on the market during the way, what worries you the most?

PETERSON:  Yes.  OK.  This relates to Social Security, Chris.  To be fair to the administration, I—all we know about is the plan to take a small part of this payroll tax and put it into private accounts.  However, there‘s a lot of indication that they play to borrow the money, up to $2 trillion.  Among the last signal I think we should be sending to foreign governments is that on top of all the mammoth borrowing we‘re doing now, we‘re quite benign in borrowing another $2 trillion.  I think that would send a very unfortunate signal.  What would the effects of that be?  We must build confidence in foreign markets while we get our act together.  I don‘t think that kind of a Social Security plan does anything but create serious doubts as to whether we‘re really serious about fixing our fiscal house.

MATTHEWS:  Brian, we‘ve got a deficit right now, a fiscal deficit, of about $600 billion.  It‘s—if you add another $200 billion a year, that‘s $800 billion, in order to get the Social Security system transformed to this new individual account basis.  How do you—if you‘re a Chinese business or a money manager or a Japanese money manager, why would you continue to invest in dollars, if the United States keeps basically printing money, just running up bigger deficits every—and monetizing them?

BRIAN WESBURY, GRIFFIN, KUBIK, STEPHENS AND THOMPSON:  Well...

MATTHEWS:  Why do you go—why would you think the dollar would be a good investment?

WESBURY:  Well, there‘s two parts to this question.  The first is that we already have a $10 trillion unfunded liability in Social Security.  That debt‘s already out there.  So all we‘re doing is moving part of the financing of that up front.  So we‘re really not increasing debt anymore, we‘re just changing the timing of it.  The second thing is...

MATTHEWS:  But we‘re changing the federal deficit from $600 billion a year now, which is already outlandish in historic terms, to $800 billion a year.  Why doesn‘t that hurt our ability to borrow money?  Doesn‘t it get harder to borrow, the more you borrow?

WESBURY:  You—the trade deficit is $600 billion.  The budget deficit is somewhere in the $300 billions right now.  We might add $200 billion a year, $100 billion a year, no one really knows, if we go to private accounts.  But what I‘m saying is, is that we have to fund those—those liabilities...

MATTHEWS:  Yes.

WESBURY:  ... for Social Security at some point.  So whether we do it in 20 years or 30 years or 2 or 5 years really doesn‘t make a difference.  So if I was a foreigner—in other words, I work in the financial market.  I don‘t believe the financial markets will look at a change in Social Security, a reform in the system, that moves the recognition...

MATTHEWS:  All right.

WESBURY:  ... of the debt up in time as some kind of bad economic policy.

MATTHEWS:  OK, let‘s talk about that unfunded liability, Paul Krugman.  We‘ve seen ratio numbers right now.  When Social Security was first started under Roosevelt back in the ‘30s, there was an incredible number of people working, at least double digits, from—compared to the people who were retired and getting the check.  And now you have a situation where I understand it to be that we‘re going to reach the situation fairly soon where there‘ll be only three workers for every retiree, which means, basically, you got to pay a third of somebody‘s retirement out of your taxes every year.  Can we sustain the current system if we don‘t change it?

PAUL KRUGMAN, COLUMNIST, “THE NEW YORK TIMES”:  Well, the current system—yes.  I mean, look, the—let‘s not be apocalyptic here.  It is going to rise.  You know, right now, Social Security is taking in about $1.25 for every $1 of benefits that it‘s paying.  Now, over time, as the population ages, it‘s going to eventually reach a point where it‘s taking in less than the benefits it‘s scheduled to pay.  So it‘s a very long-term issue, and we ought to be thinking about that.

But you know, the rest of the federal government—by the way, your $600 billion is right because Brian is counting the Social Security surplus twice.  He‘s counting it both as money that we can use for privatization, and he‘s counting it as part of the federal revenue.  You can‘t do that both ways.

The rest of the federal government right now—right now—is taking in about 70 cents for every dollar of spending.  So we‘ve got, on the one side, the federal budget, 70 cents of revenue per dollar of spending.  On the other hand, you‘ve got Social Security, right now, $1.25 of revenue for every dollar of spending.  But 30 or 40 years out from now, when the Baby Boomers have all retired, you know, it‘s going to have a financial problem.

MATTHEWS:  Well, go back to my math...

KRUGMAN:  Which of these ought to be the priority?  Which of these ought to be...

MATTHEWS:  Well, go back to my math.

KRUGMAN:  ... the priority?

MATTHEWS:  Go back to my math, which is how many workers do you have for every...

KRUGMAN:  Right now—right now, we‘ve got...

(CROSSTALK)

MATTHEWS:  ... retirees watching right now imagine probably, if they think about it, they certainly say, Well, I paid in.  I deserve to get the money at the end of my working years.  Fine.  But in real life, they sit back and say—but they understand that the way the money moves—it‘s a transfer payment from the people working to the people retired.  How many people do you need to be working for you, Paul, to be satisfied we have a good system?  Do you need, like, five or six workers for every retiree?

KRUGMAN:  Look...

MATTHEWS:  What would you consider...

KRUGMAN:  Right now...

MATTHEWS:  ... a solid system?

KRUGMAN:  Right now, it‘s three.  Right now, it‘s three.  And right now, the burden is not so bad.  Forty years from now, it‘s going to be two.  And that‘s harder.  Remember, it‘s not—you know, you‘re not paying people their full income.  Social Security is not replacing everybody‘s income in full.  It‘s—you know, it‘s—so it—look, it‘s not that big a thing.  And if you look at these long-term projections about how big the burden of Social Security and Medicare is going to be—and they are pretty scary, it‘s Medicare, not Social Security, that does it.  And it‘s not really the aging population.  That‘s an issue, but it‘s really secondary.  It‘s really...

MATTHEWS:  So if somebody‘s calling...

KRUGMAN:  ...  medical costs.

MATTHEWS:  Just to get...

KRUGMAN:  So this is a—this is a fake crisis.

MATTHEWS:  So let me just—let me go back again to Pete Peterson.  If you figure you‘re getting $15,000 a year in Social Security benefits, a modest benefit—it‘s certainly not a lot of money—you figure three people are each paying $5,000 out of their taxes.  Is that what is?  Is that what‘s going on right now?

PETERSON:  No.  At the moment, we have a Social Security surplus.

MATTHEWS:  Yes, but who‘s paying the—who‘s paying in?  Most of the money that goes to people...

PETERSON:  No, but the point is...

MATTHEWS:  ... who are retired right now?

PETERSON:  ... we use fancy words like “trust funds” and “surpluses,” as though we‘re setting them aside.  For the last 50, 60 years, we‘ve been spending those surpluses on other items, and that‘s what leads to this unfunded system.

But I want to pick up on what Paul said.  To me, the big, big elephant in the room that we‘re pretending is not there, and we hope no one else notices, is Medicare.  It‘s three to four times the size of the problem, in terms of unfunded entitlements.  And in my opinion, we ought to really be honest with ourselves and fix Social Security and really fix it because it‘s far easier to solve, instead of adding to the problem of Social Security, which just makes the Medicare problem that much more difficult.

KRUGMAN:  Chris, if I can just come back...

(CROSSTALK)

KRUGMAN:  The point—and the really important thing to say is that the Social Security fix—when people like Brian talk about—when $11 trillion—you know, it‘s actually more like $3 trillion, but who‘s counting?  The—but the point is, this fix is not a fix.  It‘s actually going to make things worse.  And so this is phony.  This is really—this is using—crying wolf about...

KRUGMAN:  ... a long-term crisis to sell a program that‘s going to make things worse.

MATTHEWS:  OK, that‘s a very strong argument.  I want you to respond to that.

WESBURY:  Well...

MATTHEWS:  What I understand the president‘s plan to be, his rough outline, is that instead of this transfer situation we live in today—which basically is a person now 70 to 80 years old right is getting a check, which most of it comes from the fact that people are getting to pay a payroll tax, 6.2 percent, on up to $87,900 a year.  Right?

WESBURY:  Right.

MATTHEWS:  That‘s it.  That‘s a simple system.  He‘s saying, NO, I don‘t like that system.  That‘s a bad system.  That‘s redistribution.  I want to have a system where starting at the time you have your first paper route, you‘re paying into a system that‘s going to give you equity returns, as if you‘re going into the equity market at 14 when you serve that first newspaper—you throw the first newspaper, you start making money.  It‘s your money.  By the time you retire at 62 or 65 or 70, it‘s all going to be your money.  You can give it to your kids.

WESBURY:  Right.

MATTHEWS:  You can spend it all on a big around-the-world trip, if you want to do it.  Right?  But it ain‘t the government‘s money.

WESBURY:  Right.

MATTHEWS:  That‘s the philosophy, right?

WESBURY:  That‘s exactly the philosophy.

MATTHEWS:  Why—why is that—why do you know that to be a sound idea?  And let me ask you this.  If I‘m working at a factory and I‘m 42 years old and there‘s an accident in the factory, and I get hurt badly and I can‘t work again...

WESBURY:  Right.

MATTHEWS:  ... who‘s—now the government pays that money because it‘s a Social Security insurance program.

WESBURY:  Right.

MATTHEWS:  Who‘s going to pay that money if I haven‘t paid in enough

in the new

WESBURY:  Well...

MATTHEWS:  Who‘s going to—I‘m—I‘ve invested all my money in the stock market.

WESBURY:  Right.

MATTHEWS:  I just got hurt.  I can‘t work.  Well, what, am I stuck then?

WESBURY:  Well, first...

MATTHEWS:  Who‘s going to pay that?

WESBURY:  I mean, first of all, we have to realize that your hypothetical person should be, I believe, taken care of somehow.  Using personal accounts in Social Security does not take away helping people that truly need help.  What it does,...

MATTHEWS:  Why should they...

WESBURY:  What it does is it...

MATTHEWS:  If they haven‘t paid in as much as everybody else has paid in, why should they get the same help that a person who‘s been paying in straight—I‘m putting all my money in the federal government.  I trust the federal government.  I trust this old-time system.  I don‘t want an individual retirement account.  I want everything in my benefits.  Shouldn‘t that person get more when they get in trouble halfway through their working life?

WESBURY:  I mean, I—I...

MATTHEWS:  They choose that route?

WESBURY:  These are all these hypothetical questions...

MATTHEWS:  They‘re not hypothetical!

WESBURY:  I don‘t...

MATTHEWS:  Everybody watching knows what I‘m talking about.

WESBURY:  Well, I—I don‘t.  Who is...

(CROSSTALK)

MATTHEWS:  ... you thought about a problem that...

WESBURY:  I mean, who is this person?

MATTHEWS:  If everybody lives happily to their retirement years and everybody lived to be 75 or 85, everybody would benefit.  But it doesn‘t work out that way.

WESBURY:  Well, the—here‘s the issue, and that is that this system, as it exists today, must be changed.  Tax rates have to go up or benefits have to go down.  That‘s the point.  And so the way out of this—in fact, Chris, no company in the last 20 years that has started has put in a defined benefit pension plan.  They put in defined contribution plans.  The reason is, is they don‘t work.  In fact, Paul Krugman wrote in 1996, 1997, in “The Boston Review” that this is a ponzi scheme.  In 2001...

MATTHEWS:  You mean Social Security is.

WESBURY:  Yes.  He—in 2001, he wrote that he...

MATTHEWS:  OK, he‘s got to respond...

(CROSSTALK)

MATTHEWS:  Paul, your response?

KRUGMAN:  My response is that‘s out of context.  The point is, Social Security needs to be running a surplus now to build up assets.  And it should not be squandered by having the rest of the government run a deficit.  So this is all a reason.  If you actually ask, What was I saying in 2001?  I was saying, Don‘t do these Bush tax cuts.  Don‘t squander the Social Security surplus, which they went ahead and did that, and now they say, Oh!  We‘ve got a Social Security problem.  No.  We have a budget problem.  And they‘re making Social Security the whipping boy for a problem that has vastly more to do with the Bush tax cuts.

PETERSON:  You see, Chris, if I may, one of my colleagues here said because these programs are unfunded long-term, you either have to cut the benefits or increase the taxes or try to borrow the money.  I‘ve heard precious little about what they‘re going to do to reduce the benefits.

WESBURY:  Yes.  Chris, if I could just get in on that...

(CROSSTALK)

PETERSON:  If they don‘t, then the idea that you‘re playing kind of a three-card Monte game...

MATTHEWS:  Right.

PETERSON:  ... like we have on 5th Avenue, where on the one hand, we borrow the money, and on the other hand, we give the public back the money we just borrowed, is to me a—it‘s truly that kind of a game.  Now, I think...

MATTHEWS:  Oh, in other words, selling T-bonds...

(CROSSTALK)

MATTHEWS:  In other words, selling T-bonds, Pete—you sell T-bonds to raise enough money from retirees who are buying T-bonds to pay for their benefits.  You‘re right.

PETERSON:  Well, to invest in the market.

MATTHEWS:  Right.

PETERSON:  And then you say, Gee, that‘s going to earn a lot of money if you put it in the market.  But what they don‘t tell you is they borrowed the money to put in the market.

MATTHEWS:  We‘ll be right back with Brian Wesbury, Paul Krugman and Pete Peterson.

And on Thursday‘s HARDBALL, we‘re going to have a special program for you that you won‘t want to miss.  We‘ll be at Walter Reed Medical Center for “A Soldier‘s Journey Home.”

You‘re watching HARDBALL on MSNBC.

(COMMERCIAL BREAK)

MATTHEWS:  I‘m back with Brian Wesbury, chief economist for the investment bank Griffin, Kubik, Stephens and Thompson, and Paul Krugman of “The New York Times”—of course, he‘s also a Princeton economics professor—and Pete Peterson, former secretary of commerce.  He‘s the author of “Running on Empty: How the Democratic and Republican Parties Are Bankrupting Our Future and What Americans Can Do About It.”

Let me start with some politics, my favorite area.  Let me go with Brian first.  The vice president, in his usual indelicate way, said that deficits don‘t matter politically.  In other words—I don‘t—I agree with him, by the way.  I don‘t think any party‘s ever lost an election for running up a big deficit.  But let me ask you this.  Do they matter economically?  Does it matter, the fact that—we argue about it, but we have a sizable fiscal deficit right now.

WESBURY:  Right.

MATTHEWS:  We‘re making—we‘re spending more money than we‘re bringing in...

WESBURY:  Right.

MATTHEWS:  ... year after year after year.

WESBURY:  Right.

MATTHEWS:  Are you saying that has no impact?

WESBURY:  Well, what I would say is that there‘s many a—many things people say it has an impact on.  I don‘t believe so.  Lots of people say deficits raise interest rates.  If the last two or three years haven‘t shown that that‘s not true, I don‘t know what will.  When I analyze the federal budget...

MATTHEWS:  Well, why are the interest rates going up now?

WESBURY:  Well, because the Federal Reserve...

MATTHEWS:  Today.

WESBURY:  ... held them so low, and now they‘re...

MATTHEWS:  Is there a connection between the big deficits we‘re running...

WESBURY:  No.

MATTHEWS:  ... and the fact that...

WESBURY:  I do not believe so.

MATTHEWS:  ... Alan Greenspan raised the rates again today?

WESBURY:  In fact, you know, long-term interest...

MATTHEWS:  OK, let me ask that around.  Let me go...

WESBURY:  Long-term...

MATTHEWS:  ... around the table.

WESBURY:  Long-term interest rates fell today, by the way.

MATTHEWS:  Paul Krugman, is there a relationship between an ongoing deficit policy of this administration, which is a deficit policy—they chose not to raise taxes.

KRUGMAN:  Right.  They‘ve chosen not to cut spending or stop the increase in spending.  Is that policy related to the fact that Alan Greenspan has to now five times this year raise rates?

KRUGMAN:  No.  I‘ll give Brian that.  I mean, in the long run, it‘s going to do a lot to raise rates, but that‘s not the problem.  But look, let‘s get to your bigger problem here about the deficit.  The public doesn‘t care.  The public doesn‘t know.  You know, they shouldn‘t.  They‘ve got other things to do with their lives.

But look, what matters—and this comes back to what Pete Peterson said at the beginning.  What matters is the United States has this huge trade deficit to cover that.  To not have the dollar go into free fall, we need foreigners to lend us about a billion-and-a-half a day.  And the size of that deficit—if—we‘ve got a bigger trade deficit as a share of GDP than Indonesia before their economy went blooey in ‘97.  We‘ve got a bigger budget deficit as a share of GDP than Argentina before their economy went blooey in ‘01.

The reason that doesn‘t happen is because the markets give us the benefit of the doubt because they say to themselves, Well, this is America.  It is not a banana republic...

MATTHEWS:  When won‘t they, Paul?

KRUGMAN:  What?

MATTHEWS:  When won‘t they?  When will there be...

KRUGMAN:  That‘s the point.

MATTHEWS:  ... a tipping point when they say...

KRUGMAN:  That‘s the point.

MATTHEWS:  ... We‘ve already leant you so much money, the Chinese investors, sitting over there and thinking, You know, they‘re running a deficit, huge trade and...

(CROSSTALK)

KRUGMAN:  The day when the markets conclude that, Hey, you know, America really is a banana republic, they are never going to get their act together, at least not under current management, that‘s the day when it all goes blooey.  And this administration is doing everything it can to convince them of that.  When you have...

(CROSSTALK)

KRUGMAN:  The government of the United States say we can solve our long-term budget problems by borrowing more money, what kind of signal does that send?

PETERSON:  Chris?  Chris...

MATTHEWS:  Pete Peterson, I‘ve learned a new word, “blooey.”  It doesn‘t sound good.

(CROSSTALK)

PETERSON:  Chris...

MATTHEWS:  Are you in agreement that if we keep running these deficits in trade and fiscal policy, we‘re going to have a bang—a bang-up bad news day?

PETERSON:  Chris, let me give you my slant on the deficit.  I think, frankly, we spend too much time talking about the effect on short-term interest rates.  Many things affect interest rates.  Let‘s get back to the savings problem of the country.  Deficits are bad from this because they‘re negative savings and they devour our limited savings pool because we have a very low personal savings rate.

MATTHEWS:  Right.

PETERSON:  It is at a shocking level today.  It‘s .2 percent of the GDP.  Ten, twelve years ago, it was it was 7, 8 percent.

PETERSON:  That‘s what makes us recklessly dependent on foreigners to finance it, and that‘s the problem we have to attack.

MATTHEWS:  OK, thank you, Pete Peterson, author of “Running on Empty.” 

Thank you, Brian Wesbury.  And thank you, Paul Krugman.

When we come back, we‘ll take a look at what may have derailed Bernard Kerik‘s nomination, his aborted nomination as secretary of homeland security.

You‘re watching HARDBALL on MSNBC.

(COMMERCIAL BREAK)

MATTHEWS:  Four days after Bernard Kerik withdrew his nomination as secretary for homeland security, the White House says officials are not focused on what happened.  Maybe so, but it turns out the Kerik story is far more intriguing and splashy than even the White House could have imagined.  HARDBALL correspondent David Shuster reports.

(BEGIN VIDEOTAPE)

DAVID SHUSTER, HARDBALL CORRESPONDENT (voice-over):  He was there with Mayor Rudy Giuliani on 9/11, and he was President Bush‘s favorite police commissioner, especially during fall campaign.

BERNARD KERIK, FORMER NEW YORK CITY POLICE COMMISSIONER:  George W.

Bush!

SHUSTER:  But now, Bernard Kerik‘s image has changed.

KERIK:  It‘s sort of like a snowball rolling downhill.  It just gets bigger and bigger.

SHUSTER:  How big?  Kerik all but admitted this week he had two extramarital affairs, including one with Judith Regan, the publisher of his autobiography.

KERIK:  I think that‘s my personal business.  That‘s their business. 

And I think it should stay at that.

SHUSTER:  But it gets even worse.  Several newspapers and magazines allege that Kerik has Mob ties, made $6 million in questionable stock profits on stun guns, was the subject of this arrest warrant for unpaid condo fees, and according to “The New York Daily News,” had a secret love nest that was used for passionate liaisons.  Based on the president‘s nomination remarks, Mr. Bush, it appears, was the last to know.

GEORGE WALKER BUSH, PRESIDENT OF THE UNITED STATES:  His broad practical hands-on experience makes Bernie superbly qualified to lead to Department of Homeland Security.

SHUSTER:  As uncomfortable as that line sounds now, reports indicate the White House had hints of trouble with Kerik before President Bush nominated him.  A year-and-a-half ago, when Kerik was asked to train a new Iraqi police force, Kerik promised to stay in Baghdad for six months.  He left after three.  And administration officials acknowledge hearing whispers about Kerik‘s colorful past, though they deny it was to the extent revealed by reporters.

PAUL LIGHT, BROOKINGS INSTITUTION:  This was a slip-up that should have been prevented.  No question about it.  It‘s not just Bernie Kerik‘s fault.  It‘s partially the White House‘s fault and it‘s partially the president‘s fault.

SHUSTER:  White House officials say President Bush relied heavily on former New York mayor Rudolph Giuliani.  They say Giuliani made personal pleas for Kerik, his friend and a consulting firm business partner.  Giuliani has apologized to President Bush, but denies this entire episode has diminished his own presidential prospects.

RUDY GIULIANI, FORMER NEW YORK CITY MAYOR:  My reputation has a long history to it, and I‘ll rest with it.  I‘m pretty comfortable with it.

SHUSTER (on camera):  In the meantime, the president is expected to nominate a new secretary of homeland security in the coming days.  Officials say this nomination will be steady, stable, and without the kind of baggage that brought down Bernie Kerik.

I‘m David Shuster for HARDBALL in Washington.

(END VIDEO CLIP)

MATTHEWS:  More on the fallout surrounding Bernard Kerik‘s withdrawal from “New York Daily News” reporter Russ Buettner and “The Washington Post‘s” Dana Priest.

And on Thursday, a special edition of HARDBALL, “A Soldier‘s Journey Home,” I‘ve spent the past few days over at Walter Reed Hospital, where some of America‘s bravest men and women who were wounded in Iraq are recovering and putting their lives back together.  That‘s “A Soldier‘s Journey Home” this Thursday at 7:00 Eastern here on HARDBALL.

(BEGIN VIDEO CLIP)

GEN. NORMAN SCHWARZKOPF, U.S. ARMY (RET.):  Hello.  I‘m General Norman Schwarzkopf.  I just want to say to the troops serving abroad all over the world, and especially those people serving out in the Gulf, that we‘re really proud of you, we‘re really proud of what you‘re doing in the service of your country.  Thanks for serving your country, and have a merry Christmas and get some soon.

UNIDENTIFIED MALE:  Happy holidays, guys.  Wish you all the best.  And God bless you.  Thank you.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

MATTHEWS:  This half hour on HARDBALL, Rudy Giuliani apologizes to President Bush over Bernard‘s Kerik‘s aborted nomination for secretary of Homeland Security.  Will that hurt Giuliani‘s chances to run for president next time.  That‘s coming up.  But first lets check in with the MSNBC newsdesk. 

(NEWSBREAK)

MATTHEWS:  Welcome back to HARDBALL.

Russ Buettner has been covering the Bernard Kerik beat for “The New York Daily News” and reported on Kerik‘s extra-marital affair in today‘s edition. 

And Dana Priest is the national security correspondent for the “Washington Post.”  She‘s also an MSNBC military and intelligence analyst. 

We‘ll get to the fall over Bernard Kerik‘s aborted nomination in a moment. 

But first I want to play something that General Norman Schwarzkopf said to me last night. 

(BEGIN VIDEO CLIP)

GENERAL NORMAN SCHWARZKOPF, MSNBC MILITARY ANALYST:  You know, the Humvee was never considered an armored vehicle to begin with.  So the system they‘ve come up with is a jury rigged system which really doesn‘t give you much protection when you‘re going against being blown up from a mine on the side of the road or something of that sort.  But they deserve every bit of protection that we can give them, absolutely.  I was very, very disappointed.  Let me put it stronger.  I was angry about the words of the secretary of defense when he laid it all on the army.  As if he as the secretary of defense didn‘t have anything to do with the army.  The army was doing it themselves, screwing up. 

(END VIDEO CLIP)

MATTHEWS:  An interesting critique, isn‘t it, Dana, from the most respected military man in the country, addressed to the secretary of defense?  It‘s not the kids‘ fault?  It‘s not the soldiers‘ fault?  It‘s your fault. 

DANA PRIEST, “WASHINGTON POST” NATIONAL SECURITY CORRESPONDENT: Of course, it is the leaders‘ responsibility to be prepared.  I have to tell you, I traveled with Secretary Rumsfeld a year ago.  And there were soldiers asking similar questions about their body armor.  And his main response was, you volunteered to be here, period.  And so he has the habit of throwing it back into their laps, so to speak, and pointing out that this is a war and war is tough.  As he has said, critics now have come out and say, this is an insurgency they never expected and certainly, it looks like, not the plan for it. 

MATTHEWS:  Well, they are never really going to admit that really.  The ideologues pushing this war from the beginning—well let‘s give you an example, John McCain, who‘s a very hawkish fellow on the war on Iraq, is now blasting away at Rumsfeld, the secretary of defense for not putting enough troop in the field. 

Were you surprised to their hear his very critical remarks the other day about the secretary of defense? 

PRIEST:  John McCain is doing it.  Brent Scowcroft did it.  Also the national security council advisor.  A lot of people are piling on.  I think not to say the Rumsfeld should step down as much as, he should really get a reality check here and start tweaking, start turning the military operation toward a counter insurgency operation and forget this happy talk.  They‘re all very worried about what is going on and how to get out of it. 

MATTHEWS:  Well, Dana, you play in a different league than I do.  When somebody says they have no confidence in someone and you say that‘s a little tweak, a little shove on the elbow to get your act together, it seemed to be tougher than that.  It seems to me, he was saying, you‘re out of here.  You don‘t agree with that?

Just one more shot at this, you don‘t think that calling a man for not having the confidence of the nation, as John McCain did of Donald Rumsfeld yesterday, you don‘t think that was a get out of here statement? 

PRIEST:  No.  McCain is always playing both sides in the sense that he‘s campaigned for President Bush.  So, he‘s not going to say that the war is a failure and the leadership is a failure. 

MATTHEWS:  OK, let talk about the other partner in this battle for the 2008 Republican nomination.  It is so interesting, because two stories are coming to the top.  John McCain is taking a shot at the administration over inadequate number of troops in the field.  And therefore, the reason why we‘re not doing well in this war.  And now you have Rudolph Giuliani taking a hit for Bernie Kerik. 

Let me ask you, Russ, you‘ve been covering this.  Russ Buettner, for “The Daily News in New York.”  Do you think that—that this fellow, Giuliani, who has done so well politically since 9/11, has broken its pick on this one? 

RUSS BUETTNER, “NEW YORK DAILY NEWS”:  Well, that‘s the big question that everyone is asking in New York, Chris, does this blow Giuliani back to where his political career was before September 11.  Since that point in time, he‘s enjoyed an incredible halo effect, and well deserved for the comfort he brought to us in the harrowing days.  But this definitely changes the dynamic. 

MATTHEWS:  Why did he bet all his chip on Bernard Kerik when he knew, he must have known a lot more about the fellow than President Bush knew about him certainly? 

BUETTNER:  That‘s another big question that‘s on the table, is exactly what did Rudolph Giuliani to know? 

You know, a lot of the stuff has been talked about for years.  But they were also masters at keeping internal problems under wraps during their administration.  They‘ve lost some of that power since then, and we‘re seeing the after effects of that now. 

MATTHEWS:  Rudy has been a lifelong bed in war of the mob.  He‘s been tough.  The pizza connection, et cetera, et cetera.  He‘s always been very tough on organized crime.  Is there any hint of evidence, any evidence particularly, that he knew about Kerik‘s connections to that construction company that caused all the hell? 

BUETTNER:  The only evidence that he may have is that the city investigate that had company.  It was trying to get a license from the city Trade Ways Commission.  It investigated the owner of the company, Frank DeTommaso.  It deposed him for a couple of days.  Franky DeTommaso, told them that he had hired Bernie Kerik‘s best man, based on Bernie Kerik‘s recommendation.  That they had hired Don Kerik, Bernie‘s brother.  So, the city investigators knew that.  Now, the question is whether that investigation gets back to the mayor.  The mayor yesterday denied that.  But do we really know? 

MATTHEWS:  Let me ask you—let me ask you, Dana, the political marriage between the President/Bernie Kerik was several months back.  I noticed from watching him on this program, he became one gung-ho, predictable advance man for all the president‘s political good will.  I mean, he‘s certainly out there pushing the war.  He is pushing everything the president believe in.  When did that marriage take place between president and Bernie Kerik?  It doesn‘t seem like it was entirely Rudolph Giuliani‘s making. 

PRIEST:  I‘m not sure exactly.  I do know that by the time Bush nominated him, he was fairly comfortable with him and that‘s really important to this president.  I think what they were looking for, in a successor to Tom Ridge as the homeland security chief, was somebody that not only Bush could feel confident in, but the country would take some comfort in listening to.  One of Ridge‘s problems was that he was confusing sometimes when he spoke.  He sometimes made people think that the alert system wasn‘t working well.  On the other hand, he told them to get duct tape.  On the other then he came back and said, don‘t get duct tape.  And Kerik‘s tough talk, according to his supporters, was something they really thought would work well with the public.  And I think that was one reason he was a very attractive candidate for the... 

MATTHEWS:  Is this one of these battlefield promotions that we saw Zell Miller get during the campaign?  One of those people the president just took a shine to because they were as tough as he was? 

PRIEST:  You could read it like that.  Yes—good—great personalities there. 

MATTHEWS:  OK.  Let me ask you, let‘s go back to Russ, he‘s done thought great work.  I mean, any time somebody digs up something important, on somebody important, it‘s good reporting.  Russ, why did you beat the feds to all this information? 

BUETTNER:  I think because we had a head start.  We started looking into issues related to corruption at the correction department two years ago, when we uncovered high ranking bureau chief who would have been promoted by Mr. Kerik who was moonlighting for the Pataki campaign at that point in time, earned $250,000 over 90 days.  And we later learned that he had been marshalling correction officers to renovate his home on city time with city equipment. 

MATTHEWS:  You know, I have a hard time with this.  I‘ve been through two full fields, one to get into the Peace Corps, one to work at the White House.  A full field for people haven‘t been through one, is like a body search.  They go to ever --- they ask you to name every house you lived in, every single day of your life.  They ask you, and that gives them information on who your neighbors have been.  They then go to the strangest neighbors that you probably never said hello to, they ask them all about you.  It‘s a thorough examination when it is done.  And I just wonder how Bernie Kerik got through all these, how many marriages and affairs have you poked up here? 

BUETTNER:  The affairs are hard to count.  We know we have at least, he‘s had children, I believe, by four women.  And I believe there have been four marriages, one of which he had hidden from everybody. 

MATTHEWS:  Well, he‘s one up on Rudy. 

But let me ask you this.  We all know about Rudy‘s.  They were public.  Let me ask you that.  But nobody knows—anybody watching those dueling banjos on television with him and Donna.  But let me ask you, how come you found out about it and the FBI didn‘t? 

BUETTNER:  I don‘t think they had knocked down all doors yet, Chris.  I mean, I‘ve been talking to people for months about this who had not had contact with anyone.  They expected to hear from the FBI but they had not yet. 

MATTHEWS:  Unbelievable. 

Dana, are you surprised by the failure of the FBI to do an adequate background check on Bernard Kerik, a man who‘s going to defend this country against our enemies? 

PRIEST  Am I surprised?  I think they would have gotten to a lot of it sooner or later.  I think they needed...

MATTHEWS:  What the hell good is later?

PRIEST:  Look at how many cabinet members were replaced...

MATTHEWS:  He‘s been nominate for—excuse me, Dana, I‘m not going to yell.  

MATTHEWS:  He was nominated—he was nominated for Homeland Security and they hadn‘t done the background check.

PRIEST:  You know, I think members of Congress will be asking that question.  Why didn‘t they do it more thoroughly?  Is it just a one-time anomaly?  Or is there some systematic failure they should look at more carefully? 

MATTHEWS:  We‘re coming back with Dana Priest and Russ Buettner.  And on Thursday, a special edition of HARDBALL.  We‘re taking the show to Walter Reid Hospital with a story about a soldier‘s journey home.  HARDBALL was there when Corporal Casey Owens, who lost both his legs in Iraq, took his first steps.

(BEGIN VIDEO CLIP)

UNIDENTIFIED FEMALE:  Right there, it should bend, let go.  Perfect.

UNIDENTIFIED MALE:  Much better.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

MATTHEWS:  Welcome back to HARDBALL.  We‘re back with “The Washington Post‘s” Dana Priest and Russ Buettner of “The New York Daily News.”

Dana, tricky question, did the White House try to push Bernard Kerik‘s nomination with the press before all this really opened up, the bad stuff? 

PRIEST:  Oh, sure.  I mean, they would like us to see the good side always, but particular with him, I think there was full confidence that he would be a good, capable, good communicator with the American people. 

MATTHEWS:  Did this hurt some of the flacks at the White House, having to push this nomination without having all the information?  I mean, they were victims as much as the country was in a sense. 

PRIEST:  You know, when they get stories wrong, or they‘re incomplete with us, there‘s always some credibility that falls out.  Because they do try to be as honest as they can at times.  And they know that the tradeoff for not being that way is the risk of your relationship in the future.  So as you‘ve mentioned before, a lot of this was known to reporters at “Newsday” before it was to the FBI, so in that case, I think they have a slide on some of it. 

MATTHEWS:  Let me ask Russ.  Is it your sense that the president, based upon your reporting, I know that‘s all you have, that the administration was so in love with the idea of naming Rudy Giuliani‘s partner and the former police commissioner of New York City where all the hell went on in 9/11, that they didn‘t give him the real vetting he needed? 

BUETTNER:  I‘m not sure there was much vetting done beforehand, other than just asking Mayor Giuliani and Mr. Kerik what mine fields there might lie out in his history. 

MATTHEWS:  OK, let me go to Dana on this.  We‘ve talked a lot on and off the air, and I have to tell you, I‘m waiting for a good response, Dana.  I was aghast watching that Medal of Honor ceremony today.  George Tenet, Bremer, Tommy Franks.  It looked like the president was pinning a medal on the Iraq war, on himself, for having fought the war.  Why did these three guys deserve the Medal of Honor, and why are they all so obvious emblematic of the war, including the bad intel beforehand, the bad early work after the invasion itself that set us up for all this hell later.  Tommy Franks, fine, he‘s a hero, he‘s a military guy.  But what does this picture say to you of these three guys? 

PRIEST:  Well, it says just about the opposite of what you just said.  It says the president still very much believes in the Iraq war.  And is very thankful and grateful for the work that the CIA performed in that war, regardless of whether they and the European allies and the Clinton administration‘s CIA all got that intelligence wrong.  And the same...

MATTHEWS:  Wait a minute.  They‘re giving a medal to a guy for getting us into war under false pretenses?  You give a guy the Medal of Freedom for that?  That medal used to go to...

(CROSSTALK)

PRIEST:  He did not give the Medal of Freedom to George Tenet because he miscalculated the WMD report.  He gave it to him for the work that the CIA did inside Iraq, and before that war, and also, the war in Afghanistan. 

MATTHEWS:  You mean the sales pitch they cooked up for Colin Powell to deliver at the U.N.  It was all a pack of lies. 

PRIEST:  No, they didn‘t cook up the sales pitch.  They were wrong about the facts, but there‘s no indication that they knew that they were wrong, and then they put it out there.  There‘s a big difference. 

MATTHEWS:  (UNINTELLIGIBLE).  If you give the Medal of Freedom to a guy who is completely wrong in doing his job, what do you give to a guy who is completely right? 

PRIEST:  I don‘t think he was completely wrong.  He was wrong about the analysis on WMD.  But you can‘t say that the work they did inside Iraq or the work they did in Afghanistan was wrong.  In fact, it netted all the al Qaeda leaders that we have in custody now.  And that‘s the CIA, the same CIA.

MATTHEWS:  OK.  Dana Priest, thank you very much, “The Washington Post.”  Russ Buettner of “The New York Daily News,” which is very hot right now. 

Up next, nearly two years after allegations of sexual assault surfaced at the Air Force Academy, the Pentagon‘s inspector general says the Academy‘s chain of command failed to recognize the severity of that rape problem out there.  I mean rape.  I‘m not talking about harassment.  I‘ll talk with a cadet who says she was raped while at the academy.  We‘re talking about officer material here.

And don‘t forget to check out Hardblogger, our political blog Web site.  Just go to hardball.msnbc.com.

(COMMERCIAL BREAK)

MATTHEWS:  Welcome back to HARDBALL.  Nearly two years after the Air Force Academy was rocked by allegations of sexual assault, a report by the Pentagon‘s inspector general blames the academy‘s chain of command for failing to acknowledge the severity of the problem over the past 10 years.  Does the report go far enough in finding fault or does it let top officials off the hook? 

Beth Davis says she was raped when she was an Air Force cadet and said the Air Force Academy failed to deal with her charges.  And Joseph Madonia is her attorney.  Beth, thank you very much.  Thank you very much, Joseph for coming on the program.  Beth, I want to you tell your story.  But most importantly, I want you to tell why you think justice was not done here even by this latest I.G. report. 

BETH DAVIS, FMR. AIR FORCE CADET:  Chris, I was raped repeatedly as a freshman at the Air Force Academy.  And I took my case to O.S.I. as a sophomore.  O.S.I. took my case.  They were very confident about it.  They said it was the worst case they had ever seen at the Air Force Academy.  Seven months into the investigation, it was abruptly shut down by an unauthorized officer.  The officer, I ended up finding out, he had done it.  I went to go see him and he said that it was in my best interests, that he shut it down.  He sent me directly to a doctor on base and the doctor was under a direct order to diagnose me with something that would get me off base, that would take my commission ability and my pilot qualifications. 

At that point, when the doctor did diagnose me with that, I had no choice but to leave.  They had ruined my medical record, as far as my Air Force career was concerned. 

So this report is in essence just perpetuating the very problem that I was dealing with at the Academy.  They are refusing to hold officers accountable for what they‘re doing to cadets there.  In essence, they‘re ruining lives. 

MATTHEWS:  What is their motive? 

DAVIS:  Their motive, I believe, is to cover their butts.  At this point, they don‘t want this to be happening on their watch.  Nobody wants to be held accountable.  That‘s why this list of eight officers that this executive summary is placing partial blame on, seven of them are retired.  And one is deceased. 

MATTHEWS:  Let me to go Joe.  Your attorney.  Let me ask you, as you look at this case, from the cold eye of an attorney, what do you see as the systematic problem here, the systemic problem at the Academy? 

JOSEPH MADONIA, BETH DAVIS ATTORNEY:  Well, I think first there‘s an epidemic problem of rape at the Academy.  Rape, sexual assault, mistreatment of women.  That‘s existed since women first were admitted into the Academy in 1976.  The systematic program of not addressing the issue and a systematic program of trying to sweep it under the rug and not hold the officers, the commanders responsible who this happened under their watch.  It has been happening literally since women have gone to the Academy. 

MATTHEWS:  How can you let someone, I‘m just being open-minded here, I‘m trying to be totally open-minded.  Why in the world would any commanding officer of any service of the United States military, want to have future officers raped with impunity?  What thinking is that? 

MADONIA:  Well, there‘s a mentality that exists at the Air Force and the Air Force Academy that is extraordinarily hostile to women.  The Department of Defense, its own statistics, by surveys at the Air Force Academy‘s had in their hand.  They knew that many, many of the male cadets there did not want women at the Academy.  There‘s been such a problem where we‘ve talked to women who have been gang raped years ago by gangs, individuals at the academies...

MATTHEWS:  Why would you want a rapist as an officer? 

MADONIA:  You would think you wouldn‘t.  The problem is perhaps with hundreds and hundreds, perhaps a thousand rapes in the last 10 years, by the Department of Defense‘s own statistics, that said 80 percent of the women who are raped or sexually assaulted do not come forward, and we know that about 142 to 170 people had come forward.  The total number of cadets who have been court-martialed, convicted and punished for raping a fellow cadet is zero.  The victims that are raped that come forward are drummed out of the Academy.  Their careers are destroyed.  They‘re left to hang with no medical benefits, no educational benefits, while the rapists go forward to be commissioned, to be promoted, and to serve in the military.  It is a...

MATTHEWS:  So the United States Air Force Academy is a high crime neighborhood. 

MADONIA:  The U.S. Air Force Academy has an epidemic problem of rape that has existed since women were admitted there.  The leaders have failed to take action and to hold the officers responsible.  The only movement we had towards that was an independent panel appointed by Secretary Rumsfeld.  Appointed by the Senate to look into the matter which consisted of former military and civilians.  That found there was a hostile environment.  That found there was a problem there.  That found the Air Force leadership has known about this problem for years. 

MATTHEWS:  Beth, during the time between your freshman and sophomore year at the Air Force Academy when you had this working in your mind and your heart that you had been raped, did you get snickers from the guys?  What kind of reaction?  Did people know about this in your classes?  Out in the field?  In the mess hall?  Did they know that you had been raped by your classmates? 

DAVIS:  Confidentiality didn‘t exist when I was there.  They claimed it did but O.S.I. would help themselves to me in my classes.  They would just—they would walk in.  They would call me out.  I would be called out of training in the evenings.  So it was renowned in the squadron that there was something going on.  And everybody kind of knew what it was. 

MATTHEWS:  Was there any sense of guilt or embarrassment by your male classmates, that some of them had participated in this crime? 

DAVIS:  No.  They definitely, they were mad, if anything.  They were mad that I hadn‘t gone to them for help.  But no.  Unfortunately, it happens so often there, I don‘t know many girls that aren‘t harassed and assaulted there.  It‘s a shame. 

MATTHEWS:  What are you going to do with your life? 

DAVIS:  I plan on finishing this out.  I want to make it better for the girls after me.  I‘m not sure how much longer it will take.  But I‘m prepared to see it through. 

MATTHEWS:  You want to fly? 

DAVIS:  Yes.  I would love to fly.  I actually have my license. 

MATTHEWS:  OK.  So good for you.  Best of luck.  It‘s hard not to root for you.  Thank you very much, Beth Davis.

DAVIS:  Thank you. 

MATTHEWS:  Thank you, Joseph Madonia, your attorney.  It‘s great to have you on the show.  A terrible subject but you look like fine people.  I wish you well. 

DAVIS:  Thank you. 

MADONIA:  Thank you, Chris.

MATTHEWS:  Join us again tomorrow night at 7:00 Eastern for more HARDBALL.  And on Thursday, a special edition of HARDBALL from the Walter Reed Medical Center.  A soldier‘s journey home.  I‘ll introduce you to some of the brave troops who were seriously injured in Iraq and in Afghanistan.  You can get more information on the special we‘re having and on Walter Reed at our website.  And while you‘re there we want you to give your holiday wishes to the troops.  Just go to HARDBALL.MSNBC.com.  Right now it‘s time for the COUNTDOWN with Keith.

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