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'Race for the White House with David Gregory' for Friday October 10, 2008

Guest: Erin Burnett, John Harwood, Lawrence O'Donnell, Pat Buchanan, Barbara Boxer, Dylan Ratigan, Paul Krugman

DAVID GREGORY, HOST: Tonight, the president confronts fear in the markets and frustrations around the world as so many are left to wonder, who will lead us out of this crisis? The markets fight back in the final hour of trading today, but it was a tumultuous day on Wall Street, to say the least. The Dow closes down 128 points.

And back on the campaign trail, both Senators McCain and Obama roll out new plans with some specifics on how they plan to get the economy back on track.

That and more, as RACE FOR THE WHITE HOUSE rolls on.

Twenty-five days to go in the race for the White House.

Welcome to the program tonight, a special edition. I 'm David Gregory, live from the White House tonight, where the president made his fifth attempt in just the last week to calm panicky financial markets worldwide.

Also here tonight, the treasury secretary has convened an emergency meeting with central bankers and finance ministers from the world's six other richest countries. We're going to hear from Secretary Paulson live this hour with some of the results of that meeting.

My headline tonight, "Wall Street's Wild Ride Yet Again."

Another day for the record books. The stock market ends its worst week in history, fluctuating within a 1,000-point range today for the first time ever.

In the first 11 minutes after the opening bell this morning, the Dow Jones Industrial Average dove as much as 8.1 percent, falling below 8,000. And in the final hour of trading, stocks fluctuated wildly as well. The Dow was up at one point over 300 points, before finally closing town at 128. The Nasdaq closed up a little over four points. The Standard & Poor Index closed down nearly 11 points.

Here at the White House this morning, President Bush tried to calm fears over the financial crisis.


GEORGE. W. BUSH, PRESIDENT OF THE UNITED STATES: Anxiety can feed anxiety, and that can make it hard to see all that is being done to solve the problem. The federal government has a comprehensive strategy and the tools necessary to address the challenges in our economy.

Fellow citizens, we can solve this crisis, and we will.


GREGORY: The president speaking this morning as financial markets worldwide were tanking, trying to shore up those markets. I mentioned later this hour, Secretary of the Treasury Hank Paulson is going to address reporters on his plans to take an unprecedented and extraordinary steps to get control of the U.S. economy, and he's going to stress the coordination that he's been trying to achieve with other G-7 ministers, finance ministers and central bankers from the six other richest countries in the world, as I mentioned off the top.

Let's go now to get the latest from Wall Street. CNBC's Erin Burnett, anchor of CNBC's "Squawk on the Street" and "Street Signs" joins me from the New York Stock Exchange. And from here in Washington, John Harwood, CNBC's chief Washington correspondent and political writer for "The New York Times."

Erin, I'm going to start with you.

From the White House to Wall Street to the rest of the world, there is an effort to establish some kind of leadership for this crisis. In other words, who leads us out of the crisis. Was Wall Street again reacting to the fact that they don't see anybody who can do that?

ERIN BURNETT, HOST, "STREET SIGNS": It's really the main point. You just made it there. The lack of leadership so far has frightened the markets around the world. And I think the hope is today that we are going to start to see that.

You know, you heard Paul Volcker tell Charlie Rose-and he was one of the most famed central bankers of all time-this is the weekend for all the nations around the world to say, look, banks are in trouble, we are going to do whatever it takes to help them get out of trouble, and we're going to do it in a coordinated way. It doesn't mean that we're going to come out with some joint bailout plan from all the countries. That isn't going to happen, but that there's going to be a coordinated acknowledgment.

That's what everyone's been looking for, and I think the hope that that was going to happen is part of the reason that you saw that 1,000-point turnaround which was unprecedented, as you mentioned. The market only ended down 128 points. And that was pretty darn amazing for a day like today-David.

GREGORY: John Harwood, let me bring you in.

I've been talking to officials at the White House who are obviously keeping tabs on this very important meeting between Paulson and Bernanke and the finance ministers, central bankers of the world's other largest economies. And there seems to be some agreement that they ought to be able to get together and coordinate. And they're primarily going to coordinate on helping banks that are on the brink of failure.

And whereas the original plan here in this administration was to say, OK, we're going to buy all this bad debt that's on their books, and we thought that would restore confidence, now it's gotten to the point where they have to say, no, we're actually going to give money to U.S. banks so that they don't go under. We're going to take a direct stake in those banks. That's where we've gotten to.

JOHN HARWOOD, CNBC CHIEF WASHINGTON CORRESPONDENT: Exactly. And David, these politicians and central bankers are like a sandlot football team, drawing up plays in the dirt, seeing something-they try something, it doesn't work. The bailout plan they thought would be enough to restore confidence, some of the earlier steps, the lending facilities at the Federal Reserve-they've tried to get into the commercial paper market. Now they're going to try to buy-in effect, buy pieces of these banks, nationalize them.

The U.K. led the charge on that midweek, and now the Treasury is coming around. And-but what we're dealing with, as you and Erin were just talking about, is sort of a double-barreled loss of confidence not just in the financial institutions, but in the political system as well.

BURNETT: You know, David...

GREGORY: Well, my question for Erin-my question for you, Erin, and for John, which is, why doesn't Wall Street listen to the president? Why don't they believe the president? He's spoken five times in the last seven days. They're not listening to Paulson either when they say, no, really, this plan is going to get people lending again.

Is it that Wall Street is not listening or investors around the country are saying, no, no, no, we don't buy it?

BURNETT: Well, I think partially it's what you talk about all the time. It is a lame duck administration. And the public opinion about the bailout plan proposed by the treasury secretary was overwhelmingly negative. And still is, by the way.

There was just a lack of confidence completely, because to be honest with you, David, this belief in free markets and markets fixing themselves, while laudable in some cases, didn't work. So there was this feeling that every single time a crisis happened, the government, the Treasury Department, the Fed was too late. Too late to cut rates. Too late to decide who should fail and who should bail. And that's really the big issue here.

GREGORY: John, comment on that?

HARWOOD: Look, I agree with what Erin said. They've got to-they're improvising.

They're trying to see what will put a floor under the situation, what will stop-what will stop this slide. You know, everybody says the market is trying to find a bottom. And the political system and these finance ministers are trying to do what they can to accelerate the moment when we find it.

BURNETT: David, one crucial thing I just wanted to squeeze in here.


BURNETT: And that was just, in term of the market trying to find a bottom and heal itself, one important thing happened today. Lehman Brothers, people could bet whether Lehman would go bankrupt or not. And most people thought that would never happen. Right?

But obviously it did happen. And today was the day when people had to make good on those promises, those bets they made. And it went OK.

Everyone was able to pay the money they promised they would be able to pay.

The system works. And that is actually a pretty impressive thing.

I think a lot of people were worried, this was the first huge test of this unknown derivatives market. And we passed the test. That's important.

GREGORY: All right. Erin Burnett and John Harwood, thanks to both of you.

I want to bring in Pat Buchanan, former presidential candidate, MSNBC political analyst. Also, Lawrence O'Donnell, an MSNBC political analyst. And John is going to stay with us.

Lawrence, let me start with you.

I was just thinking about this as I was talking with John and Erin, that some of what I heard from President Bush today, when he said, look, this government has a lot of tools, we are an immense country with a lot of resources and a lot of flexibility, it was a reminder at some level of what I heard from Karen Hughes on 9/11 when the president was traveling, when she said to the American people the government is functioning here. The government is still open for business and is still functioning, it can still perform all the critical functions of the United States.

That sort of reassurance is what the president was trying for today. It seems to me impossible to overstate the significance of that and the gravity of this situation.



GREGORY: Go ahead, Lawrence.

BUCHANAN: Go ahead, Lawrence.

O'DONNELL: He can reassure on that basis, David, but the problem is this:

the government has embarked, as of two weeks ago, on a set of exercises that it has never done before. Nothing like it in our history. And so for the public, and for the investing public to sit back and say, I don't know if this is going to work, is a perfectly reasonable posture to have.

We can't point to the time when the government did this before and it worked. You know, so there's no-you know, to be impatient with investor confidence now doesn't really make much sense. There is no reason that anything government has done should inspire widespread instantaneous confidence in the investing community or in the public. We've never done anything like it before.

BUCHANAN: Let me disagree with that, David. This is not 1933 when FDR came in. You had the bank holiday. You had various things done. Many of them were disasters. But look what happened today.

I agree with Erin. The market drops 800, or drops 800, 900 points, and suddenly it turns around and shoots up 1,000 points.

I think what Paulson and Bush and the others are doing, they've made a lot of mistakes. I didn't like the bailout. But they're trying something new every single day, the way FDR, for example, and Hoover tried something, say, every six months.

So I think...

O'DONNELL: Now here's Pat Buchanan's rush to socialism.

BUCHANAN: ... that there is a measure now. I think a possibility that we are hitting the floor.

No, I think-look, we all agree that some desperate measures are required. Government's required in here because of the disaster partly made by government. But I think that what they're trying to do, frankly, is not bad, and it does inspire a bit of confidence.

GREGORY: Let me just break in here and I'll bring...

O'DONNELL: Pat Buchanan embraces the socialism of the 1930s.


HARWOOD: Look, even conservatives have got big 401(k)s.

BUCHANAN: We used to have very large ones.


GREGORY: I want to get to the presidential candidates, because both Senators McCain and Obama took questions today about how they're both responding to this. I think we have two sound bites here. Let's hear Senator McCain first.


SEN. JOHN MCCAIN ®, PRESIDENTIAL CANDIDATE: We have all heard what he said, but it's less clear what he has done or what he will do. Rather than answer his critics, Senator Obama will try to distract you from noticing that he never answers the serious and legitimate questions he's been asked.



SEN. BARACK OBAMA (D), PRESIDENTIAL CANDIDATE: Nothing is easier than riling up a crowd by stoking anger and division, but that's not what we need right now in the United States. The times are too serious. The challenges are too great.


GREGORY: John Harwood, are Americans looking to these presidential candidates for answers here? If they don't find it out of the administration, if they've lost confidence in the administration, and indeed foreign governments to get involved here, are they looking for positive answers from these two at this stage?

HARWOOD: Well, sure. A lot of the country is ready to move on from President Bush. We know that. But I'm not sure exactly what McCain is talking about in the sense that Barack Obama has provided some answers and some guidance on his thinking.

When the bailout package came up, he announced sort of where he generally stood on it with certain conditions which were, quite frankly, the same thing that John McCain was in favor of. So I'm not sure what he thinks, other than the other stuff on Bill Ayers or whatever, that he thinks Obama is withholding right now.


GREGORY: Yes, go ahead.

BUCHANAN: David, I think this-look, Barack Obama has handled this very well. He has not proposed the mortgage bailout plan that McCain did, which is now tremendously controversial.

He is riding the wave of the greatest tsunami, anti-Republican tsunami in history. He put out the principals, as John pointed out, and he is not putting anything specific so he doesn't have anything to shoot at. He is benefiting every day from this disaster.

I think-why should he? Quite frankly, politically he's doing exactly the right thing.

GREGORY: All right.

Lawrence, final word here for this segment. Go ahead.

O'DONNELL: The not answering questions charge just isn't going to stick. This is a guy who was in all those primary debates and has now been through two debates with John McCain where he answered every question that was thrown at him. The public is watching Obama take questions and answer questions. So the label just can't stick now.

GREGORY: All right. We've got to take a break here.

Just want to remind everyone watching, at 45 past is when we expect Secretary Paulson to make a statement to reporters about the meeting he's having with finance ministers from the world's richest countries, the biggest economies. You'll want to stick around for that.

Coming next, I'm going to go one-on-one with Senator Barbara Boxer of California. Her state is feeling the crunch of this economic crisis. Is that where the next shoe drops in all of this? We'll talk to her.

The RACE FOR THE WHITE HOUSE returns right after this.


GREGORY: We are back on RACE FOR THE WHITE HOUSE, live from the White House tonight. We're going to hear from Secretary of the Treasury Paulson later on this hour on the financial crisis. And we're expecting to talk one-on-one with California Senator Barbara Boxer.

But I'm back now with Pat Buchanan, MSNBC political analyst; and Lawrence O'Donnell, also an MSNBC political analyst.

Just want to make sure-do we have Boxer now or no? We do.

Actually, OK.

Gentlemen, stand by just a minute. I'm told we do have Senator Boxer from Capitol Hill.

Senator, welcome.

SEN. BARBARA BOXER (D), CALIFORNIA: Hi. I'm in California.

GREGORY: Oh, you're in California. I'm seeing you for the first time.

OK. There you are.

BOXER: I am.

GREGORY: Hi Senator.

BOXER: Can you see the background?

GREGORY: Thanks for being here. Now I see the background. I see my home state.


GREGORY: I see the background. OK.


GREGORY: Senator McCain has been on the campaign trail. And we have a little bit of news here. In the last 15 minutes in Wisconsin, made some comments about Senator Obama. I want to play them and get your reaction to them.


MCCAIN: He is a decent person and a person that you do not have to be scared as president of the United States.


GREGORY: Any reaction to that given some of the rhetoric we've heard from the McCain campaign over the past week about Obama? More personally about his character? It seemed to be an attempt by McCain to dial a lot of that back.

BOXER: I don't know what he is doing, but it seems to me, here is Barack Obama. He's been in the Senate for four years. He was in the state senate for seven years.

You know, he worked as a community organizer. He is a known quantity. And for someone to say, don't be scared of that known quantity is strange. It would be like my saying to my people, don't be scared of Senator McCain, even though he is very erratic. So I don't-I mean, it's sort of a backhanded compliment.

Look, they've been out on the trail using guilt by association. And I've got to tell you, anyone could play that game.

You know, Sarah Palin just recently cut a videotape in which she praised an organization whose founder cursed America and the American flag. You know, this isn't where the American people want us to go.

The American people are struggling, they're suffering, they want and crave leadership. And that's why Barack Obama is moving forward, because he is talking about the economy.

And I don't agree with Pat. I think he is being quite specific on what he would do. And the first thing is, he's going to look at this era of deregulation. You know, John McCain said he is a deregulator. And if you want me to, I could trace all of this back to that.

GREGORY: All right. But Senator, let's talk about this financial crisis in the largest context, which is everything that's happening on Wall Street. But talk about California, because I know that part of your motivation for supporting this were some real threats in California financially.

Is that-what do you worry about as you watch all this play out and the fact that all these confidence-building measures have not seemed to work thus far. What is on the brink of happening in your home state?

BOXER: Well, here's where we stand in our home state. I've just spokesperson with our treasurer, Bill Lockyer. And we have two problems nationwide. And in California, we have those exacerbated here.

One is we have a credit crunch. And that's hurting our state. You know, our state, a state our size, goes out and they get these revenue anticipation notes. And they've never had a problem before. They play a little bit of interest, a point or two.

Now, if they can get the credit, he told me, it could be 9 percent. Now, this is going to really kill us at a time when our revenues are going down.

So there is this credit crisis that we must address, which is what we expect Paulson to do. And I'm glad he is now using some of the tools we gave him, rather than buy up those toxic assets, which I've never supported, use it to go directly to the banks, and attack the problem head on. Which is, make the credit available. And then, of course, you have the confidence crisis here.

So I would say, I've been listening in on the show and I've been waiting.

And I heard some people saying, well, this has never been done before.

Well, on a small scale in the '90s, Sweden had a very serious crisis. And I know everyone's going to say, Sweden? It's a tiny country. But I think it's important to look at what they did.

They're doing what the other Europeans are beginning to do and what Paulson is considering, which is to go straight to the heart of the crisis. It's a credit crisis.

GREGORY: Right. In other words, don't just buy the debt. Don't just buy the debt, actually make a direct investment in these banks and take an equity position in the banks, which...

BOXER: Yes. Yes.

GREGORY: ... you know, here at the White House, they would say we're not going to take an ownership stake, we're not nationalizing the banking system. Do you see that as a distinction?

BOXER: Yes, I see it as a distinction. They're going to infuse, hopefully into banks that can survive-we don't want to just do a phony deal. But if a bank can survive, we're going to help them get the funds they need, the capital that they need to keep on functioning. And yes, the taxpayers would have an equity.

Buying up these toxic assets, you know, I've got to tell you, whoever named it toxic, those are the Wall Street people. It means toxic.

I don't see how those CDOs and CMOs, those collateralized debt obligations, are going to come back in any way.

GREGORY: All right.

BOXER: Some people think they will. I think we're on the right track now.

And the last point I'd make, you know, I think back to Clinton. When he came out with Treasury Secretary Rubin, people had confidence. We don't get that from George Bush. We will get it from Barack Obama and Joe Biden.

GREGORY: All right. Senator Boxer, always nice to see you. Sorry about the little problem there off the top.

BOXER: Thanks.

GREGORY: But on a lighter note, hope we can I hope agree when we say, "Go dodgers!"

BOXER: You know what? I love the Dodgers. I love all my California teams. I have a lot of...

GREGORY: There you go. There you go. All right, Senator. Thank you very much. Really appreciate it.

BOXER: Thanks.

GREGORY: Now, I'm going to switch things over now, switch gears, and hand over to "MORNING JOE'S" Mika Brzezinski, who's going to be with you while I cover today's developments for "NBC Nightly News."

I'm going to be back a little later in the hour when we hear from Treasury Secretary Henry Paulson, his news conference.

So Mika, thank you for being here and I'll hand it over to you.

MIKA BRZEZINSKI, CO-HOST: David, no problem. You're a busy man. Get to work. I got it for now from here.

GREGORY: OK. Thank you.

BRZEZINSKI: Coming up, why one conservative believes vice presidential nominee Sarah Palin is helping drive voters away from the Republican Party. It's Next in "Smart Takes."


BRZEZINSKI: We're back with THE RACE.

Time now for "Smart Takes."

The New York Times' David Brooks sparked a lot of discussion when he called vice presidential nominee Sarah Palin "a cancer to the Republican Party" in an interview this week. In his column today, Brooks explains why he believes Palin is hurting the GOP long term. Here it is.

"Palin is smart, politically skilled, courageous and likeable. Her convention and debate performances were impressive, but no American politician plays the class warfare card as constantly as Palin. Nobody so relentlessly divides the world between the normal Joe Six-Pack American and the coastal elite."

Up next, a top McCain adviser says the campaign can turn it around and fight their way back. But how can he do it? We'll talk about it.


MIKA BRZEZINSKI, MSNBC HOST: Tonight, Treasury Secretary Henry Paulson will try to restore shaken confidence that the $700 billion rescue package will work. And team McCain launches some hard hitting attacks on Obama with 25 days to go in THE RACE FOR THE WHITE HOUSE.

Welcome back to THE RACE FOR THE WHITE HOUSE. We're going to get back to David Gregory in just a few minutes. The McCain campaign is sharpening its attacks as the financial crisis continues to dominate the news. And Obama continues to lead in the polls. Today, the McCain campaign is up with this ad, linking him to Bill Ayers once again.


ANNOUNCER: Obama's blind ambition. When convenient, he worked with terrorist Bill Ayers. When discovered, he lied. Obama, blind ambition, bad judgment. Congressional liberals fought for risky subprime loans. Congressional liberals fought against more regulation. Then the housing market collapsed, costing you billions. In crisis, we need leadership. Not bad judgment.


BRZEZINSKI: Okay. Here with me to go inside the war room. The McCain war room. Chuck Todd, NBC News political director. Bob Shrum strategist and still with us Pat Buchanan, MSNBC political analyst.

Chuck, Barack Obama on Michael Smerconish's radio show responded to these attacks by McCain. Take a listen.

All right. This is what he talked about on Smerconish. He basically said, if John McCain is going to be making this the center piece of his campaign, he just doesn't get it.

Chuck Todd, here's the deal. If it is going to be something that works, I could see why John McCain would make it a center piece of the campaign. But my question to you, does it appeal to be working? Here's actually first let's listen to Barack Obama on Smerconish.


SEN. BARACK OBAMA, (D) PRESIDENTIAL CANDIDATE: The fact that Senator McCain wants to make this the centerpiece of his campaign is pretty remarkable. I mean, we are going through an enormous challenge right now. Senator McCain surely doesn't believe that I endorsed any of the actions that he's taken. The central thing that people need to know is, this guy is not part of my inner circle. He doesn't advise my campaign. He is not going to advise me as president. This is a red herring.


BRZEZINSKI: Chuck, any indication this is working? Especially in the middle of this economic crisis.

CHUCK TODD, NBC NEWS POLITICAL DIRECTOR: Well, we haven't seen any evidence that it is working. I think the McCain campaign is struggling with how to do it. I think they wanted to make character part of the campaign against Obama. They wanted to do it early. They waited, you talk to a lot of folks. There are a lot of people think they waited too throng introduce Ayers into the conversation. He was introduced a little bit during the primaries. Not much. Mostly Reverend Wright was the issue he had to deal with them. There was a time in July and August when they were doing that celebrity stuff and the whole Britney Spears-Paris Hilton thing. That I think in hindsight, they sit there and say, OK, they should have made more of his associations then, rather than trying to create the empty-suited Democratic nominee which is what they were trying to do.

This goes to this whole problem that the McCain campaign has had. There's been a series of tactics with not the broad strategy of exactly how they were going to go after Obama.

BRZEZINSKI: Another tactic, Pat Buchanan is going after Barack Obama pertaining to voter fraud. Here is John McCain on the campaign trail talking about that.


MCCAIN: My friends, you've seen the allegations, the multiple registrations under the same name. The more registered voters than the population. You've seen, these are serious allegations, my friends, and they must be investigated. And they must be investigated immediately. And they must be stopped.


BRZEZINSKI: Pat, what is he doing and does this go beyond the base?

BUCHANAN: What he's doing, I think Chuck is exactly right on this. Look, Barack Obama was very comfortable with an Afro-racist character who hates America, despises America. Reverend Wright with this unrepentant bomber. Wine and cheese parties there!

And this crook Rezko who helped him get his house. Now these are all his associates. He was comfortable with them. If you're going to make the case that Barack Obama's character is deeply questionable, you do it long ago. You don't suddenly bring these things up and introduce them in the middle of a financial collapse and economic crisis. It looks opportunistic. It looks belated. People say why now?

So I think that is why it is really, it has not been ineffective and it may very well be too late and I agree Chuck again. It reflects a certain schizophrenia in the McCain camp. John McCain told him in North Carolina, they're going after Reverend Wright. And McCain said don't do that. That's off limits. Now he's going to go back and do what he told others they shouldn't do. Tough on credibility.

BRZEZINSKI: I'm glad you didn't use the word erratic. A little tired of that word, Pat.

Let me bring Bob into this. I want to show John McCain on the campaign trail today, discussing whether or not voters should fear voting for Barack Obama. Listen to what he said.


MCCAIN: He is a decent person and a person that you do not have to be scared as president of the United States.


BRZEZINSKI: Okay, Bob Shrum. Explain that one to me.

BOB SHRUM, DEMOCRATIC STRATEGIST: Well, either his conscience is bothering hill or they got back some polling data saying this isn't working. The way Pat talked about this a minute ago, had same kind of McCarthyite quality as the ad we heard from McCain which said, he worked with terrorist William Ayers when it was convenient. Giving the impression that somehow or another he worked with him on terrorism. Look, the more serious things have gotten in this country with the economy, the more frivolous the McCain campaign has gotten.

And Ayers and ACORN and Obama's middle name are not going to take this campaign in a different direction. McCain is sending the country a signal that he can't and won't talk seriously about the economy, so he will try to smear his opponent. It is going to fail.

BRZEZINSKI: Now, Chuck, that seems to be the conventional wisdom in the editorials and among maybe some of the media elite. But is that the kind of tactic that works? In Pennsylvania, in some of these states that John McCain needs to get a hold on to.

TODD: Well, I'll tell you, something happened today in Minnesota that I think it didn't happen in isolation. The Republican incumbent, Norm Coleman, made a decision. He is pulling all of the negative ads. He is in that race with Al Franken, it has been a very negative race. Minnesota is a state we've seen some negative ads in in the presidential race.

There is something now that you do wonder, are Republicans seeing the negativity is hurting them in general. The economic crisis is hurting them as well. And suddenly, a lot of them need to figure out how to change the tone. Change some things there.

I wonder if you're going to start seeing that maybe the McCain campaign saw their negatives go up. That's why we saw what McCain saw today. Norm Coleman made his decision in Minnesota. He's yanking all his negative ads for the duration of the campaign. A stunning decision four weeks out. Sometimes candidates do it 10 days out. Four weeks out is a big decision to do that. That tells you that they're seeing something in their polling. I just wonder, is this economic crisis trumping everything right now? To the point where everybody is afraid of going negative?

BRZEZINSKI: Pat Buchanan, real quick. Sarah Palin. Is she possibly not being utilized in the way she can, and is she not bringing to the table what a Mitt Romney would be bringing to the table right now?

BUCHANAN: Well, look, Sarah Palin was the most sensational choice of the vice president in history. She gave McCain something like a 10-point turnaround and put him in the lead after Barack had a great convention. And for two weeks she was terrific. For the last four weeks, we've had the greatest crash in history. And I think if McCain loses, folks will say it was because of the crash and economic crisis and collapse. Not because Sarah Palin had a tough interview with Katie Couric.

BRZEZINKSI: All right. Our panel stands by. I have an update to bring you before we go to break. U.S. Treasury Secretary Henry Paulson announces the U.S. government will move ahead with its plan to buy stock in financial institutions. We're going to bring you his press conference live with Secretary Paulson after this quick break.


BRZEZINSKI: Welcome back to THE RACE. We want to let you know that the Treasury Secretary Hank Paulson is announcing the U.S. government will move ahead with its plan to buy stock in the financial institutions. I am rejoined now by David Gregory, who has been covering the developments for NBC NIGHTLY NEWS. And also with me, Dylan Ratigan, anchor on CNBC's FAST MONEY and THE CALL. Within the next few minutes we're going to hear from the treasury secretary live. Henry Paulson is going to hold a news conference to give details about how the $700 billion rescue package will be implemented.

And David, of course, this along with a big weekend ahead with finance ministers at the White House.

GREGORY: Right and I think what is important is that you have an image that the White House is trying to create here. And that is of coordination, that the U.S. administration is working foreign governments, the biggest economies in the world actually working together on coordinating their actions. What they want to coordinate principally is measures to shore up failing banks. And I want to bring in Dylan Ratigan in on this and I know we have Paul Krugman as well standing by from "The New York Times."

Dylan, what is striking about the move today, I've been talking to White House officials, there is a recognition. That this is not just today but in past days that is correct the initial approach is simply buying the debt with the $700 billion from the struggling institutions is not enough. Now they have to take the step of getting the equity state. Giving money directly to the banks for fear that they'll go under otherwise.

Amplify on the significance of that and what we'll hear from Secretary Paulson.

RATIGAN: Again, understand what this has come to. The seizure in the U.S. banking system is such that we've trillions of dollars of both taxpayer money and other moneys having been thrown at the situation, the banking system, still, David, refuses to unlock. You have to ask yourself why that is. What is the risk that bankers see that they refuse to interact with one another. And the only potential answering answer to that is that the result of the bad housing debt, because of the housing finance system that was created as a matter of policy largely over the past ten years is so big, that until the banks have the benefit of the total comfort, not only of our Federal Reserve, but of all the major finance ministers in the world, that they will not allow themselves to reengage. It's a reflection of how big the potential problem of housing finance that was created through the policy actions of the past 10 years is, David.

GREGORY: Paul Krugman, the White House officials here say, look. This is not nationalizing the banking system. The government won't have any voting rights in these banks. We're just making a loan, essentially. We're buying equity so that they stay afloat. Is that how you see it? Why is Paulson taking this step now?

PAUL KRUGMAN, PRINCETON ECONOMIST: It is a bit more than taking the loan. You're taking an ownership stake although not a voting stake. We'll see whether more comes. But it is actually a major reversal. This kind of thing, essentially buying preferred shares, buying into the banks was what a lot of us thought should have been done from day one. It is the standard way you deal with this banking crisis. It does expose the taxpayers to a possible loss but it is a way of getting the banks able to meet their debts. So this is actually good news after basically wasting four weeks Paulson is now doing what a majority of the economists I talk to say he should do. But it is huge. It is an awesome step.

RATIGAN: Understand this, David. The problem is banks have this much money and they lent this much money. What we're looking at here is a government stepping in to make this much money back into this much money, so that the burden of all those loans doesn't basically make the banking system collapse.

KRUGMAN: Recapitalizing our banks.

RATIGAN: Exactly.

GREGORY: Pumping, priming the pump, essentially into the bank.

RATIGAN: In effect, they took too much risk and now we have to bail them out. I'm sorry, Paul.

KRUGMAN: It is not clear that-other countries have done this. The Swedes put in a bunch of money and got most of it back, it didn't cost them much in the end. Hopefully this will be the same here. There is not enough working capital for the banking system to operate so Paulson needs to pump it in. Realism, a little bit of facing reality is good to see finally at long last.

RATIGAN: Here, here.

GREGORY: This becomes, Dylan, the confidence question. Who has lacked confidence and why will this be the step that actually restores confidence when other things have not worked? I pointed out that President Bush has spoken five times in the last seven days to try to calm the markets.

RATIGAN: The largest investors in the world, David, and all of the major banks in the world, are the ones who lack confidence. In other words, the banks themselves are skeptical to lend money to one another for fear that they do not have enough money to back up a loan or pay back a loan, were it to come in. Which goes to what Paul was talking about. The reason we even have to make these investments that you speak of, David, is because the banks are so fear. That other banks are under so much housing debt that they will not be able to repay a loan. And as a result, the lending system at its highest levels, among the biggest investors and biggest banks, that's where confidence has been lost. That's what we were trying to restore confidence by the measure that we were talking about this evening.

GREGORY: Let me say to our viewers. We're less than two minutes away from seeing and hearing from Secretary Paulson. He's been meeting with the G-7 leaders all day long. You see a live picture there from the Treasury Department. The president will address this group tomorrow. Again, what is key here is that they're taking coordinated action, announcing steps to shore up troubled banks around the world.

This is a banking, a financial crisis that has spilled into the global economy. Paul Krugman, a political question here for these two candidates as they slug it out on the economy. As an economist yourself, what do you worry with in material of continuity in policy here, and direction? As we're just 25 days away from an election. And then a transition period before a new administration takes place.

KRUGMAN: I would hope we can actually form, at least on the financial front, a government of national unity the day after the election. To have basically, presumably, tempting fate but presumably it's going to be Obama, that Obama's people will start in fact being in policy making role in concert with the Treasury Department, right from the day, the moment that the networks call the election. This is too dangerous.

RATIGAN: We're at a precipice here. Think about the, it growth in the '80s in brief was a function of making efficient our capital structure. There were hugely high interest rates in the late '70s. They came down by the end of that decade. Tax policy was rewritten. Money moved around more easily. The '80s were a boom decade. The '90s we innovated the Internet, the advent of that technology delivered jobs, growth across the board. This decade driven by a housing boom that was supported by credit. That now is over. The question for the next president of the United States is how will you precipitate meaningful economic activity through innovation, whether it's health care solutions or energy solutions, in the next decade.

GREGORY: All right. Gentlemen and Paul, thank you very much. Here now, Treasury Secretary Henry Paulson.

HENRY PAULSON, TREASURY SECRETARY: . of the G-7 finance ministers and central bank governors. We finalized an aggressive action plan to address the turmoil in the global financial markets and the stresses in the financial institutions. This action plan provides a coherent framework that will direct our individual and collective policy steps to provide liquidity to markets, strengthen financial institutions, protect savers, and enforce investor protections.

The G-7 is compelled to robust international partnership and cooperation. Never has it been more important to find collective solutions to ensure stable and efficient financial markets and restore the health of the world economy. Global financial market conditions are severely strained. In the United States, our economy has been facing a prolonged period of uncertainty and our financial markets are experiencing unprecedented and extraordinary challenges. A root cause of this situation is the housing correction, and a lack of confidence in mortgage assets, as well as a lack of confidence in many of the financial institutions that hold these assets.

We are squarely focused on the immediate need to stabilize our financial markets and recognize that investor confidence is critical to restore liquidity, and enhance the stability of our financial system.

As recent developments have demonstrated, the market turmoil is a global event. Governments around the world have taken actions to address financial market developments and international cooperation and coordination has been robust. It is critical for governments to continue to take individual and collective actions to provide much-need liquidity, strengthen financial institutions, enhance market stability and develop a comprehensive regulatory response.

We must continue to closely coordinate our actions and work within a common framework so that the action of one country does not come at the expense of others, or the stability of the system as a whole.

Central banks from around the world have acted together to provide additional liquidity for financial institutions, taking the necessary steps to support the global economy. The Federal Reserve has established swaplines with nine central banks to reduce pressures with global short term U.S. dollar markets. Additionally, the U.S. Treasury implemented a temporary guaranteed program for the U.S. money market mutual fund industry. Here in the United States, the members of the President's Working Group on Financial Markets, the PWG, made it clear we will coordinate the use of our existing and new authorities to restore market confidence.

Other countries are considering appropriate program, given their national circumstances, and we pledge to stay in close contact as they move forward with their plans.

I briefed my colleagues on the work we are pursuing to implement swiftly and thoughtfully the new financial rescue package. We are developing strategies to use the authority to purchase and ensure mortgage assets and to purchase equity and financial institutions, as deemed necessary to promote financial market stability.

As we develop plans to purchase equity, as in the approach we are taking to broad mortgage asset purchases, we are working to develop a standardized program that is open to a broad array of financial institutions. Such a program would be designed to encourage the raising of new private equity capital, to complement public capital.

Consistent with the legislation, any equity the government purchases through a broadly available equity program would be on a nonvoting basis, except with respect to market standard terms to protect our right as investors.

Securities investors around the world have taken measures to enhance market stability by addressing market abuse. Here in the United States, we have taken steps to protect the savings of American people by increasing deposit insurance limits, and the European Union member states have raised individual deposit limits to an E.U.-wide minimum.

The G-7 and others are working together through the Financial Stability Forum, the FSF, to ensure a comprehensive international regulatory response to the financial market turmoil. FSF Chairman Mario Dragi (ph) reported to us on the good progress that he has been making in approving prudential supervision and regulation and increasing exposure and transparency, and enhancing accounting frameworks.

I am committed to making sure this work continues. We are also committed to tackling the next steps laid out by Chairman Dragi to be done by the end of this year, and our ambitious agenda for 2009. Thank you, and now let me take your questions.


QUESTION: Mr. Paulson, since Japan and China are the two biggest holders of U.S. treasuries, do you think it is possible the U.S. may be seeking help from these two countries?

PAULSON: We are in close coordination and communication with Japan and China and other investors around the world. And we've all been, I think people have been very mutually supportive. And so we work together closely. And I expect us to continue to do so.


QUESTION: How do you ensure that deposit guarantees are consistent from one country another? What do you think of the Ireland and Greece guarantees, deposits - to provide financial (ph) guarantees to deposits?

PAULSON: Obviously, what we commented on was, there is an E.U. minimum for individual accounts. I told you what our focus is here. Individual countries are going to have different needs, and they're going to approach the problems differently. But the point that we all emphasized is we've got the same objectives and as we pursue those objectives, it is very important not to pursue policies that are going to undermine global stability or other nation's policies. And I think we're committed to that goal.


QUESTION: Mr. Secretary, a number of market (inaudible) were hoping that you would have a plan to secure access to funding on the part of financial institutions either by providing .

GREGORY: You are listening to Treasury Secretary Henry Paulson. He is at the Treasury Department announcing some of the elements of his plan to make direct investments on the part of the U.S. government into failing U.S. banks. It is the latest measure the administration is taking with the authority, the newfound authority from the bailout law that was passed just recently that provides all that cash, $700 billion, with which the government can make equity investments in U.S. banks to try to shore up those banks, to get the money flowing again.

Mika Brzezinski is in New York. This comes at a very sensitive time, Mika, as we have been talking about.

We have Dylan Ratigan from CNBC and Paul Krugman with us as well but this is a delicate time and another important step the administration is trying to take to convince, not just the markets but indeed, banks around the world and businesses to be confident to keep doing business with one another.

BRZEZINSKI: A delicate time and a volatile time as well, David. Dylan tells me, actually, this has been the worst week in the history of the Dow and today the most volatile day in history.

So Dylan Ratigan, my question to you is what does this say about the bailout package and the benefits that were being predicted?

RATIGAN: What it says is it hasn't kicked in yet. What it says is this problem is larger than that bailout package. What it says is that when you attach risk to a multi-trillion-dollar marketplace, which is what American and global banks did, they were basically leveraging themselves to the house of every house in America. Imagine if I could attach your bonus, Mika, to the price appreciation of every home in America. As those houses went up, I could pay you hundreds of millions of dollars. But when those houses flipped over and started to go down, you don't have the money to incur that risk.

The market has come to the realization that a system was allowed to be created that allowed for exactly that and as a result, you have the most precipitous drop in the equity markets ever and the most volatile day ever. The markets coming to terms with the fact, a system that was created that was phenomenally dangerous.

GREGORY: Dylan, thank you. This is David again at the White House. I want to pick up with Paul Krugman the last word here. Interpret for us in easy to understand language, what we heard from Secretary Paulson tonight and why it matters.

KRUGMAN: Well, he said basically, the plan has changed focus. He is going to buy in. It will be buying stakes in the banks, rather than taking the bad assets off their hands. Actually, in some ways, it is like a cliche. But what is really important is what he didn't say. There was nothing in there about guaranteeing the banks' liabilities, which is the other half of what Britain announced on Wednesday. He just did half of Gordon Brown. The immediate reaction will be, wait, that's only half the plan. Where is the rest of it?

By the way, we also had the communique from the G-7 which was a disappointing document that came out just a few moments before Paulson spoke. It was vague. What we've just gotten is a big change in direction but still half-hearted.

GREGORY: If you say half-hearted, Paul, what is the additional step the administration could take and might take yet?

KRUGMAN: Guarantees on interbank lending. That's what we need from the administration. We need both. We're going to put in capital and we'll provide temporarily, we're going to provide some guarantees for banks lending to each other. What we want to hear from the G-7, what we want to hear from the other countries, us, too, rather than the kind of bromides that they issued in their official statement. We're not there yet. If it doesn't get a lot stronger in the next 48 hours, not good.

GREGORY: Quickly, Paul, to you expect the candidates to jump in in a specific way in terms of shaping policy at this stage?

KRUGMAN: No. It's beyond-It is hard to do politically. And look, they don't have the resources. They've got smart guys, or at least Obama has smart guys around him. But they're not capable of keeping up with this. It's - stuff is moving too fast, you need the Treasury Department.


GREGORY: Paul Krugman, thank you very much. Mika Brzezinski, thank you for all your help throughout the hour.

That's the program. A special addition from the White House tonight of RACE FOR THE WHITE HOUSE.

A quick programming note before we go tonight. Be sure to tune to MSNBC next Wednesday, October 15th when John McCain and Barack Obama face off at Hofstra University. It is their third and final debate before Election Day. A very important night.

Thank you for watching. Again, thanks to Mika Brzezinski for all of her help tonight.

I'll be back on Monday night, 6:00 p.m. Eastern Time. Mika will be back with you of course on MORNING JOE 6:00 a.m. on Monday.

BRZEZINSKI: I'll be there.

GREGORY: Have a peaceful Friday night. Thank you, Mika. And stay right here. HARDBALL WITH CHRIS MATTHEWS starts right now.



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