IE 11 is not supported. For an optimal experience visit our site on another browser.

'Race for the White House with David Gregory' for Wednesday, September 17

Read the transcript to the Wednesday show

Guests: John Harwood Robert Reich, Eric Schmidt; Michael Smerconish, Eugene Robinson, Willie Brown, Mike Murphy

DAVID GREGORY, MSNBC NEWS ANCHOR: Tonight, message wars. Obama and McCain battle over who's more to blame-Washington or Wall Street after the government bails out yet another financial giant. This hour I'm going to go one-on-one with former Clinton labor secretary, Robert Wright, who will tell us what the candidates need to do to fix our ailing economy.

And as the financial meltdown rocks Wall Street, Google's chairman and CEO, Eric Schmidt will join me one-one-one to talk about his view of the state of the economy, how it impacts tech companies like Google and what advice he would give the candidates as they look ahead to big challenges in this country in this election.

Then we're going to go inside the War Room tonight with NBC news analyst and Republican strategist and Republican strategist, Mike Murphy, to hear how McCain and Obama need to recraft their messages and their final sprint to November 4.

And finally, here San Francisco, we'll be joined by the former mayor of San Francisco, Willie Brown. He'll talk about race and the RACE. All of that coming up and more as the RACE FOR THE WHITE HOUSE rolls on.

Forty-eight days to go in the RACE FOR THE WHITE HOUSE, welcome to the program, I'm David Gregory, reporting tonight from San Francisco. My headline tonight: stalemate on the economy. The candidates berate Washington and Wall Street today after the federal government bails out yet another financial giant, American International Group. The Dow Jones industrial average plunged 449 points today, closing at just over 10,600. The campaign's battle for rapid response on the financial crisis is rocking Wall Street.

Senator Obama tried to strike a presidential tone in a new two-minute ad in which he delivers a pretty sobering mini address to the nation about all of this. He struck that tone again on the campaign trail. He was in Nevada.


BARACK OBAMA (D), PRESIDENTIAL CANDIDATE: We need a please will lead us out of this mess and that's the kind of president I intend to be.



GREGORY: Meanwhile, Senator McCain had a more aggressive tone on the campaign trail today, promising to put an end to reckless conduct, corruption and unbridled greed on Wall Street. Listen.


JOHN MCCAIN ®, PRESIDENTIAL CANDIDATE: We're going to fighting the greed and irresponsibility on Wall Street and we're going to create prosperity for our people, and now is the time to grow the economy and my plan does that. Senator Obama's does not.


GREGORY: Let me bring you John Harwood's CNBC's chief Washington correspondent, political writer for the "New York Times."

John, we seem to have a real fight here to get ahead of events, when all of this is happening real-time, it's a real challenge for a presidential campaign.

JOHN HARWOOD, CNBC CORRESPONDENT: It is. It is a much better hand for Barack Obama than it is for John McCain. Look, David, sometime we make these things more complicated. What we have here is a tremendous failure of the market right now and the market is looking for Washington, looking to government for help. Well, who represent the market party? That's John McCain. Who represents the government party? That's Barack Obama. He's got the high side, he's starting to pick up. Both campaigns know this is a problem for McCain. It doesn't mean McCain will lose the argument or lose the election, but this is a much more favorable development for Barack Obama.

GREGORY: And yet Senator McCain is making, frankly, a narrower argument in response to events. He's talking about the need for reform, taking on Wall Street. That's a message that resonates right now.

HARWOOD: Well, it could resonate, but what is there in John McCain's history in 26 years in Washington, relating to Wall Street that would cause people to say, oh, yeah, he's been fighting those guys on Wall Street. Now, Barack Obama doesn't have a long track record on the economy. He's only been in the Senate for a short time, but again, when you look at which philosophy, which ideology, which political party is more closely identified with the workings of the free market and which ones more closely identified with the workings of the government, which is now the source of rescue for the free market, that's not a hard thing to sort out. It's the Democrats with the government, the Republicans with the market.

GREGORY: All right, John Harwood with CNBC and the ""New York Times." John, stick around, obviously we'll get back to you later on in the program.

Joining me now to weigh in on all of this is Obama supporter Robert Reich who was, of course, secretary of labor under President Clinton. During that time, the administration was able to reduce the budget deficit while raising minimum wage and protecting worker pensions. All part of Clinton record that certainly likes to be argued about, but also held up as an example of what the next president will try to do. Mr. Reich, of course, professor of public policy at the University of California and is also the author of " Supercapitalism: The Transformation of Business, a Democracy in Everyday Life."

Secretary Reich, welcome to the program.


GREGORY: First of all, let me get your assessment of where things stand from Wall Street and then the ripple effects in the economy. Is this a time, in your judgment, for panic or patience?

REICH: Well, it's never a time for panic. I mean, this is not another great crash, it's not a great depression, but a lot of people, a lot of institutions, a lot of very wise investors are seeking safer ground. They're seeking safer ground because frankly, nobody knows how bad things are going to get, nobody knows where the bottom is. There are a lot of pieces of paper floating around Wall Street where really, that have essentially no value because nobody can assign a value to them.

GREGORY: But, there is a huge psychological effect from in the markets and on other industries that are not even as heavily leveraged as some of the investment banks were.

REICH: Absolutely. I think there's a, again, you find today, even banks are refusing to lend to other banks. Now, when banks don't lend to other banks, you know that there's a crisis of confidence. And that crisis of confidence, David, really has its origin, not just in the meltdown of the subprime loans and the mortgage lending crisis, it goes back several years. There has not been very much regulation of Wall Street. There has grown a whole set of markets with derivatives and complex derivatives. Nobody even knows what is in a lot of these portfolios.

GREGORY: Let me ask you here, what is the leadership test for these candidates as they debate the economy?

REICH: Well, the real question is what are the candidates going to do about the mess on Wall Street? Essentially, you've got to regulate who is most sincere about regulation, who has a career or a record with regard to regulation. There are three kinds of regulations that are needed: No. 1, disclosure rules, making sure that people actually know, investors and lenders know what is the value of these pieces of paper. No. 2, capital requirements. Now, commercial banks have to require, have to have a certain amount of capital on hand, not investment banks. And No. 3, conflicts of interest and there are a lot of them right now in Wall Street.

GREGORY: All right, let's talk about overall views of the economy. I referenced a moment ago that Senator Obama issued a two-minute ad in which he talked with his economic goals in some detail. Here's just portion of it. Let's listen.


OBAMA: Here's what I believe we need to do. Reform our tax system to give $1,000 to the middle class, instead of showering more on oil companies and corporations that outsource our jobs. In the anything goes culture on Wall Street, with real regulation that protects your investments and pensions.


GREGORY: Secretary Reich, what makes believe that Senator Obama in fact has the right prescription to take on an ailing economy?

REICH: Well, first of all, since February of 2006, he has been pushing regulation of Wall Street, but-and John McCain has been deregulating, in fact, John McCain's whole history is deregulation. But, there's also more basic things here, David, and that is that you got two different economic approaches. One is top down, trickle down economics, you give tax breaks to the rich, tax breaks to corporations, corporations who deregulate and hope everybody gets better and it all trickles down.

The second is bottom up. That is you give tax breaks to people who are in the middle and lower middle class. You invest in education and job skills and healthcare and you regulate and make sure the economy expands from the bottom up.

Well, John McCain's entire his industry top down. And Barack Obama's history and his policies are all bottom up. I think we need bottom-up economic reform, quite frankly.

GREGORY: Well, let's talk about tax cuts because Senator Obama wants tax cuts, as well. What's different in terms of how president Clinton came into office is that the next president is going to face a budget deficit on the order of about $480 billion. Is it unwise to pursue tax cuts in that sort of climate, even if you're talking about bottom-ups kind of tax cuts for the middle class?

REICH: Well, you've got to get the economy going again. You've got to put money in people's pockets. Now, John McCain says let's give big tax cuts to the very wealthy, let's continue the Bush policies, but I want to go further, he says, more tax cuts for the wealthy and for big corporations. That's not help in this climb. What Barack Obama is saying is, let's have tax cuts for average working people, let's also make sure that there are adequate investments in infrastructure and technology, again in healthcare and education. That's how you grow the economy. If you grow the economy, then the budget deficit shrinks because the economy has so much more capacity to have a deficit.

GREGORY: Secretary Reich, what's different in this march climate is that even those who are in the middle of this financial mess don't really know where the bottom is. We don't know where the way out is of a credit crisis, we don't know where and when the mortgage market is going to really bottom out. What challenge is the next president going to walk in on day-one, in terms of being a catalyst for economic growth?

REICH: Well, a lot of this boils down, David, to confidence. Right now Wall Street is suffering from a crisis of confidence. It hasn't terribly affected Main Street and it certainly has affected Main Street in terms of a lot of people worrying about their jobs and having difficulties getting loans. But what the danger here is, is that Wall Street's near meltdown could cause huge havoc on Main Street if a lot of small businesses cannot get loans, if average workers cannot get any kind of help with regard to buying a new house, if the entire credit market clogs up for Main Street.

What the new president has to do-and I happen to believe that Barack Obama can do this much better than John McCain-is establish enough credibility through adequate regulation and also through kind of a vision of where that man is going to be taking this economy. I think Barack Obama can could that.

GREGORY: OK, Secretary Robert Reich, thank you very much.

REICH: Thanks very much, David, bye-bye.

GREGORY: Appreciate you being here.

More on this as we continue here on the state of the economy. The RACE returns live from San Francisco with the CEO and chairman of Google, right after this.


GREGORY: Coming up, more on the state of the economy and the state of the race with a focus on Sarah Palin. Is her record, her views being overshadowed about all this talk about the economy? Also ahead in this program, the CEO and chairman of Google on his assessment of the state of the economy. We're live from San Francisco, tonight when the RACE returns, right after this.


GREGORY: Back now on RACE FOR THE WHITE HOUSE, live tonight from San Francisco. Pleased to be joined now after another troubling day on Wall Street with the Dow plunging 450 points, pleased to be joined by the chairman and CEO of Google. Obviously, one of the biggest companies in the world right now and we want to get his perspective from the Google campus in Mountain View, California.

Dr. Schmidt, good to have you on the program.

ERIC SCHMIDT, CEO, GOOGLE: Yes, hi, thank you for having me.

GREGORY: Obviously, pleased to be out here in California to take part in your company's Zeitgeist conference today, which was so interesting and it was an honor to be involved. Also interested in terms of, we talk about the small effects in parts of our economy and how it has larger effects on the rest of the global economy, as well as dealing with the kind of changes that are rocking the marketplace right now, and it all comes back to what we're seeing happen and playing out in our financial markets. So, my first question to you is, Google is not a company that is highly leveraged, there's a lot of cash on hand, it's unlike what the investment banks are going through. And yet do you feel the impact of what's going on Wall Street?

SCHMIDT: Only through our friends. Google, as you now, has a large cash position and we believe in cash, we don't use debt in any particular way. We're fortunate that way. My view is that this could ultimately affect us and everybody else, if it ultimately leads to some sort of business contraction. So, it's incredibly important that the people who managed to get us into this mess get us out of this mess really, really quickly.

GREGORY: And yet when there's an environment where credit markets freeze you up, where there's no lending going on, it's not good for your market either, right? I mean, you've big enough to absorb it, but it's still-you still feel it?

SCHMIDT: And of course, we could feel it. And the important thing here is if people are not being able to get credit, let's get credit to them now somehow. All right? Because the economy needs credit structure and ultimately, sure, people buy products, we need to be able to do it. Absolutely.

GREGORY: There has been some discussion in the administration about more regulation of short sellers in the view of what has happened in Wall Street of late. Do you think that's a good idea?

SCHMIDT: Well, it's clear that the whole area was not regulated enough. I'm not enough of an expert to know that short sellers are part of the problem. We do know that there was a disconnect from an agency perspective where people could sort of give money and then immediately give the risk to somebody else, so they never paid the right penalty for the errors that they made in giving out too much credit. So, that's the problem that needs to get solved. And there is a long history, there.

So, it just seems to me that the quicker we can figure out the right sort of structure and the right sort of risk incentives, the quicker we can get back to work. You know, America is enormously creative and one of the great things about America is that when we get to the bottom, and I hope it's this week, we very, very quickly climb right back out. People have short memories, they move on. So, let's use this as an opportunity to get the structure right. Let's make sure the people who have right incentives also have the right positives and negatives for them, personally.

GREGORY: I want to ask you about challenges for the next president, including the area of the environment and energy, which I know you care a great deal about. But, from your vantage point, here we are in a political campaign where the economy is being debated every day, it's overshadowing every issue, but you run Google. What is your assessment of the state of this country's economy?

SCHMIDT: Well, we see the traffic and we see what people are doing. And most analyses, and we concur, indicate that if we're not in a recession, we're sort of in a flat part. We know that people are buying things, but they're buying them at less of a rate, and so we know about there is some kind of a slow-down going on. Whether it's a recession or not, it's a naming problem. The government needs to act and the government needs to act to get people going again. And the quickest way for them to do that is use the various stimulus proposals that are in discussions today. It's interesting that everybody's focused on the next president, but the current Congress has to act right now.

GREGORY: And is there a leadership test for not only those in Congress, and indeed the president, but also these candidates who are debating these issues? And what is that leadership test for them at this stage?

SCHMIDT: Well, it seems to me between now and November 4, both of the leading candidates are trying to maximize the chance of getting elected. And for obvious reasons, they're figuring out where the strengths and weaknesses are. This is a systemic failure that a lot of people participated in over many, many years. It requires a fairly lengthy conversation about why did the checks and balances in our financial system get so screwed up. And I'm not going to suggest that one presidential candidate or another will fix that better than the other. It seems to me that it is a systematic problem and it's an opportunity for the current people, people in their jobs today, to fix this now, rather than being distracted by all this other excitement.

GREGORY: But, there is a lot of fear out there. I mean, not just on Wall Street, but average Americans have fear about their jobs and about their financial standing.

SCHMIDT: Well, people depend on credit and they depend on credit for lots and lots of things. Of course, we're seeing the ending of a multi-year housing bubble. When you start calling it a bubble, maybe it's time to burst it ahead of time so that people don't go through this pain, right now. The important thing here is that as the financial industry gets itself recapitalized, and as credit gets restored hopefully in a day, right? People will move past this and will get back to the kind of optimism that characterizes American business.

GREGORY: You know, there's been an issue that's come up on the campaign trail about whether these candidates, and their running mates, would be capable of running the government or running a major corporation. When you think about Barack Obama, you think about John McCain, you think about Sarah Palin or Joe Biden, do you think they're capable of running a company like Google?

SCHMIDT: What I learned is that the characteristics to be a successful politician are different from the characteristics of being a successful CEO. Different set of problems, different set of opportunities. One does not make the other. People in business often end up going into politics. Often the politicians are better than the people from business going into politics. I don't know why.

GREGORY: Let me ask you about something that I know was discussed today, that you talked about. The political world, there tends to be a shorter term focus, whereas business leaders, like yourself, often have a longer term vision for challenges in the country. And talk about that. As you look toward the next president and this campaign, what are the longer term challenges that the next leader is going to face?

SCHMIDT: Well, first place, the current dialogue is so short-term oriented, it's difficult to break out of that. So, let's talk about great leadership. A great president, a great future president will be able to articulate a longer term vision than this month or this crisis or what have you. And what they're fundamentally going to do is they're going to bring back some form of optimism, a sense of balance. So for example, all those people who were hurt in the financial crisis, they need some form of recompense. The need some sort of hope, they need some sort of solution which ultimately involves job creation, investment, successful business creation, those sorts of things.

We need to repair all of our issues with respect to international relations and free trade and those kinds of things so that we can have really, really successful businesses. So, from a business perspective, we take a much longer term, because we're going to be here, our buildings and our companies and so forth, are going to be here for a long time. We're working hard, for example, on climate change because climate change is the longest term issue facing America and indeed world. But, if we don't start now, we have to address this sometime, so why not now? And the great thing about business, unlike, for example, government, is that business can take a capital and apply it now. So, we can invest now to have savings later. And it's very difficult for the government to do that.

GREGORY: And finally, what would you like to see government do as a catalyst in the area of the environment and energy as we move forward?

SCHMIDT: Well, it just seems to me there is a huge crisis in front of us, this whole issue of the government going down, all the problems that we've talked about. So, what's going to happen is that the government is going to do a stimulus package. So, rather than just giving all the money to all the normal suspects, why don't we have it be focused around solving the renewable energy problem in the following way. Let's rebuild the energy infrastructure of America. Let's literally solve the gas problem once and for all. Let's solve the pollution problem once and for all. Let's get oil prices going down, because of less demand.

And there are a number of proposals to do this, all over a 10 or 20-year period for some number of billions of dollars, but less than much of what we pay today, we could literally invest in America. We could invest in the infrastructure, the engineers, the technicians, the technology. We could replace the current fossil based infrastructure by co-by solar, by wind, and by enhanced geothermal over the next 10 to 20 years, creating a jobs, exports, and increasing our energy security. The next wars are going to be about oil, so why don't we take oil away? Why don't we just take it out of the equation and solve the problem from an energy independence perspective with money now?

GREGORY: All right, a big debate that will go forward. Eric Schmidt, the chairman and CEO of Google, taking time off from the terrific Zeitgeist forum today on the Google campus in Mountain View, California. Thank you very much. I really appreciate it.

SCHMIDT: And thank you very much for coming and speaking and your comments were phenomenal.

GREGORY: Thank you. Thank you very much.

We will take a break, here. Coming next, today's deadly attack on the U.S. embassy in Yemen. It is on the RACE's radar, coming up next.


GREGORY: Back now with a look at what's on the RACE's radar. Today, 16 people were killed when terrorist attacked the U.S. embassy in Yemen using a car bomb and rocket propelled grenades. U.S. officials tell NBC NEWS it bears "all the hallmarks of an al Qaeda attack." Today, President Bush called the attack a reminder that America is still in a war on terror.

Mike Smerconish on our panel, comment here on a reminder of what the administration is talking about.

MICHAEL SMERCONISH, RADIO TALK SHOW HOST: You would think that John McCain would have had more to say on this issue, today. And from a cold political calculus, David, politically speaking, he's better on talking about matters of international terrorism than he is talking about whether the fundamentals of the economy are strong. I think he needs to address both.

GREGORY: But he certainly can't get out of this debate on the economy very easily.

SMERCONISH: No, he can't. And you've been asking, what's the threshold leadership question. I think from my perspective, it is this:

Convince me that you have a grasp as to the cause and a solution to these problems, because I think it's beyond the knowledge of most members of the electorate, certainly including me. So, I want to make sure that those for whom I'm about to vote, that they understand and appreciate exactly what got us into it and what's going to get us out.

GREGORY: All right, got to take another quick break.

Here, coming up next, VP nominee, Sarah Palin, responds to today's federal bailout of AIG. Later in the program, former San Francisco mayor, Willie Brown, will join us here in the city. The RACE is back right after this.


GREGORY: With 48 days to go, the focus turns to the economy and away from VP pick Governor Sarah Palin. Plus, a prominent Obama surrogate brings up the race factor. Former Mayor Willie Brown joins me live from San Francisco to respond.

Back on RACE FOR THE WHITE HOUSE in San Francisco tonight for the back half. I'm David Gregory. Governor Sarah Palin single handily changed the political terrain of this race, reenergizing Senator McCain's base, replenishing his war chest, and shifting up the electoral amount. With the financial crisis rocking Wall Street now, will the bad economic news neutralize McCain/Palin's bounce, the two of their bounce together?

Joining us now to talk about it, Gene Robinson, MSNBC political analyst and columnist and associate editor at the "Washington Post." John Harwood is CNBC's chief Washington correspondent and a political correspondent for the "New York Times," and Michael Smerconish, Philadelphia radio talk show host and columnist for both the "Philadelphia Daily News" and the "Philadelphia Inquirer."

Gene, let me start with you. The Palin bounce, the Palin effect, seems to have been overtaken by this debate over the economy.

EUGENE ROBINSON, "THE WASHINGTON POST": It seems that way. If you're a devote of the daily tracking polls, you see Obama moving up a bit, McCain moving down a bit. And this looks like a good issue for Obama. In part, because McCain seems to keep tripping over himself with the fundamentals are strong comment. He was against the AIG bailout. Then he was for it. And so it seems to be a real opportunity for the Obama campaign to regain its footing.

GREGORY: Today at a campaign stop in Cleveland, Ohio, Governor Palin weighed in on that federal bailout for AIG.


PALIN: Disappointed that tax payers are called upon to bail out another one. Certainly AIG, with the construction bonds that they're holding and with the insurance they're holding, very, very impacting to Americans. The shots that have been called by the Feds, it is understandable, but very, very disappointing. Tax payers are called upon for another one.


GREGORY: John Harwood, a couple points here. First, we've not seen her in impromptu sessions being questioned about issues of the day. Two, on the issue of federal bail outs, both McCain and now Governor Palin saying they don't like these bail outs, but they are supportive of them. This is something that is all happening in real-time. And they're trying to size up the best response.

JOHN HARWOOD, "THE NEW YORK TIMES": Exactly. And nobody wants to talk about putting the taxpayer on the books. But they also don't want the economy to collapse either. They really don't have any choice. What the McCain campaign has to ask us, do sessions like that inspire confidence that Sarah Palin knows what she is talking about on the economy? You look at the interview she had with Charlie Gibson on that subject the other day. I don't think that was something that demonstrated a lot of grasp of economic detail or economic policy. That's another reason why this is something that's benefiting Barack Obama rather than John McCain.

Also, the Carly Fiorina comments yesterday about how neither John McCain nor Sarah Palin could run a major corporation. She said the same thing about Barack Obama, but that doesn't help when your surrogate delivers that message. Finally, I talked to a McCain strategist today who said the Palin effect, that is yesterday. This is a real problem that we're in right now, which was a sign to me that, again, this is something that provides an opportunity for Barack Obama to take off.

GREGORY: Right, Smerc, this is a very specific set of problems. And I suppose, in fairness to both sides of the political aisle here, the people who are in the middle of this financial storm don't know exactly when it will end and which way is the exit. It is a pretty complicated set of facts right now.

MICHAEL SMERCONISH, RADIO TALK SHOW HOST: It is heady stuff. That's what you're saying. I think that we Americans can form intelligent decisions, relative to whether we should get out of Iraq and whether there should be a timetable by virtue of doing so. On this, I think there is complete bafflement in the American populace. You look at that footage of Sarah Palin in the diner or that restaurant where she offers that quick sound bite. I don't think that is going to wash. I don't think that is going to be sufficient.

We asked our perspective employees for routine jobs far more questions than she's been subjected to in this process so far. I think it may catch up with her for that reason.

GREGORY: Also, the political reality, the strategic reality is that both sides are looking for vulnerabilities in the other side to undermine each on this basic confidence question on the economy. So today in Nevada, Obama attacked McCain for saying he'll take on the old boys network in Washington. Watch.


OBAMA: This is somebody who has been in Congress for 26 years, who put seven of the most powerful Washington lobbyists in charge of his campaign. And now he tells us that he is the one who is going to take on the old boys network. The old boys network. In the McCain campaign, that's called a staff meeting.


GREGORY: John Harwood, how effective?

HARWOOD: I think that was a pretty good line. More effective than the advertisement that Barack Obama has been running on that subject, which features pictures of lobbyists people don't know and lines connecting them with corporation that they lobby for. Anything that allows Barack Obama to make the argument in broad strokes that that is the party that has been in charge. They're not on your side. I am on your side. It's an opportunity for him to make progress.

GREGORY: Go ahead.

ROBINSON: I was going to say one thing; if we develop a consensus that one of the causes of this crisis was deregulation or lack of regulation or proper regulation, then I think that is a problem for McCain as well, since he has been throughout his career such a proponent of deregulation. And I think the more we go back into that history-of course, now he says we need more regulation. But that will be a tricky thing for him to explain.

GREGORY: Carly Fiorina, who was on the program a couple night ago said it is easy to confuse McCain as a sort of full effect free market guy, where she said the reality is that he has never really been that. He likes to think of himself more in the mold of Teddy Roosevelt, who is more of a populist who would take on Wall Street. They laid the blame-there is an opportunity for the McCain team to lay the blame at the Bush administration. She said, you want to talk about the wild west, no regulation, let the markets reign; that's the argument the Bush administration of the past eight years. That's the argument that the McCain folks are now making.

ROBINSON: Yes. And I think that's a smart argument for them to make. The question is, will the Obama people then point to McCain's previous votes in favor of deregulation, votes that supported measures that the Bush administration took to deregulate markets. This is what John McCain says, but what did he do when he had the chance to do something about it.

GREGORY: That's the question here, Smerc, which is if you're John McCain, can you separate from the Bush administration? Can you separate from your party's economic philosophy?

SMERCONISH: It is funny that you raise this because Carly Fiorina yesterday was on my radio program. When I asked her who is to blame, the first thing she mentioned, the Democratic conscience. I said, wait a minute, you can't mention the Democratic Congress without talking about the Republican White House. This all bodes poorly for John McCain because he is a member of the party in control. These events reached such a stage that I think there could be a throw them all out mentality.

GREGORY: Let's listen to more of Governor Palin. She was in a rally in Ohio last night and she talked about the economy in terms of gas and groceries.


PALIN: A full tank at the pump kind of seems like a luxury. The cost of living is going up. Groceries going up. Everything is going up. But the value of your paychecks has been going down.


GREGORY: John Harwood, she is an effective spokes person on this particular issue. She is going to connect with a lot of voters given her background in life as somebody going through a lot of this with young kids and kids approaching college age.

HARWOOD: A couple points on that. Yes, she is relatable to the average person. A lot of people see themselves in Sarah Palin's life. That's a positive attribute. On the other hand, when you have a crisis, and it looks like something is going deeply wrong with the economy, do you want somebody who looks like they are your next door neighbor and doesn't have a much higher level of expertise to solve the problem? This is what -there is a premium on looking like you know what you're talking about.

And secondly, if you look at Sarah Palin in that interview with Charlie Gibson, what she was she wants government to get out of the way. She was asked, what are you going to change about the Bush economic policy? She said, we shouldn't look to the government for solutions. There is a role for government, but that's not where we should look. We should get government out of the way of the private sector.

That goes exactly against the impulse that is coursing through the country right now, including John McCain who himself said we need more regulation.

GREGORY: More regulation, but also that the federal bail outs are necessary, that the balancing tests here, even for free market Republicans, is yes, in principle, we agree with that. We can't let the economy crumble. We can't let the likes of AIG go under. They did that with Lehman. But they didn't do it with Fannie Mae and Freddie Mac.

HARWOOD: That's true. You have to pick and choose and Hank Paulson is playing defense, trying to do the best job he can to figure out what he can let go, where he can draw the line, as he did yesterday at Lehman, as the Fed did yesterday, and where you can't draw the line, because it's going to take everybody down.


SMERCONISH: Can I make a quick comment?

GREGORY: I have to get a break in here. Hopefully we'll be able to come back to it. Coming up next, polls show a dead heat between McCain and Obama over who would best handle the economy. Can either side make the issue their own? I'm going to go inside the war room, one on one, with Republican strategists and our analyst as well Mike Murphy, when THE RACE returns after this.


GREGORY: Back now on RACE FOR THE WHITE HOUSE. Joining me now inside the war room is Mike Murphy, former adviser to Senator McCain and a top Republican strategist, also an NBC News analyst. Mike, welcome to the program.

This is an amazing situation where you have got a Republican administration now on defense, trying to contain a financial meltdown on Wall Street, getting the tax payers heavily involved. All of this forcing the candidates to respond in real-time to try to own this issue. So if you're inside McCain' war room, what do you think the calculation is like?

MIKE MURPHY, REPUBLICAN STRATEGIST: I think they're going to play the leadership. That's why they have the tough guy television ad going up. They're saying, on one side of the equation, the economic crisis is pushing the economy issue up even higher. It is already number one, but it is requesting to like red hot level.

Generically, economic trouble can sometimes be very good for Democrats. They're saying we have to survive in this environment. Our contrast is tough guy, can-do leadership performer, versus inexperienced Obama. So they're trying to put the bow of the ship into the wave here and be able tackle this economic issue by stressing, McCain is tough, give him hell Harry, reform credentials. It's the best move they can make.

GREGORY: You talk about the new ad. We'll show that here, where he has the experience and the best handle on how to fight Wall Street. Let's play that.


MCCAIN: You, the American workers, are the best in the world. But your economic security has been put at risk by the greed of Wall Street. That's unacceptable. My opponent's only solutions are talk and taxes. I'll reform Wall Street and fix Washington. I've taken on tougher guys than this before.


GREGORY: You're right. It is the tough guy image here. It fits with the idea of a reformer who wants to take on Wall Street. But for both these candidates, this is a leadership test. Nobody is going to have all the right answers here on something that's still unfolding. How do you define the leadership test in the middle of a political campaign?

MURPHY: That's a very good point. I think we're only beginning to litigate the issue. This could have more bump back and forwards. It is almost like you take the phrase, economic crisis. What the McCain people want to do is put a big red circle around the word crisis and play to his gray hair, his experience. The Obama people want to put a big circle around the word economic, talk about middle class squeeze, what it means to working families, try to argue that McCain is out of touch, doesn't understand those things.

It is almost going to be McCain's toughness versus Barack Obama's empathy. It's like a jump in basketball. They're trying to get control of the debate and frame it their way. It is only the beginning. This will go on for a while. We won't know how it will play out until we've had 10 or 12 days of it. It's only the beginning right now.

GREGORY: We've been talking in the course of the program about vulnerabilities for Senator McCain, questions about his own history of being somebody who pushed for deregulations, some of the comments that were made, including by Carly Fiorina, about whether Sarah Palin could run a corporation. She said no. Let's ask you to take a look at where the vulnerabilities in Senator Obama at this stage on this issue.

MURPHY: Well, I think one angle is going to be ideology. You saw a whiff of it in the television commercial, which is go to taxes, to try to debate the side of free market economics that people like the most. We know the wild swings in a deregulated market. The Democrats are going to say see the pain it brings. The Republicans and McCain are going to try to do is a say look, we put liberal economics in charge, they're going to cripple us with taxes, choke the economy, make a very dicey situation even worse.

I think you're going to hear a lot about taxes, a lot about liberal economics from the McCain people, trying to hurt Obama with that and try to get the topic off empathy and who is going to make you feel better, which is always the Democratic advantage, into who is the better hard headed financial manager that's not going to a big leftist economic ideology.

GREGORY: What about the Palin effect, Mike? Is she at a stage now where it is a time of testing some of the initial cult of personality, some of the energizing effects on the base? It's now going to give way to a pretty hard test of not only her views, her experience, but her philosophy and her view of leadership moving forward?

MURPHY: Well, it's going to be a little tricky. I think the Palin bounce is now dissipating. I was always one of the few Republican who was slightly critical of the strategy of the choice, because I thought it was a base pick in a non-base year. Now what's happening is with this economic crisis, there is some pressure on the McCain folks to cash in experience, to cash in knows his way around a crisis. That's not Palin's strength. She is not the candidate with experience. They're probably a few people at the barn near McCain headquarters cleaning up for a few rounds who might thinking that Romney might not have been such a bad pick. Not to say that Palin-

GREGORY: Finish your thought.

MURPHY: I think-so experience, we're going to be playing to the weaker side of Palin. Ultimately, the election is not going to be about the vice-presidential nominees. It is going to be about these two guys. We have a crisis now. Presidents operate in the crisis business. So the spotlight is on both of them.

GREGORY: Mike Murphy down in Los Angeles for us today. Mike, thanks very much.

MURPHY: Thank you.

GREGORY: Going to take a break now. Coming up next, I go one-on-one with former mayor of San Francisco, his honor himself, Willie Brown. We're going to talk about the role of race in the RACE FOR THE WHITE HOUSE when we return.


GREGORY: Back now on RACE FOR THE WHITE HOUSE from San Francisco tonight. I'm joined now by the former mayor of this great city, Willie Brown. Mr. Mayor, terrific to have you here.


GREGORY: Nice to be in your city. You wrote this about Governor Palin being a game changer in the "San Francisco Chronicle" on Sunday. I'll put it on the screen. "Thanks to Sarah Palin, this is no longer a contest between Barack Obama and John McCain. It's between brother Barack and sister Sarah, rock star versus rock star, inexperience versus inexperience, new comer versus new comer, change versus change. His change is East coast intellectual. Her change is NASCAR. The Democrats have got to get to the core of this new campaign. It's not a pretty thought, but somehow Democrats must plant in voters' minds that given McCain's age and his health history, he might not make it through the term if he is elected."

Obviously an awful thought. From a tactical point of view, you're suggesting that they should be focussing on Governor Palin?

BROWN: They have to literally make sure that they run against John McCain. And they have to do so on the basis that Barack Obama is better qualified to be the president. They cannot continue to take on Sarah. She is in a position where, as a rock star, you don't really ever get to the core, to the substance.

However, the Democrats have a real lucky break. The day that Lehman Brothers said uncle, the day that Merrill Lynch said near uncle, the day that AIG said help, everybody focused their attention on those three ailing giants, and gave Democrats an opportunity to get back on track. Let's hope they stay there.

GREGORY: So how does Barack Obama exercise some real ownership over an issue that he has not? I'm talking about the economy. He has not established the confidence and the connection with voters to give him a sizable lead in the polls over McCain on this particular issue, even if it is an issue that favors Democrats.

BROWN: He has to literally make people believe, make Democrats in particular believe that he has the answer to their job loss. He has the answer to their threatened 401(k) plans. He has an answer to their health plan that's about to be wiped out by some insurance takeover. He literally has to say, I am going to see that your house is no longer foreclosed on. And they're going to have to believe it.

So his geniuses, and believe me, he has a cadre of people who really did Hillary in. They beat Hillary at her own game on the campaign trail. I suspect that when they put their heads together, they can do the same to John McCain.

GREGORY: I want to switch gears a little bit. At an event in Iowa yesterday, Kansas Governor Kathleen Sebelius was asked why Obama and McCain were so close in the poll. She said that, in fact, race is a factor, telling voters this, quote, "I think that the notion that 'by the way, have any of you noticed that Barack Obama is part African American,' I think that is for a number of people difficult. All the code language, all that doesn't show up in the polls. That may be a factor for some people." How big of a factor?

BROWN: It is a very big factor. We went through that out here 20 years ago in a race involving Tom Bradley versus George Deukmejian. The Bradley factor is the way we call it in California. That factor is there. The Obama campaign has known that from day one. They made sure that Obama did not reiterate his blackness anywhere during the course of the primary. They really wanted to assert his qualifications. And they did a spectacular job.

They also knew that on the question of race, black people would be so proud of the fact that there was potentially a black president, they wouldn't ask anything of him. They would simply come out in numbers and support him. Bill Clinton ran into that on Hillary's behalf in South Carolina.

GREGORY: That was in the primary. And they got over it in the primaries. Now in the course of the general election, does he have to address this head on in some way? To answer people's concerns? Are these vote who are going to make race a factor simply beyond him?

BROWN: They're going to make race a factor no matter. He has just got to accept that they're out there. And he can't ever allow himself to be put aside and start dealing with that. It is too small of an issue from his total standpoint. However, David, there are now some 12 million African-American who's are 18 years of age and over, unregistered. If he runs, or has somebody for him, run an operation with the NAACP and other organizations like that on voter registration, absentee ballot programs, he energizes the black church without ever allowing it to be shown on national television.

He could very well change the nature of the end result by expanding the number of people who actually vote for the first time. I think that's exactly what he will do.

GREGORY: As you know, I love everything about this great city of San Francisco except for one thing. As a native of L.A., I have to say, go Dodgers. Go all the way.

BROWN: This year, I'm actually for the Dodgers. When they got Ramirez, that said to me that, in fact, this guy is where he should be. This year we're in training stages. We're not playing real baseball. So I'm for the Dodgers this year.

GREGORY: Glad to hear it. Mayor Willie Brown, thank you very much. Appreciate you coming on the program. That is going to do it for us, RACE FOR THE WHITE HOUSE from San Francisco. I'm David Gregory. Thanks again to our panel and to you for watching tonight. We'll see you back in Washington, D.C. tomorrow night, same time, 6:00 p.m. Eastern time. Stay where you are, "HARDBALL" with Chris Matthews coming right up on MSNBC, the place for politics.



Copy: Content and programming copyright 2008 NBC. ALL RIGHTS RESERVED. Transcription Copyright 2008 ASC LLC ALL RIGHTS RESERVED. No license is granted to the user of this material other than for research. User may not reproduce or redistribute the material except for user's personal or internal use and, in such case, only one copy may be printed, nor shall user use any material for commercial purposes or in any fashion that may infringe upon NBC and ASC LLC's copyright or other proprietary rights or interests in the material. This is not a legal transcript for purposes of litigation.