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Economic Emergency: Talks on Anti-Recession Plan; Clintons and Obama at War; Dems' New Target: John McCain

Aired January 22, 2008 - 16:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


WOLF BLITZER, CNN ANCHOR: Happening now, a state of economic emergency. The Fed takes some dramatic action early in the morning to boost plunging stock prices. President Bush summons lawmakers to try to hammer out a financial rescue plan.
I'll speak live with a top economic adviser to the president and we'll -- I'll ask him if the administration has been asleep at the switch. That's coming up.

Also this hour, which Clinton is Barack Obama running against? There's no letup in the war of words betweening (ph) the leading Democratic presidential candidate a day after our debate in South Carolina produced some strong fireworks.

And Republican Fred Thompson dropping out. We'll take a look at the collapse of his presidential bid and whether he'll hop on the John McCain bandwagon.

I'm Wolf Blitzer. You're in THE SITUATION ROOM.

Alarm bells about the U.S. economy are ringing loud and clear today on Wall Street, as well as here in Washington. With the markets in meltdown, the Federal Reserve unexpectedly flashed two key interest rates early this morning.

And the president and congressional leadership, they are clearly feeling pressure to make a big move of their own. They sat down over at the White House just a short while ago to discuss an emergency recession fighting plan.

Let's begin our coverage with our White House correspondent, Ed Henry, who is watching all this very, very closely.

The stakes for millions and millions of people not only in the United States, Ed, but around the world are enormous. Did they make some progress on an economic stimulus package?

ED HENRY, CNN WHITE HOUSE CORRESPONDENT: It seems like they did, Wolf. There's such a bipartisan rush to get something done now.

The Senate Democratic leader, Harry Reid, just walked out of this meeting with President Bush and told reporters he's on board with the president's price tag of $150 billion for a stimulus plan, and even suggested that he could go higher in that price tag if this crisis deepens.

(BEGIN VIDEOTAPE)

HENRY (voice over): Markets plunging, consumers hurting.

UNIDENTIFIED FEMALE: I'm definitely concerned because I know my retirement fund is completely deteriorating.

HENRY: Washington, scrambling.

GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: I believe we can find common ground to get something done that's big enough and effective enough so that an economy that is inherently strong gets a boost.

HENRY: While President Bush works with congressional leaders on an economic stimulus plan that may take months to actually reach consumers, the Federal Reserve hit the panic button, slashing a key interest rate by three-quarters of a point, the biggest cut in 24 years, to deal with an economic shock that's becoming a defining issue in the 2008 campaign and could overshadow the president's final year in office.

ANNE MATHIAS, STANFORD GROUP: If we go into a recession, even if we have this economic stimulus package, we are not going to be out of the recession. It's not going to be smooth sailing by September and October and the waning days of the presidential campaign. And this could not be worse news for the Republicans.

HENRY: A long list of economic headaches for the president, from the subprime mortgage crisis, to rising prices for gas and food, stoking concerns about inflation. Amid Wall Street's wild rise Tuesday, Mr. Bush huddled privately at the White House with his economic team and then dispatched Treasury Secretary henry Paulson to Capitol Hill, pushing his stimulus plan of nearly $150 billion in tax cuts and government spending.

HENRY PAULSON, TREASURY SECRETARY: Time is of the essence here. And the president stands ready to work on a bipartisan basis to enact economic growth legislation as soon as possible.

HENRY: There's also risks political risks for Democrats if they appear to be dawdling, which is why they're also sounding a rare note of bipartisanship.

SEN. HARRY REID (D-NV), MAJORITY LEADER: During the break I spoke to the secretary of Treasury at least eight or nine times. He's concerned. We're all concerned.

To be effective, this stimulus plan must be timely. It must be targeted, and it must be temporary.

HENRY: But some economists believe any relief may be too little, too late.

MATHIAS: Well, it's sort of a Band-Aid.

(END VIDEOTAPE) HENRY: Now, Democrats and Republicans both say that they hope to get this stimulus plan to the president's desk by mid-February, but economists point out that the actual rebate checks that are likely to come to consumers aren't going to be rolling until late string or early summer. So, the bottom line is that, even if they come to this quick agreement, consumers probably won't feel any relief until the summer -- Wolf.

BLITZER: Two points, Ed.

The first, yesterday was Martin Luther King Jr. holiday here in the United States. The markets were closed. A lucky break for a lot of investors, otherwise there could have been a disaster yesterday, as was the case in Europe and in Asia.

The second point, they didn't waste any time, the Federal Reserve, this morning. In the 8:00 a.m. hour they went ahead and slashed those interest rates, the largest single cut in, what, some 23 years. A dramatic development designed to deal with this potential of a real collapse on the markets today, and it seemed to have worked.

HENRY: A little bit, because it did study the markets. You saw in the early trading, in pre-trading, it was about 500 points down. Then it was still down later, but down much less. Some people taking are that as a victory -- Wolf.

BLITZER: Only 128 points on the Dow Jones Industrial. Only, we say. It could have been a lot worse.

Thanks very much, Ed, for that.

This is the fourth time the Federal Reserve has slashed interest rates since September. And further cuts are expects as soon as next week, perhaps, when the Fed holds its regularly scheduled meeting. The reduction should ripple through the economy.

If you have a credit card, for example, with a variable interest rate, you may pay less on your debt. Interest rates on home equity loans may also dip. But your mortgage payment won't go down because the Fed cut short-term interest rates. If you're in the market for a new car, auto loans should get cheaper.

Stay tuned to see how your stocks are doing. The market, as we've been pointing out, rebounded somewhat today after the Fed's rate cuts. Investors may still be jittery, though.

On the downside, you'll now earn less interest on cash in traditional savings accounts, CDs, and money market accounts.

Let's get to the red-hot tensions out of the Democratic presidential campaign right now.

Hillary Clinton and Barack Obama trading new accusations after they came out swinging on our debate stage last night. And Bill Clinton continues to be a leading player in this campaign slugfest.

Let's go to CNN's Jessica Yellin. She's out in South Carolina. She's watching this story for us.

What are we hearing today from these two leading Democratic camps?

JESSICA YELLIN, CNN CONGRESSIONAL CORRESPONDENT: Well, Wolf, to borrow a phrase, both of these campaigns seemed to be awfully fired up over last night's debate.

(BEGIN VIDEOTAPE)

YELLIN (voice over): It would seem the love fest is over.

SEN. HILLARY RODHAM CLINTON (D-NY), PRESIDENTIAL CANDIDATE: Wolf, wait a minute. Wait a minute. Just a minute.

You know, now that...

BLITZER: Senator Edwards...

YELLIN: At the center of this drama, Bill Clinton.

CLINTON: You talked about Ronald Reagan being a transformative political leader. I did not mention his name.

SEN. BARACK OBAMA (D-IL), PRESIDENTIAL CANDIDATE: Your husband did.

CLINTON: Well, I'm here. He's not.

CLINTON: OK. Well, I can't tell who I'm running against sometimes.

YELLIN: That wasn't enough to knock out the former president, who is throwing punches again today.

WILLIAM JEFFERSON CLINTON, FMR. PRESIDENT OF THE UNITED STATES: I thought he was running against me in Nevada for a while.

YELLIN: And Senator Hillary Clinton isn't backing down either. She chastised Obama for his attacks on her husband and on her campaign.

H. CLINTON: Senator Obama is very frustrated. He clearly came last night looking for a fight.

YELLIN: Today, Obama's campaign raised the stakes. His supporter, former Senate majority leader Tom Daschle, told reporters he thinks this kind of backbiting destroys the party.

Meantime, Obama insists he's taking the high road.

OBAMA: This is exactly the kind of politics we cannot afford right now, not when the stakes are this high.

YELLIN: But it seems he's not opposed to attacks when he's the one making them. OBAMA: Being ready on day one means getting it right from day one.

She changed her plan to look like mine.

Only in Washington could Senator Clinton say that NAFTA led to economic improvements up until she started running for president.

(END VIDEOTAPE)

YELLIN: Now, Wolf, today the Obama campaign in the latest development has announced they're unveiling a truth squad of supporters who will go out and defend his record when they say it's distorted. But the truth is, all these candidates have had informal truth squads for months, supporters who make their case, especially when they're making points the candidates don't want to -- Wolf.

BLITZER: All right, Jessica. Thanks very much.

In fact, Obama is speaking right now right behind Jessica. Let's listen in briefly to hear what he's saying.

OBAMA: ... about change. But I also know this: that there has been no meaningful thing that has ever happened in this country, except somebody somewhere decided to hope.

That's how this country was founded, because patriots decided, we'll take on the great British empire. That's how slaves and abolitionists resisted that evil system. That's how a generation, the greatest generation, defeated fascism and lifted themselves out of a great depression.

That's how women won the right to vote. That's how workers won the right to organize. That's how women decided to walk instead of ride the bus. And you had young people traveling from all over the country down South to Montgomery and Selma and other places right here in South Carolina.

BLITZER: He's advocating change out on the campaign trail, as he often does in his stump speeches. An important day getting ready for the South Carolina primary this coming Saturday for the Democrats.

John Edwards also proclaiming he won the Democratic debate in South Carolina last night. Edwards often was upstaged by the sparring that went on by the two front-runners, Clinton and Obama, but he suggests he scored points by staying above the fray.

(BEGIN VIDEO CLIP)

JOHN EDWARDS (D), PRESIDENTIAL CANDIDATE: Between all of the allegations of Hillary serving on the Wal-Mart board and Senator Obama working for a slum lord, I was proud to represent the grownup wing of the Democratic Party last night.

(END VIDEO CLIP) BLITZER: Later, we're going to take a look at the possible impact of the Clinton/Obama feud on Edwards' struggling campaign. That's coming up.

The number of candidates in the Republican presidential race is growing smaller. Fred Thompson announced late this afternoon he's withdrawing his candidacy. The decision was widely expected after Thompson's disappointing third place finish in the South Carolina primary last Saturday.

Just ahead, we'll take a closer look at how Thompson's exit could impact the other Republicans still in the running -- who wins, who loses.

That's coming up.

Let's go to Jack Cafferty. He's got "The Cafferty File" in New York.

Hi, Jack.

JACK CAFFERTY, CNN ANCHOR: The big question is whether any of them will notice he's gone. He hadn't made much of an impact.

That was quite a Pier Six Brawl you refereed last night.

BLITZER: Yes.

CAFFERTY: What did you think of that thing?

BLITZER: I thought it was -- it was a lot more rancorous than I expected. I thought there would be some barbs, they would get into it. But we were asking questions, Jack, about subprime mortgage crisis and jobs and health care, and it didn't make any difference. They really wanted to get into it. And they had their -- they had their talking points and they were ready to lash into each other irrespective of the questions.

CAFFERTY: Yes. I don't know how much -- how much good it did the Democratic Party, but it was great television. I enjoyed watching it.

And as always, you did a magnificent job.

BLITZER: And I might point out, Jack, it was the most widely watched presidential primary ever in the history of cable news.

CAFFERTY: Well, you know why? Because it was handled by professionals instead of letting all those gum-chewing whatevers send in their little I-Report things, which it was only a distraction.

That's just my opinion.

A messy day on Wall Street, Wolf, although it could have been a lot worse, as you reported. Dow down 460 in early trading. Recovered to close down 128. That's a big comeback. The Federal Reserve rushed in, cut interest rates by three- quarters of a point before the market opened this morning. Dow futures were down 560 points of one point.

They went in, they slashed rates. They said it's because the downturn in the housing market is getting worse, unemployment is on the rise, and overall the economy is weakening. That includes things like the credit crunch, rising debt, continuing fall of the dollar.

It's clear what's happening to our economy. It's reaching far beyond our borders. World markets plunged yesterday on fears the U.S. could be in a recession.

The global sell-off, which continued today, includes some of the worst market drop since 9/11 and represents a loss of more than $5 trillion in value from stock markets this year.

As investors at home and abroad panicked, the U.S. scrambling now to come up with a solution. Suddenly, Washington is noticing the economy is headed straight south. Imagine that. Whatever they come up with, it's probably going to be too little, and you can bet it will be too late.

Harry Reid says, oh, we might be able to get a bill to the president in three weeks. What are you busy with, Harry?

The signs of trouble, the housing crisis, credit crunch, falling dollar, et cetera, these have all been around for months. But it must be serious, because the two parties in Washington are actually talking about cooperating to try to find a solution. Nothing like the threat of a depression to remind them who they work for.

So here's the question. How concerned are you about the U.S. economy?

Go to cnn.com/caffertyfile, where you can post a comment on my blog -- Wolf.

BLITZER: I wrote a blog today, too, at cnnpolitics.com on the ticker about my impressions of the debate last night. Go ahead and read it.

CAFFERTY: Well, I will. Of all of the debates that you've done -- and you've done a bunch of them -- where would you rank this one? I mean, just from a personal point of view?

BLITZER: I thought this one was the best because it was only three candidates. The others -- I did three earlier ones, Republican and Democratic, and there were seven, eight, nine candidates out there. It's hard to do a debate when you have that many people up on the stage. When you have three -- two or three, it's a lot easier.

CAFFERTY: Yes. It was great. It really was. Nice job.

BLITZER: Thank you, Jack. Thank you very much. Did President Bush wait too long to acknowledge the economic problem and to try to do something about it? Coming up, my live interview with the president's chairman of the Council of Economic Advisers over at the White House.

Plus, John McCain targets military veterans in Florida, while Democrats target him.

And we're tracking voters' hopes and fears about the economy. We'll have a live report from the CNN Election Express. It's on the move right now. Ali Velshi is inside.

Stick around. You're in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: Here's the Democrats battling each other for the White House. They're also running against another presidential candidate.

Our senior political analyst, Bill Schneider, is down in Myrtle Beach, South Carolina.

Bill, did you notice anything that was coming out involving a Republican's name that kept emerging in our debate last night?

WILLIAM SCHNEIDER, CNN SR. POLITICAL ANALYST: Yes, I did. And the name was not George W. Bush, Wolf.

(BEGIN VIDEOTAPE)

SCHNEIDER (voice over): It sounded like the first debate of the general election campaign.

EDWARDS: It's becoming increasingly likely, I think, that John McCain is going to be the Republican candidate.

SCHNEIDER: Hillary Clinton is the name that gets Republicans' juices flowing.

MIKE HUCKABEE (R), PRESIDENTIAL CANDIDATE: The most, I guess, wonderful reaction we've had in this entire room is when Hillary's name is mentioned. It gets louder than an Aerosmith concert.

SCHNEIDER: Some Republicans like to mock the senator from New York.

RUDY GIULIANI (R), PRESIDENTIAL CANDIDATE: I want to tell her I agree with this one. I quote Hillary Clinton -- "I have a million ideas." America cannot afford them all.

SCHNEIDER: The Democrats didn't treat McCain as a joke. They treated him as a tough adversary, and promoted themselves as tough enough to take him on.

H. CLINTON: I believe of any one of us I am better positioned and better able to take on John McCain or any Republican when it comes to issues about protecting and defending our country and promoting our interest in the world.

SCHNEIDER: If McCain is the Republican nominee, expect the Iraq issue to take center stage.

OBAMA: I believe that the way we are going to take on somebody like a John McCain on national security is not that we're sort of -- we've been sort of like John McCain but not completely. You know, we voted for the war, but we had reservations. I think it's going to be somebody who can serve a strong contrast and say we have got to overcome the politics of fear in this country.

SCHNEIDER: McCain's response? Bring it on.

SEN. JOHN MCCAIN (R-AZ), PRESIDENTIAL CANDIDATE: And Senator Clinton was wrong when she said -- when she said to General Petraeus when he testified before our Armed Services Committee, "I would have to suspend disbelief in order to believe that the surge is working."

You would have to suspend disbelief to believe that it's not working, my friends. You would have to suspend disbelief.

(END VIDEOTAPE)

SCHNEIDER: Our polling shows Democrats are divided in their personal view of John McCain. About half the Democrats say they like him and about half don't like him. But Democrats are not at all divided about the war in Iraq. They disagree with McCain completely -- Wolf.

BLITZER: All right. Thanks very much.

Bill Schneider in Myrtle Beach for us.

John Edwards says he won the latest Democratic debate. Does he have a point? Or was the real winner not even on stage?

Donna Brazile and Terry Jeffrey, they're standing by for our "Strategy Session."

Plus, is Hillary Clinton waving the white flag in South Carolina? We're going to take a close look at her campaign schedule, the strategy behind it. Candy Crowley watching this story for us.

Stay with us. You're in THE SITUATION ROOM.

(COMMERCIAL BREAK)

(NEWSBREAK)

BLITZER: It could be coming to a place near you. Take a look at this.

These are live pictures outside the windshield of CNN's Election Express. It's traveling across country right now, listening to Americans talk about what's troubling them about the nation's economy.

Ali Velshi is inside. We're going to tell you where it's headed, what's going on.

Stay tuned for that.

And what are the best ways the Bush administration might try to fix the nation's economic woes? I'll speak live with the president's chairman of the Council of Economic Advisers at the White House. That's coming up.

Stay with us. You're in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: As we reported earlier, the actor and former Republican senator Fred Thompson has now officially dropped out of the race for the White House. Days ago, he finished a disappointing third in South Carolina's Republican primary.

Let's go to our chief national correspondent, John King. He's in Fort Walton Beach, Florida, watching this story for us.

So, here's the question a lot of political pundits are asking. How does Thompson's decision to drop out affect the Republican contest?

JOHN KING, CNN CHIEF NATIONAL CORRESPONDENT: It's a fascinating question, Wolf, because Senator Thompson campaigned in Iowa, campaigned in South Carolina. He has not spent a lot of time in some of the other states yet to vote. So, many say, will there be much of an impact at all?

But he does run as high as 9 percent in some national polls. And what most Republicans believe is that if there is an impact, it will go to the benefit of the former Arkansas governor, Mike Huckabee.

The vote Senator Thompson did get, especially in South Carolina, came from Christian conservative evangelical anti-abortion voters. Senator Thompson had the National Right to Life Committee's endorsement.

So, they believe if any one candidate in this field benefits, it would be Governor Huckabee. But, Wolf, remember, this is also a time when Governor Huckabee is having financial troubles. He suspended his press plane. He's having fewer events because he's running low on campaign cash.

So we'll look to see what happens here in Florida, especially up here in the area where I am, the panhandle area, where you do have those cultural conservative voters. So most Republicans believe not a dramatic impact, but if it benefits any one candidate, it would be Mike Huckabee.

BLITZER: A week from today is the Florida Republican primary. John McCain doing his best to try to score a win there, and he's going after veterans.

Update our viewers on what he's up to. KING: And there's good reason for that targeting, Wolf.

Back in 2000, when John McCain went off the tracks in South Carolina, he split the veterans vote with George W. Bush. This time he won big with veterans, won South Carolina. He's hoping to do the same right here in Florida.

(BEGIN VIDEOTAPE)

KING (voice-over): For John McCain, Northwest Florida is full of memories...

SEN. JOHN MCCAIN (R-AZ), PRESIDENTIAL CANDIDATE: How proud I am to have gone through pilot training here.

KING: ... and full of what a Navy pilot and prisoner of war turned politician might call targets of opportunity.

J. MCCAIN: From here to Key West, Florida, it's one of the most patriotic states in America. And that's why I'm very proud...

(CHEERING AND APPLAUSE)

J. MCCAIN: And that's why I'm very proud to be here.

KING: Veterans made the difference in McCain's narrow win Saturday in South Carolina and could be even more influential here; 1.7 million veterans call Florida home, second only to California.

J. MCCAIN: This is a critical issue.

KING: The struggling economy is the campaign's dominant issue. And, at every stop, McCain answers Republican critics who challenge his fiscal conservatism.

J. MCCAIN: We need to make the tax cuts permanent. Otherwise, every business and every family in America are going to experience a tax increase.

KING: Social conservatives also have doubts, so this on the 35th anniversary of the Supreme Court decision legalizing abortion.

J. MCCAIN: .. tell you I'm proud of those judges to the bench that strictly interpret the Constitution of the United States and do not legislate from the bench.

KING: But McCain's overriding theme is national security experience, a pitch he hopes sway fellow veterans in a state rich in military installations and traditions.

J. MCCAIN: This is a transcendent evil we are facing. And I want to tell you right now, we will never surrender. We will never surrender. They will. I know how to lead. I know how to defeat them.

(APPLAUSE) KING: The appeal takes many shapes: promises to improve veterans health care.

J. MCCAIN: That's what I'm going to do for our veterans. And they deserve it.

KING: McCain is the son of an admiral and the only leading presidential candidate in either party with children who has served in the military. One son is in Iraq, the other at the Naval Academy. They get a mention in almost every Cindy McCain introduction.

CINDY MCCAIN, WIFE OF SENATOR JOHN J. MCCAIN: I want my sons back, like everybody else. But I want them back having done their duty and with honor and in dignity and, most of all, in victory.

KING: The senator himself rarely mentions his sons, but, at 71, 50 years after he was first stationed here in Florida, often makes a personal appeal.

J. MCCAIN: My dear friends, as president, I would like to serve this nation a little while longer.

(END VIDEOTAPE)

KING: Now, in South Carolina, 25 percent of those who voted in the Republican primary described themselves as veterans. And, among those voters, Senator McCain beat Mike Huckabee by more than 10 points. Wolf, the McCain camp believes the percentage of veterans voting here in Florida could be even higher than that.

And they take this view. The more veterans who vote, the better McCain's chances -- Wolf.

BLITZER: All right, John, thanks very much -- John King getting ready for Florida. He's there.

The CNN Election Express is moving through the South right now. We're not just covering the campaigns. We're listening to you, the voters, trying to get a better handle on the economic pain that is being felt across the nation.

CNN's Ali Velshi is joining us right now live from inside the bus as it rolls down the highway.

Ali, tell us about this journey you're on. What's going on?

ALI VELSHI, CNN CORRESPONDENT: Wolf, we left South Carolina, where -- Myrtle Beach, last night, where you were. And we are headed to the Pacific Ocean. Over six days, 2,600 miles, nine states, we are stopping, and we are talking to people.

Now, as you can see, we are bringing you this live from the bus as we're on the highway. We're heading toward Georgia now. We're still in South Carolina, but we are able to stop and talk to people. So, when we say that the economy is the number-one concern on the minds of voters, we want to know what exactly is bothering people. We have been talking to Americans. We spoke to the owner of a restaurant in Florence, South Carolina, about what he says he was worried about, the people who work and still can't make ends meet.

Listen to what he said.

(BEGIN VIDEOTAPE)

HARRY KANOS, RESIDENT OF FLORENCE, SOUTH CAROLINA: I'm talking about the average hourly worker people. It's just hard for these people to stay above water, because their costs are so just expensive, rent, gasoline, food prices.

And I know that some of those people, even though they have the problems, they still find it hard to get government help. Somehow, if we could subsidize some of those people that really are out there working 40 hours a week and trying hard, if we could figure out a way to subsidize those people and reward them for working, then that would be a big help. How you do that, I don't know.

(END VIDEO CLIP)

VELSHI: And that's what it is, Wolf. It's concerns not only about jobless rates.

South Carolina has the third highest jobless rate in the nation. But it's about people who are working. They work. And they can't make ends meet because of inflation, because of high (AUDIO GAP) energy, because (AUDIO GAP) in their mortgage rate.

So, these are the kind of concerns we're heading in South Carolina. We're heading into Georgia. We might get to Alabama tonight. But we are going to be listening to Americans all the way until we get to the Pacific Ocean -- Wolf.

BLITZER: Ali, aboard the CNN Election Express, we will be checking in with you every single day. Ali, thanks very much.

And, over the next six days, the CNN Election Express will roll through nine states through the South and the Southwest and log, as Ali just said, 2,600 miles -- the final destination, Los Angeles, for our Republican and Democratic presidential debates on January 30 and January 31.

President Bush and the congressional leadership are desperately seeking common ground on an economic package, as recession fears echo across the nation and on the presidential campaign trail.

We're joined now by Edward Lazear. He's chairman of the Council of Economic Advisers for the president at the White House.

Mr. Lazear, thanks very much for coming in.

EDWARD LAZEAR, CHAIRMAN, COUNCIL OF ECONOMIC ADVISERS: Thank you. Pleasure to be with you. BLITZER: The president keeps saying that the economy is fundamentally strong, but there's so much pain out there. A lot of economic experts already believe the country is in a recession, even if the technical definition hasn't been -- hasn't been achieved.

Why is the economy fundamentally strong?

LAZEAR: Because the structure of the American economy is sound.

We have all of the ingredients that allow for a very resilient economy. We have a mobile labor market. We have very deep capital markets. We have relatively low taxes, and we have openness to trade. All of those things are extremely important in making sure that the economy grows over the long run.

That said, we also understand that there has been some problems in the short run, some problems that are affecting the economy. The credit market issues have been a problem. Housing markets have been the major problem for this economy perhaps over the past year, year- and-a-half. And those are things that we have been looking at and we are trying to deal with right now through a variety of programs.

BLITZER: Do you believe the economy, the country already is in a recession right now?

LAZEAR: We don't think it is in a recession. And most market observers don't think the country is in a recession. Nor do we predict that the country will go into a recession.

That said, again, we do believe that growth has slowed. We're at the point, after many, many years of economic growth, many years of continued job growth, where the reality is, it's just tougher to keep things going. It's tougher to keep jobs growing. And, so, we believe that the kind of stimulus package that the president outlined a few days ago would be very effective in making sure that the economy continues to grow.

And we think we have got a very strong shot at getting bipartisan work together to get this thing happening and happening quickly.

BLITZER: Will this stimulus package include a tax rebate? There have been reports $800 for individuals, $1,600 for families. Is that within the ballpark of what you're looking at?

LAZEAR: Well, again, I don't want to get into the specifics of what -- what is going on right now.

You know, there are negotiations between the president and Congress. I literally was just in a meeting with the president and leadership of Congress, and a variety of things were discussed.

But let me tell you that I think that the president and the leaders of Congress are very close and that we will be able to get something together very quickly and do it in a way that will be effective for the economy. BLITZER: Some critics of yours, including some of the Democratic presidential candidates, suggest you were asleep at the switch over these past many months, as the economy was deteriorating.

Alan Greenspan, back in February of last year, warned of a recession. In June through August, the banks started revealing the subprime mortgage crisis. Bernanke, in September, said the losses were worse than expected. In November, five major banks reported losses from the subprime market.

What do you say to those critics who say, now you're getting involved, but it's too little, too late?

LAZEAR: Well, let's remember where the economy is right now.

The unemployment rate is currently at 5 percent. Five percent is still a low unemployment rate. It's below the average for the last three decades. So, this is an economy that is still moving. Wages are still continuing to grow.

Again, there are sectors of the economy that are concerned. The housing sector, as you mentioned, is an important concern for us. But we started working on that months ago. The president outlined some plans for some action to be taken in the mortgage market with FHA Secure back in August. We have made additional steps in terms of tax relief for those people who have had their written down.

HOPE NOW is an additional program. So, we have been moving on this for many, many months now. I don't think it's too late. And it is certainly something that we believe will be effective.

BLITZER: Well, let's hope that the White House, together with the Democratic majority and all the members of Congress, can reach some sort of deal that can alleviate some of this economic pain out there.

Edward Lazear, the Council of Economic Advisers chairman, thanks for coming in.

LAZEAR: Thank you very much.

BLITZER: Here's a look at how the financial markets are doing right now around the world.

The leading stock index in Hong Kong closed down more than 8 point. Japan's Nikkei index ended the day with a drop of more than 5 percent. The Dubai financial market fell more than 6 percent. Markets in the Middle East and Asia closed before the Federal Reserve cut interest rates here in the United States early this morning.

But the news helped European markets rebound. Stock prices closed up almost 3 percent in the United Kingdom.

Let's go to our Internet reporter, Abbi Tatton. She's watching all of this unfold as well.

You have been looking at some of the newspaper headlines, Abbi.

ABBI TATTON, CNN INTERNET REPORTER: Yes, Wolf, dial back a few years and -- a few hours -- I'm sorry -- and this is the kind of thing that people were waking up to all around the globe today, headlines like "Black Monday," Black Tuesday," depending on your time zone, from South America to the U.K. here, from "The Guardian" newspaper saying -- reporting on the biggest fall in seven years, saying that the economists are expecting the toughest year since 1992.

In Hong Kong, "The South China Morning Post" called it a horror day yesterday for global markets, the reason, U.S. recession fears. And that's repeated on front pages from all around the world, this one here in India. In -- "The Sydney Morning Herald" here, an Australian newspaper, woke readers up this morning with a question, "Ever driven down a long hill without breaks?" saying, Australia's prosperity this year will be largely out of Australia's hands -- Wolf.

BLITZER: And a lot of people think we would have seen similar headlines here in the United States if there has been market activity yesterday. It was closed, thanks to Martin Luther King Jr. holiday.

Hillary Clinton badly wants to win South Carolina's primary this weekend. So, why is she not campaigning in the state today?

And now that Fred Thompson has dropped out of the race for the White House, what might it mean for the other Republicans? Who might benefit from his exit?

Stick around. You're in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: Hillary Clinton is campaigning out West today, looking ahead to Super Tuesday -- that would be February 5 -- instead of South Carolina's Democratic primary this coming Saturday. But some are wondering if the Clintons have written off the Democrats' first Southern primary.

Let's go to our senior political correspondent, Candy Crowley. She's in Columbia, South Carolina, watching this story for us.

What's the answer? Has she decided that she's not going to win in South Carolina; she might as well go campaign elsewhere?

CANDY CROWLEY, CNN SENIOR POLITICAL CORRESPONDENT: They can certainly read the polls as well as we can. And Barack Obama has the advantage. But she's never abandoning a state when her husband is still here. And he is still here. He was campaigning in Aiken. He's expected to be here until the primary day.

So, she has him here. And that is the Clinton presence. As you know, not only do they share a last name, but they share deep roots in the South. They share deep roots in the African-American community here. So, because Hillary Clinton is off to New Mexico and California and points West doesn't mean that they aren't playing here. However, again, they can read the polls. And, if you were making the strongest pitch and putting all of your money on this race, she would be here. But they know that February 5 is a huge day. You can't be everywhere on February 5. You have to start now. And that's what she's doing, leaving South Carolina, frankly, to her husband.

BLITZER: Arguably, John Edwards has the most at stake this Saturday in his native South Carolina right now. He says he was the grownup after that debate last night, given the bickering between Hillary Clinton and Barack Obama. Tell us what his strategy is right now.

CROWLEY: Well, last night fit perfectly into the template that the Edwards people, still hoping he can make his way to the top, really foresee.

They said, listen, coming out of that debate -- and I'm sure you heard it, Wolf, as well as I heard it -- which is, people said, you know, I wish they would stop fighting with each other. I really like John Edwards.

You know, he made the point, well, how is this all going to get health care to children and jobs for people who don't have them?

So, what the Edwards campaign is counting on is that people will begin to get buyer's remorse. They will look at Clinton, they will look at Obama and say, you know, I don't know. And then number three, John Edwards, gets a second look. That's how they see it.

BLITZER: Thanks very much, Candy. Candy is in Columbia, South Carolina, watching this story.

Carol Costello is monitoring another story that is just developing right now.

What are you picking up, Carol?

CAROL COSTELLO, CNN CORRESPONDENT: You know, this is pretty shocking, Wolf.

The Associated Press is reporting the actor Heath Ledger has died. I'm going to just read this wire to you. A New York Police Department spokesman says the actor Heath Ledger has been found dead at a downtown Manhattan residence.

Of course, he was famous for playing in the movie "Brokeback Mountain." He's very young, 28 or 29 years old. No indication of what he died from.

I'm going to keep an eye on this, Wolf, and I will pass on any new information.

BLITZER: That is shocking news, indeed.

All right, when you get some more, let us know.

COSTELLO: Sure. And I'm just getting word that CNN has confirmed that this is indeed true.

BLITZER: Oh, unfortunately.

All right, thanks very much. We will continue to watch this story together with you.

Coming up in our "Strategy Session": Iraq and the race for the White House. The Democratic presidential field takes direct aim at John McCain. And he's firing right back.

(BEGIN VIDEO CLIP)

MCCAIN: But you were wrong. And now it's time for us to return to the old tradition that partisanship ends at the water's edge. And I reach out my hands to the Democrats.

(END VIDEO CLIP)

BLITZER: We will talk about the McCain factor and why the conservative "National Review" says he was the winner of last night's debate.

And Fred Thompson exits stage right. Will his departure from the race shake up the upcoming Florida primary a week from today?

Donna Brazile and Terry Jeffrey, they are standing by live, right here in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: In South Carolina, three Democrats -- three Democrats were at our debate last night, but you might one Republican might as well have been there. That would be John McCain. His name was mentioned several times, suggesting Democrats think he's the Republican to beat.

Let's get to our "Strategy Session" right now.

Our political analyst Donna Brazile, a Democratic strategist, is joining us, and conservative commentator Terry Jeffrey. He's editor in chief the Cybercast News Service.

Is that the conventional wisdom right now? Edwards started it. But they seemed to follow up, both Hillary Clinton and Barack Obama, that John McCain looks like he's going to be the Republican nominee, and they're gearing up for him?

DONNA BRAZILE, CNN POLITICAL ANALYST: Well, no Republican has won the White House without first taking South Carolina in the Republican primary. So, that's the conventional wisdom.

I still believe on the Republican side that that race is too close to call. We don't know what's going to happen in Florida. We don't know if Giuliani is going to have a comeback or Romney will surge. So, I think, for now, it's best to run against all four top leading Republicans. BLITZER: Terry?

TERRY JEFFREY, EDITOR IN CHIEF, CYBERCAST NEWS SERVICE: Honestly, I think it's now a two-way race for the Republican nomination. It's between McCain and Romney. I think Giuliani is already out of it. McCain has the upper hand. But I wouldn't put it past Romney to come back, precisely because McCain has so many problems on issues with conservatives.

BLITZER: Some suggest that Thompson's decision to drop out of the race today could help Huckabee, because now Huckabee doesn't have to worry about splitting up that evangelical conservative vote with Fred Thompson.

JEFFREY: I think that's quite possible. I think, if Thompson had not been in South Carolina, had he not attacked Huckabee so hard, kind of laid off Romney, laid off McCain, who knows, Huckabee might have won South Carolina.

But I think Thompson's vote is more likely to go to Romney and Huckabee than to McCain.

BLITZER: Who is helped by Thompson's decision to drop out?

BRAZILE: I think Huckabee in the short term, because he is a Southerner. And we have a lot of southern primaries coming up. But he's short of cash. So, he needs some resources. And Fred Thompson can't loan him any money.

I think also McCain is helped, because clearly there was a little Thompson-McCain love affair going on. It might have not been kissing cousins, but they were clearly close. But I think long term it's Romney, because the fewer conservatives, the better Romney will fair in that primary.

JEFFREY: I will also say, there were times during the South Carolina race where it looked like Huckabee was going soft on McCain and kind of trying to position himself potentially to be a V.P. nominee if McCain gets the ticket. He didn't go after Romney. He went after McCain. I think it's a two-way race.

BLITZER: A lot of viewers, Donna, want to get your analysis of what happened last night among these three Democrats.

BRAZILE: Well, it was a very bare-knuckle fight.

And I think for Republicans who are wishing for a Hillary or Obama should be scared, because both candidates showed that they will not be swift-boated. Look, I know people don't like blood sports. I tend to like it. I'm from Louisiana.

But I believe that what they did last night was, they brought in their research books and said, you know what, I'm going to fight back. And that's what they did.

JEFFREY: You know, I think it was good for Republicans, but I think it was bad for Hillary, even though I think she's probably going to get the nomination.

There was a moment there in the debate, Wolf, where it looked like, if someone had splashed water on Hillary, she would have melted like the Wicked Witch of the West.

BRAZILE: Oh, that's awful.

(LAUGHTER)

JEFFREY: There's two characteristics about Hillary Clinton that I think came out in the debate that would play against her in a general election.

One was her demeanor. She did very well in the New Hampshire debate, when she was charming and deflected tough questions with a smile and a laugh. She didn't do that last night. The second is the question Obama was hitting hard last night, hitting hard today, is the truthfulness of the Clintons.

BRAZILE: You know, if that was Margaret Thatcher, you would be here salivating. You would be the one with the water.

I think Hillary Clinton displayed not just presidential timber in responding to some tough questions, but she also showed that she has the strength of being in a campaign where she has to deal with the issues. So, I disagree with characterizing her that way.

(CROSSTALK)

BRAZILE: She's in this to win and be commander in chief. She's not running for a beauty contest.

JEFFREY: Barack Obama today is saying she fudges the truth, the Clintons fudge the truth. I think that's what everybody remembers from the Clinton time in the White House. And it will be an issue in the campaign if she is the....

(CROSSTALK)

BRAZILE: Obama has to defend his record. And he's doing it by having a truth squad led by Tom Daschle. That will him defend at the attacks.

JEFFREY: Is Hillary telling the truth about Obama?

BRAZILE: But you know what? He's not invincible.

BLITZER: All right.

BRAZILE: Look, I'm not in the contest. I'm just talking to you right now.

BLITZER: Donna and Terry, thanks very much for our "Strategy Session."

Mike Huckabee is trying to save money, but does his campaign's cost-cutting mean the campaign is in trouble? We're watching the story.

And talk of recession looms over the nation's economy. How did the nation get here?

Barack Obama says he's the focus of very nasty Internet smear campaigns. I will speak to the journalist, David Brody, who talked with Obama just a short while ago for the Christian Broadcasting Network.

Stay with us. You're in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: On our Political Ticker this Tuesday: Mike Huckabee's campaign acknowledging some money troubles. The Republican's top aides have agreed to work without pay, so Huckabee can afford to run ads in vital states.

The campaign also has stopped arranging charter flights and hotels for journalists. Huckabee's resources are stretched thin heading into Florida and Super Tuesday, and without a win since Iowa. We're watching the story.

Remember, for the latest political news any time, check out CNNPolitics.com. That's where you can read my daily blog. I wrote one today on the debate last night.

Let's go to Jack. He's got "The Cafferty File" in New York -- Jack.

CAFFERTY: And I read it a few minutes ago. Not bad.

BLITZER: Thank you.

CAFFERTY: You have got a future in this business.

BLITZER: Thank you.

(LAUGHTER)

CAFFERTY: The question this hour is: How concerned are you about the U.S. economy?

Paul writes: "I won't be concerned about the economy until food becomes scarce. Too many people living in too many McMansions driving too many Hummers making too much easy money, they're the ones who should be concerned with a serious lifestyle adjustment which is right around the corner."

Katie writes: "A recession might be final nail in the coffin that devours the middle class. With no savings, their 401(k)s destroyed and rampant inflation, the middle class will disappear and all that will be left will be a large sector of poor people with no political power and a very small minority of wealthy with all the political power. Could a second American revolution be in the future?" Pat writes: "What's scarier than the tanking economy is that Bush is talking the same ole, same ole: Give the breaks to businesses, and it will all somehow miraculously trickle down to the rest of us. The only trickle down to the middle class is when we get the bill."

Conor writes: "The problem with the economy is a fundamental one. We can't base our currency on nothing, and we can't print it when we come up short. Until that changes, recessions will happen every 15 years or so. But I fear this one is going to be as bad as the Great Depression. And, therefore, I do have a Plan B in my office file cabinet. It has the details on my move to Canada."

Theresa writes from Petal, Mississippi: "The feds have been cutting interest rates for years to buck up the so-called Bush economy, and now the chickens are coming home to roost. Greenspan cut and ran months ago, which should have been the first sign that he couldn't even stomach this hypocrisy anymore. The first Bush had the S&L scandal. Now we have the subprime mortgage scam, and it's deja vu all over again. Save your Confederate money, boys. The South's going to rise again" -- Wolf.

CAFFERTY: Jack, thanks very much.

And, to our viewers, you're in THE SITUATION ROOM.

Happening now: Stocks do a stunning turnaround after the Federal Reserve offers some medicine for an ailing economy. But could we still be headed for a relapse and a recession?

They pummeled each other from the opening bell. And, long after the debate, Hillary Clinton and Barack Obama are still going at it. How nasty can it get?

And Barack Obama wants to leave no doubt in voters' minds that he is a Christian, not a Muslim. We're going to hear him in his own words. That's coming up.

I'm Wolf Blitzer. You're in THE SITUATION ROOM.

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