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The Last Word: Jennifer Granholm

Aired March 22, 2009 - 12:00   ET


JOHN KING, HOST: We'd like to welcome back our international viewers to our STATE OF THE UNION report for this Sunday, March 22nd. President Obama responds to the AIG scandal saying, the buck stops with him. But an outside review sees more red ink in the administration's plan to pay for its ambitious agenda. We'll discuss the outrage and check the math with one of the president's top economic advisers, Christina Romer.

A Republican who not long ago thought so highly of the new economic team, he agreed to join the cabinet, now compares the Obama administration's approach to Venezuela. The Senate Budget Committee's top Republican, Judd Gregg, explains his changing tunes.

And three-and-a-half years after Katrina, a new normal settles in on New Orleans. We'll visit one neighborhood that's trailing far behind the city's recovery. That's all ahead in this hour of STATE OF THE UNION.

Pictures of the White House there on a beautiful Sunday here in the nation's capital. And the wait is almost over, the Obama administration this week will share its plan to ease the credit crunch and put more money in your hands.

The goal is to rid struggling banks of the toxic loans that keep them from lending. One question is how Wall Street, which posted its first two-week gain in nearly a year, will take the news. And the announcement follows a week of outrage over millions in bonuses handed out by the insurance giant AIG, even though it is taking billions in taxpayer bailout funds.


KING: Let's talk it through with the president's chief economist, chair of the White House Council of Economic Advisers, Dr. Christina Romer.


ROMER: Great to be here. KING: And let's start with the toxic asset plan. Here it is on the front page of The Washington Post. "Treasury Presses Ahead with Plan for Toxic Assets." The announcement tomorrow. A couple of sentences in this account troubled me, and I'll start with this one here. "But the government will put far more money into the deals and take on more risk than the investors, which could include hedge funds and foreign investors." So taxpayers, who are already bailing out financial institutions, already outraged over bonuses at AIG, are going to take on more risks here? ROMER: I think you need to keep your eye on why we're doing this at all, which is we do know that banks have these so-called toxic assets on their balance sheets. We think they're highly uncertain. They are making banks unwilling to lend, they're making private investors unwilling to come into banks. We need to get those off the banks' balance sheets. That's a market that really hasn't been functioning, really hasn't existed. That's exactly when the government needs to step in. And what is really innovative about this is partnering with private investors, partnering with the FDIC and the Federal Reserve to get all the resources we can to get those things off banks' balance sheets. KING: One other thing in this front page account in The Post, key details of the toxic asset purchasing program are not yet finalized. Treasury officials express concern the markets would expect too much. You remember when your colleague, Secretary Geithner, gave the broad outlines of this plan. It was so vague, the markets tanked. Are you sure you will meet the test this time? ROMER: I think it is important to realize this is just one piece of what we're doing. So if you think about what his speech in February is supposed to be, that was the broad outline, and what we've been doing sort of each week since then is rolling out the housing plan, the small-business plan, the consumer and business lending initiative.

This is just one more of those pieces, and I don't think Wall Street is expecting the silver bullet. This is one more piece. It's a crucial piece to get those toxic assets off, but it is -- it is just part of it, and there will be more to come. KING: There are many critics of the administration who are critical just about every day, who don't like the way this is going forward. But I want you to respond to a critic from someone who is like-minded.

Paul Krugman in The New York Times, an economist who generally supports the administration's perspective, says this of your plan. "This plan will produce big gains for banks that didn't actually need any help. What an awful mess." ROMER: I think that's just unfair. And again, keep in mind why we're doing this, it's precisely because banks have these bad things on their books. We need to get them off. We think this is a good way. Another way to say it, part of the reason we're partnering with private investors is to make sure the government doesn't overpay, right, so it isn't just another handout to banks, right? We are trying to actually help the taxpayer by using the expertise of the market to set the price for these toxic or legacy assets. KING: Is there a number at which taxpayers are at risk in terms of loan guarantees or programs guarantees, a monetary figure you can put on this? ROMER: I think, you know, the Treasury, I think we're putting up something in the order of $100 billion, out of the TARP funds, working through, again, the Fed, the FDIC. You know, the crucial thing is it's being designed precisely so that it is going to be safe. We very much have the taxpayers' interest in mind, but we also have the interest of the whole economy on the mind. Right? The crucial thing is getting lending going again. I can't say that enough, and that is why we're doing this. KING: I want to move on to the cover of TIME magazine this week, and this I assume is not why you took this job and why you came to Washington. But the bailout bomb, the outrage over AIG. And the outrage is so big in the country that the Congress decided -- the House spent most of last week on a plan to -- punitive taxes on those executives who took the big bonuses from AIG.

The Senate now will continue that debate, and wants to expand it even further to say maybe there's Fannie Mae or Freddie Mac executives out there who got bonuses. That anybody who makes a sizable amount of money who is getting a bonus from a firm that gets taxpayer money will be taxed punitively. The administration thinks that's a bad idea. Why? ROMER: I think the main thing the president said is he very much wants to draw a distinction between the firms that have gotten a lot of government money, where the -- basically if it weren't for the government, they wouldn't still exist. He think it's completely appropriate to have different standards for them, and for firms that are basically playing by the rules and not taking a lot of money from the government. I think the other thing to say is the president -- I mean, he shares the outrage. We all agree that a firm like AIG that is getting huge amounts of government money should not be paying bonuses, right? That's just -- that's just terrible. What he has been trying to say, though, is let's channel this, and I think that is exactly right, to say let's make sure this never happens again. And that's why he is already talking to Congress about getting resolution authority so that the next time we have an AIG, there is a judge that can say this contract is out of here, right? We -- you know, a legal way to break these contracts and go forward. KING: You say the president shares the outrage and wants to channel it in the right way. I want to go back through the past week, because I think it's important and I think there were some mixed messages to the American people.

A week ago on a Sunday show, one of your colleagues, Larry Summers, another of the president's top advisers, was asked about these bonuses and said I don't like them, but contracts are contracts, and we can't abrogate the contracts.

The very next day, the president, starting to get a sense of the outrage in the country, said something quite different. Let's listen. (BEGIN VIDEO CLIP) BARACK OBAMA, PRESIDENT OF THE UNITED STATES: I've asked Secretary Geithner to use that leverage and pursue every single legal avenue to block these bonuses and make the American taxpayers whole. (END VIDEO CLIP) KING: The president makes that statement, but we learn that there is actually specific language in the Obama stimulus plan protecting these bonuses. So the reporters are trying to find out where did this language come from.

One of the people blamed for this is Chris Dodd. He's the chairman of the Senate Banking Committee. He went on our air last week and said flatly, no, I had nothing to do with it, absolutely nothing to do with it, I don't know where this language came from.

The very next day, when confronted with CNN reporting, he came back on our air again and said something very different. (BEGIN VIDEO CLIP) SEN. CHRISTOPHER DODD (D-CT), CHAIRMAN, BANKING COMMITTEE: The alternative was losing, in my view, the entire section on executive excessive compensation. Given the choice, this is not an uncommon occurrence here, I agreed to a modification in the legislation, reluctantly. (END VIDEO CLIP) KING: Dr. Romer, he says he reluctantly agreed because of pressure from senior Treasury Department officials. So the president, on the one hand, is expressing outrage at these bonuses, but the chairman of the Banking Committee says the language that protected those bonuses was put in the bill by the Obama administration.

Is that Washington double-speak, or was the president ill-served by his own economic team? ROMER: You know, I think the truth is, I don't really know all of the tick-tock of when various things were done. And I'm not sure it's useful. I think the president, again, is very -- very aware of, you know, just how outrageous these things are. He has expressed that. That is his genuine... KING: But if they're so outrageous, why did the Treasury Department put language in the stimulus plan that protected them? ROMER: I think there, again, there were legal issues, and I can't really help you about sort of the particulars. I think the thing I want to keep coming back to is the big picture. The president absolutely says there's just this crucial distinction, firms that are getting a lot of government money -- absolutely, we need a different way to deal with those so that this kind of thing doesn't happen, because it is, frankly, outrageous. KING: I was down in New Orleans this past week. One of the things I did was stop by a class at Tulane University. The former speaker of the House, Newt Gingrich, was there, speaking to a class that is taught by our colleague here at CNN, the Democratic consultant James Carville.

I want you to listen to the former speaker of the House, Newt Gingrich. (BEGIN VIDEO CLIP) NEWT GINGRICH (R), FORMER SPEAKER OF THE HOUSE: One of my conclusions over the last 10 years is, if you are too big to fail, you're too big to manage. And I would break up Fannie Mae, I'd break up Freddie Mac. I would break up AIG.

I frankly wouldn't defend any of the biggest banks. And I say, if you're too big to be managed, you need to become smaller. (END VIDEO CLIP) KING: Is Newt Gingrich right? ROMER: He is getting at an idea -- certainly, we know we need a financial regulatory structure that puts limits on these companies, or if you are going to be too big to fail, we've got to have an eye on you and make sure that you're taking prudent practices. KING: Mr. Liddy said he is going to break up AIG. Do we need to break up Fannie and Freddie?

ROMER: I think that is certainly going to be an issue going forward. I think it should be part of the overall financial regulatory reform, to figure out what's the best way.

Again, you know, anytime we have now got taxpayer money on the line, what we have an obligation to do is do it in a way that protects the American taxpayer.

What's going to be the way that gets these institutions safe, gets them doing what we need them to do, which is lend like crazy, and just basically functioning again for the economy?

KING: More of our conversation with Dr. Romer in just a minute.

Paying for his plans to overhaul health care and education already was a daunting challenge. Now, a new estimate suggests deficit spending in the Obama administration could dwarf the record red ink of the George W. Bush presidency.

Will the president have to scale back his plans or maybe raise more taxes? Coming up.



REP. JOHN M. SPRATT JR., D-S.C.: Can we get everything done in one year? I doubt it. But we're behind him, and we think the country is behind him to give him the mandate that he earned in the last election.


KING: The House Budget Committee chairman, John Spratt, there.

We continue our discussion now with the chair of the White House Council of Economic Advisers, Dr. Christina Romer.

An ally in Congress, John Spratt, saying "I doubt it" -- "I doubt it." The question is can you pass all of the president's ambitious agenda this first year.

The reason he says he doubts is because of these new numbers I want to show on the wall. The Congressional Budget Office has a more pessimistic view of the economy than you do at the White House. They say growth next year will be 2.9 percent. The administration says it will be over 3 percent, 3.2 percent.

The administration says the unemployment rate will go down to 7.9 percent. The Congressional Budget Office thinks it will actually keep going up to 9.0 percent.

And if you look at the federal budget deficit, the administration says about $1.17 trillion with a "t," CBO says $1.38 trillion.

Now, these aren't just numbers. This is your ability to pay for health care, your ability to pay for the president's education agenda, or the tough choices you would have to make, whether to pare something back like health care, which the president promised in his first year, or go looking for other revenues out there, to raise taxes.

What will the tough choices be if CBO is right?

ROMER: I think there are a couple of things to say. One is, there is a question whether CBO is right. So we know that forecasts, both of what the economy is going to do and of what the budget deficit are going to do are highly uncertain.

And especially when you get further out in the CBO numbers, we think they really are too pessimistic in thinking about how fast the U.S. economy can grow even in normal times and more pessimistic than most private forecasters or the Federal Reserve. So there is that issue. On the trimming back, I mean, I think the president is in complete agreement with the CBO on a crucial issue, which is the deficit is way too big and he is committed to getting it down. He -- that commitment to cut the deficit that we inherited in half absolutely stands, and we will work with Congress to make the hard choices to do that.

Let me pick up on health care, though, right? That is a crucial issue, one that the president said we just can't put off. But that's an issue where I think, again, we agree with the Congressional Budget Office. They have been saying for the last probably 10 years that the thing that's going to bankrupt the federal government is the rising cost of health care, and that is why the president has said we can't take that off, right?

That is such an important issue. We haven't dealt with it in good times and bad times, and peace time and wartime.

When are we going to deal with it? He said now is the time.

KING: Is it so important that, if the economy does not rebound as fast as you think and as fast as you hope, that it is so important, doing it now that you would take the politically more risky decisions, like taxing the health insurance benefits I receive from my employer, that others receive from their employer, or going out somewhere else to find revenue, find tax increases to do it now, as opposed to saying let's wait a year or two and let the economy come back, where it might be more affordable? ROMER: I think the key thing -- again, think of what we are trying to do on health care. A big part of that is cost containment, figuring out why it's rising at so much -- why health care costs are rising at a so much faster rate than GDP is growing, or other costs are going up. And that is just going to be crucial. Those are absolutely...

KING: It's not enough. It's not enough. You still need revenue. In the campaign, the president said that revenue would come from the Bush tax cuts, repealing the Bush tax cuts. Instead, that money now goes to deficit reduction, and the administration wants to limit charitable contributions for wealthy Americans to get the money for health care.

So even with cost containment in your budget, if your cost containment numbers are dead on in this budget, you still need revenues. If the economy does not come back at the pace you think do you say, Mr. President, we need to wait a year or two for health care, or do you find more revenue?

ROMER: You either say you need more revenues, or you need more cost containment, right? So there are things -- what he's saying is told every agency, go through your budget, the old line-by-line. But that's a real commitment to say is there spending, is there bad spending that we're doing? Let's get rid of that.

So he is absolutely committed to working with Congress to figuring out how we pay for things. That is, you know, we brought ideas to the table, but we're certainly looking for ideas from Congress as well, and we're committed to working with them.

KING: We don't like on this program to use the Washington words that people out in America don't quite understand, but I'm going to put one on the table, it's reconciliation. It means you can use the Senate rules and pass big things as part of the budget, big things like health care, like energy and environment reform, with a majority, not the 60 votes it normally takes to shut off debate on a big issue.

And many have said the administration, starting to sense the opposition of Republicans and some conservative Democrats to some of these proposals, will go the reconciliation route on health care reform, on other big-ticket items.

You hear the grumbling already, not just from Republicans, many centrist Democrats. The chairman of the Finance Committee, the chairman of the Budget Committee say it's not the way to do it, it's not the way to make friends with Republicans, and it's not the way to deal with these big-ticket items and build public consensus.

Will you take that off the table today, the administration going the reconciliation route?

ROMER: I think the truth is, we're getting ahead of ourselves, and sort of what the ins and outs of the legislative strategy are going to be I think is not certainly my -- to use another piece of jargon, my comparative advantage. I think the crucial thing is just to come back to these are fundamental issues, and we absolutely -- we want to work with Congress, with the committees that are already, for example, starting to talk about health care, starting to talk about energy. Work with them to make the best legislation possible, and I think, you know, we'll continue to do that.

KING: I will translate that into an option still on the table.

I'm going to get up for my final question because we've talked a lot about Washington. I want to talk about the country. Because, when you travel in the country -- excuse me; we'll get rid of these numbers -- people ask, "When is the bottom?"

And you are the president's chief economist. And one way some people judge the economy is this way, by the unemployment rate. And we can show, here, way back, 1983, we were up at 10.4 percent. You know how this plays out; 4.6 percent, a low, in 1998; now at 8.1 percent. Some say it may go to 9 percent or higher.

That's one way some people judge the economy. Another way, especially now that so many Americans are invested in 401(k)s -- we'll make this one go away -- is this way, through the Dow and through the markets.

And you see, obviously, this is 1997, the great high of more than 14,000, in 2007, and this is about where we are now, down around 7,000, 7,200.

Dr. Romer, you see all the data. It all comes into you. As an economist and academic, and now in the political environment, what is it you're looking for?

What is it, in a report, that you will circle someday and say, "We have hit the bottom?"

ROMER: All right, so I think the key thing for us -- and certainly the president has made from the beginning, right, what he cares about is employment, getting people back to work.

And so we will not be -- be satisfied or sure that we've turned the corner until we start seeing the economy add jobs rather than lose jobs, right?

So that's going to be the gold standard. But, obviously, you're going to get signals before, right?

So you'll start seeing -- you know, maybe we're starting to see some glimmers. We've seen the retail sales data come in positive. We've seen some positive business -- you know, building permit data come in.

You know, a lot of the private forecasters are saying, well, maybe we're starting to bottom out, at least on the consumer side, right? So, you know, we're going to watch all of those numbers. I think the one thing we're trying to do is to keep our heads here, and to say, until we have, sort of, overwhelming evidence that we have, you know, the -- all the crucial sectors are turning up, we're not -- not going to say anything.

KING: Do you have any doubt at all that we will be on a path to growth in this year? ROMER: I don't. I think the reason that -- I mean, I should say things could change, right? I'm not a fortune teller. I do feel strongly we've taken the right policies, the big bold fiscal stimulus, the financial rescue. As you talked about, there's going to be more announced this week. What we're doing in housing; all of that for small businesses -- I think all of that is absolutely crucial. And the reason we took them is we think they are the policies that the economy needs. And then we just saw the very aggressive action that the Federal Reserve has been taking. So I think we are absolutely taking the right policies. I have every expectation, as do private forecasters, that we will bottom out this year and actually be growing again by the end of the year. KING: Christina Romer, the chair of the Council of Economic Advisers, thanks for joining us this morning on STATE OF THE UNION. And the debate over whether to punish those who accepted AIG bonuses heads now to the Senate, where not everyone thinks Congress is properly channeling its outrage. Ahead, the Republican who almost joined President Obama's Cabinet and is now one of his economic plan's toughest critics, Senator Judd Gregg, joins us next.



KING: I'm John King. And this is STATE OF THE UNION. Here are stories breaking this Sunday. Turkey's prime minister isn't ruling out allowing U.S. troops to withdraw from Iraq across Turkish territory. But so far the United States has not asked for permission. You might recall Turkey refused to allow a U.S. invasion force Turkey's border into Iraq when the war began.

Pakistan's fired chief justice was reinstated today in a flag- raising ceremony. This comes after Pakistan's president gave in to protesters' demands. The chief justice was ousted by the former president, Pervez Musharraf, in 2007 after the judge began examining cases that could have threatened the military ruler's claim to office.

About a million Angolans turned out today for a Mass with Pope Benedict XVI. It was the pontiff's last major event in his week-long trip to Africa.

STATE OF THE UNION continues right now.

An image there of the old mills of Manchester, New Hampshire, up in New England this morning. It was just weeks ago that Republican Judd Gregg was eager to join the Obama economic team. But then came a dramatic reversal. And since deciding against joining the Democratic administration as commerce secretary, Senator Gregg has emerged as one of the president's toughest critics.

And his voice matters. He's the senior Republican on the Senate Budget Committee where there is bipartisan talk that Mr. Obama needs to scale back his ambitious spending plans. Senator Gregg is back home in New Hampshire this weekend, and he joins us from Manchester.

Senator, good to see you on STATE OF THE UNION. Let me start...

GREGG: Thanks for having me on, John.

KING: Let me start with the AIG bonus debate. You know what happened in the House last week, a punitive tax on those who accepted the bonuses. The debate now moves to the Senate where some say let's make it even broader, let's look at people at Fannie and Freddie who accepted these bonuses.

You think this is a bad idea, why?

GREGG: Absolutely. It's an abuse of the tax law. You know, the taxing authority of the United States is our most powerful weapon. You know, the reason we separated from England was because the British were using it abusively.

And we, as a Congress, in reaction to something that is outrageous, the AIG bonuses, should not adulterate the system of taxation in this country. We shouldn't use it in a penal and personal way.

It's really overstepping the appropriate use of taxing authority. And it leads to a very slippery slope. I mean, where does that stop? When does the -- what happens if the majority becomes upset with somebody else in the community of our nation and decides to tax them punitively?

And what happens to the ability of the government to go out and get participants in this financial effort to table -- stabilize the financial system? It's going to be very hard, I suspect, to get the private sector to participate with the government if the members of the private sector fear that by joining with the government in trying to stabilize the financial system they're going to end up with potentially a personal and a punitive tax. It's really an abuse of the power by the Congress, in my opinion, to use the taxing authority in this way. There are other ways to get these -- get back on the issue of how you recover these bonuses. I'm sure using the legal authority that we have rather than this excessive weapon of the tax authority.

KING: I want to show you one of the front pages of your morning newspapers in New Hampshire, The Valley News here: "AIG Outrage Testing Obama." And I show you this headline, Senator, because I want to ask the question, you know, as we were all covering the story last week at the beginning of the week, the president says he is outraged and wants to do something about it, then by the end of the week we learn that the language protecting those bonuses was put in the stimulus bill at the insistence of the Obama Treasury Department.

Is that double-speak? Or what word would you use for that?

GREGG: Well, we don't know who did what to whom and hopefully we'll find that out. And I know you, as a good investigative reporter, and your team, will probably get to the bottom of this.

Clearly something happened that wasn't a good decision, which was that they did not discipline the AIG bonus structure and they had the authority at Treasury to do that. Both administrations had that authority.

But more the issue really arises in the last few weeks. And so something should have happened, it didn't happen, and these bonuses were paid. People are disgusted and outraged, as they should be.

But let's not overreact in a way that basically has the Congress grabbing its pitchforks and charging up the hill and abusing what is a core authority of the government, which is the authority to tax its people.

KING: Let me switch from pitchforks to baseball bats. When President Obama announced his economic team just after the election, you said this of Larry Summers and Tim Geithner, now a top economic adviser and the treasury secretary. You said: "He has basically signed up Manny Ramirez and David Ortiz, they're extraordinarily strong nominees."

As a fellow Red Sox fan, that is the gold standard, although sometimes "Manny being Manny" can get in the way. But...

GREGG: Yes, we traded him.

KING: ... Manny Ramirez and David Ortiz, do you still feel that way and do you think Tim Geithner -- there are some Republicans -- your fellow Republicans, who say it's time for him to go, do you agree?

GREGG: No, no. I do think that in the area of trying to stabilize the financial sector of our economy, they're doing the right things. They haven't done it as definitively as they should have. Clearly, we would have liked the plan more definitive earlier, but they are moving in the right direction and the Fed is moving in the right direction.

You've got to remember we're not going to get out of this recession unless we have credit available to the American people at a reasonable price and reasonably easily available. And you can't have that unless you have financial system that's working.

And so we've had to make these really difficult but significant efforts to try to get the financial system stabilized. And they've gone down the right route in that area. So I don't have any problem with the initiatives they've pursued in this area.

I do have problems with the budget. I do have problems with the stimulus package. But in the area of defending the financial structure and trying to get it stabilized, I think they are taking the right course of action.

I wish it had been more definitive, more specific earlier, but they're on the right course.

KING: Let's move to the budget and your concerns. You just heard Dr. Romer, the chair of the Council of Economic Advisers. She is not ready to give yet.

KING: But I know on your committee, the Budget Committee, you look at these new congressional projections and say, "Sorry, Mr. President, the math doesn't add up." What does the president have to give from his agenda, whether it be health care, education, the environment, what has to give to meet your bottom line?

GREGG: Well, first, I think your listeners have to understand how staggering the numbers are. We're talking about a deficit in the trillion-dollar range for as far as the eye can see. We're talking about deficits which are 4 percent to 5 percent of GDP, which is not sustainable under any form of government.

We're talking about a public debt -- this is the debt that people own of the federal government that will be around 80 percent of GDP. Historically, it's been around 40 percent of GDP in the out-years.

The practical implications of this is bankruptcy for the United States. There's no other way around it. If we maintain the proposals which are in this budget over the 10-year period that this budget covers, this country will go bankrupt. People will not buy our debt; our dollar will become devalued.

It is a very severe situation. And I find it almost unconscionable that this administration is essentially saying, well, we're just going to blithely go along on this course of action after they're getting these numbers which show that they're not -- they're not sustainable, and they know they're not sustainable.

The way I've described it, it's as if you were flying an airplane, and the gas light came on, and said you've got 15 minutes of gas left, and the pilot said, "Oh, we're not going to worry about that. We're going to fly for another two hours." Well, the plane crashes and our country will crash. And we'll pass on to our kids a country that's not affordable.

That's not fair to our kids. No generation should do this to another generation; that's what this comes down to. The president keeps talking about how he doesn't want to pass the problems onto the next generation? What he's guaranteeing here in his budget structure are problems which our children aren't going to be able to survive with. They're just basically not going to be able to pay the price of the cost of the government.

And it is primarily a spending issue. The proposal in this budget is to take federal spending up to 23 percent of gross national product and keep it there. Well, historically, gross national product spending in this country has been about 20 percent of GDP or the federal government has taken about 20 percent of gross national product.

When you take it up 3 percent, it doesn't sound like much, but it calculates into massive deficits and massive debt, where it -- the budget as proposed doubles the debt in 5 years, triples it in 10 years, and basically puts this country in an untenable position.

So we've got to go back, and we've got to reorganize. And what I've said, and what Senator Conrad has said, and what others in the Senate have been willing to say, let's go back, rethink this in a bipartisan way, let's take a look at where the real spending is, which is in the entitlement accounts, and figure out how we get them under control and get their growth rates into something we can tolerate so that we do pass on to our kids an affordable government.

KING: Senator, let me ask you lastly -- we're out of time -- but when you decided not to take the commerce secretary job and to remain in the Senate, you also said you would not seek re-election in 2010. Any second thoughts about that decision?

GREGG: No, no, no, absolutely not. Gee, you know? I do hope we can make some great strides here before my term is up in the area of bipartisan effort on entitlement reform along the lines of what Kent Conrad and I have proposed, but, no, I don't have second thoughts about that.

KING: Senator Judd Gregg, joining us this morning from the beautiful city of Manchester, New Hampshire. Senator, thank you so much.

GREGG: Thank you, John.

KING: And if you want to hear more about the economy and the outrage over AIG, don't miss "Fareed Zakaria: GPS" at 1 p.m. Eastern. This week Fareed speaks exclusively with the former New York governor Eliot Spitzer, in his first television interview since he was forced from office in a scandal a year ago. They talk about tracking the billions of dollars the federal government has given to AIG.


FORMER GOV. ELIOT SPITZER, D-N.Y.: $80 billion -- virtually all of it flowed out to counterparties, $12.9 billion to Goldman Sachs.

Why did that happen? What questions were asked? Why did we need to pay 100 cents on the dollar on those transactions, if we had to pay anything? What would have happened to the financial system had it not been paid?

These are the questions that should be pursued.


KING: Stay tuned for "Fareed Zakaria: GPS," coming up at the top of the hour, only here on CNN. And just ahead, President Obama is reaching out to Iran in a bold new way. But is the Iranian government receptive to the message?

We'll get unique insights and a live report from our chief international correspondent Christiane Amanpour. Stay with us.



PRESIDENT BARACK OBAMA: My administration is now committed to diplomacy that addresses the full range of issues before us, and to pursuing constructive ties among the United States, Iran and the international community. This process will not be advanced by threats. We seek instead engagement that is honest and grounded in mutual respect.


KING: President Obama's dramatic overture to the Iranian people and their government, this past week, in a holiday message marking the start of the Persian new year.

CNN's chief international correspondent Christiane Amanpour has been following the Iranian government's response. She knows this story as well as anyone. And she joins us from Taturan (ph) in central Afghanistan.

Christiane, what do you make of the reaction from Iran's supreme leader, not overwhelmingly positive?

AMANPOUR: Well, John, the speech by President Obama was unprecedented and made unprecedented overtures. And that was welcomed in Iran, both on the government level and at the leadership level, at Ayatollah Khamenei. However, what they objected to was what they considered threats in that speech, talking about arms and terror.

What they're saying, basically, is that they are willing, right from the leader's office, the Ayatollah Khamenei to the president and elsewhere, they are ready and willing and want to engage with President Obama and they want change for change.

In a speech to new year, Ayatollah Khamenei said, "We will change our policies if the United States changes its policies, too."

But sources are telling me today that, once there is a formal outreach, which there has not yet been, to the Iranian leadership, in terms of the American administration's engagement -- once there is a formal outreach, they hope that it will not contain any threats.

And they hope that it will do exactly as President Obama has said, deal with all the issues of mutual concern on a basis of mutual interest, mutual respect and dignity. John?

KING: And, Christiane, help us break down how that is likely to happen.

We do know that Secretary of State Clinton is to be at a regional meeting to discuss the country you're in today, Afghanistan, and she expects to have Iranian diplomats at that meeting, and perhaps to have the highest-level engagement between the United States and Iran in quite some time.

Take us behind the scenes, in what the next expectation is.

AMANPOUR: Well, John, remember that the Iranians were at the table, post-9/11, when the (inaudible) on the current Afghanistan government was under way. The Iranians did engage with the Bush administration at the time, and the Bush administration, to this day, has said that that was a constructive engagement, in terms of stabilizing post-war Afghanistan.

Now, at a time when Afghanistan desperately needs coordination in a civilian infrastructure, not to mention the ongoing military engagement, Iran hopes to be back at the table.

But this apparently is not a U.S.invitation; it's a U.N. invitation. It's a Dutch government invitation. It's going to happen at the Hague at the end of this month. And Iran, of course, is saying that it is willing to be there and to play a very positive role.

All in all, the Iranian leadership, from the ayatollah on down, have said they are willing to engage and they're waiting for a formal reach-out from the U.S. administration.

KING: That is a fascinating story. And we will continue to track it, continuing with the best in the business, Christiane Amanpour, with us from central Afghanistan today.

Christiane, thank you so much. And up next, you could say her state is ground zero for the current economic crisis. What does Michigan Governor Jennifer Granholm want to hear from President Obama that will help her state and others dig their way out of this recession? She has the "Last Word" when we come back.


KING: Thirty news makers, analysts, and reporters were out on the Sunday morning talk shows today. But only one gets the "Last Word." That honor this week goes to the Democratic governor from the state of Michigan. Jennifer Granholm is with us this morning in Washington.

Governor, thanks for joining us. You are, sadly, ground zero in the recession that is punishing this country right now. Your state unemployment rate is 11.6 percent, that's the worst in the nation right now. The president's top economist was on the program earlier. She says by the end of this the year, we'll be growing again, we will be out of a recession and heading toward a path of growth.

Do you believe that from what you see on the ground, the continuing pain in the auto industry, other industries in your state? Are you that confident?

GOV. JENNIFER GRANHOLM (D), MICHIGAN: Well, I think that it depends on how you define growth. I don't know that we're going to see job growth or maybe some growth in the overall economy. But I can tell you for us what happens with this auto task force, what happens in how we as a country support the manufacturing sector, it's all wrapped in together.

And for everyday citizens in Michigan, what happens in Washington and how it affects us is very, very real. It's hot right now. And it's very tangible. They want to know what is this going to do for us, how are we going to be helped as citizens by what you all are talking about in Washington?

KING: Well, what we all are talking about in Washington, let me show you one of your front pages. This is The Sunday Free Press, a Detroit newspaper: "Obama's aid package so far eluding homeowners."

They have had a stimulus plan. They have had a housing plan. They will announce tomorrow the toxic asset plan. And yet if you pick up -- this is your leading newspaper in your state, not reaching your state.

Is that a fact, that for all of the plans and all of the talk of the administration, that we are helping, that it has not reached you in the heartland yet?

GRANHOLM: Well, I think what this is saying is probably that the technical aspects of the foreclosure plan haven't gotten through to the local banks yet. And that's really the question, is, you know, you can do all of this stuff here in D.C., but how is it affecting the people on the ground? I mean, you know, this toxic asset buyout, for example, how is it going to affect, you know, my aunt Linda in Warren who wants to be able to buy a car and she can't access credit?

And it's the same thing with the dealers all across the country. They can't access credit. How do we loosen that up? Now will the toxic asset program help them? I think it has to be explained to them in a way where people can appreciate, yes, these policy moves mean that I'm getting help here on the ground.

KING: One of the big debates is about your biggest industry, the car industry. And we just had a week in which the administration said, you know, we probably can't go back and take away the big bonuses, the taxpayer money because we're bailing out AIG.

The taxpayer money goes to AIG which gives bonuses to rich executives. They take that money, the government says, well, that's a signed contract, we probably have no legal authority to go back and get it.

At the same time, the same administration is telling the automakers in your state who make $30,000, $40,000, maybe $60,000 or $70,000, sorry, but if we are going to bail out General Motors, if we're going to bail out Chrysler, you need to go back and renegotiate your contract. Is that fair?

GRANHOLM: It is a huge unfairness, can I just say that? It is very -- this is why it's so hot right now in Michigan is that there is this impression of a complete disparity of the way people are being treated.

So you have auto workers, the guys who are on the factory lines, in exchange for a bailout, they've got to give back a part of their pay. But when it comes to Wall Street, you have another standard, a different standard. They can negotiate and they don't have to give back.

Now I think that's changing. Obviously the Obama administration is saying that they're going to do everything they can to get those back. But the message that is received by the folks on the ground is that there's one standard for Wall Street and one standard for the average Joe. And that is not fair.

And so the question is, what can you do to make sure you take down the temperature, give people the patience that they are going to have to have to make sure that this plan actually works, and that there is fairness in the system?

KING: But do you see -- you say a double standard. Do you see double-speak in that it was the Obama Treasury Department that put the language in the stimulus bill, insisted on it, the language that protected those bailouts -- the way -- it gave the protection for the bonuses from AIG? Again, at the same time they're telling the auto workers you have to go back to the table.

Do you see -- the Democratic Party is supposed to be the party of the little guy. Do you see a problem for a Democratic administration?

GRANHOLM: I think that's exactly why they've gone back and said they're going to do everything they can to get those bonuses back.

You know, when the auto industry was asking for help back in December and certain southern senators were saying, you've got to go back in and take back those contracts and those dollars that were negotiated, people in Michigan were furious because it seemed like there was already brewing a double standard.

What happened this past week really calcified that. So it's a good thing that the Obama administration is trying to be much more consistent in saying, give those bonuses back. They're outraged, too.

But really the bottom line is, how do we move beyond this anger that's out there? Because it is so real. People feel it very much. And they want to know what are the plans that are going to help me on the ground?

It's not about giving payback, what it is about is making sure I can stay in my home, making sure I have a job. In Michigan it's all about jobs. What is the stimulus package going to do to create jobs in our state? And how are we going to keep the jobs that we have, which includes the manufacturing sector?

KING: You're a chief executive. I was reading your last two budget statements in the office yesterday. And it's pretty painful to read them because of the tough choices you have made. I want to get to some of those choices in a minute.

But as a chief executive, when you talk about this calcified anger in your state, do you think the president of the United States, another chief executive, is being well-served by his team at the moment?

GRANHOLM: Oh, I do. I think that they are. I mean, Judd Gregg was on earlier today saying that they're making the right moves. I think from a policy perspective they are doing everything that they can and they're trying all sorts of things.

It's sort of like FDR, you try, try, try, if it doesn't work, you adjust, you move forward. So I do think that they're doing more than we have ever seen. In fact, I was saying yesterday, and I'm almost exhausted by all of the policy moves that are being made to be able to help everyday citizens.

But what we need to really see is the tangible results on the ground. And for us, you know, I can just tell you in Michigan, you know, we have this enormous unemployment rate because of the contraction in the auto industry.

This auto task force that's considering this right now, I just beg them, I ask them, please help to save this manufacturing sector because it is the backbone of the middle class in this country.

KING: And you were here in Washington last night for one of these ritual dinners, which is why you're with us today.

KING: I won't bore our viewers with some of the silly things we do at these dinners, but you were the Democratic speaker. Your were born in Canada. Arnold Schwarzenegger was the Republican speaker, another big-state governor, born in Austria.

The jokes running around were that, you know, it's too bad you can't run for president, he can't run for president. Arnold Schwarzenegger said, on your behalf, he'd like to change the Constitution so you can run.


Life's not fair, huh?

GRANHOLM: No, that's quite all right. Really...


... I'm so glad we have the president we do. I'll let him have that job.


KING: Give him one piece of advice in our final -- we have about 30 seconds left. He -- you know, the Congress now says the economy's not going to grow as fast as the president thinks.

So he's going to make a tough decision. He says he wants to do a lot of things in his first year. Let's just focus on health care reform. Should he say, we're going to do it this year even if the economy doesn't come back, and he would have to then -- either more deficit spending or raise taxes to do it?

GRANHOLM: I think he should do it. It is part of the economy. If you look at the manufacturing sector, one of the huge costs on (inaudible) is health care; $1,500 in every car you buy is associated with the American health care system. Cars are being made, now, in Ontario more than they are in Michigan, because of health care.

It's part of the economic malaise that this country's feeling, so they need to fix that.

KING: Jennifer Granholm, the governor of Michigan...

GRANHOLM: You bet. KING: ... tough talk on the economy today. And I can tell everybody out there watching, you had a very good sense of humor at the dinner last night, as well, a side of the governor we don't always see.

GRANHOLM: Well, it's not a funny time, usually, but thank you.


KING: No, but every now and then, we all need to laugh.

Governor, thank you so much for being here.

And up next, we'll visit New Orleans' lower ninth ward, still struggling to rebuild, 3 1/2 years after Hurricane Katrina. Stay with us.


KING: This is from a helicopter above. We decided to go check in on the city in our travels this week. It's been 3 1/2 years since Hurricane Katrina. One interesting statistic: Louisiana, the only state in the country where the unemployment rate actually went down last month.

If you come in here, into central New Orleans, this is the Lower Ninth Ward, right here. Right along the industrial canal, here, is where the levee broke.

And here's the map of neighborhood. This is a mail delivery map. The yellow and the green is this part, further away from the canal, where some people have moved back.

But what the red means -- this means almost nobody has moved in exactly where the levee broke, right up in here -- still devastated; that's what the red means.

You know, I spent some time there, in the weeks after Katrina and Rita. What we found when we went back this time, some heart-warming images, but also heart-wrenching devastation.


KING (voice-over): Care and concern for those in desperate need, this clinic a glimmer of hope, 43 months after the waters of Katrina changed everything.

(UNKNOWN): Hello (inaudible) Patricia Berry (ph) here. How may I help you?

KING: Questions remain from the routine to the desperate.

(UNKNOWN): Well, as far as the HIV test, if you can come on Tuesday from 11 a.m. to 1 p.m., it's no charge.

KING: Ninety-five percent of the patients who walk in do not have health insurance, but no one is turned away. And Executive Director Alice Craft-Kerney encourages younger patients and parents to take a book or two on the way out.

CRAFT-KERNEY: Because we have such a low literacy level here in Louisiana, not only are we 50th in health care, but we're also 50th in education. So they can come by, browse, and take whatever books they want, free of charge.

KING: The staff is cheery...

(UNKNOWN): Hey, I really enjoyed you coming in today. KING: ... the clinic clean...

(UNKNOWN): We'll be calling you in a few minutes, OK?

KING: ... the neighborhood around it, rough and still a mess. From above, concrete slabs and grass and weeds where homes once stood. And on the ground in the Lower Ninth, the construction and volunteer work is encouraging, but most of the ward remains an abandoned wasteland.

Overall, New Orleans' population is about 330,000 people, roughly 75 percent of its pre-Katrina number. And Tulane University's Richard Campanella says a city that was 70 percent African-American before the storm is about 60 percent African-American now.

CAMPANELLA: We've also seen the median household income go up from about $27,000 in the 2000 census to over $40,000 now, not because the city is doing better economically. My sense is that the post- Katrina city that we all wondered about 3 1/2 years ago; what would it look like, that we're there now, that the patterns are stabilizing, and we're in a, sort of, a new normal period.

KING: A new normal in which the Lower Ninth Ward trails well behind.

CAMPANELLA: No question about it. The hardest-hit neighborhood within New Orleans from the levee breach, the overtopping, and then a repeat with Rita three weeks later, the Lower Ninth Ward has the lowest return rate of New Orleans neighborhoods, and that's at 19 percent...

KING: Nineteen percent?

CAMPANELLA: ... out of a pre-Katrina 19,000. So that's about 3,600 folks living there today.

KING: The city is more affluent overall because the poorest of poor, the folks who lived here, can't afford to come back. Those who have returned live in a community with no supermarket or dry cleaner and just one school.

(on-camera): Why is it that you think your neighborhood keeps getting the short end of the stick? CRAFT-KERNEY: Because, as my teacher used to say, "Them that got gets" -- those who have the money usually are able to keep the money. Much of it has been the lack of political will on the part of our governmental entities.

KING (voice-over): The clinic is among the community groups pushing for another school, a pharmacy, a supermarket. But its primary mission is giving good care and good cheer to those who have returned.

(UNKNOWN): You're doing really good. Now, what are we going to do about you and that smoking?

(UNKNOWN): Trying to get -- get me to stop. (END VIDEOTAPE)

KING: Remarkable people, there. And we'll be here again, next Monday and every Sunday, at 9 a.m. Eastern, for the first and last word in Sunday talk. I'm John King in Washington. Have a great Sunday.