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THE SITUATION ROOM

Frustrations Run High in Debt Talks; Interview With Congressman Paul Ryan; Egypt: Months After the Revolution; 'Strategy Session'

Aired July 14, 2011 - 17:00   ET

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


WOLF BLITZER, HOST: Happening now: Growing frustration and a danger of financial chaos. New debt talks underway right now at the White House after the stormiest session yet. We're now hearing that the focus of these high stakes negotiations could shift very, very soon.

Also the FBI launches an investigation into Rupert Murdoch's media outlets here in the United States and whether alleged phone hacking could have happened here. This, as Murdoch and his son agree to face British lawmakers next week and get hammered with angry questions.

And Egyptians take security into their own hands. Even some children are armed with illegal guns. The revolution giving way to a widespread crime and a Wild West mentality.

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

The United States is another day closer to a possible default on its debts; 19 days before the deadline there's no sign that political leaders are any closer to preventing an unprecedented and frightening financial train wreck. Right now President Obama and members of Congress are in the fifth straight day of talks aimed at raising the debt limit. Their frustrations and their tempers have been laid bare.

Let's go to our Chief White House Correspondent Jessica Yellin. She's over there with the latest.

What do what do we expect from these negotiations today, Jessica?

JESSICA YELLIN, CNN CHIEF WHITE HOUSE CORRESPONDENT: Wolf, as you know, it's been 24 hours of extremely high tension around these debt talks, with each side accusing the other of political posturing. Now they're back to see if they can salvage these negotiations or if they have to move on to Plan B, or maybe at this point, we'll call it Plan C.

Today we're told that they will tackle two major issues. First specific discussions of spending cuts. Already we are told they have agreed to 1.5 trillion in spending cuts. Today they'll see if they can get that number even higher.

Then another issue that is crucial to the White House. Whether Republicans will agree to any revenue increases. The president has said that is essential to any deal. If Republicans won't go there, then the question on the table is, will Republicans give up their determination that for every dollar the debt ceiling must be increased, there must be one dollar in spending cuts? If Republicans refuse to come off that point, it would seem that from the White House and Democrats' perspective, there will likely be no deal here, Wolf.

BLITZER: What did the president mean when he apparently told the House Majority leader Eric Cantor, at yesterday's session that he's ready to take this to the American people?

YELLIN: Well, the president held a series of the interviews with local TV stations. And they are about to air around the country, but we did read the Tweets from at least one reporter. He clearly made his case past Washington, directly to the American. Here's what he said to one reporter, quote, the president expressed frustration that the Republicans, quote, "continue to play games." The president said he is "willing to tackle his party's sacred cows, but Republicans aren't." That's what he told Philadelphia's KYW. Clearly the president has the bully pulpit and he's willing to use it, Wolf.

BLITZER: He said something very similar, the other day, Monday, at his news conference over in the White House press briefing room.

What is this talk of a deadline tomorrow, Friday, deadline? What does that mean?

YELLIN: The White House is saying they must -- these talks must yield clear progress, clear signs of steps toward a deal, and if not, then they have to move on to another solution. Here is White House Press Secretary Jay Carney today.

(BEGIN VIDEO CLIP)

JAY CARNEY, WHITE HOUSE PRESS SECRETARY: The president views Friday as an important moment where we can make an assessment about whether we are moving toward a significant bipartisan agreement on deficit reduction, or not. If we're not, then we have to begin looking at making sure that we fulfill our obligation to uphold the credit rating of the United States.

(END VIDEO CLIP)

YELLIN: Now, Wolf, if this process doesn't work, what else is there? There is the option of letting the leaders in the U.S. Senate come to their own sort of negotiated deal, see if that could pass the Senate and then hope that it could get through the tricky politics of the U.S. House of Representatives. But you know there are many freshmen in the House of Representatives who could potentially resist any type of deal. The question is, with the clock ticking, with so much at stake, might that change as this gets down to the wire, Wolf?

BLITZER: We'll see in my interview with Paul Ryan, the chairman of the House Budget Committee, that's coming up later this hour.

The chairman of the Federal Reserve hasn't been mincing words how bad things could get if the debt limit isn't raised by August 2cd. Ben Bernanke was back on Capitol Hill today warning of a looming crisis that would touch almost all of us.

(BEGIN VIDEO CLIP)

BEN BERNANKE, CHAIRMAN, FEDERAL RESERVE: In almost every area where people have pocketbook concerns -- jobs, interest rates, credit, availability of government payments, benefits, all those things would be affected in relatively short order.

(END VIDEO CLIP)

BLITZER: If debt negotiations do fall apart there will certainly be a lot of tough choices ahead about who gets paid and who does not. Our own Lisa Sylvester is looking at some possible scenarios.

LISA SYLVESTER, CNN CORRESPONDENT: Wolf, I spoke to several economists who say that we are in uncharted waters. We have never been in a scenario like this. Come August 2nd, the United States government will no longer be able to borrow any money and consequently will not be able to pay all of its bills.

We have a couple scenarios we can show you. First of all, let's take a look at this. Let's say the U.S. government, as a priority, decides it will continue to pay the interest on the debt it owes, $29 billion for the month of August. It can also afford to continue to pay Social Security benefits, Medicare and Medicaid, defense contractors, unemployment insurance.

But after that, take a look at what happens. The United States government will only have enough money to pay for these items here and will not have enough money to pay for instance, for military active duty pay. They won't have enough money to continue to pay federal salaries.

Let's take a look at a different scenario Let's say in this case the U.S. government decides, as a priority, instead to continue (AUDIO GAP) focus on making sure safety programs are in place. So the U.S. government will continue to pay $29 billion on interest, Social Security payments, Medicare, nutrition services. You can go down the line here one by one. What you will find is the exact same scenario, that there will come a point where, let's say this scenario, you won't be able to pay defense spenders anymore. You won't be able to pay federal salaries. So there are real some tough choices.

I spoke to Jay Powell, with the Bipartisan Policy Center, who says there are limited options.

(BEGIN VIDEO CLIP)

JAY POWELL, BIPARTISAN POLICY CENTER: It's funny. People want to believe the Treasury Department has a secret bag of tricks they can deploy to make sure the government is fully financed for months on end, and it just is not true.

(END VIDEO CLIP)

SYLVESTER: So, Wolf, take a look at this calendar. We can walk you through what will happen, as August 2nd, is the deadline.

Come August 3rd -- this is a Wednesday -- we have $12 billion coming into the federal coffers, but we have $32 billion in scheduled payments.

The next day is not much better. Take a look at Thursday, $4 billion. Under any scenario, that is an incredible amount of money, however, we have $10 billion that we owe.

You can look at Friday, same thing, $7 billion incoming, but $12 billion going out the door.

And the Treasury Department, I spoke to someone there today. And they say the point is even if the U.S. government is able to pay the interest on the debt that it owes, that they consider it still a default if the United States government is not able to pay federal workers. The other point they make is that it's not easy to essentially just shut down payments.

The U.S. government makes 80 million payments every single month, and a number of those are electronic payments. So it's not as easy as it sounds to just sort of pick and choose and decide that you will pay, for instance, Social Security benefits, but you won't pay federal workers. That's going to be a real problem moving forward, Wolf.

BLITZER: All right. Lisa, thank you. Lisa Sylvester reporting; much more coming up later in THE SITUATION ROOM.

Meanwhile, outraged lawmakers in Britain have a lot of questions for Rupert Murdoch. Will they get answers when he and their son appeared before parliament next week?

Why won't Republicans take what they can get in debt talks? I'll ask the House Budget Committee Chairman Paul Ryan about this game of chicken that's making so many Americans sick.

(COMMERCIAL BREAK)

BLITZER: Jack Cafferty is here with "The Cafferty File" -- Jack.

JACK CAFFERTY, CNN CONTRIBUTOR: Casey Anthony will be released from jail on Sunday. As a free woman, she'll reportedly live in a secret location, likely under a new name, and according to some reports, she's being advised to dramatically change her appearance.

While her lawyers are aware of how hated she is, Miss Anthony may not fully understand that until she gets out. While she's been sitting in a jail cell, she's become a celebrity of sorts, getting letters of support and money from all over the country.

ABC News reports Anthony has about $500 in her jailhouse bank account. The money has come in from at least 17 different donors since May, mostly men.

What a surprise. In a grand American tradition, Casey Anthony stands to make millions of dollars telling her story, not that it would likely be the truth. The woman is a stranger to the truth. A producer associated with "The Jerry Springer Show" offered Anthony a million for her first televised interview. However, "The Jerry Spring Show" denies the offer was made to appear on that particular program.

You can draw your own conclusions from some of this stuff.

At some point there will be an interview, a book, a movie. She stands to become a rich woman, while the questions about what happened to her beautiful little daughter remain unanswered.

For 31 days a child is missing and Casey Anthony parties while lying to everybody about the child's whereabouts. The trunk of her car is later found to smell of death, human decomposition, her daughter's remains eventually found thrown in a swamp like so much trash. And the jury found her not guilty of her daughter's death.

She was convicted of repeatedly lying to police, but why would you like to police if you weren't trying to hide something?

Anyway, here's the question: Did the Casey Anthony trial alter your view of the criminal justice system?

Go to CNN.com/CaffertyFile and post a comment on my blog.

If she gets recognized in public, she may hope to be back in the jail cell where it is quiet.

BLITZER: She's going to try to disappear, I suspect, but we'll see what happens, Jack. Thanks very much.

Right now, Rupert Murdoch's news outlets here in the United States are being dragged deeper into the scandal surrounding his media empire. We have new confirmation the FBI is investigating allegations of phone hacking by reporters who worked for Murdoch.

Let's go to New York. CNN's National Correspondent Susan Candiotti is standing by.

News Corporation is, as all of our viewers know, headquartered right near you in New York City.

SUSAN CANDIOTTI, CNN CORRESPONDENT: Right down the street, Wolf.

The FBI calls it a high priority. Today, opening investigation of the News Corporation owned by media mogul Rupert Murdoch. A federal law enforcement source telling CNN that federal agents are looking into allegations that News Corp. employees, or associates, may have hacked into phone records or voicemails of 9/11 victims and families.

CNN has learned the scope will be broad. The FBI will be looking at anyone acting on behalf of News Corp, from the top down to janitors. Sally Regenhard, who represents an organization, is among those who called on the FBI to open an investigation. She spoke with me by phone a short time ago.

(BEGIN AUDIO CLIP)

SALLY REGENHARD, SON WAS KILLED ON 9/11: I believe that's a criminal act. And I hope there are statutes on the books now to, you know, confirm that that's a criminal act. I would hold these people accountable and responsible in a legal sense. And I think it is a crime. It's certainly a crime against ethics and against humanity. Someone has to defend the dead, and the parents and the families of the victims are going to continue to do that.

(END AUDIO CLIP)

CANDIOTTI: No reaction yet tonight from the man at the helm of News Corporation. However, one of Murdoch's papers, "The Wall Street Journal," interviewed him today. He said his company is handling the hacking scandal in his words extremely well with only, quote, "minor mistakes." Assessing any damage to the company? He said there's, quote, "nothing that will be recovered."

Will Murdoch himself be interviewed by the FBI? Well, Wolf, we shall see. No telling when that could happen and no one would be surprised if the investigation took at least a year or maybe longer -- Wolf.

WOLF BLITZER, CNN ANCHOR: And just to be precise, on this point, is it your information that the FBI is investigating News Corp news organizations in England who may have been involved in wrongdoing here on the United States, or his news organizations in the United States like FOX News or "The Wall Street Journal" or "The New York Post"? Because it's a sensitive subject.

CANDIOTTI: It appears to encompass both those things, certainly the latter here in New York. Since they are the most closely connected to 9/11.

BLITZER: We'll have much more on this part of the story later.

Thanks very much, Susan Candiotti.

Rupert Murdoch and his son have agreed to appear before the British parliament next week. Lawmakers there have lots of questions and they also have lots of anger.

CNN's Becky Anderson is in London.

(BEGIN VIDEOTAPE)

BECKY ANDERSON, CNN CORRESPONDENT: Wolf, it's been a long day in the life of the Murdochs, never mind a long week. Early Tuesday, we were told that the Murdochs, Rupert and James, would not be appearing in front of a parliamentary subcommittee on Tuesday next week. They've been invited by British lawmakers to account for their actions.

However, later on this Thursday, after being summoned by parliament, they decided they would be appearing alongside the CEO of "News International" Rebekah Wade Brooks.

So, we look forward to that. It will be a media -- the story has developed, of course, with the media momentum for it has grown.

What we understand is that British lawmakers can decide whether to ask them to testify under oath. If indeed they do do that and they were to lie, then they would be subject to perjury laws. It's not clear exactly what will happen on Tuesday -- Wolf.

(END VIDEOTAPE)

BLITZER: We'll be watching together with you, Becky, and much more on this story coming up later. We'll speak with a former FBI assistant director who will walk us through the process of how the FBI is going to investigate the Rupert Murdoch empire here in the United States.

An 8-year-old boy killed walking home from summer camp. Just ahead, dramatic new details about the suspect charged in his death.

And we'll also have the latest on a deadly suicide blast at a memorial service for the Afghan president's half-brother.

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

(COMMERCIAL BREAK)

BLITZER: A deadly blast for the memorial for Afghan President Hamid Karzai's half brother.

Lisa Sylvester is here. He's monitoring that and some of the other top stories in THE SITUATION ROOM.

What's going on?

LISA SYLVESTER, CNN CORRESPONDENT: Hi, Wolf.

Well, at least six people are dead, and another 15 wounded after a suicide bomber blew up a mosque in Kandahar. A number of high- ranking officials were gathered there to remember Ahmed Wali Karzai, who was assassinated Tuesday by his security guards. The Taliban say the guard worked for them and have claimed for that shooting.

A New York man has been arraigned in the murder of an 8-year-old boy missing since Monday. Police say they found human remains believed to be the child's in the suspect's refrigerator and trash bin. The boy, who was part of an orthodox Jewish community in Brooklyn, got lost and asked the suspect for directions.

The TSA is testing a so-called tested traveler program which had ease the screening process for airline passengers who are willing to volunteer more detailed information about themselves. Typically, the agency only has name, gender and date of birth when vetting a passenger. The program, which begins this fall, is available to a limited number of travelers, at only four airports. But it could expand if it's successful.

And a thrilling find for scientists in Malaysia. This Bornean rainbow toad has not been seen in the wild for 87 years. And these photos are the first ever to be taken on the lanky creature there. The research was part of a wider lost amphibian search launched by environmental group Conservation International. You can read more about it on our Website, CNN.com/SituationRoom.

Pretty good-looking, fellow there.

BLITZER: Beautiful little Bornean toad.

SYLVESTER: A rainbow toad. That's what they called it.

BLITZER: Thank you.

America's credit and its reputation now on the line. Will either party blink in the talks on raising the debt limit? I'll ask an influential Republican, the chairman of the House Budget Committee, Paul Ryan. He's here in THE SITUATION ROOM.

And Egypt after the revolution. Many citizens are packing guns, because the police can't or won't protect them.

(COMMERCIAL BREAK)

BLITZER: I'm Wolf Blitzer. More dramatic stories we're working on for our next hour.

The Pentagon unveiling its first-ever strategy for fighting cyber-attacks, just as it admits suffering one of the worst online security breaches in its history.

Also, growing demand on Capitol Hill for answers from the media mogul at the center of a widening tabloid scandal now stretching right here to the United States.

And what's behind a radical effort in California to form an entirely new state.

You're in THE SITUATION ROOM.

(MUSIC)

BLITZER: Nineteen days from now, we could be experiencing a kind of financial shock and awe in this country. The president, members of Congress have heard the dire warning on what could happen if there's no deal to much raise the debt limit by August 2nd.

And joining us now from Capitol Hill, the chairman of the House Budget Committee, Paul Ryan of Wisconsin.

Mr. Chairman, thanks very much for coming in. REP. PAUL RYAN (D), WISCONSIN: Hey, thanks for having me, Wolf. Good to be with you.

BLITZER: You know, based on all the emails I'm sure you're getting and I'm getting, the tweets, everything else, Americans are sick of this fight that's going on over at the White House right now with the Democrats and the Republicans. Why can't this be resolved so there won't be a crisis on August 2nd?

RYAN: Well, I think ultimately it will be resolved. There won't be a, quotes/unquote, "crisis." The reason is, is we got to cut spending and there's not a big appetite in the White House to do that. That is the reason we're at the debt limit we are at because spending has grown far to fast. And, look, we just don't think it's a good idea to be raising taxes in this very, very soft economy.

And, yes, the president says he wants the tax increases to kick in about a year and a half's time, but the problem is, when you're raising taxes on businesses, they're forward-looking. And if they see taxes going up even higher than they are already scheduled to occur in current law, it puts a chilling effect on hiring today.

And the second thing I would say is, the good old days of like 2007, we used to say this debt is a problem for our children and grandchildren. It's not. It's a problem for us right now.

The debt is a hangover on our economy. Look what's going on in Europe that is costing jobs right now.

So, we've got to keep our eye on the ball, and that is we've got to cut spending. We're negotiating spending cuts right now. And so, this thing is just going to play itself out. It's a little fluid but it's going to play itself out.

BLITZER: Well, I just want to be precise. If, in fact, they do reach a deal, the speaker, the leadership, the Democrat and Republican leadership, who will theoretically be ready to vote yea, to vote in favor of raising the debt ceiling?

RYAN: Yes, I'm not one of those people who say under no circumstance I won't vote for an increase in the debt limit. Look, you know, those of us who voted for budget before, debt element increases were in those budgets, that's how it used to be done. We took that out of the budgets. And so, yes, if we get a decent package that gets a downpayment on our deficit and debt, then I will vote for it.

I've been saying all along, I think it's dangerous for the credit markets and for the economy to just raise the debt limit without any spending cuts. At the same times, nobody is looking to default. Nobody wants to see that happen. We've got to get a downpayment on our fiscal problems and that's our deficit and our debt.

And the more we can do that, the better off our economy can be, because we can remove this huge debt cloud that's overhanging us. BLITZER: Here's what David Brooks, the moderate conservative columnist at "The New York Times," wrote the other day in a column "The Mother of All No-Brainers." "If the Republican peter were a normal party," he writes," it would take advantage of this amazing moment. It is being offered the deal of the century: trillions of dollars in spending cuts in exchange for a few hundred billion dollars of revenue increases."

He says you should just say yes.

RYAN: That deal never came together. There were never any specifics that were actually presented to show you what David Brooks is talking about. So that deal never materialized.

Now we're off of I guess what they call the "Grand Bargain," because the Speaker and the president never came together on that, and so now we're going back to brass tacks, which is coming up with a spending cut package to lift the debt limit. So the whole point here is, let's get a down payment on the deficit and the debt, in conjunction with raising the dead limit.

Will we get the kind of spending cuts what we're looking for? No. Obviously, it's divided government. We cut $6.2 trillion in our budget. The president is not going to accept that. We're not going to accept all the tax increases he's asking for.

So, hopefully, clearly, with a $1.3 trillion deficit, we can get some common ground on the fact that spending is too high and we've got to get it down if we're going to deal with this problem. And I'd like to think we can find some consensus on that area.

BLITZER: If worst comes to worst, would you be prepared in principle to vote for Senate Minority Leader Mitch McConnell's compromised last-ditch proposal at least to avert some sort of economic collapse?

RYAN: You know, I don't want to get into that, only because I don't think it helps us to negotiate to the media on what we would take at the end of the day, worst comes to worst. But nobody wants to see a default situation happen. The McConnell plan has been received a little more coolly over here in the House, but it wouldn't surprise me if you have combinations of approaches that come together at the end of the day with this thing.

BLITZER: Presumably, that's what they're talking about at the White House, maybe even as we speak right now.

And I just want to be precise on this point. As far as the potential disaster occurring after August 2nd, what the Treasury Department says could be the deadline, you're with Mitch McConnell and John Boehner in saying you've got to avoid that, we can't take any chances, as opposed to Michele Bachmann and Sarah Palin, who say you know what, the government could deal with it if necessary?

RYAN: Well, look, I watch the daily cash flows. Nobody knows this stuff for sure, but you can see days in August in which the outflows, interest on debt, Social Security payments, paying our troops, things like that, far exceed the money we have coming in that day. So, on a day-to-day cash management, we could have some serious problems.

Not just not paying our troops or Social Security. I think we can do those things. But we have some big debt coming due that's going to be an issue.

So, look, I don't want to go down that path. I want to cut spending. And I've got to think we can get the president to cut some spending around here, and that's what we're negotiating.

BLITZER: Well, apparently --

RYAN: So, I don't want to see default, but I also -- I really think it's a mistake, Wolf, if we just rubberstamp a debt limit increase, because that will tell the credit markets, you know what? These Americans, they can't get their act together. Their fiscal house is not in order, and even having two parties involved in government doesn't do anything. So I think it would be a mistake if ours if we just have an (INAUDIBLE) increase in the debt limit.

BLITZER: Because the president, his supporters, his advisers, they have repeatedly said and he's suggested that that big deal, that $4 trillion deal he wanted, $4.5 trillion, and at least $3 trillion in spending cuts, maybe more, and then some tax revenues, not necessarily tax hikes, rates in the sense of raising the rate from 35 to 39.6 percent, the highest income bracket, but eliminating some of those loopholes, those subsidies, stuff like that.

Are you open to tax reform like that, by the way?

RYAN: Not only are we open to tax reform as you describe it, it's in our budget. What we propose in our budget that passed the House is, get rid of these loopholes in exchange for lowered rates.

Look, General Electric made a lot of money, didn't pay any taxes. UPS, another big company, paid a 34 percent tax rate, while their competitor, DHL, paid a 24 percent tax rate.

So, we've got a problem here. And what we want to do is get rid of these loopholes, all of these loopholes, in exchange for lowering everybody's and every business' tax rates to make us more globally competitive. But that is not what we saw coming together with this big deal.

And it wasn't a 3-1, by the way. If you run the numbers the honest way, we weren't looking at $3 of spending cuts for $1 of taxes. It was far different than that.

BLITZER: What was it?

RYAN: So -- I thought it was closer to $2 to $1, closer to $1 to $1. More to the point, we weren't getting the rates down. So we weren't getting any sure agreement that we were going to get those rates down. And if you don't get the tax rates down, then it really is a tax increase. And that's bad for the economy.

BLITZER: How surprised were you, Mr. Chairman, that the president was willing to put your issue, Medicare, Medicare reform, cuts in Medicare on the table?

RYAN: Well, the kinds of reforms he was putting on the table are the kinds of things you'll have to do if you don't do the reforms that we are talking about. The reforms we are talking about allows us not to change benefits at all for anybody above the age of 55 if you reform it for younger people like myself.

If you don't do that, then you will have to change benefits for current seniors. So it really is that kind of a tradeoff. Apparently, the president is more interested in going down that path. His independent advisory board and his health care law does that, which will, starting in 2013, start price controlling health care to current seniors.

We don't think that's the way to go. And that's why we think we should reform Medicare for the younger generation, and leave it alone, keep it as it is, for the current generation.

BLITZER: All right. One final question, and you can give me a yes or a no. You think there will be a deal by August 2nd?

RYAN: I think so.

BLITZER: OK. It doesn't sound a resounding "I think so," but you think so.

Mr. Chairman, thanks very much for coming in.

RYAN: You bet, Wolf. Nice to be with you.

BLITZER: Thank you.

Paul Ryan is the chairman of the House Budget Committee.

The Pentagon is revealing one of the worst breaches ever of computers storing very sensitive U.S. military information. Stand by for details.

And why even some children in Egypt are now carrying guns months after the revolution.

(COMMERCIAL BREAK)

BLITZER: Just months after Egypt's mass revolution, elation has now turned to fear. Parts of the country now engulfed in crime, and many people are desperate for protection.

Here's CNN's Fred Pleitgen in Cairo.

(BEGIN VIDEOTAPE)

FREDERIK PLEITGEN, CNN INTERNATIONAL CORRESPONDENT (voice-over): In this rough Cairo neighborhood, a place even the police almost never go, we find the weapons that are flooding Egypt's streets: cheap, homemade guns, simple, lethal, and in high demand as security has deteriorated in the revolutionary turmoil.

Khalid Hussein has three pistols for community defense, he says. "Before the revolution, a weapon cost about $50," he says, but after that, it went up to about $150, because there were so many robberies and other crimes."

(on camera): So, as you can see, these guns are very rudimentary. They're basically a single barrel, a trigger and a hammer. And they take these single shotgun rounds.

(voice-over): Even Khalid's kids are handy with a steef (ph). He runs a thriving recycling business here and assures us he would only use the guns to protect his neighborhood.

But since Egypt's revolution, the role of the police force, perceived by most as brutal, corrupt, and incompetent, has been greatly diminished. Crime has skyrocketed. Citizens form community militias to defend their property during the uprising, and many like Saeed Ata are still taking security into their own hands.

Saeed owns several major electronics stores in Cairo, and says he keeps gun in all of them.

SAEED ATA, OWNS ELECTRONICS STORES: Lots of trouble on the streets. Some stores were robbed. Lots of stuff were taken -- money. They even had, like, trucks to carry the guns. You know?

PLEITGEN: Authorities say they are trying to tackle the problem, but so far there is little improvement.

That's good for this man, who calls himself "Khanofa." He broke out of prison during the uprising where he was serving time for drug trafficking, a crime he says he didn't commit. Since the revolution, he says the cops can't touch him in this neighborhood.

"It's great," he says. "I feel very safe here among my cousins and the people of this neighborhood."

It comes as no surprise that Khanofa supports the revolution, as most other Egyptians still do. But it has left the country in a major quagmire -- a weak police force that almost no one trusts, soaring crime, and more and more people taking matters into their own hands.

Fred Pleitgen, CNN, Cairo, Egypt.

(END VIDEOTAPE)

BLITZER: The Republican contenders for the White House turning up the heat on debt talks in Washington. But will any of them come out on top? Stand by.

And Republican presidential candidate Michele Bachmann now leading yet another new poll. But could Sarah Palin break her momentum? We'll talk about that and more in our "Strategy Session."

(COMMERCIAL BREAK)

BLITZER: Let's get to our "Strategy Session."

Joining us, our CNN political contributor, the Democratic strategist, Paul Begala. He's a senior strategist for the Democratic fund-raising groups Priorities USA and Priorities USA Action. Also joining us, Republican strategist Terry Holt.

Guys, thanks very much for coming in.

Let's talk about these negotiations continuing even as we speak right now over at the White House today, for a fifth straight day. Yesterday, it was a rough, rough session. Listen to how Eric Cantor, the majority leader in the House, summarized it.

Listen to this.

(BEGIN VIDEO CLIP)

REP. ERIC CANTOR (R), MAJORITY LEADER: He said to me, "Eric, don't call my bluff." He said, "I'm going to the American people with this."

I was somewhat taken aback, you know, because, look, I was compromising. I said, look, I'm willing to come off my insistence that I have always said that the House is not going to support more than one vote on this in the spirit of saying, look, none of us want to bring this to the brink.

He shoved back and said, "I'll see you tomorrow" and walked out.

(END VIDEO CLIP)

BLITZER: Wow. Shoved back and walked out, storming out. It sort of reminds me of the stories -- you remember this, Paul; I'm sure Terry does as well -- that controversial meeting about a year or so ago with the prime minister of Israel, Benjamin Netanyahu. At the end of that meeting, the president sort of just walked out, said he was going to dinner, and left Netanyahu there.

Do you remember all those reports about that, that moment?

Is this a president that just walks out in frustration from a meeting like that?

TERRY HOLT, REPUBLICAN STRATEGIST: Well, you know, the first thing I thought of, Wolf, was that, but it was also -- remember when Newt Gingrich lost control during the budget fights in the '90s? You knew right then he had lost control of the trajectory of how that negotiation was taking place. And I wonder if we're going to look back on this moment and wonder if this isn't when Barack Obama had a moment where he lost his cool and lost control of whether he was going to win or lose this fight.

BLITZER: Paul?

PAUL BEGALA, CNN POLITICAL CONTRIBUTOR: Nice try, Terry. Swing and a miss, strike one.

First off, Terry knows this -- Wolf, you know this -- you've covered any number of presidents. A presidential meeting ends when the president stands up and walk out. Others don't walk out on him. That's the protocol in our country.

The president didn't lose his cool. He's "No Drama Obama." The truth is, Eric Cantor is a bit of a lightweight, and Harry Reid, the Senate majority leader, said this, and he's right. He doesn't belong in that meeting. I mean, Mitch McConnell clearly does, the Republican leader of the Senate, the Speaker does.

HOLT: Oh, Paul, the man is the majority leader of the House of Representatives. That's disrespectful.

BEGALA: But Eric Cantor is punching (ph) several classes above his weight. Well, look -- I am being disrespectful? Eric Cantor doesn't belong in the room. He's a lightweight. He's not serving your party or our country very well.

They need to cut a deal. And when Eric Cantor sits there and says no, we're going to make sure that senior citizens gets cuts in their Social Security, but not make wealthy corporations even close loopholes that they use for corporate jets, that's untenable. It's damaging to the Republicans, harmful to the economy, and he may drive us over the cliff.

HOLT: I'll tell you what -- you know, Cantor was telling the truth. And for this president, the truth hurts. Cutting spending is the way out of this debt ceiling controversy. And the moment he gets his arms around that is the moment we'll have a deal and we can move on, and the American people can turn their attention to other issues.

BLITZER: I want to move on to some other issues, including presidential politics.

But in fairness to Eric Cantor, Paul, it's not up to you or me or Terry or anyone else to decide whether he belongs in the room. It's up to the Republicans in the House of Representatives. And they elected him, right?

HOLT: That's right.

BEGALA: Well, they did. And I'm quite sure right now that they regret that. Actually, John Boehner has, I think -- even though I don't agree with him either -- performed quite well from all the reporting. So it's not a partisan thing.

(CROSSTALK)

BEGALA: This guy is a lightweight. Come on, Terry. You know he is. Everybody says it behinds the scenes, too. HOLT: This leadership team has been more successful than any other Republican leadership team in my memory. They were able to beat your guys and Nancy Pelosi in the last election, and they hold the majority. There is a recipe for success there. And I, myself, would rather have Eric Cantor on my right than just about any member of your party in this negotiation.

BLITZER: All right. Let's move on.

I will say this though --

BEGALA: But no. That's not the question.

(CROSSTALK)

BLITZER: As someone who's interviewed Eric Cantor, I will say this -- as someone who as interviewed Eric Cantor on many occasions, Paul, I disagree with you. I do not think he's a lightweight. He's an intelligent guy.

You can disagree with him on the substance of a lot of these issues, and I'm sure you do. But to call him a lightweight, you don't get to that level in politics necessarily by being a lightweight.

HOLT: Amen.

BEGALA: I've interviewed him, too, Wolf. I've interviewed him a lot.

I didn't say he's an intellectual lightweight. He's perfectly bright, and he's probably marginally above average for a congressman, but he's not up to the -- I'm trying to think of a word that I can use on television -- the guts that it takes to make these kinds of hard decisions. That's what he lacks.

(CROSSTALK)

HOLT: It was Barack Obama who walked away in a huff. Excuse me.

BEGALA: Excuse me for talking while Terry is interrupting. First off, it was Mr. Boehner who broke up the negotiations with Joe Biden. Now he seems to be trying to break up the negotiations with President Obama.

But he just won't deal with -- it's an obvious deal, Terry. Democrats have to cut spending, Republicans have to raise taxes on the rich. We got into this debt because Republicans squandered the surplus.

BLITZER: Let's move on, because we're not going to agree necessarily on this one.

But let's talk about Michele Bachmann.

Once again, Terry -- and you're a Republican -- she's leading the polls in all of these polls, day after day. This latest GOP caucus- goers' choice for the Republican nominee in Iowa, Bachmann with 32 percent; Romney, 29 percent; Pawlenty, 7 percent; everybody else way down.

She's really got a lot of momentum now. Is she going to win Iowa, Terry?

HOLT: She's certainly giving people fits that thought they were going to win Iowa.

Tim Pawlenty, the governor from the neighboring state, thought he had a lock on it. A lot of these other conservative candidates thought they had a leg up. But this candidate is working hard, she's well organized, she's deeply ingrained into the kinds of coalitional support that she's going to need in Iowa. And good for her.

BLITZER: Right now, the only thing that's going to change that momentum, Paul, is Sarah Palin, if she jumps in.

BEGALA: Well, a lot of things could change it. I mean, Mrs. Palin, I saw a poll recently, actually, that her negative in Alaska is now up to 49, but that she was doing a little better in Iowa without campaigning there at all. So I have no idea if Governor Palin gets in or not.

But I actually concur with a lot of what Terry says. Congresswoman Bachmann brings a lot of energy to the campaign, a lot of excitement.

I have no idea how the Republican Party sorts itself out, but it really is quite a pathetic performance by Mitt Romney, the millions of dollars and thousands of days he's spent in Iowa. And, you know, this --

(CROSSTALK)

BLITZER: All right. Hold on, guys, because we've got to leave it on that note of relative agreement between the two of you. We like to do that.

Guys, thanks very much for coming in.

BEGALA: Thanks, Wolf.

BLITZER: The FBI is investigating Rupert Murdoch's media company, and there's growing sentiment for a congressional investigation as well. We have new information on how the phone- hacking scandal is taking hold right here in the United States.

And the Pentagon declares war against computer hackers as we learn of one of the biggest breaches yet of the U.S. military's cybersecurity.

(COMMERCIAL BREAK)

BLITZER: Jack is back with "The Cafferty File" -- Jack.

CAFFERTY: Indeed.

The question this hour: Did the Casey Anthony trial alter your view of the criminal justice system? She gets out of Sunday, and a lot of people not happy about the way that thing turned out. There are reports she may wear a disguise, go into hiding, change her name, all kinds of things.

Kay writes, "Yes, it changed my mind for the better. The jury did what they're supposed to do -- put emotion, conjecture aside, weigh the actual direct evidence. There was reasonable doubt all over the case because none of the evidence was ever directly connected to Ms. Anthony."

"We can't say a person committed a murder just because we don't like her. Proof is required, and there was none."

Richard in Pennsylvania says, "The verdict only bolsters my cynical view of our justice system. It's a system run by the lawyers, a.k.a. liars. That being the case, juries do the best they can based on the evidence or lack of evidence they're presented."

"It supports the old adage that if you're guilty, be tried by a jury. If you're innocent, be tried by a judge. As a postscript, I think she's a stone-cold killer."

Joan in Pennsylvania writes, "Yes. What possible reason could a mother give for not reporting her child missing for 31 days other than having something to hide?"

David in Virginia writes, "No. It worked. If you bring charges against someone and you can't convince a jury of their peers they're guilty, they walk. It's a vital, critical protection afforded all of us by the Constitution."

"Having said that, though, I wish the prosecutors had gone after a lesser charge which might have stuck. Something is not right in the Anthony family. We may never find out what it is or how else it might manifest itself on someone else in the future."

Carla in Alabama writes, "No. Those 12 jurors came from very different backgrounds, and each found there was not enough evidence to convict. Even though they knew that they would face incredible criticism after they delivered their verdict, they did what they felt was right, not what was popular. We may not always get it right, but I would rather see one guilty party go free for lack of evidence then see an innocent woman sent to her death on popular opinion."

And Paul in Texas writes, "The prosecution didn't provide proof beyond a reasonable doubt, so I guess the system worked. And by the way, those guilty will eventually pay. Right, O.J.?"

If you want to read more on this, you can go to my blog, CNN.com/CaffertyFile -- Wolf.

BLITZER: All right, Jack. Thank you. We want to follow up right now on some very dramatic and exclusive CNN video from Libya. Our senior international correspondent Ben Wedeman and his team were caught in the middle of an intense firefight for control of a western village. He later filed this report.

(BEGIN VIDEOTAPE)

BEN WEDEMAN, CNN SENIOR INTERNATIONAL CORRESPONDENT (voice-over): This is how our day started, ambushed by Gadhafi loyalists.

UNIDENTIFIED MALE: Wait! Wait! Wait!

Get down! Get down!

WEDEMAN (on camera): They're leaving this area because there's gunfire all around us, and we believe Gadhafi's forces are doing a roundabout movement. We are rushing out of this area.

UNIDENTIFIED MALE: You all right, guys?

Alex?

WEDEMAN: Everybody's fine.

We're going as fast as we can. We can't tell who the -- OK.

Is the other car behind us?

UNIDENTIFIED MALE: Yes, it's behind us. Yes.

WEDEMAN: That's a lot of gunfire. It's continuing to come through.

Gadhafi's forces apparently have entered Qawalish, a town we were in just the other day that the rebels took on the 6th of July. And there's been talk that they might be building up forces to make a counterattack. And it looks like the counterattack is going on right now.

Gadhafi forces apparently have -- we were in the town just the other day, and the rebels took it on the 6th of July, and there has been talk they have been building up forces (INAUDIBLE), and it looks like the counterattack is going on right now.

(voice-over): But Qawalish, on this day, was lightly defended at best, and it's defenders didn't put up much of a fight.

(on camera): We came back to this checkpoint, which is about halfway between Qawalish, the town that is apparently fallen, and Zintan and we have been told we need to go back even further, because Gadhafi's forces are on the move. And as you can see, the traffic is only going back in one direction, nothing that way.

(voice-over): They're running away with their weapons, this man shouts. Nizbah (ph) is fleeing with his wife and six children. This is the result of the people not being ready, he says. They abandoned their positions, they should be there all the time.

We were treated to a house near Zintan where we found a group of fighters preparing their weapons for a counterattack. All their weapons were captured from the enemy.

Mohamed, one of the fighters, did not want to appear on camera because he has relatives in Tripoli, but told me local fighters from nearby villages were careless. What happened today, he says, was that nobody was watching the front. If they had, they would have seen the Libyan army was moving forward.

Cars and pickups full of fighters gathered by the roadside. The plan, says Commander Mukhtar Al-Akhdar, is to stop Gadhafi forces and push them back. Part of the plan was to pound the loyalists with rockets, and then move forward toward Qawalish, which they were able to take.

But rockets kept on coming in, as well as the occasional incoming bullet. Nearly 30 rebel fighters were wounded in the battle, at least eight were killed, all to regain control of a town they captured a week before.

Ben Wedeman, CNN, Qawalish, western Libya.

(END VIDEOTAPE)