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THE SITUATION ROOM

Interview With White House Press Secretary Jay Carney; Political Deadlock Remains As The Debt Ceiling Deadline Looms Closer; Vets Stage Virtual March On DC; Flights Canceled After Pilot Sickouts

Aired July 27, 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: The political temperature here in Washington, now tipping the scales, as the White House intensifies both parties over how to solve the debt crisis. Fears that a solution won't be reached in time are quickly, quickly potentially, at least, becoming a reality.

What is President Obama doing right now to end this bitter gridlock? The White House Press Secretary Jay Carney will join me just minutes from now.

Plus, even if Congress agrees on a last-minute deal, the country's coveted AAA credit rating could be still be at risk; just ahead, the unprecedented consequences for all of us, if it goes down.

And taking a hard line, why some lawmakers argue the looming August 2cd deadline isn't the Armageddon the president says it is.

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

We're only five days away from what could lead to unprecedented default in the United States-if, if the political sparring between our elected officials here in Washington doesn't stop. And we can't emphasize enough how devastating the repercussions could be, not only here, but indeed around the world.

Interest rates could go up, mortgages, car loans, student loans could become more expensive. Meanwhile, the country could lose its prized AAA credit rating for the first time in recent history, a move many analysts think could plunge the U.S. into global economic disaster. Our Congressional Correspondent Kate Bolduan is up on Capitol Hill. The political battle there is brewing not only between Democrats and Republicans, but among Republicans, Kate, themselves.

KATE BOLDUAN, CNN CONGRESSIONAL CORRESPONDENT: Fascinating day, Wolf. House Speaker John Boehner is still working to rewrite his bill right now after cost estimates showed he was falling short. At the same time, he is still working to build support for his plan ahead of tomorrow's expected vote.

(BEGIN VIDEOTAPE)

BOLDUAN (voice-over): Working hard to secure the votes for their debt plan, House Republican leaders met with their rank and file behind closed doors again Tuesday. And Speaker John Boehner was blunt. According to Republican sources, he told conservatives unhappy with his plan to quote, "get your ass in line". As members left, there were signs Boehner's tough message was getting through.

REP. BLAKE FARENTHOLD, (R) TEXAS: I've shifted to leaning yes, from leaning no. And that really is, you don't let the perfect, you get in the way of the doable.

REP. STEVE CHABOT, (R) OHIO: I was originally opposed to it until I realized the odds of getting anything better at this point in time are probably very, very slim. So I think this is probably the best thing that we're going to get.

UNIDENTIFIED MALE: I know the hearts of the Republicans I'm serving with --

BOLDUAN: But outside the capital, a very different message from Tea Party supporters.

AMY KRAMER, TEA PARTY EXPRESS: It's time to stop, and stop now, and these Republicans need to hold the line.

BOLDUAN: And further evidence of a party divided over this debt ceiling crisis, a blow-up Wednesday among House conservatives over a staffer's e-mail to outside groups, asking them to step up pressure on fellow GOP members to oppose the Boehner plan.

REP. TRENT FRANKS, (R) ARIZONA: We just had a family discussion, everybody loves everybody.

BOLDUAN: Despite the continued bickering and blaming there were perhaps glimmers of compromise as congressional leaders hinted the way out is in their hands.

SEN. HARRY REID, (D-NV) MAJORITY LEADER: Magic things can happen here in Congress in a very short period of time under the right circumstances. But-

(END VIDEOTAPE)

BOLDUAN: Now, in terms of what happens next, there's a definite sense that all eyes remain on the House. As the Senate seems to still wanting to wait to act until it sees what happens when the House takes up the Boehner bill, which they are aiming to happen, tomorrow, Wolf.

BLITZER: Later in THE SITUATION ROOM we're going to debate between two of those Republicans, one who have supports Boehner's plan and one who opposes Boehner's plan. That is coming up later.

Kate, thanks very much.

The Democrats are having struggles of their own, having to rewrite their own plan after cost estimates reveal that it fell about $500 billion short of the $2.7 trillion they promised in savings.

(BEGIN VIDEOTAPE)

BLITZER: Joining us now from the White House, White House Press Secretary Jay Carney.

Jay, thanks for coming in.

JAY CARNEY, WHITE HOUSE PRESS SECRETARY: Thanks for having me, Wolf.

BLITZER: Tell us what the president has done, today, to try to resolve this debt ceiling crisis.

CARNEY: Well, Wolf, the president, the vice president, his senior members of his team continue to have a conversations, negotiations, discussions, whatever it takes to find a path forward. We're obviously not able to act on our own. In order to raise the debt ceiling, to ensure that we have the borrowing authority that we don't lose it, for the first time in our history, Congress has to act. It has to pass legislation to do that.

We're obviously watching what's happening in the House where the House is spending a lot of time for the second week now, trying to pass a bill that we know from, as a foregone conclusion will not become law because it cannot pass the Senate. And will not be signed by the president. That's unfortunate simply because we're running out of time.

You know, sort of the period like we had last week with Cut, Cap and Balance, or Cut, Cap and Paste, or whatever it's called, the ritual that the House Republicans went through to pass something they knew wouldn't become law. We spent a whole week doing that. We're doing it again, and now as you know, on August 2nd we face a very serious deadline.

BLITZER: Is the president speaking with the House speaker? I don't know if you saw the markets. They closed just a little while ago. The Dow Jones, the Nasdaq, they have dropped significantly today. So, pressure is clearly mounting. Is the president picking up the phone talking with the speaker of the House?

CARNEY: Well Wolf, what I'm not doing, what I haven't done is read out individual or specific conversations. Even those we've tried to be circumspect about have leaked out. As you know, the president spoke with the speaker over the weekend. Not anything we announced at the time, and conversations continue at all levels including the highest level.

But unfortunately there's a lot of time being occupied on the Hill by going through the motions of passing legislation that is not the solution, is not the vehicle for a compromise. But we are continuing, because there's no time to waste, continuing to have the kinds of discussions you need to have to find a path forward.

BLITZER: Are we any closer to a deal today than we were, let's say, Monday night, when the president addressed the nation?

CARNEY: Well, Wolf, I would say only in the sense that because of this hard deadline that we face, and their -- and the acceptance by all the leaders in Washington on both parties in both houses as well as the president that we have to act to ensure that we do not default on our obligations for the first time. We are one step closer to the ultimate deadline when we have to do that.

So we never wanted and I sense -- I've spent a lot of time from this room stating the president's position that we shouldn't wait until the last moment here, this is too serious, and that there will be a negative reaction if we wait too long because it will begin to cast doubt on whether or not, in fact, we will raise the debt ceiling. I think we're beginning to see that impasse, which is unfortunate. But I can assure you that the president believes, we still believe here that, in the end, Congress will act, saner heads will prevail and we will find a compromise to move this forward and get it done.

BLITZER: Is there any wiggle room at all, even a few days, on that August 2nd deadline that more money, for example, is coming into the Treasury, that you can delay it for at least a few days?

CARNEY: Well, let me dispel a couple of myths. First of all, receipts -- tax receipts, incoming cash for June and July were as expected, so there's no extra money coming in.

Secondly, August 2nd is a hard deadline established by the career analysts at the Treasury Department based on their crunching of the numbers. That's when we cease to have borrowing authority.

Beyond that point, we run on fumes. We essentially have 60 cents for every dollar we owe going forward. And -- and that risks we -- we're in this -- in the situation -- a position of risking default for the first time in our history as a country and even, obviously, leading up to that August 2nd date, if there is, the more there is doubt about our capacity to deal with this problem, the -- the -- the worse the impact on our economy and on the market. So that is a hard deadline.

And -- and also let me make clear. The secretary of Treasury has been very forthright and direct about this with Congress since January, when he first sent the letter establishing the time line by which this would unfold, when he -- and he -- he predicted then, based on the information that he had, that by mid-May, we would hit the debt ceiling. We did, on May 16th.

Since then, he has been able to take extraordinary measures, the kinds that other Treasury secretaries have been able to take, to -- to prolong our borrowing authority. But that -- his capacity to do that ends on August 2nd.

There is no off ramp. There's no way around that reality. We need to get this done by then.

BLITZER: If it's not done by then, if Congress were to, say, pass a stopgap measure for an extra week or two weeks or even a month, I assume the president, under those circumstances, to avoid default, would accept such a short-term resolution?

CARNEY: Well, what -- what I have said from -- from this room, Wolf, is that if we have a deal and we need to cross the Ts and dot the Is and do the things that are required just to process things, to get legislation through Congress, then he would -- obviously, as he did during the CR negotiations, sign a very short-term extension of the debt ceiling, lifting of the debt ceiling. That is different from what the current legislation in the House would have us do, which is relive this whole experience around Christmastime, which is a terrible idea. If you think about the impact of doing this whole debate again, casting into doubt whether or not the United States will default on its obligations and doing that around the Christmas season, the incredibly vital shopping season for retailers in this country, a terrible, terrible idea. We need to get this done. We need to get it done for a sustained period of time so the cloud that's hanging over our economy caused by this debate is lifted and we can get about the business of growing the ecomon -- economy and -- and creating jobs.

BLITZER: Former President Bill Clinton said in an emergency, what the current president should do, he should invoke that clause in the 14th Amendment that -- and just simply do it without Congressional authorization. Bill Clinton saying: "I think the Constitution is clear and I think this idea that the Congress gets to vote twice on whether to pay for expenditures it has appropriated is crazy. Force the courts to stop me."

That's the former president. Does he have a point that this president might accept?

CARNEY: No. We -- we have made -- we have made clear -- the president addressed this last Friday in a press conference, that we have looked into what the 14th Amendment does and doesn't say and it -- it clearly establishes that Congress and Congress alone has the authority to increase the debt ceiling, to further our borrowing authority.

And that's just -- that's -- that's an esoteric -- exercise, to talk about what's constitutional and what's not. The fact is, August 2nd is a hard deadline. We have to -- we have to act by then. Congress has to act by then. There are no escape hatches. There are no off ramps.

BLITZER: I know you want a deal and August 2nd is approaching. Do you believe there will be a deal by August 2nd to avoid what could be financial disaster?

CARNEY: Wolf, I do. And the president does because in spite of everything and -- and the kind of shenanigans that have been going on and sort of, you know, showboats and things that delay this process, in the end, every leader in the House and Senate has said we absolutely have no alternative, the risk is too great, we must do the right thing and raise the debt ceiling. We must ensure that the United States of America can pay its bills, to -- to pay the bills that have already been rung up by previous Congresses.

and I think that, in the end, the leaders of the House and the Senate, together with the president, will persuade members of Congress to take that action.

BLITZER: Well, let's see if they do. Appreciate it very much.

Jay Carney, the White House press secretary.

Thanks for coming in.

CARNEY: It's a pleasure, Wolf.

Thank you.

(END VIDEOTAPE)

BLITZER: As I mentioned, let's take a look at the big drop on Wall Street today. The Dow closing down 198 points, about 1.5 percent. The Nasdaq slipped 2.6 percent. The S&P 2 percent. Another drop on Wall Street.

The mounting debt crisis could end up lowering the country's signature credit rating for the first time in decades. Ahead, we'll lay out the severe consequences of such a move and why some say politicians here in Washington are right now playing with fire.

And not everyone thinks the country is approaching Armageddon. Why some lawmakers in Congress are taking a hard line on raising the debt ceiling. Stay with us. You're in THE SITUATION ROOM

(COMMERCIAL BREAK)

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

JACK CAFFERTY, CNN ANCHOR, THE CAFFERTY FILE: The American people have had enough. But their feelings on the debt ceiling crisis continue to fall on deaf ears. Monday night, President Obama called on the American people to, quote, "make your voices heard." And boy, did they. The calls and e-mails to Congress the next day almost shut down the phones and computers in Washington, which might not have been a bad idea, actually.

But no matter, here it is Wednesday, default now five days away and still nothing. Americans want compromise. They made that very clear. The polls, CNN/ORC, Pew, ABC News, Washington Post, they've all been reflecting this for week now. The American people do not want the government to default on its debt obligations. They know the rest of the world is watching. They want leadership, they want the mess fixed.

Washington remains clueless. They don't seem to hear us or care much what we think. They have their own agendas there and as a result are playing games with the financial well being of millions of people. According to two recent polls, two-thirds of Americans think that a failure to raise the debt ceiling will have a negative impact on their own financial situation.

Yesterday the new chief of the International Monetary Fund Christine Lagarde said a default or even a downgraded U.S. debt would be a, quote, "very, very, very, serious event", unquote. Not just for the United States economy but for the global economy.

Meanwhile, Reid has a plan that won't pass. Boehner has a plan that won't pass, Obama doesn't have any plan at all. Maybe the voters can come up with a plan for these dysfunctional clowns in 2012.

Here's a question: When it comes to the debt ceiling crisis, why won't the government listen to the American people? There's a concept. Go to cnn.com/caffertyfile. Post a comment on my blog, Wolf.

BLITZER: It's a good question, Jack. Thank you.

With the majority of Americans saying they want lawmakers to compromise on the debt crisis, you're going to hear why some close to the House Speaker John Boehner say he's the best man for that job. And the Obama administration scores a major court victory surrounding a rather controversial issue. We'll explain, right here in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: There's a major ruling on stem cell research. Lisa Sylvester is monitoring that and some of the other top stories in THE SITUATION ROOM right now.

What's going on, Lisa?

LISA SYLVESTER, CNN CORRESPONDENT: Hi, Wolf.

Supporters of stem cell research on human embryos are applauding a decision today by a federal judge in Washington. The judge dismissed a lawsuit that tried to block federal funding of embryonic stem cell research. The ruling backed a decision earlier this year from a federal appeals court. That court ruled no embryos are destroyed with federal funds and research should go on, a position the Obama administration supported.

Texas Governor Rick Perry is likely to skip a traditional step to announcing a presidential bid. Perry's advisor tells CNN the Republican governor will probably not form an exploratory committee, and instead jump head first into the primary fight. The reason? Perry's adviser says there's no enough time to test the waters before launching a full-blown campaign. Perry is expected to make a decision on a bid next month.

And schools in Memphis, Tennessee, may now start on time. The city's school board threatened to delay the start date until it received $55 million, a portion of the money it says the city owes the system. But the school board has now voted to start school as scheduled on august 8 if several criteria are met. Those conditions includes a $12 million payment from the city and a detailed schedule.

And Wall Street investors have a big appetite for Dunkin' Donuts. Dunkin Brands debuted as a public company today. And interest for its IPO was strong. Shares of the parent company of Dunkin Donuts and Baskin Robbins started trading at $25 each, up more than 30 percent from the list price. The stock offering raised $423 million for the company, which it will use to pay down debt, Wolf.

BLITZER: Good for Dunkin' Donuts. Thanks very much.

The AAA credit rating, is the best a country can have. So what happens if the United States of America loses that rating and how could that affect you? And some conservatives accuse the Obama administration of being fast and loose with the fact whence it comes to the debt crisis. You are going to hear why they say they're not all that concerned about the looming August 2 deadline.

(BEGIN VIDEO CLIP)

BARACK OBAMA, PRESIDENT OF THE UNITED STATES: --Affects the lives of all Americans.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

BLITZER: Just five days away from that looming deadline to raise the nation's debt ceiling, there are growing fears the United States will lose its prized AAA credit rating, even-even if a deal is reached. And joining us now from London, our own Richard Quest.

Richard, explains what it means if the U.S. were-it is still a big if-to lose its AAA rating?

RICHARD QUEST, CNN ANCHOR, QUEST MEANS BUSINESS: If it were to lose its rating, the fundamental effect would be that borrowing costs would go up. Now, it depends on the circumstances under which it happened, but basically, it would no longer have this top level, gold plated, Rolls Royce AAA that enables the U.S. to borrow money in the markets at the lowest possible price.

It wouldn't be a catastrophe. The world wouldn't stop turning on its axis. I think it would have a very deep psychological affect on the American psyche. Because after all, when you consider the U.S. AAA has been there since 1917. And it has the most, the deepest and the most important markets in the world, not to enjoy the highest level of value would certainly be a down side.

BLITZER: It survived all those years, including a Great Depression, a lot of recessions, world wars. And it still has that AAA rating. When could this happen, Richard, that the U.S. might-and it's still a big might-when could it happen?

QUEST: You have two things to bear in mind. The first is obviously if there is a default. If there is a default or anything even approaching a structural default then, you know, kiss goodbye to the AAA. That is just a -- you can take that one to the bank, basically.

If they do cobble together a deal and they do raise the debt ceiling, it becomes far more difficult because S&P, Moody's, Fitch, they look at the totality of debt, what the country is doing about it, the monetary policy, the taxation policy, the economic agenda. And they determine, is there a credible plan, and a realistic plan to bring down the debt and stabilize the finances. If they believe that that isn't the case, then again the AAA goes.

One of the reasons, Wolf, Britain has embarked on this Draconian austerity, they believed the market was going to blow up U.K. guilt bonds. That U.K. could lose its AAA. It was warned it was on a negative. The U.S. has been warned. It's on a negative watch. And it hasn't managed to put together this deal yet, to actually avoid default. So you've got to ask yourself, maybe the rating agencies are doing their job in actually warning that something is smelly under the hood.

BLITZER: Richard, how does the rest of the world see what's happening in the United States right now. You're in London.

QUEST: Which word would you like many me to use? Flabbergasted, bewildered, horrified, alarmed, concerned? Pick any one of them will do. Because what people are saying at the very top level-and they will not say it publicly yet-but if you talk to policymakers, they will say what the heck are they playing at over there in the U.S.? Don't they realize they're playing with fire?

Now, the U.S., of course, has the answers as yes, it's necessary. But, Wolf, remember back in Lehman Brothers, what was so damaging was not just Lehman Brothers, it was the uncertainty, the dislocation in the markets. If the U.S. defaults or loses its AAA, then you've got to say there will be volatility, and that volatility will have consequences.

The dollar will suffer and that will have consequences. And it is that that could take a shade or two, and it only takes a bit of shaving off economic growth in this country, your country, every other country, and pretty soon, we're in trouble.

BLITZER: And how worried -- I'm very worried, but I want to know how worried you are -- how worried should we be?

I'm not worried about a default. If it happens, it will be. It will be reverse very quickly. I'm concerned about losing on the AAA because AA even (INAUDIBLE), but my major concern is uncertainty. It is that uncertainty that creates damage in the global economy. And we know because the IMF and the OECD, we know all these organizations have warned the recovery is fragile.

It's unbalanced between Asia, on the one hand which is going and the emerging markets. And Europe and the U.S. which is sclerotically slow. And that environment, it's playing with fire to actually continue with this uncertainty.

BLITZER: Richard Quest, thanks very much.

Not everyone here in Washington says a failure to meet the August 2nd deadline necessarily means Armageddon. Some lawmakers are being urged to stand firm in the debate.

Let's bring in our own Brian Todd. He's got some details. What's going on here, Brian?

BRIAN TODD, CNN CORRESPONDENT: Well, Wolf, there's more talk now among the president's staunchest opponents. That means the Tea Party and others that the debt ceiling deadline is what they call a manufactured crisis. They say the White House is fear mongering over that August 2nd date for political leverage. So, we took a look at what the deadline really means.

(BEGIN VIDEOTAPE)

TODD (voice-over): A deadline looms on the debt ceiling, but these folks don't want conservative Republicans to back down. Tea Party loyalists here want hard line Republican lawmakers to hold the line. Don't strike a budget deal and don't raise the debt ceiling just to make that August 2nd deadline.

(on-camera): Some of the hard liners were against raising the debt ceiling, unless, the most traumatic spending cuts were attached. Hard liners like those who spoke at this rally say that that August 2nd deadline is not the Armageddon that the president and some economists it is.

(voice-over): Republican congressman, Steve King, is among those who pushed the White House to go way beyond the spending cuts the president has wanted, and they're OK with letting that deadline pass without lifting the debt ceiling.

Why is it not a crisis beyond that day?

REP. STEVE KING, (R) IOWA: It's not because the first day redefined the word default now in the minds of lot of the American people. Default means if the United States of America fails to service its debt. That would be default. It's not when a bill comes in to buy a package of nails or screws somewhere, that bill being paid two days late.

TODD: He's not alone in feeling that an immediate lift of the debt ceiling isn't doomsday. In a recent CNN/ORC Poll, more than a third of those surveyed said no, the debt ceiling shouldn't be raised even if a debt reduction deal is made. Is that off-base? Economist, Peter Morici, says what would trigger all out default is if the U.S. government couldn't pay the interest on the bonds it sold to investors.

He says if the debt ceiling is not lifted by August 2nd, the government would still have the money to pay that, at least, for several days.

PROF. PETER MORICI, UNIVERSITY OF MARYLAND: The United States government has adequate sources to pay the interest on its debt and to avoid a default. That would turn this into more like a government shutdown.

TODD: And that's manageable, Morici says. The governments had shut downs before. But other economists and the Obama administration argue that would force the government to prioritize what bills to pay and plenty of people would still be hurt.

JOSEPH GAGNON, AUTHOR, "GLOBAL OUTLOOK FOR GOVERNMENT DEBT": They're going to have to send government workers home. They're going to have to stop paying government contractors, and possibly, they may not have enough money to pay Social Security checks that go out on August 3rd. At the minimum, they may have to delay them.

(END VIDEOTAPE)

TODD: And that's what Joe Gagnon says may lead the U.S. credit rating to be downgraded. We just heard Richard Quest talk about that. It may cause the dollar to fall in value, send the stock markets down further than they've already plummeted in recent days. That is what would continue if the debt ceiling is raised, Wolf. We've seen the markets go down drastically as we've seen in the last couple of day.

BLITZER: Yes. Today, the Dow Jones went down about 200 points.

TODD: Right.

BLITZER: But let's talk about to clarify this all-out default.

TODD: That's right.

BLITZER: That's different.

TODD: Economists do say that there's a parsing here, and you can make the argument that it is very different. Economists, Joe Gagnon, says, an all-out default, that would come if the U.S. can't make those crucial interest payments. That would make Treasury securities unstable. He says that's the bedrock of the whole financial system.

You know, a lot of banks hold U.S. debt. Those banks might become insolvent. If the Treasury securities become unstable, that's when you've really got a problem. That's all-out default. That's not necessarily what's going to happen right away if the debt ceiling isn't raised by August 2nd.

BLITZER: It's not good no matter --

TODD: Not good news either way.

BLITZER: Thank you.

The impasse on the debt could dramatically affect U.S. military veterans. Thousands are staging a march on Washington without taking one step. We're going to explain what's going on.

And a new ad attacks President Obama by making a doomsday prediction about the country's future. We're going to show you what's going on in our "Strategy Session."

(COMMERCIAL BREAK)

BLITZER: Many military veterans are voicing their concerns about the debt crisis in a massive online campaign. They're demanding their benefits be protected in the event August 2nd comes and goes without a deal in place. Let's go to our Pentagon correspondent, Barbara Starr. She's following the story for us. All right. Barbara, explain.

BARBARA STARR, CNN PENTAGON CORRESPONDENT: Well, Wolf, millions of veterans are increasingly concerned about what might happen to their benefits if the government defaults. They say the big problem is no one in Washington is telling them what's going on.

(BEGIN VIDEOTAPE)

STARR (voice-over): Three million American veterans receive government disability checks. The advocacy group, Disabled American Veterans, is now using social media in what they call a virtual march on Washington. Gathering messages from veterans worried those checks may disappear if Washington can't agree on raising the debt ceiling and the government defaults. more than 15,000 people have logged on to the Facebook site.

ARTHUR WOODSON, VETERAN: Mr. president, Congress, the veterans come to you today, this virtual march to let you know that we stand arm and arm with each other, the veterans, asking you and the politicians to throw away that "R" and that "D" and help the people, not your party.

PAUL RIECKHOFF, IRAN/AFGHAN VETERANS OF AMERICA: We heard from our members nationwide who are concerned. They're not going to get their checks. Disability checks, GI bill checks, retirement checks, even paychecks. We're hearing from people overseas who are on checkpoints in Iraq and Afghanistan who don't know what's going to happen if our country defaults.

STARR: Rieckhoff says White House officials stopped short of assuring vets groups that VA checks and military pay won't be interrupted. Officials at the Pentagon and the Department of Veterans Affair will only say that they hope it won't come to that. Online, Marie Wyatt offers her solution saying, wake up Washington. If you need money for the budget, try cutting your own pay.

Joe Himplemann is 70 percent disabled after three tours in the war zone. He worries about his September disability check.

JOE HIMPLEMANN, DISABLED VETERAN: That's a big concern to my wife and I who rely on our VA disability check as a portion of our income that we use for everyday expenses like a portion of the mortgage payment, child care, expenses for our son.

STARR: Sepehr Sepahrom also receives his 70 percent disability check.

SEPEHR SEPAHROM, DISABLED VETERAN: I would ask Mr. President the same thing that I would ask every senator or every congressman. Would you do the same thing that you're doing right now if you were in my shoes?

(END VIDEOTAPE) STARR: And Wolf, these veterans groups tell us, they just want some answers. They want a solution like so many Americans, and they don't want to become a football in this increasingly acrimonious debate -- Wolf.

BLITZER: Yes, it's clearly huge right now for not only them but for a lot of Americans. Barbara, thank you.

A new political ad attacking President Obama looks ahead to the last day of his presidency and paints a nightmare economic scene. We're going to show you the ad after the break in our "Strategy Session."

And on the offensive, Sarah Palin, you can hear what she said about President Obama that has fact checkers raising red flags. Stick around. You're in the SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: And let's get right to our "Strategy Session." Joining us, our CNN political contributor, the Republican strategist, Mary Matalin, and our CNN political contributor, Roland Martin.

Guys, thanks very much for coming in.

Let me start with this new Republican Party ad, this RNC ad, that just came out. I want to discuss it, but I'll play a little clip from it.

(BEGIN VIDEO CLIP)

UNIDENTIFIED MALE: Good morning. January 20, 2017. The last day of Barack Obama's eight years as president.

UNIDENTIFIED MALE: Eight tough years for many as unemployment continues climbing.

UNIDENTIFIED FEMALE: With debt to China reaching record levels, some analysts believe the Chinese have overtaken the United States.

UNIDENTIFIED MALE: Eight years ago, we were promised hope. Today, many believe their American dream has been lost.

(END VIDEO CLIP)

BLITZER: You see that little girl there. It's sort of like that Daisy ad that the Democrats used against Goldwater back, as a lot of you remember, back in 1964.

But go ahead, Roland, and react to that.

ROLAND MARTIN, CNN POLITICAL CONTRIBUTOR: Well, first of all, that could have been an ad the DNC put out January 17, 2009, after, of course, the tough last couple of years of President George W. Bush's years in office. Look, who cares about their ad. The most fundamental problem we're facing right now is that we have Republicans and Democrats who seem to don't understand the issue of compromise when it comes to debt ceiling.

Hopefully, both of them will understand the reality of spending, but also know how to put together a jobs plan that benefits all folks, not just the top two percent of wage earners here in the United States.

BLITZER: Why is the Republican Party, the RNC, Mary, putting out an ad like this right now?

MARY MATALIN, CNN CONTRIBUTOR: Because it's a reflection of how people feel right now. Sadly, Wolf, I do remember that 1964 ad. I also remember the 1980 Reagan question, are you better off today? That was at an all-time high when Reagan asked that same question that people think they are not better off today, 20 points higher. There's a 75 percent wrong track where the first generation that doesn't think we're going to leave the country as good for our kids as it was left to us.

So, it's a reflection of how people feel and have felt essentially since June 2009, and they've been in opposition to the Obama policies, which are creating more debt and fewer jobs. That is the reflection of today's opinion.

MARTIN: Tell you what, Wolf, when you look at the approval ratings of Congress, Republicans and Democrats far lower than a president, but I'm sure, a Democrat is saying, hey, RNC, we appreciate that because you're pretty much saying President Obama will get re- elected in November 2012.

BLITZER: It's a little fearful, but Rowland, you know, those of us who remember covering the government shutdown back in 1995 during the Clinton administration. I write about this in our blog at CNN.com/situationroom today. You know, he used that, Bill Clinton, very effectively the following year to get himself re-elected when they were emboldened Republicans and Newt Gingrich.

MARTIN: Of course.

BLITZER: Some Democrats are saying that this president could use the current stalemate with House Republicans effectively, but the big difference between then and now is the economy, because in 1995-1996, millions of jobs were being created. The economy was robust and that doesn't look very promising right now.

MARTIN: Well, first of all, the issue is not necessarily how the president uses a crisis. The question is, how will the American people determine who is working on behalf of them. And so, if you have Republicans right now, especially in the House, you got the catholic bishops coming out today against Speaker Boehner's plan. You got other Republicans. You got (INAUDIBLE).

You got people, Republicans, a study of committee of people getting yelled out for sending out e-mails trying to oppose it. The people say at the GOP, they were actually doing more to harm us than also be as president (ph). And so, it's really about what the American people, how they will react, not necessarily how president uses the crisis --

BLITZER: All right. Let me play a clip, because I want you to react to this, Mary. Sarah Palin, she may or may not be running for president. She was on Fox last night, and she was complaining about the president, the doomsday scenarios if the debt ceiling is not lifted, and then, she said this.

(BEGIN VIDEO CLIP)

SARAH PALIN, FORMER GOVERNOR OF ALASKA: Scaring the American people is exactly what President Obama is doing in that bizarre speech that he gave last night. It reminded me of when he insisted that TARP had to be passed, you know, it was life or death at that time also. We had to increase spending and the federal government or people would be starving on the streets. I mean, look at what TARP resulted in.

(END VIDEO CLIP)

BLITZER: I could be wrong, but she seems to be confusing President Obama with President Bush because it was President Bush back in October 2008 that was pushing TARP, not then-candidate Obama.

MATALIN: That is not only in her mind and the majority of Americans' mind, the conflation of that first Bush TARP which is $350 billion, which is chump change in Obama world. Obama added on to that. He added his own economic rescue plan at 700,000, and the GM bailout and the clunkers (ph) and the housing and the -- all of that adds up to an unsustainable deficit and unsustainable debt and no jobs.

So, yes, she did conflated, and people just love, love, love when Sarah gets one syllable that is incorrect, but expansion of government is laid squarely at the feet of President Obama. And Roland's right. The people out there, their hair is on fire. They don't like Republicans. They don't like Democrats, but they don't want more spending. They want less spending. They don't care how these guys come together. They want to stop spending (ph) in Washington.

MARTIN: Let me correct something, Wolf. First of all, when you talked about what President Obama did with GM, I'm sure the people will supply chain. The people who have those jobs in Ohio and Pennsylvania and Michigan, I'm sure they are satisfied with the jobs we're actually saying. So, what people complaining about jobs loss, those jobs were saved.

The last point, Sarah Palin makes a comment on Fox News. I really don't care on CNN what a Fox News analyst has to say. Unless, you decide what (ph) for president, who cares. She can says whatever she wants to, but it makes no sense me.

She has no skin in the game, and frankly, I would hope people who understand and compromise like President George H.W. Bush, Howard Baker, James Baker, I would hope they would step in, make comments, reasonable comments about pulling this country together and not just how the crazy folks out here make a ridiculous comments. We cannot afford to have this country go into default. So, I don't care what Sarah Palin frankly has to say.

BLITZER: I raised the issue, Mary, because a couple of weeks ago, you were here in the SITUATION ROOM, and you seemed to be concluding she's likely to run for the Republican presidential nomination.

MATALIN: I thought and I still think while she hasn't 100 percent made up her mind, she's sending more signals. But, the country cannot afford the silliness -- Roland is correct again, but it cannot afford and send a signal and Sarah -- the essence of her message has been will be she'll have an impact, whether or not she has skin in the game. It's not just stop spending, but reform our debt structure, reform these entitlements or we're going to have the kind of future that's envisioned in that RNC commercial.

MARTIN: And reminder, Wolf, $3.3 trillion, Bush tax cuts contributed to our deficit over the 10 years according to CBO, and so, frankly, both sides have to own, up and they have both contributed to this problem.

BLITZER: Roland and Mary, guys, thanks very for coming in.

He is the republican leader going head-to-head with the president over the debt crisis. I had a closer look at the political rise of the House Speaker John Boehner.

And Jack Cafferty is asking, when it comes to the debt ceiling crisis, why won't the government listen to the American people? You're e-mail and Jack next.

(COMMERCIAL BREAK)

BLITZER: Travelers got unexpected news today. Lisa Sylvester is back monitoring that and some of the other top stories in the SITUATION ROOM.

What's going on?

LISA SYLVESTER, CNN CORRESPONDENT: Well, Wolf, Continental and United Airlines, which recently merged, canceled 24 flights today because of pilot sickouts. The airlines say pilots started calling in right as the company is negotiating a collective bargaining agreement with pilots. The Airline Pilots Association has no comment on the sickouts. New York and Newark, New Jersey were hardest hit by the cancellations.

And the unanimous show of support in the Senate for FBI director, Robert Muller. Today, members voted a 100 to 0 to keep Mueller in office for another two years, extending a term that had been set to expire August 2nd. Today's confirmation vote makes Mueller the longest serving FBI chief since J. Edgar Hoover. Norway's Prime Minister says an independent commission is being set up to examine the brutal attacks which left at least 76 people dead. A suspect is custody and has admitted to carrying out the siege. Meanwhile, in New York, a bell given to Manhattan after the 9/11 attacks rang out today in memory. It's very sad, sad story.

BLITZER: Thanks very much.

Jack is back. He's got "The Cafferty File" -- Jack.

CAFFERTY: The question this hour is: When it comes to the debt ceiling crisis, why won't our government listen to the American people?

Mike in Texas says, "Our elected officials never listen to the people. Republicans think their number one job is to make President Obama a one-term president. The Tea Party congressmen think they were elected to shut down the government and get rid of all the social safety nets. And the Democrats think they were sent to Washington to cave in to any stiff opposition without a fight. They are all clueless."

Lou writes, "Because Americans don't vote in enough numbers to make a difference. If every citizen who ever griped about how dysfunction our government was actually showed up at the polls, we would have leaders who responded to our needs."

Carlos writes from Pasadena, California, "Whether you are for or against Obama and the Democrats, it doesn't matter. What matters is that if you're like me who paid his way to save for his retirement, you should be very concerned. A default will jeopardize, in my case my IRAs, my teacher's pension, my wife's pension and her Social Security. Whether you believe it or not, the middle class is on the verge of extinction."

Victoria says, "Why don't they listen? Because they're too involved in finding ways to enrich themselves to understand, much less care about the rest of us. In all the pontificating that's going on, I haven't heard one of them suggest that they cut their own salaries, benefits or staff. It wouldn't make a big difference in terms of reducing the deficit, but it will show that they're willing to do some of what they're imposing on the rest of us. Just a thought."

Mike in Brooklyn, "Because the number one priority of the conservative agenda is to assure that President Obama is a one-term president. The loss of a AAA of U.S. Treasury bonds would be a great achievement for the Republicans running the country -- ruining the country -- I should say is a necessary casualty."

And Nate in North Carolina says, "Naturally, when a third party intervenes in an argument between two other parties, it becomes the common enemy. We, the American people, are like the only child yelling at its dysfunctional parents."

If you want to read more on this, you'll find it on my blog, CNN.com/caffertyfile -- Wolf. BLITZER: Jack, thanks very much.