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Rumsfeld Addresses Troops in Baghdad; Pilgrims Return to Bethlehem; Homeland Security Faces Tough Challenges Ahead; Retailers Counting on Last Minute Shoppers

Aired December 24, 2004 - 13:00   ET

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

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


DONALD RUMSFELD, SECRETARY OF DEFENSE: ... The soccer stadium is being used for soccer instead of beheading people. So the accomplishment in Afghanistan was a truly breath taking experience. I was there for the inauguration.
(LIVE EVENT: RUMSFELD SPEECH)

RUMSFELD: We've got wonderful people working on it, and I'm here just simply look you in the eye and say thank you, every one of you. God bless you.

MILES O'BRIEN, CO-HOST: The secretary of defense, Donald Rumsfeld, recorded within the past couple of hours at a place called Camp Victory near Baghdad at a mess hall in the wake of that Mosul bombing. Let's listen back in. He's saying a few more things.

RUMSFELD: ... but I did today, and I'm glad I did.

O'BRIEN: What you missed was the secretary of defense said he doesn't do hats. Apparently, he was offered one of the unit hats there.

In any case, giving a speech which was pretty much almost word for word what he has said at several previous locations on his whirlwind Christmas Eve visit to buck up the troops there in Iraq, particularly in the wake of that Mosul suicide bombing.

The secretary of defense schedule obviously not being publicly released. These pictures gathered a few hours ago and for security purposes, obviously, not covering this particular trip live.

Now the Pentagon says today's trip was planned before Tuesday's attack in Mosul, which we've been telling you so much about. Nevertheless, it has a tremendous public relations effect.

And joining me now to tell us a little more about this is Brigadier General James Marks. He is in Washington for us.

General Marks, are you with us?

BRIG. GEN. JAMES MARKS (RET.), U.S. ARMY: I am, Miles.

O'BRIEN: I don't know if you were able to hear the speech.

MARKS: I could. O'BRIEN: You've heard similar words at previous stops. I'm curious what the troops think about these kinds of visits. Do they kind of -- does it really have an effect on morale or is it just looked at with a bit of cynicism or skepticism at least?

MARKS: No, the troops love it. They truly do. Frankly, they don't have enough time to be skeptical or cynical about visits like that. When their civilian leadership shows up, they appreciate it.

And I know the secretary appreciates being in their presence as well. And he demonstrated that.

O'BRIEN: Nevertheless, there are obviously some big issues to contend with over there. The specific issue of securing force protection is what it is called comes back time and time again, no matter which way you slice it, to the issue of the number of troops on the ground in Iraq.

What's your feeling on that? Are you -- do you go along with the secretary in the sense that there are enough troops there now or do you go with some others who would tell you that we're way shy of what is necessary there?

MARKS: Well, the civilian leadership has indicated that they thought there wasn't enough force presence. There wasn't enough ground forces, whether those were coalition forces or U.S. or other contributing nations. In that they increased the total number from about 130,000-plus to about 151,000 today.

So the acknowledgment is that in advance of the elections and as the circumstances present themselves, in order to dominate the terrain, they're going to have to increase the numbers, and they have.

O'BRIEN: Well, yes, but those -- those aren't big numbers. There are some who suggest double the number of troops there is really what we're talking about in order to maintain some measure of security and stamp out this insurgency and really make it possible to have an election that someone could say is truly fair.

MARKS: Well, between now and the elections, any increase you're going to see would be moderate, I would think. But I think the decision's been made that the number has been reached.

Now your question gets to the heart of, does the top line of the army or the Marine Corps, has it been reached? Does it need to expand? In order to keep dipping back into the well and bringing those same soldiers and leaders and Marines back into theater and ask them to perform these great missions that they perform. Do we have enough?

Or is the operational tempo so great that we might see some fraying and breaking of the force as we move down the road? That's the real issue here.

O'BRIEN: Final thought here. What's your biggest concern right now on the specific issue of force protection? Are we likely to see copycat attempts, and is that a big concern of yours and others?

MARKS: I would think a copycat attempt is a legitimate concern. In fact, Brigadier General Carter Ham up in Mosul indicated that that's a concern of his. And he's obviously talking to his intelligence professionals and getting that type of counsel.

I don't know if it's a copycat because, frankly, our enemies are very adaptive. And I don't know that they would try to do the same thing.

But where you have the mixing of Iraqi forces and other coalition forces and U.S. forces, you're also going to have some challenges like you saw up in Mosul. And you'd open hope that you could prevent a tragedy like what occurred just a couple of days ago.

O'BRIEN: Yes, we would. Brigadier General James Marks, thanks per your time on this Christmas Eve.

MARKS: Thank you, Miles.

O'BRIEN: We appreciate it -- Kyra.

KYRA PHILLIPS, CO-HOST: Christmas in the holy land still a far cry from the picture of St. City (ph) and merriment the faithful long to revisit. But a welcome break from recent years marred by violence, blockades and dread.

CNN's John Vause is in the little town of Bethlehem.

How's the -- how -- I guess, what's the energy like, John?

JOHN VAUSE, CNN CORRESPONDENT: Hi, Kyra.

Well, it's a little rainy and it's a little cold here on this Christmas Eve in Bethlehem. But still, there's a few hundred people in Manger Square right now. They've got their umbrellas up. They're listening to the choirs. And everyone here is getting ready for midnight mass, which is now just a few hours away.

And we're also told that this year there's actually a few thousand pilgrims here. Now, their numbers are way up on previous years. Still nothing like the tens of thousands who would gather here before the outbreak of violence four years ago.

But their numbers are good news for the people of Bethlehem. It's a town which survives on tourism, and that's an industry which has taken a huge hit over the last years. The mayor tells us that unemployment is around 60 percent. The incomes here have fallen dramatically over the last two years.

And also the Palestinians say, well, that is good news. There is still bad news in all of this. And they point to the barrier, which Israel is building around this city, a barrier which Israel says is necessary to stop suicide bombers and other militant attacks. But Palestinians here say they'll just turn this holy city into nothing more than a prison. But there is a little flicker of hope, a sense of optimism that maybe next year in the coming months the Israelis and the Palestinians will start working towards the peace negotiation.

And a significant sign in all of this, Kyra. Over the last three years, there's been an empty seat in the front row at midnight mass. That seat was reserved for Yasser Arafat while he was confined to his West Bank compound. But this year there will be no open seat.

In fact, Mahmoud Abbas, the man widely seen as the one who will take Yasser Arafat's place as president of the Palestinian Authority, he will be attending the services -- Kyra.

PHILLIPS: John Vause, live from Bethlehem, thanks so much -- Miles.

O'BRIEN: The Department of Homeland Security, arguably the most important of all federal agencies these days, and in charge of guarding our airports and borders. What's the mood, though, inside the department, with the change in leadership on the way? We'll talk to a man who recently served as a deputy adviser there, up next on LIVE FROM.

ALLAN CHERNOFF, CNN CORRESPONDENT: Last-minute shopping rush is well under way, and we'll have details of how people are planning to meet their deadlines. Coming straight ahead.

ANNOUNCER: You're watching LIVE FROM on CNN, the most trusted name in news.

(COMMERCIAL BREAK)

PHILLIPS: Well, it's been a roller coaster of a month in the Department of Homeland Security. Although Tom Ridge's resignation on November 30 was not a surprise, no one predicted that New York's former top cop, Bernard Kerik, would fall through the trap door of personal scandal.

So what happens next for a department on the frontlines of the war on terror? We've got an insider's point of view from a man who served as deputy adviser to the department until this past May.

Richard Falkenrath joins us now, live from Princeton.

Richard, good to see you.

RICHARD FALKENRATH, FORMER DEPUTY ADVISER, HOMELAND SECURITY DEPARTMENT: Hi, Kyra.

PHILLIPS: Well, I definitely want to get right to the challenges. For whoever takes this post, number within challenge, what do you think, the grant money?

FALKENRATH: Well, grant money is a management problem. We've got to get about $4 billion of grants out to state and local public safety agencies each year. And there is no way to keep everybody happy and at the same time spend the money wisely.

As you know, the department recently announced a number of additional grants for large cities. The rural areas tend not to like that very much. But the money has got to go, and it's the right way to allocate it.

PHILLIPS: Do you think there are cities at risk? Do you think there are, particularly, big cities that are not getting the money or the monies that they need for fire, police, first responders?

FALKENRATH: Well, everybody is getting some money. Nobody says they're getting enough money. From the federal government's point of view, with a finite amount of resources, it makes sense to allocate it primarily to the largest urban areas, since that's where you have the densest concentration of people, the densest concentration of critical infrastructure and the most likely areas to be hit with a subsequent attack.

PHILLIPS: All right. Let's talk about screening at the airports. Something we can all relate to, from the long lines to the pat down. There were a number of complaints about that, specifically from female travelers.

How are we doing? Is it good enough? Does it need to be improved? Where are the gaps?

FALKENRATH: Well, we're doing a lot better than we were pre- 9/11. The quality of screening of passengers and checked bags today is a far cry removed from what it was pre-9/11.

It is inconvenient. I myself, as a private citizen, now experience inconvenience, and it's no fun. But we're getting a much better level of security.

The things we need to do in the future are improve the checking of manifests against our terrorism watch lists. That's not really happening right now. There is a program to do it by the end of the year.

And also to start screening the air cargo that flies in the bottom of passenger aircrafts for possible explosives.

O'BRIEN: You know, you mentioned the watch list. There's been a lot of criticism about that watch list. A lot of individuals with Middle Eastern names coming forward and saying, "All right. I had to go through a tough time, and I didn't have to go through that. Why should I go through that?"

FALKENRATH: Well, it is tough. There are false hits, people whose names are similar to people whose -- who are on the name. But we need to have an integrated watch list in this country. We do. We spend billions of dollars trying to acquire the names and date of births of possible terrorists. And we need to apply that information wherever we can.

The public would never forgive the government if we had a name of a terrorist who then traveled on his own name and carried out an attack, as the 9/11 hijackers did. So that's why we use watch lists at points of entry and on airports.

PHILLIPS: So Richard, the next head of homeland security, is there someone you would like to see take that post? If there isn't a specific individual, what type of person does it need to be?

FALKENRATH: It's a very tough job. I don't have any particular favorite. It's the president's favorite who matters. The person should be politically skilled, be able to maintain the trust and confidence of the American people in a crisis and be able to manage a very complex department at a time when it is still forming and it's still taking up.

The department has made a lot more progress than I, frankly, expected it to three years ago when we set it up. I'm proud of what they're doing, but there's a lot more that needs to be done. Whoever gets that job has got a tough job ahead of them.

PHILLIPS: Biological and nuclear threats. We haven't talked about that in awhile. What do you think? Is there a gap there? Do we need to be concerned?

FALKENRATH: Well, if a terrorist were to acquire a biological weapon or nuclear weapon, they'd have the ability to cause catastrophic damage against our society, damage well beyond what occurred on 9/11. So that is an enormous fear that we all have.

The probability of that happening is probably somewhat lower than a conventional attack. But the consequences are so high that we have to take it seriously.

We've got a pretty good program going on the biodefense side. About $6 billion a year that was not being sent pre-9/11 now is. On the nuclear side, we've got more to do. And I expect there will be a lot of new initiatives in that area in the coming year, particularly the deployment of nuclear sensors around cities and at our points of entry at our borders.

PHILLIPS: Former deputy adviser to homeland security, Richard Falkenrath. Pleasure to have you today. Thank you so much.

FALKENRATH: Thank you, Kyra.

PHILLIPS: You bet -- Miles.

O'BRIEN: Cleaning up and digging out of the Midwest. The snow has stopped falling, but the cold temperatures are sticking around through Christmas. How high and how low will it be around the U.S. for the holiday? We'll have the answers for you, coming up.

And after the attack in Mosul, can U.S. troops trust the Iraqis? We'll ask the Iraqi deputy representative to the U.N. about that. And we'll ask about the oil-for-food scandal, as well. Stay with us.

(BEGIN VIDEO CLIP) UNIDENTIFIED MALE: Hello, Albany. Merry Christmas and season's greetings from the camp here in Kuwait from the 42nd Infantry Division. Hi, Kathy; hi, Elizabeth; hi, Rachel. I miss you a lot. Merry Christmas. Enjoy the holidays and I'll see you soon.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

O'BRIEN: Hey, forget the sleigh bells. Retailers are keeping their ears on the cash registers this time of year.

Despite generally softer sales so far, there are good reasons to expect strong numbers when all the counting is done, and that won't come, of course, until after Christmas.

CNN's Allan Chernoff is at a consumer Mecca, Short Hills, New Jersey, to explain what's up there.

How can be so certain, Alan, that things are going to turn around for retailers?

CHERNOFF: Well, certainly here things are going to do just fine. In fact, Miles, you might say this is the Mecca and Medina of shopping, a shopper's paradise here.

This is one of the toniest malls in the New York metropolitan area. And the manager here tells me that sales this year are up six to seven percent compared to the same period a year ago. So they're doing just fine, thank you, over here.

Other retailers at the mid-level and certainly at the discount level, they're having a very challenging holiday season. Lots of department stores are talking about gains in the very low single digits.

Wal-Mart, for example, has said sale increases may be as little as one percent this December compared to last December.

And it's clearly the higher cost of gasoline that is impacting the discount shoppers. There's no question about that. The higher cost of energy, plus higher medical expenses -- Miles.

O'BRIEN: So Allan, how do you explain the relative success at these tony places, all these expensive handbags and lotions and potions and so forth?

CHERNOFF: Yes, well, certainly the upscale shoppers, they are not impacted all that much by the higher price of gasoline, which, by the way, is up about 20 percent from last year. They're spending quite freely.

Cashmere sweaters. You mentioned handbags. They're very popular. You know, it seems the top line, they don't really suffer all that much, the people at the top end. They're always out there spending. It's really more the middle income, the lower income folks. They make the difference year over year.

And, remember, also this has been a pretty strong year on Wall Street. We're having a strong end to the year. And a lot of folks who work on Wall Street live around here, and they're anticipating big bonuses, as well. So they're spending some of that bonus in advance.

O'BRIEN: All right. So what you're talking about, though, is the very, very top -- the top of the bottle, if you will. In order for retailers to declare victory, though, they have to win the middle and low range, don't they?

CHERNOFF: Yes, certainly that's -- that's very important. And what we have seen this year is aggressive discounting. In fact, right after Thanksgiving, Wal-Mart conceded, "You know, we didn't even discount enough." And they said, "You know what? We're going to cut our prices even more."

You've seen very aggressive discounting, No. 1. And No. 2, the retailers this year did not carry very large inventories going into the holiday season. So, of course, you're going to have those fantastic sales right after Christmas. But analysts are saying that the inventory will not be that large.

So if you're thinking of trying to get some bargains right after the holiday, you probably want to get over to the mall, get what you can, because the inventory likely is not going to last all that long, as much as it has in years past.

O'BRIEN: Quick final thought. Have you done your shopping?

CHERNOFF: I'm all taken care of, Miles. I'm not a huge shopper, but I'm set. I can stand here very comfortably, unlike a lot of the men in this mall, who are running around with great anxiety.

O'BRIEN: I know that pain ever too well. Allan Chernoff, not going to do it this year, though. Got it all done.

Kyra, you did yours in June, right?

PHILLIPS: Absolutely. I was done last year, Miles. Always looking forward. I'll share your gift in just a few minutes.

Well, of course, last-minute shoppers in the Midwest may have to cut out pictures of what they had planned to buy and put them under the tree along with an IOU, for after all the snow, well, when it melts.

Detroit got dumped on with up to 10 inches of snow, bringing travel headaches for some and driveway detail for others.

In Ohio, hundreds of thousands of people still without power and may not have electricity until Sunday.

Bad news for Big Lots employees around the country. The checks were on planes grounded in Wilmington, Ohio.

CNN's Orelon Sidney joins us with more on the snowball effect of winter storms and holiday shopping, holiday travel.

I hope you got your paycheck, Orelon.

ORELON SIDNEY, CNN METEOROLOGIST: Well, we'll see. I don't know just yet.

(WEATHER REPORT)

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Aired December 24, 2004 - 13:00   ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
DONALD RUMSFELD, SECRETARY OF DEFENSE: ... The soccer stadium is being used for soccer instead of beheading people. So the accomplishment in Afghanistan was a truly breath taking experience. I was there for the inauguration.
(LIVE EVENT: RUMSFELD SPEECH)

RUMSFELD: We've got wonderful people working on it, and I'm here just simply look you in the eye and say thank you, every one of you. God bless you.

MILES O'BRIEN, CO-HOST: The secretary of defense, Donald Rumsfeld, recorded within the past couple of hours at a place called Camp Victory near Baghdad at a mess hall in the wake of that Mosul bombing. Let's listen back in. He's saying a few more things.

RUMSFELD: ... but I did today, and I'm glad I did.

O'BRIEN: What you missed was the secretary of defense said he doesn't do hats. Apparently, he was offered one of the unit hats there.

In any case, giving a speech which was pretty much almost word for word what he has said at several previous locations on his whirlwind Christmas Eve visit to buck up the troops there in Iraq, particularly in the wake of that Mosul suicide bombing.

The secretary of defense schedule obviously not being publicly released. These pictures gathered a few hours ago and for security purposes, obviously, not covering this particular trip live.

Now the Pentagon says today's trip was planned before Tuesday's attack in Mosul, which we've been telling you so much about. Nevertheless, it has a tremendous public relations effect.

And joining me now to tell us a little more about this is Brigadier General James Marks. He is in Washington for us.

General Marks, are you with us?

BRIG. GEN. JAMES MARKS (RET.), U.S. ARMY: I am, Miles.

O'BRIEN: I don't know if you were able to hear the speech.

MARKS: I could. O'BRIEN: You've heard similar words at previous stops. I'm curious what the troops think about these kinds of visits. Do they kind of -- does it really have an effect on morale or is it just looked at with a bit of cynicism or skepticism at least?

MARKS: No, the troops love it. They truly do. Frankly, they don't have enough time to be skeptical or cynical about visits like that. When their civilian leadership shows up, they appreciate it.

And I know the secretary appreciates being in their presence as well. And he demonstrated that.

O'BRIEN: Nevertheless, there are obviously some big issues to contend with over there. The specific issue of securing force protection is what it is called comes back time and time again, no matter which way you slice it, to the issue of the number of troops on the ground in Iraq.

What's your feeling on that? Are you -- do you go along with the secretary in the sense that there are enough troops there now or do you go with some others who would tell you that we're way shy of what is necessary there?

MARKS: Well, the civilian leadership has indicated that they thought there wasn't enough force presence. There wasn't enough ground forces, whether those were coalition forces or U.S. or other contributing nations. In that they increased the total number from about 130,000-plus to about 151,000 today.

So the acknowledgment is that in advance of the elections and as the circumstances present themselves, in order to dominate the terrain, they're going to have to increase the numbers, and they have.

O'BRIEN: Well, yes, but those -- those aren't big numbers. There are some who suggest double the number of troops there is really what we're talking about in order to maintain some measure of security and stamp out this insurgency and really make it possible to have an election that someone could say is truly fair.

MARKS: Well, between now and the elections, any increase you're going to see would be moderate, I would think. But I think the decision's been made that the number has been reached.

Now your question gets to the heart of, does the top line of the army or the Marine Corps, has it been reached? Does it need to expand? In order to keep dipping back into the well and bringing those same soldiers and leaders and Marines back into theater and ask them to perform these great missions that they perform. Do we have enough?

Or is the operational tempo so great that we might see some fraying and breaking of the force as we move down the road? That's the real issue here.

O'BRIEN: Final thought here. What's your biggest concern right now on the specific issue of force protection? Are we likely to see copycat attempts, and is that a big concern of yours and others?

MARKS: I would think a copycat attempt is a legitimate concern. In fact, Brigadier General Carter Ham up in Mosul indicated that that's a concern of his. And he's obviously talking to his intelligence professionals and getting that type of counsel.

I don't know if it's a copycat because, frankly, our enemies are very adaptive. And I don't know that they would try to do the same thing.

But where you have the mixing of Iraqi forces and other coalition forces and U.S. forces, you're also going to have some challenges like you saw up in Mosul. And you'd open hope that you could prevent a tragedy like what occurred just a couple of days ago.

O'BRIEN: Yes, we would. Brigadier General James Marks, thanks per your time on this Christmas Eve.

MARKS: Thank you, Miles.

O'BRIEN: We appreciate it -- Kyra.

KYRA PHILLIPS, CO-HOST: Christmas in the holy land still a far cry from the picture of St. City (ph) and merriment the faithful long to revisit. But a welcome break from recent years marred by violence, blockades and dread.

CNN's John Vause is in the little town of Bethlehem.

How's the -- how -- I guess, what's the energy like, John?

JOHN VAUSE, CNN CORRESPONDENT: Hi, Kyra.

Well, it's a little rainy and it's a little cold here on this Christmas Eve in Bethlehem. But still, there's a few hundred people in Manger Square right now. They've got their umbrellas up. They're listening to the choirs. And everyone here is getting ready for midnight mass, which is now just a few hours away.

And we're also told that this year there's actually a few thousand pilgrims here. Now, their numbers are way up on previous years. Still nothing like the tens of thousands who would gather here before the outbreak of violence four years ago.

But their numbers are good news for the people of Bethlehem. It's a town which survives on tourism, and that's an industry which has taken a huge hit over the last years. The mayor tells us that unemployment is around 60 percent. The incomes here have fallen dramatically over the last two years.

And also the Palestinians say, well, that is good news. There is still bad news in all of this. And they point to the barrier, which Israel is building around this city, a barrier which Israel says is necessary to stop suicide bombers and other militant attacks. But Palestinians here say they'll just turn this holy city into nothing more than a prison. But there is a little flicker of hope, a sense of optimism that maybe next year in the coming months the Israelis and the Palestinians will start working towards the peace negotiation.

And a significant sign in all of this, Kyra. Over the last three years, there's been an empty seat in the front row at midnight mass. That seat was reserved for Yasser Arafat while he was confined to his West Bank compound. But this year there will be no open seat.

In fact, Mahmoud Abbas, the man widely seen as the one who will take Yasser Arafat's place as president of the Palestinian Authority, he will be attending the services -- Kyra.

PHILLIPS: John Vause, live from Bethlehem, thanks so much -- Miles.

O'BRIEN: The Department of Homeland Security, arguably the most important of all federal agencies these days, and in charge of guarding our airports and borders. What's the mood, though, inside the department, with the change in leadership on the way? We'll talk to a man who recently served as a deputy adviser there, up next on LIVE FROM.

ALLAN CHERNOFF, CNN CORRESPONDENT: Last-minute shopping rush is well under way, and we'll have details of how people are planning to meet their deadlines. Coming straight ahead.

ANNOUNCER: You're watching LIVE FROM on CNN, the most trusted name in news.

(COMMERCIAL BREAK)

PHILLIPS: Well, it's been a roller coaster of a month in the Department of Homeland Security. Although Tom Ridge's resignation on November 30 was not a surprise, no one predicted that New York's former top cop, Bernard Kerik, would fall through the trap door of personal scandal.

So what happens next for a department on the frontlines of the war on terror? We've got an insider's point of view from a man who served as deputy adviser to the department until this past May.

Richard Falkenrath joins us now, live from Princeton.

Richard, good to see you.

RICHARD FALKENRATH, FORMER DEPUTY ADVISER, HOMELAND SECURITY DEPARTMENT: Hi, Kyra.

PHILLIPS: Well, I definitely want to get right to the challenges. For whoever takes this post, number within challenge, what do you think, the grant money?

FALKENRATH: Well, grant money is a management problem. We've got to get about $4 billion of grants out to state and local public safety agencies each year. And there is no way to keep everybody happy and at the same time spend the money wisely.

As you know, the department recently announced a number of additional grants for large cities. The rural areas tend not to like that very much. But the money has got to go, and it's the right way to allocate it.

PHILLIPS: Do you think there are cities at risk? Do you think there are, particularly, big cities that are not getting the money or the monies that they need for fire, police, first responders?

FALKENRATH: Well, everybody is getting some money. Nobody says they're getting enough money. From the federal government's point of view, with a finite amount of resources, it makes sense to allocate it primarily to the largest urban areas, since that's where you have the densest concentration of people, the densest concentration of critical infrastructure and the most likely areas to be hit with a subsequent attack.

PHILLIPS: All right. Let's talk about screening at the airports. Something we can all relate to, from the long lines to the pat down. There were a number of complaints about that, specifically from female travelers.

How are we doing? Is it good enough? Does it need to be improved? Where are the gaps?

FALKENRATH: Well, we're doing a lot better than we were pre- 9/11. The quality of screening of passengers and checked bags today is a far cry removed from what it was pre-9/11.

It is inconvenient. I myself, as a private citizen, now experience inconvenience, and it's no fun. But we're getting a much better level of security.

The things we need to do in the future are improve the checking of manifests against our terrorism watch lists. That's not really happening right now. There is a program to do it by the end of the year.

And also to start screening the air cargo that flies in the bottom of passenger aircrafts for possible explosives.

O'BRIEN: You know, you mentioned the watch list. There's been a lot of criticism about that watch list. A lot of individuals with Middle Eastern names coming forward and saying, "All right. I had to go through a tough time, and I didn't have to go through that. Why should I go through that?"

FALKENRATH: Well, it is tough. There are false hits, people whose names are similar to people whose -- who are on the name. But we need to have an integrated watch list in this country. We do. We spend billions of dollars trying to acquire the names and date of births of possible terrorists. And we need to apply that information wherever we can.

The public would never forgive the government if we had a name of a terrorist who then traveled on his own name and carried out an attack, as the 9/11 hijackers did. So that's why we use watch lists at points of entry and on airports.

PHILLIPS: So Richard, the next head of homeland security, is there someone you would like to see take that post? If there isn't a specific individual, what type of person does it need to be?

FALKENRATH: It's a very tough job. I don't have any particular favorite. It's the president's favorite who matters. The person should be politically skilled, be able to maintain the trust and confidence of the American people in a crisis and be able to manage a very complex department at a time when it is still forming and it's still taking up.

The department has made a lot more progress than I, frankly, expected it to three years ago when we set it up. I'm proud of what they're doing, but there's a lot more that needs to be done. Whoever gets that job has got a tough job ahead of them.

PHILLIPS: Biological and nuclear threats. We haven't talked about that in awhile. What do you think? Is there a gap there? Do we need to be concerned?

FALKENRATH: Well, if a terrorist were to acquire a biological weapon or nuclear weapon, they'd have the ability to cause catastrophic damage against our society, damage well beyond what occurred on 9/11. So that is an enormous fear that we all have.

The probability of that happening is probably somewhat lower than a conventional attack. But the consequences are so high that we have to take it seriously.

We've got a pretty good program going on the biodefense side. About $6 billion a year that was not being sent pre-9/11 now is. On the nuclear side, we've got more to do. And I expect there will be a lot of new initiatives in that area in the coming year, particularly the deployment of nuclear sensors around cities and at our points of entry at our borders.

PHILLIPS: Former deputy adviser to homeland security, Richard Falkenrath. Pleasure to have you today. Thank you so much.

FALKENRATH: Thank you, Kyra.

PHILLIPS: You bet -- Miles.

O'BRIEN: Cleaning up and digging out of the Midwest. The snow has stopped falling, but the cold temperatures are sticking around through Christmas. How high and how low will it be around the U.S. for the holiday? We'll have the answers for you, coming up.

And after the attack in Mosul, can U.S. troops trust the Iraqis? We'll ask the Iraqi deputy representative to the U.N. about that. And we'll ask about the oil-for-food scandal, as well. Stay with us.

(BEGIN VIDEO CLIP) UNIDENTIFIED MALE: Hello, Albany. Merry Christmas and season's greetings from the camp here in Kuwait from the 42nd Infantry Division. Hi, Kathy; hi, Elizabeth; hi, Rachel. I miss you a lot. Merry Christmas. Enjoy the holidays and I'll see you soon.

(END VIDEO CLIP)

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O'BRIEN: Hey, forget the sleigh bells. Retailers are keeping their ears on the cash registers this time of year.

Despite generally softer sales so far, there are good reasons to expect strong numbers when all the counting is done, and that won't come, of course, until after Christmas.

CNN's Allan Chernoff is at a consumer Mecca, Short Hills, New Jersey, to explain what's up there.

How can be so certain, Alan, that things are going to turn around for retailers?

CHERNOFF: Well, certainly here things are going to do just fine. In fact, Miles, you might say this is the Mecca and Medina of shopping, a shopper's paradise here.

This is one of the toniest malls in the New York metropolitan area. And the manager here tells me that sales this year are up six to seven percent compared to the same period a year ago. So they're doing just fine, thank you, over here.

Other retailers at the mid-level and certainly at the discount level, they're having a very challenging holiday season. Lots of department stores are talking about gains in the very low single digits.

Wal-Mart, for example, has said sale increases may be as little as one percent this December compared to last December.

And it's clearly the higher cost of gasoline that is impacting the discount shoppers. There's no question about that. The higher cost of energy, plus higher medical expenses -- Miles.

O'BRIEN: So Allan, how do you explain the relative success at these tony places, all these expensive handbags and lotions and potions and so forth?

CHERNOFF: Yes, well, certainly the upscale shoppers, they are not impacted all that much by the higher price of gasoline, which, by the way, is up about 20 percent from last year. They're spending quite freely.

Cashmere sweaters. You mentioned handbags. They're very popular. You know, it seems the top line, they don't really suffer all that much, the people at the top end. They're always out there spending. It's really more the middle income, the lower income folks. They make the difference year over year.

And, remember, also this has been a pretty strong year on Wall Street. We're having a strong end to the year. And a lot of folks who work on Wall Street live around here, and they're anticipating big bonuses, as well. So they're spending some of that bonus in advance.

O'BRIEN: All right. So what you're talking about, though, is the very, very top -- the top of the bottle, if you will. In order for retailers to declare victory, though, they have to win the middle and low range, don't they?

CHERNOFF: Yes, certainly that's -- that's very important. And what we have seen this year is aggressive discounting. In fact, right after Thanksgiving, Wal-Mart conceded, "You know, we didn't even discount enough." And they said, "You know what? We're going to cut our prices even more."

You've seen very aggressive discounting, No. 1. And No. 2, the retailers this year did not carry very large inventories going into the holiday season. So, of course, you're going to have those fantastic sales right after Christmas. But analysts are saying that the inventory will not be that large.

So if you're thinking of trying to get some bargains right after the holiday, you probably want to get over to the mall, get what you can, because the inventory likely is not going to last all that long, as much as it has in years past.

O'BRIEN: Quick final thought. Have you done your shopping?

CHERNOFF: I'm all taken care of, Miles. I'm not a huge shopper, but I'm set. I can stand here very comfortably, unlike a lot of the men in this mall, who are running around with great anxiety.

O'BRIEN: I know that pain ever too well. Allan Chernoff, not going to do it this year, though. Got it all done.

Kyra, you did yours in June, right?

PHILLIPS: Absolutely. I was done last year, Miles. Always looking forward. I'll share your gift in just a few minutes.

Well, of course, last-minute shoppers in the Midwest may have to cut out pictures of what they had planned to buy and put them under the tree along with an IOU, for after all the snow, well, when it melts.

Detroit got dumped on with up to 10 inches of snow, bringing travel headaches for some and driveway detail for others.

In Ohio, hundreds of thousands of people still without power and may not have electricity until Sunday.

Bad news for Big Lots employees around the country. The checks were on planes grounded in Wilmington, Ohio.

CNN's Orelon Sidney joins us with more on the snowball effect of winter storms and holiday shopping, holiday travel.

I hope you got your paycheck, Orelon.

ORELON SIDNEY, CNN METEOROLOGIST: Well, we'll see. I don't know just yet.

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