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The Situation Room

New Bailout Mystery; Awaiting President Obama; Risks of Spending $1 Trillion

Aired March 19, 2009 - 16:00   ET

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

WOLF BLITZER, CNN ANCHOR: Happening now, President Obama, he's moving quickly, facing taxpayers with a plan to give billions to the auto industry. We're standing by for his live event in California. And guess what? He's going to have some Republican muscle by his side, the governor, Arnold Schwarzenegger.

We'll have live coverage.

Another bailout shocker. More than a dozen companies that have accepted federal money owe millions of dollars of back taxes. This hour, the mystery over how this happened and which companies haven't paid up.

And the new homeland security secretary firing back at Dick Cheney. In our exclusive interview, Janet Napolitano says the former vice president is flat-out wrong. Their feud over your safety.

I'm Wolf Blitzer in CNN's command center for breaking news, politics, and extraordinary reports from around the world.

You're in THE SITUATION ROOM.

Right now, 13 companies are the newest targets of shock and disgust. They got billions in federal bailout money and now we've learned they owe $220 million in back taxes. But wait, it gets worse. Exactly which companies broke the public trust in such a disturbing way? Not even Congress knows. It's a new bailout mystery, and CNN is right now on the case.

Our White House Correspondent Dan Lothian is here. He's got more on this outrage that's going on.

Dan, what do you know?

DAN LOTHIAN, CNN WHITE HOUSE CORRESPONDENT: It really is. You know, if you had unpaid taxes, the IRS would come down very hard, would track you down, garnish your wages until you paid up. Well, in this case, you have companies that had unpaid taxes and they still got bailout money.

(BEGIN VIDEOTAPE)

LOTHIAN (voice-over): It's another stunning revelation coming from Capitol Hill. Companies that have received billions of dollars in bailout money owe hundreds of millions in taxes, and the federal government apparently didn't know. Oops. REP. JOHN LEWIS (D), GEORGIA: We found that 13 of them owed more than $220 million in unpaid federal taxes. Two companies owed over $100 million each. How can this be?

LOTHIAN: Outrage coming from Representative John Lewis, who made all this public during a hearing. Oversight of the federal bailout is part of his portfolio.

LEWIS: Taxpayers have no sense that there is any control over this money. They have no idea what, if anything, they would get in return. This entire program is based on trust, trust in the giver and trust in the takers.

LOTHIAN: But trust in Washington is being tested. The AIG bonus scandal, who knew what and when? And who was behind the loophole that allowed it?

Now this. Representative Lewis says companies received bailout money are required to show their tax payments are current, but he added that the Treasury Department did not ask for tax records as proof.

This is yet another distraction for the Obama administration and it's ambitious economic agenda. Speaking at an electric vehicle facility in California, the president used a bit of humor to frame the challenges he's been facing.

BARACK OBAMA, PRESIDENT OF THE UNITED STATES: I know it's not easy. There are days I'm sure when progress seems fleeting and days when it feels like you're making no progress at all. That's how it feels in the White House sometimes, too.

(END VIDEOTAPE)

LOTHIAN: Now, we reached out to the Treasury Department. They sent out to the IRS, which issued a statement saying, in part, "The IRS has every expectation that the amounts will be paid and is committed to collect every dollar of taxes that are owed."

BLITZER: But we still don't know these companies, which companies are involved?

LOTHIAN: We still don't know. We have the number, 13 companies, but we still don't know the names of those companies.

BLITZER: How was all of this uncovered to begin with?

LOTHIAN: Well, there's a review that was being done of about two dozen or so companies that have received this bailout money, and that's how they were able to pinpoint that some of them had not paid their taxes.

BLITZER: If you break -- if you unravel this mystery, let us know. We want to get this on the air. Thanks very much.

This hour, the president is set to face Californians in the heat of the firestorm over corporate bailouts. We're going to have a powerful -- he will have a powerful Republican at his side -- the governor, Arnold Schwarzenegger. He's going to be there momentarily.

We're going to go live to that town meeting in Los Angeles.

Right now, let's bring in our Senior White House Correspondent Ed Henry.

Ed, this is the president's second day in California. Has he been able to escape the bailout backlash?

ED HENRY, CNN SR. WHITE HOUSE CORRESPONDENT: Well, Wolf, top White House aides think so, and they cite a CBS News poll showing the president's approval rating at 62 percent. That's keeping steady where it's been for weeks, even though he's dealing with the fallout from the AIG bailout, the bonus situation. But they acknowledge privately that he's been playing some defense now when they want to play offense.

The whole point of this trip was to tout his stimulus plan, how he thinks it's helping in states like here in California to create jobs. And also, he wanted to talk about his budget, health care, energy, all those key education initiatives, et cetera.

I think there was a telling moment last night in another town hall meeting. The president talked about AIG and some of these other firms who want bailouts, and he said it's a little bit like dealing with someone who's got a bomb strapped to their chest and they've got their hand on the trigger, and you're trying to talk them down. Pretty stark language from the president. He seemed to be suggesting, look, if they pull that trigger, the economy blows up, but also, it may be a lot harder to sell Congress on future bailouts because of all of this bad spending -- Wolf.

BLITZER: He's going to have a powerful ally today; namely, the governor of California, the Republican, Arnold Schwarzenegger. Give us a little background on how this came about.

HENRY: Well, it's interesting. I was there on Halloween, when Arnold Schwarzenegger, in Ohio, was campaigning for John McCain and was making fun of Barack Obama, saying he had scrawny legs, skinny little arms, he needed to pump up his body and also his ideas.

Now, obviously, all is forgiven. Arnold Schwarzenegger is a moderate Republican, has been supportive of some of this president's policies on energy, renewable energy, green jobs, but also on the stimulus package as well in general, in terms of pumping money into the economy.

Also, some more star power tonight. The president will be on "The Tonight Show With Jay Leno," the first sitting president to ever appear on a late-night talk show like that. They're looking for other avenues to promote his plans -- Wolf.

BLITZER: Once we see the governor start speaking, and the president, of course we're going to have live coverage. Ed, stand by. We'll get back to you.

The Obama administration today is pouring more money into the stabilizing the auto industry. The Treasury Department announcing a $5 billion program to help ensure that auto part's makers get money owed to them for their products. Part suppliers have been hit hard financially because of deep concerns that car makers might go bankrupt. This comes as the federal government considers giving GM and Chrysler even more cash on top of the $17 billion in loans.

And as Ed mentioned, tonight the president will be a guest on Jay Leno's program. We want to hear your response to his appearance. How did he do? You can submit your video comments to ireport.com/situationroom, then you can watch tomorrow's program, right here, to see if your iReport makes air.

I hope it does.

You might be wondering to yourself whether -- where all the money is coming from. The Federal Reserve was back in rescue mode yesterday with a plan expected to cost more than a trillion dollars. Yes, more than a trillion -- that's with a "T."

CNN is digging deeper, channeling our global resources to bring you weeklong reporting on America's "Road to Rescue." Let's go to Poppy Harlow of CNNMoney.com.

Poppy, how does the Fed want to spend all this money?

POPPY HARLOW, CNNMONEY.COM: I mean, just take a look at the number here, Wolf, and all of the zeros on the wall. In the industry, this is called quantitative easing. What the Fed is doing, what it means for you, is the Fed is simply printing more money and spending it to try to help Americans.

Let's break down, folks, where this money is going -- $750 billion of it, the majority there, buying up mortgage-backed securities; $300 billion buying up treasuries; and $100 billion in agency debt, buying the debt of Fannie Mae and Freddie Mac.

So what are the intended consequences of this, the positive effect? A number of them here for you. Three big ones -- lowering mortgage rates, making it more affordable for the average American to buy a home or refinance. Next, simply lowering the rate on treasuries, making it cheaper for the government to borrow money. And finally, increasing inflation.

On the surface, Wolf, that might sound a negative. The thought by some economists is if you increase short-term inflation, you get Americans to spend money now and possibly get out of this recession a little quicker -- Wolf.

BLITZER: The potential downside -- there is a potential downside to all of this.

HARLOW: Oh yes. Some big downsides. Let's go through them, because you're talking about just a huge risk here. Again, an unprecedented move by the Fed.

OK, one concern is that the Fed could be out of ammunition in terms of using most of its firepower that his left.

And next, another concern, is long-term inflation. The central bankers, they say they're not concerned about inflation now, but they may be down the road.

And the third thing you want to think about here is the dollar depreciation. When this news came out, we saw the dollar yesterday fall by 3 percent, the greatest amount in a single day in nine years. That could mean rising oil prices. A big boost in oil prices today. And also, it hurts American consumers as they head abroad.

It does help multinational industries in this country in terms of selling power, but it can hurt American consumers, Wolf. So there is a lot of risk associated with this as well. The market liked the move yesterday. Not so much today -- Wolf.

BLITZER: That's yesterday. And that's today.

All right, Poppy. Thank you.

When you add up all the federal spending to boost the economy and rescue Wall Street, the tab so far is simply mind-boggling. We're talking $4.8 trillion worth of plans unveiled since last fall, including the stimulus package, and a variety of bailouts. By way of comparison, it could cost less than $1 trillion to fund the wars in Afghanistan and Iraq and the fight against terrorism over the past eight years.

Members of Congress are scrambling to prove they're not asleep at the switch, while crumbling companies spend billions in federal dollars. The House of Representatives just a little while ago passed a bill to slap a big tax on those bonuses given to bailed-out firms.

Let's go to our Senior Congressional Correspondent Dana Bash. She's looking at this story.

They're working in pretty warp speed right now on the Hill. A lot of embarrassed members.

DANA BASH, CNN SR. CONGRESSIONAL CORRESPONDENT: That's right. You know, you can't find a lawmaker up here who won't tell you that the kind of outrage they're hearing from their constituents back home is like they've never even seen or heard before. And that's why even though the Republican leaders saw what we saw today on the House floor, that he said was a political circus, there was a bipartisan vote for a quick fix.

(BEGIN VIDEOTAPE)

BASH (voice-over): Democrats are under intense pressure to get beyond the outrage...

REP. CHARLES RANGEL (D-NY), WAYS AND MEANS CHAIRMAN: Do these people deserve a taxpayer's expense to receive these type of bonuses?

BASH: ... and actually do something about AIG bonuses.

REP. STEVE ISRAEL (D), NEW YORK: We just want to recover the taxpayers' money for them.

BASH: So House Democrats rushed to pass a bill imposing a 90 percent tax on bonuses for employees with family incomes above $250,000. It applies not just to AIG, but all companies that got at least 5 billion taxpayer dollars. Some Democrats admit that punishing employees by taxing bonuses after the fact may be legally questionable, but because of the public outcry, they say it's worth the risk.

REP. SHEILA JACKSON LEE (D), TEXAS: I realize that this may be subjected to constitutional challenge and/or the courts. But you know what? I'm prepared to battle in the courts.

BASH: Republican leaders call it a sham.

REP. JOHN BOEHNER (R-OH), HOUSE MINORITY LEADER: It's nothing more than an effort to cover somebody's rear end because of the political damage that's out there.

(END VIDEOTAPE)

BASH: But it's not just Republicans assigning blame, Wolf. More and more congressional Democrats are pointing fingers, too, and they're pointing them at the White House, telling us that they believe that they tried many times to deal with this bonus issue, but they were stopped by the Obama administration -- Wolf.

BLITZER: Hold on for one second, Dana. I just want to remind our viewers of what happened right here in THE SITUATION ROOM yesterday.

Senator Chris Dodd admitted, here to CNN, his role in a bailout mystery. He acknowledged playing a part in creating a loophole that allowed AIG to give some big, fat bonuses out to its employees after getting its bailout. But Dodd made it clear the Obama Treasury Department pushed him to do it.

Let's listen to Senator Dodd again.

(BEGIN VIDEO CLIP)

SEN. CHRISTOPHER DODD (D), CONNECTICUT: The administration had expressed reservations about the amendment. They came to us and asked for modifications in the amendment. The alternative was, of course, losing the amendment entirely, which was a possibility. I didn't want to see that happen.

(END VIDEO CLIP)

BLITZER: All right, Dana. You're hearing something similar from other Democrats as well. What are you hearing? BASH: That's right. Another Democratic senator, Ron Wyden, he also tried last month to pass a measure that effectively would have stopped the bonuses from companies like AIG, but he told us today that it was killed, and that was because the Obama administration, he said, blocked it.

Listen to what he told me.

(BEGIN VIDEO CLIP)

SEN. RON WYDEN (D), OREGON: What I can tell you specifically is I talked to virtually the entire administration economic team. I wasn't able to convince them that even with this bipartisanship, even with the savings, even with the legal analysis, I wasn't able to convince them to go along, and I think that's unfortunate.

(END VIDEO CLIP)

BASH: Now, Wolf, Wyden also told me that he does not think President Obama was served well by his economic team, because he said he think that just like the Bush administration, Obama officials felt -- in fact, he said that they told him this point blank, that they felt it really is -- was a bad idea to do away with these bonuses because they feared that it would drive away what they consider to be talent on Wall Street at a time where they thought that they needed that talent to help get the country out of an economic ditch.

BLITZER: Dana Bash up on Capitol Hill

Thank you.

The man in the hot seat talks to CNN. The Treasury Secretary, Timothy Geithner, responds to calls that he resign and reveals what he knew and when about that stimulus bill -- that clause in that stimulus bill that allowed those AIG bonuses to go forward.

And the nation's veterans often fought enemies at war, but competing against you in the job market is an entirely different battlefield. Who might have the edge?

And the first lady teaming up with some of your favorite A-list celebrities. Wait until you hear Michelle Obama's reaction when a young lady calls the president -- and I'm quoting now -- cute.

(COMMERCIAL BREAK)

BLITZER: The governor of California now getting ready to introduce the president of the United States.

Arnold Schwarzenegger, the Republican. Let's listen in.

(JOINED IN PROGRESS)

GOV. ARNOLD SCHWARZENEGGER (R), CALIFORNIA: ... injects $51 billion into California's economy.

(APPLAUSE)

That's right, $51 billion into California's economy -- $18.6 billion for health and human services; $10.9 billion for education...

(APPLAUSE)

$7.2 billion for infrastructure; $5.3 billion for labor; $3.4 billion for energy and climate change; $1.2 billion for housing. And the list goes on and on.

I tell you, it is the greatest package. I'm so happy that we're getting these kind of benefits from the federal government and from President Obama.

(APPLAUSE)

Now, this economic solution can only come from a strong partnership between the federal government, the state and the locals. And so our state here, the state of California, has a fantastic partner in President Obama.

And now, it is my honor to introduce to you, our leader in the economic recovery of our state and the nation.

Ladies and Gentlemen, welcome the president of the United States, Barack Obama.

(APPLAUSE)

BLITZER: The president of the United States in Los Angeles, walking into this room, introduced by Arnold Schwarzenegger. We expect he's going to be making some opening remarks. He'll be thanking a lot of people right at the top. A nice hug from the mayor of Los Angeles and the governor of California.

Here's the president of the United States. He'll speak, and then he'll start answering questions at this town meeting.

OBAMA: Thank you! Thank you! Thank you so much!

Thank you! Thank you! Thank you! Thank you, everybody. Please.

Thank you, everybody. Please have a seat. Have a seat.

Thank you so much.

It is good to be here.

(APPLAUSE)

It is good to be here, although I was hoping that the governor was going to take a little longer on his remarks because I was standing outside, soaking in some rays. Nothing like California weather. I am greatly honored to be joined here by one of the great innovators of state government, somebody who has been leading California through some very difficult times, and somebody who has turned out to be just an outstanding partner with our administration. I'm grateful for him, I'm grateful for the first lady of California.

Please give it up for Arnold Schwarzenegger and Maria Shriver.

Thank you.

(APPLAUSE)

Another outstanding public official, somebody who is fighting every day on behalf of the working people of Los Angeles, and has a vision for the future of this great city, please give a huge round of applause to your mayor, Antonio Villaraigosa.

(APPLAUSE)

Somebody who's always been ahead of his time and has covered the waterfront in public service, and has excelled in each thing that he's done, please, a big round of applause for your attorney general, Jerry Brown.

(APPLAUSE)

BLITZER: While the president of the United States introduces and welcomes all the special guests, the VIPs, we'll take a quick break.

Our coverage of this town hall meeting in Los Angeles will continue after this.

(COMMERCIAL BREAK)

BLITZER: President Obama now beginning the substantive part of opening remarks, mentioning how it's always great to get outside of Washington, D.C.

OBAMA: I'm hearing about your concerns, and I look forward to telling you about the work my administration is doing to address some of those concerns.

But the one thing I don't need to tell you is that these are challenging times. I don't need to tell you this because you're living it every day.

Between December of last year and January of this year, this state lost more than 500,000 jobs. One out of every 10 Californians is now out of work. Housing prices here have fallen 20 percent in the past year. You've got one of the highest foreclosure rates in the nation.

So your public servants are working double overtime to address these critical issues. And I know how tough times are in Los Angeles, in California, but also all across the country. Here's what I want you to remember though. We are going to meet these challenges. We will come out on the other side, stronger and a more prosperous nation. That I can guarantee. I can't tell you how long it will take, what obstacles we'll face along the way, but I promise you this -- there will be brighter days ahead!

(APPLAUSE)

Because of the Recovery Act that I signed into law last month, and that your two outstanding senators, Feinstein and Boxer, worked so hard to pass, we're making major investments to create jobs right here in California, rebuilding infrastructure, weatherizing homes, and putting more police on the streets, supporting community health centers. All together, we expect to create or save more than 396,000 jobs in this state over the next two years.

(APPLAUSE)

But we also know that we can't create as many jobs as we want or rebuild our economy the way we hope without addressing the problem at the heart of this economic crisis, and that's our housing crisis. We know that fixing that crisis, breaking that cycle of falling home values and rising foreclosures, is one of the keys to fixing our economy, and that's why we've launched a housing plan that will help millions of responsible homeowners save money by refinancing or modifying their mortgages.

And our plan included important steps to help lower interest rates. And today, millions of Americans, people who never thought they'd be able to lower their monthly payments, are now able to take advantage of these rates, which are the lowest that they have been in decades.

(APPLAUSE)

Already, we're seeing a burst of refinancing. Refinancing applications jumped 30 percent last week to more than double the rate we had last fall, saving the average homeowner hundreds of dollars a month. It's the equivalent of a generous tax cut. That's money in their pocket, money you can use right now to pay your bills or pay off your debts or save up for a rainy day, to save up for retirement or that college education for your child.

And today we launched a new Web site called makinghomeaffordable.gov, to help borrowers determine whether they're eligible for our plan and to help them calculate how much money the plan could save them on their mortgage, on their monthly payments. And keep in mind, this is in addition to the $8,000 tax credit for first-time homebuyers that's in our recovery plan.

And if you buy your first home any time between now and December 1st, you can claim that credit this year on your 2008 tax return and receive that money in as little as 10 days. So if you haven't filed your taxes yet, but you're thinking about buying a house, you can request a six-month extension until October 15th and claim the credit then. (APPLAUSE)

Or if you've already filed your taxes or you wish to do so before April 15th, you can just amend your form later this year after you by your home and get your money then.

Look, the idea here is very simple. If you buy a home this year, you should be able to get your tax credit this year. That's when you need it most, that's how it will help people start spending again, that's how it will help raise home values, stabilize our housing market, create new jobs again. That's our plan, that's what we're going to do right here in California.

(APPLAUSE)

Now, I'm also pleased to announce that today, California will be receiving $145 million from the Department of Housing and Urban Development to provide additional help to communities hardest hit by the foreclosure crisis.

(APPLAUSE)

These funds will be used to buy up and rehabilitate vacant and foreclosed homes, resell those homes with affordable mortgages, and to provide mortgage assistance and rehabilitation loans for low-income and middle-income families. That's how we'll help people here in California live their dream of homeownership, and how we'll start transforming abandoned streets lined with empty houses back into thriving neighborhoods.

Now, we know that it's not enough to address challenges like housing, and infrastructure and job creation just in the short term. None of this make a difference unless we build an economy that offers prosperity in the long run.

We can't go back to a bubble-and-burst economy, based on reckless -- reckless speculation and spending beyond our means, and where relative few do spectacularly well, while the middle class loses ground.

We can't go back to a culture on Wall Street that says it's OK to bend or break the rules...

(CHEERING AND APPLAUSE)

OBAMA: ... and a culture in Washington that says it's OK to look the other way. We can't go back to that.

(CHEERING AND APPLAUSE)

OBAMA: We can't allow what happened at AIG (AUDIO GAP)

(CHEERING AND APPLAUSE)

OBAMA: Now, I know -- I know a lot of people...

BLITZER: All right, we're having a little technical problem with the president's audio. We will fix that.

We will take a quick break.

And, remember, also coming up later, our exclusive interview with the treasury secretary, Timothy Geithner. Our Ali Velshi, he has just sat down with him here in Washington. He has some important things to say about AIG and those bonuses and about when he believes this recession will end.

Our coverage of the town hall meeting in California and our interview with Timothy Geithner, all that coming up -- right here in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: The president just made the case for health care reform. He's continuing his opening remarks at a town hall meeting out in Los Angeles.

(JOINED IN PROGRESS)

OBAMA: ... right here in the front row.

We know that...

(CHEERING AND APPLAUSE)

OBAMA: We -- we know and they know that countries that out- educate us today will outcompete us tomorrow.

And that's why my budget invests in a complete and competitive education for every American in early childhood education programs that work, in high standards and accountability for our schools...

(CHEERING AND APPLAUSE)

OBAMA: ... and, finally, putting the dream of a college degree or technical training within reach for anybody who wants it.

(CHEERING AND APPLAUSE)

OBAMA: Because we know that enhancing America's competitiveness will require reducing our dependence on foreign oil and building a clean energy economy, this budget will spark the transformation we need to create green jobs and launch renewable energy companies right here in California. It makes clean energy the profitable kind of energy and invests in technologies like wind power, and solar power, and fuel-efficient cars and trucks, and high-speed rail...

(CHEERING AND APPLAUSE)

OBAMA: ... powered by batteries like the one I saw in Pomona earlier today, all of which will help us combat climate change. That's got to be a priority.

That's what this budget does. Now, here's what this budget doesn't do. It doesn't raise taxes on any family making less than $150,000 -- $250,000 a year by a single dime. In fact, 95 percent of all working families will receive a tax cut as a result of our recovery plan.

Now, there are those who say these plans are too ambitious, that anything we should be trying to do is -- is just focused on the banking crisis, that we should be trying to do less, not more. In fact, somebody was saying the other -- today, I think, that I shouldn't be on Leno...

(LAUGHTER)

OBAMA: ... I can't -- I can't handle that and the economy at the same time.

(LAUGHTER)

OBAMA: They -- listen. Here's what I say: I say our challenges are too big to ignore. The cost of our health care is too high to ignore. Our dependence on oil is too dangerous to ignore.

(CHEERING AND APPLAUSE)

OBAMA: Our education deficit is too wide to ignore.

(CHEERING AND APPLAUSE)

OBAMA: To -- to kick these problems down the road for another four years or eight years, that would be to continue the same irresponsibility that led us to this point in the first place.

(CHEERING AND APPLAUSE)

OBAMA: And I -- I did not run for president to pass on our problems to the next generation. I ran for president to solve these problems for the next generation and for the next president.

(CHEERING AND APPLAUSE)

OBAMA: So I...

(CHEERING AND APPLAUSE)

OBAMA: That's what you want. I know -- I know some folks on Washington and on Wall Street are saying we should just focus on their problems. I understand the thinking behind that. It would be nice if I could just pick and choose what problems to face, when to face them, so I could say, "Well, no, I don't want to deal with war in Afghanistan right now, and I would prefer not having to deal with climate change right now, and if you could just hold on, even though you don't have health care, just please wait, because I have got other things to do."

(LAUGHTER)

OBAMA: But that's not how -- how things work. That's not how it works for you. You don't get to choose between paying your mortgage bills or your medical bills.

(CHEERING AND APPLAUSE)

OBAMA: You don't get to choose between paying your kids' tuition and saving enough for retirement. You've got to take all those problems on at the same time, and you need a government that will do the same.

That's what leadership is about. That's what the debate on this budget is all about...

(CHEERING AND APPLAUSE)

OBAMA: ... about whether we're willing to do what needs to be done to get our economy moving, and put people back to work, and put us on the road to shared and lasting priorities. That's what I'm going to do; that's what I'm going to focus on. We're going to get it done with your help. I need you.

(CHEERING AND APPLAUSE)

OBAMA: All right.

BLITZER: The president concluding his opening remarks. And now he's going to start taking some questions from members of the town hall meeting.

We will take a quick break. Our coverage will continue right after this.

Remember, our interview -- our exclusive interview -- with Timothy Geithner, the treasury secretary -- he sat down with earlier Ali Velshi today. He had some strong words out there.

Stand by. Our coverage continues right after this.

(COMMERCIAL BREAK)

BLITZER: A very enthusiastic supporter just asked the president a question about a suggestion she made years ago that he would be president of the United States. He didn't believe it then.

Let's listen in.

(JOINED IN PROGRESS)

(CHEERING AND APPLAUSE)

(LAUGHTER)

OBAMA: So, you're -- you're -- you will be able to eat whatever you want.

(LAUGHTER)

UNIDENTIFIED FEMALE: No, no trans fats. (CROSSTALK)

OBAMA: Anyway, all right, let me answer your question.

And did you just hit -- All right, hand the mike (AUDIO GAP) somebody else.

This is actually a serious question. You're exactly right that, if we are going to reform our health care system, what we can't do is simply add more people to a hugely inefficient system that is costing us more and more each and every year, because eventually it'll bankrupt families, it'll bankrupt state governments, and it will bankrupt the country.

So the only way that we can initiate true health care reform is if we control costs. And one of the most important ways for us to control costs is to deal with the issue of prevention, which means making sure that we have proper nutrition programs in our schools, making sure that we've got effective physical education programs for our children.

(CHEERING AND APPLAUSE)

OBAMA: It means making sure that everybody has access to a primary care doctor and that they are getting regular check-ups (OFF- MIKE) we are avoiding preventable diseases, like diabetes, that are helping to shoot our medical costs through the (OFF-MIKE) so that's going to be a huge component of whatever health care reform package that I sign, is a major push towards prevention.

There are some other areas where we can do some important cost savings, as well, information technology (OFF-MIKE) recovery act (OFF- MIKE) provides billions of dollars (OFF-MIKE) putting our medical records online. So -- OK. Hold on one second.

If -- if we've got a replacement mike, that would be helpful, because this one's going in and out a little bit. Got one? Well, no, but you need that for your guys.

(LAUGHTER)

OBAMA: There we go. All right. Let's -- OK. That's good. There. But these -- you know, if everybody's data, medical data is in digital form, with important privacy protections, we can reduce medical errors, we can make sure that doctors and nurses, pharmacists are all communicating more effectively. We'll have actually better quality in hospitals, and we will also be driving down costs.

So there are a whole host of measures that we put down-payments on, on the recovery package, but we've got to get our budget passed in order to actually make it happen.

OBAMA: One last point I will make. Something that has not been getting a lot of attention, we signed a renewal of the Children's Health Insurance Program that added...

(CHEERING AND APPLAUSE)

OBAMA: ... added millions of children, including children of legal immigrants, into the mix. That's an important tool to prevent long- term diseases that can cost us a lot of money.

All right, gentleman right here. Gentleman right here with the beard.

QUESTION: I'm unable to stand up. I believe that I'm entitled to an exception under that rule under the ADA?

(UNKNOWN): Oh, my god. I'm so sorry.

OBAMA: Go ahead.

QUESTION: I forgive you.

OBAMA: Go ahead. Introduce yourself.

QUESTION: I'm Gary Karp (ph). And, Mr. President, thank God for you.

(CHEERING AND APPLAUSE)

OBAMA: Sir, my question regards the true renaissance that's happening with people with disabilities. They are an emerging population, millions of people with more potential and capacity, more mobile, more educated, more healthy, more empowered technology, but still trapped in very, very old social models that see them in terms of tragedy, and charity, and need, and care.

And the modern population of people with disabilities simply does not fit that model. And as your plans succeeds and you generate these jobs, and as baby boomers retire, we're going to need every single person of capacity to work that we can, and that must include many, many, many thousands, if not millions, of people with disabilities, so...

(CHEERING AND APPLAUSE)

OBAMA: So I see you nodding your head. So my first question is, do you subscribe to what I'm saying? And next of all, can you talk about how your disability agenda will release this emerging potential that's currently wasted and untapped?

Well, you are exactly right that we need everybody. And every program that we have has to be thinking, on the front end, how do we make sure that it is inclusive and building into it our ability to draw on the capacities of persons with disabilities?

That's true on the education front, where our recovery package increases funding for children with disabilities. It is -- it is true in terms of how Hilda Solis, our secretary of labor, will be thinking about our training programs, to make sure that we are not excluding from training for high-tech jobs, the new jobs of the future, persons with disability. It means enforcing the ADA and fighting back on some court opinions that have tried to narrow what -- in ways that I think are inappropriate the original intent of that legislation.

So one -- one of the things that I think is important is to make sure, as you pointed out, that we don't see this as an afterthought, a segregated program, but we are infusing every department, every agency, every act that we take with a mindfulness about the importance of persons with disabilities, their skills, their talents, their capacity.

That, I think, is the approach that my administration is going to take. And we hope that, by taking that approach, that attitude will infuse state and local governments that are also receiving federal money. OK?

(CHEERING AND APPLAUSE)

OBAMA: This young lady right here has had her hand up for a while.

QUESTION: Hello, Mr. President.

OBAMA: Don't worry. I'm going to get around. Hold on a second. I'm going around.

Go ahead.

QUESTION: Hello.

OBAMA: Hi.

QUESTION: My name is Charnette (ph).

OBAMA: Hey, Charnette (ph).

QUESTION: And, first of all, I would just like to say, as a mixed-raced individual, it's so fantastic to finally have a role model and a leader that I can actually identify with, so thank you.

OBAMA: Well, that's -- that's nice. Thank you.

(CHEERING AND APPLAUSE)

QUESTION: There haven't been a whole lot growing up. So -- OK, so my question is specific to California. As you know, we have one of the highest costs of living in the U.S. here. A household income that is considered middle or upper class in any other state wouldn't go very far here.

However, the tax laws in the recent economic stimulus address household income on a national level and do not take into account the costs of living by state, as far as I know.

California now has, as you mentioned before, a higher unemployment rate than the national average. We make up one-third of the nation's foreclosures.

So what I want to know is, what can be done to address California's unique -- unique situation, stimulate the economy here in California, and, like you mentioned, just be prosperous into the future, keeping in mind, again, household incomes, and we're not really apples to apples with other states, but we're taxed as if we are.

(CHEERING AND APPLAUSE)

OBAMA: Well, look, I -- I mean, obviously, there's differentiation between states, both in terms of costs of living, but also in terms of salaries. And, you know, generally those are taken into account through the deductions that are available through the tax code.

I would say that the biggest problem, though, is probably not the -- in our tax code, it's not the difference between how Californians are treated and people in Idaho are treated. The bigger difference actually has to do with how people inside California are treated by the tax code.

So if you are a multimillionaire who get most of your income from dividends and capital gains, then you're typically paying 15 percent of your income in taxes at the federal level. But if you're a secretary making $30,000 a year in wages, then you're paying a higher rate.

Now, so the secretary's paying a higher rate than Warren Buffett as a percentage of their income. That's the inequity that I think is most destructive, because what it's done...

(CHEERING AND APPLAUSE)

OBAMA: ... what it's done is, over the last decade, the average working family has seen their median income flat line. Their wages and income have not gone up.

On the other hand, people who are at the very top of the income scale -- and I'm now included in that category -- we've seen all the benefits of economic growth when things were going well. And I actually think that contributes to a cycle of bubble and bust. And if we have a situation in which middle-class people are earning a decent living, where we've got bottom-up economic growth, then I think that's good for everybody. I think ultimately that's good for businesses. I think it's good for rich folks, because when the economy rises, everybody does well, and you don't get as many distortions as you've gotten in this sort of bubble-and-bust cycle that we've had.

Now, there are some things in California that we are doing that -- that focus on particular needs here. We just talked -- Governor Schwarzenegger and Mayor Villaraigosa -- here in Los Angeles, for example, there is an opportunity to deal with traffic, and transit, and transportation in a way that will relieve congestion, make this economy more efficient, more productive. (CHEERING AND APPLAUSE)

OBAMA: You know, the needs of Los Angeles in terms of transportation dollars are going to be different from the needs of somebody in a predominantly rural state. And one of the things that we want to do in terms of how transportation dollars flow is to start emphasizing the fact that the vast majority of people live in suburbs or in cities, in metropolitan regions, and how can we do a better job in planning and coordinating regionally so that you aren't in your car for two hours a day?

(CHEERING AND APPLAUSE)

OBAMA: There are things that we can do that end up being specific to the situation of the economy in California. But, generally, you know, California oftentimes gets hit worse when recessions come, but you also rise up faster when the economy starts to recover.

So, I'm confident California will continue to be on the cutting edge of our economy.

All right. It's a guy's turn...

BLITZER: All right, the president continuing to answer questions at a town hall out in Los Angeles. We're going to continue our coverage.

We're also standing by. We have two exclusives coming up here in THE SITUATION ROOM, my exclusive interview with the homeland security secretary, Janet Napolitano. She has some choice words for the former vice president, Dick Cheney. And Timothy Geithner, the treasury secretary, he sat down with Ali Velshi earlier today. He will tell us when he believes this recession will be over.

Stay with us. We will be right back.

(COMMERCIAL BREAK)

BLITZER: President Obama was just asked if he thought the United States economy could face a disaster like Iceland, a complete collapse. He said no.

He's explaining how he sees the current economic situation.

(JOINED IN PROGRESS)

OBAMA: But what is true is that the path we're on right now is unsustainable. So here's what we have to do.

Our most immediate and urgent task is to put people back to work and get the economy rolling again.

(CHEERING AND APPLAUSE)

OBAMA: That's the thing we have to do right now. And that means that, for the next couple of years, we're going to have to tolerate much higher deficits than I'm comfortable with, not just for the recovery package, but the money that we've had to put in to deal with the financial crisis.

The fact that people are out of work means they are needing unemployment insurance, they need additional -- there are greater needs for food stamps. All sorts of pressures and strains are placed on state government and local governments during a deep recession like this one.

So we've got to suffer some big deficits while we move into recovery. The worst thing we could do is not worry about recovery, slash government spending at the same time as businesses are slashing their spending and consumers are slashing their spending. That creates a downward spiral that could make things even worse.

But as soon as we start seeing a recovery -- and my hope is, is that, you know, over the next couple of years, we will have started moving again, building back up -- then what we have to do is build in a pathway for reducing our deficits.

We've already in this budget slated that, in the out-years, we're going to reduce non-discretionary -- non-defense discretionary spending, everything other than defense spending and entitlements, like Social Security and Medicare, we're going to reduce those to the lowest level relative to GDP of any time since the 1960s.

I have also said that we are going to end the Iraq war, which is going to save us money during that period of time.

(CHEERING AND APPLAUSE)

OBAMA: We -- we are going to have to reform Medicare, and that's part of the overall health care reform that we were talking about earlier. If we can get control of health care costs as a whole, then we can start bending the curve of costs for Medicare and Medicaid.