MR. MCLAUGHLIN: Issue One: Alan's Optimism.

FEDERAL RESERVE CHAIRMAN ALAN GREENSPAN: (From videotape.) The U.S. economy appears to have withstood a set of blows. The mildness and brevity of the downturn, as I indicated earlier this year, are a testament to the notable improvement in the resilience and flexibility of the U.S. economy.

MR. MCLAUGHLIN: On Wednesday:

MR. GREENSPAN: (From videotape.) As far as I can see, the underlying structure of the economy, its underlying efficiency, has not been materially impacted.

MR. MCLAUGHLIN: As for GDP growth for the year, the Fed chairman forecast an optimistic 3.5 to 3.75 percent, upping an earlier prediction. Somewhat less sanguine -- by about 1 percentage point -- is the president's own economic adviser, Glenn Hubbard, who says the GDP will grow this year by only 2.6 percent.

Question: Greenspan's quote, "withstood a set of blows," was an understatement for the market dropping 399 points Friday and 6 percent for the week. But the market is not the economy -- the macro economy, which, according to Mr. Greenspan, remains resilient, efficient and flexible. So what is the total economic picture, Lawrence Kudlow?

MR. KUDLOW: Well, I'm inclined to agree with Greenspan's economic forecast. I share it. I think we can grow by 4 percent this year.

But I have to say, John, even good intentions of members of Congress and the administration to clean up the corporate fraud and corruption may be wreaking havoc in the stock market. There's a sense of deflation. There's a sense of austerity. There's a sense of punishing businesses and entrepreneurs right now. One of the things lacking from all these packages is any growth initiatives.

Look: You're going to raise the regulatory cost of doing business now. That may be a necessary evil to deal with these issues of accounting and corporate fraud. But why aren't they lowering regulatory costs elsewhere? Why aren't they looking at some tax measures that reduce the cost of doing business? My point is, it's a very austere environment, and if it continues with a hint of deflation, John, it CAN affect the macro economy.

MR. MCLAUGHLIN: The corporate-governance reform is causing slippage on -- in the market. That's what some people think. All of this emphasis
corporate greed, infectious greed. (Isolate laughter.) It has an -- it is needed, but it's causing great pain.

MS. CLIFT: It's not the reform that causing the decline in that investor confidence; it's the way that the corporate executives have behaved. And the reform is addressing that. So let's not twist that around.

When Alan Greenspan said the market was irrationally exuberant, it was at 6,400 -- some 2,000 points less than it is now. The market didn't listen to him then, and they're not listening to him now. The growth rate is fine, contrary to what Larry is saying. But what we have is a jobless recovery, and we have a stock market that's in the tank. And that spells trouble for the economy and for the politicians.

MR. MCLAUGHLIN: What do you think? Bear in mind now that real estate is being invested in. Houses are being built. Gold stock is being bought. And bonds are being bought. So there is investment going on, and the general economy looks pretty good.

MR. BLANKLEY: Well, I mean, I certainly never want to argue with Mr. Greenspan, who knows vastly more than I do. And I -- my sense is, he's a little optimistic, not on the fundamentals, which may be right, but the impact, the emotional impact of the jitters that Washington has and the country clearly has. The confidence in "right track" and "wrong track" in the country is slipping away, and as people -- I talked to some stockbrokers during the week who said the little investors are panicking and dumping. There's a sleep factor. They want to be able to go to sleep at night, and they just want to get out of the market. When you have those kind of fears developing, the best prognostications may get trumped by rising fear. So I'm less optimistic than Mr. Greenspan.

MR. MCLAUGHLIN: How are you, sir?

MR. BAKER: Mr. Greenspan was exactly right. And of course the U.S. economy has proved incredibly resilient. If you look at all the shocks that have happened to the U.S. economy over the last couple of years -- the collapse of technology bubble, the high interest rates that we had for a while, the high energy prices and the shock of September the 11th -- it's done amazingly well. We've had the shortest, shallowest recession in at least 30 years, despite all of those shocks. So the economy itself is doing well.

The big question, though, is whether or not -- as Tony says, whether or not the jitters that there are now -- this is turning into -- this has gone from being jitters, actually, and a kind of market problem, to being a rout. We've got a real, real problem now in financial markets. We've seen a huge drop in stock prices in the last two weeks.

The question is, is that going to start impacting on consumer confidence and consumer spending? Are consumers, who are pretty stretched at the moment -- they've been borrowing money, they've seen their stock wealth go down, their 401(k)s are going down -- are they now going to say, "I can't -- I just can't afford to go on spending anymore"? That's the danger, to me.

MR. MCLAUGHLIN: How do you account for the fact that the consumers are still spending and corporations are reporting profits?

MR. BAKER: Well, the corporation profits have been pretty weak. They are starting to turn around --

MR. MCLAUGHLIN: Well, GE reported 14 percent. But it had no effect -- I'm not sure about today --

MR. BAKER: Well, if they had -- some companies are doing better than others.

But the main reason for the consumer spending is the housing market. The housing market has been the one thing that's been amazingly strong. People have been taking money in equity out of their houses --

MR. KUDLOW: John, John --

MR. MCLAUGHLIN: I was trying to make a point -- (cross talk) -- wait a minute -- I was trying to make a point with Eleanor. Is there a lynch mob on Capitol Hill atmosphere?

MR. BAKER: Yeah, there is.

MR. MCLAUGHLIN: I mean, is that affecting any of this market activity?

MR. BAKER: I don't think so.

MR. KUDLOW: Sure it is. Sure it is.

MR. BAKER: I think, as Eleanor says, it's more to do with --

MR. KUDLOW: No, it is.

MR. BAKER: -- it's more to do with the actual corporate problems themselves than with any response --

MR. KUDLOW: Look --

MS. CLIFT: Actually --

MR. MCLAUGHLIN: All right. We want to get out. We don't want to spend too much time. It's going to return --

MR. KUDLOW: August 14th CEOs have to report new income and profit statements to the SEC.

MR. BLANKLEY: Exactly.

MR. KUDLOW: If there are mistakes, John --

MR. MCLAUGHLIN: You mean revisions will come in?

MR. KUDLOW: Yeah. This is mandated by Harvey Pitt and supported by everyone -- Sarbanes --

MR. BLANKLEY: But -- (inaudible) -- they have to go to prison, which is terrible.

MR. MCLAUGHLIN: What's your point?

MR. KUDLOW: My point is -- yeah. Number one, they could face 20 years. Number two, the market is concerned that this unusual, unprecedented new scrub of income statements could produce vastly lower profits. That's what the they're worried about.

MS. CLIFT: You have a generation of people in their mid-50s to early 60s now who are not going to be able to retire, who are having to change all of life's plans, who vote a lot, and the fact that a few CEOs who have lied and finagled Congress may have to go to jail for a while, to a country-club prison, doesn't upset me, and it doesn't upset any of the people who are being hurt by this.

MR. BLANKLEY: Eleanor, it's -- Eleanor, it -- Eleanor, it is --

MR. MCLAUGHLIN: All right. We got to get out.

MR. KUDLOW: That's the thousand --

MR. BLANKLEY: No, no, wait. Eleanor misses the point.

MR. KUDLOW: Right.

MR. BLANKLEY: It's the top thousand corporations, innocent or guilty --

MR. KUDLOW: Right. Right.

MR. BLANKLEY: -- suspected or not, they've got to put their signature down --

MR. KUDLOW: Exactly right.

MR. BLANKLEY: -- and they'll personally be responsible for details they may not know. There's no precedent, and it could be cripplingly dangerous --

(Cross talk.)

MS. CLIFT: That's what I do on my income tax return every year.

MR. MCLAUGHLIN: Hold on. Exit question. Okay, exit question.

MR. KUDLOW: No one knows what this is going to uncover.

MR. MCLAUGHLIN: Excuse me. Excuse me.

MR. KUDLOW: Sorry.

MR. MCLAUGHLIN: When will the markets stabilize? That's an exit question. Quickly.

MR. KUDLOW: I think the chances are in the week or two or three after August 14th, because I believe most of the bad news is out there. But John, no one can be sure; I say that up front.

MR. MCLAUGHLIN: You're talking about other corporations reporting irregularities --

MR. KUDLOW: Yeah. I mean, there's a thousand of them.

MR. MCLAUGHLIN: When will it stabilize?

MS. CLIFT: I think we're -- I don't know.

MR. MCLAUGHLIN: It's a bear market, Eleanor.

MS. CLIFT: I know it's a bear market. (Chuckles.)

MR. MCLAUGHLIN: Well, when will it reasonably stabilize?

MS. CLIFT: Three weeks.

MR. MCLAUGHLIN: Three weeks. (Laughter.)

What do you think?

MR. BLANKLEY: If I knew, I'd be investing or disinvesting. I don't have a clue.

MR. MCLAUGHLIN: You have no clue? Not a clue?


MR. BAKER: That's the honest answer -- we don't know. And the problem is, one of the big problems here is we don't know how much more rubbish there is out there on these corporate balance sheets. And when we find -- when we start finding that out, then we can start discovering how far lower the market is going to go.

MR. MCLAUGHLIN: Gerry, I know none of us know. But as your far-darting mind scans the horizon, can you put the pieces together and give us a reasonable approximation of what you think?

MR. BAKER: I think when we see this August the 14th -- the change that comes in on August the 14th, we will then, after that, start to get some better idea of where companies actually are.

MR. MCLAUGHLIN: Well, that's about three weeks -- about three weeks hence?

MR. BAKER: I can't answer -- I still can't answer, because then the critical question becomes, has -- what I just said earlier about when the overall market's effect on confidence and spending, does that start to kick in? If that starts to kick in, then I'm afraid there could be even worse to come.

MR. MCLAUGHLIN: The answer is, only God knows, and she has not told us. (Laughter.)

MS. CLIFT: I said three weeks! (Laughs.)

MR. MCLAUGHLIN: When we come back, Boardroom Bad Boys Behind Bars.


MR. MCLAUGHLIN: Issue two: Boardroom Bad Boys Behind Bars.

Lawmakers in both the Senate and House sped to passage this week separate bills with stiff new criminal penalties. CEOs and CFOs who certify false company financial reports can face prison sentences of 10 to 20 years under the House bill, five to 10 years under the Senate bill. They would be fined $1 million to $5 million under the House bill; $500,000 to $1 million under the Senate bill. Other features included in Senator Paul Sarbanes' bill: safeguards to protect analyst conflicts and expanded resources for the SEC.

Chairman Greenspan agrees generally with the reforms but has cautions:

ALAN GREENSPAN (chairman, Federal Reserve Board): (From videotape.) Speed and expeditiousness is not important here. Doing it right is very important.

MR. MCLAUGHLIN: And former Fed Chairman Paul Volcker also likes the legislation but not the tougher prison terms as described:

PAUL VOLCKER (former chairman, Federal Reserve Board): (From videotape.) And they should be held responsible. But these kind of vague threats of circumstances under which they'd actually go to jail and the length of the jail term, I'd like to see a little more thought about that so we know what the criteria are.

MR. MCLAUGHLIN: Question: Both Greenspan and Volcker both dislike the CEO -- they're both cautionary about them; they're not comfortable with the CEO criminal penalty provisions as drawn.

Are they right?

Tony Blankley.

MR. BLANKLEY: Yeah, I completely agree with them. Look, any time Congress starts doubling the criminal penalties, whether it's for drug dealers or anything else, it's usually a grandstand play by politicians who are trying to make some cheap points.

I think there's a -- obviously, if they've committed crimes, they should go to prison. There are plenty of fraud statutes on the book. This is simply, I think, going to overburden prosecutors, should it come to that. And in any event, it is a cynical effort to protect their bottoms.

MS. CLIFT: Well, I think every poll you see, people want to see these CEOs who have wrongly enriched themselves --

MR. BLANKLEY: That's the problem, the politicians base too much on polls.

MS. CLIFT: -- they want them to go to jail, and Congress is responding to that. But doubling these penalties is irrelevant because nobody ever gets convicted and goes to jail. The white-collar lawyers are just too good. So it's an irrelevant position.

MR. KUDLOW: Can I respectfully disagree with that?

What you're going to see here is the most aggressive prosecution of white-collar crime in a hundred years, and probably throughout all American history. That is the game plan. That is what the Justice Department wants to do. That is what Harvey Pitt -- Pitt has already got a record volume of enforcement cases coming down in the SEC.

And let me repeat my earlier point: this stuff may be necessary, okay? I'm not the best judge of it. I too want reforms and the guilty should go to jail. But the government should have a more growth-oriented message.

MR. MCLAUGHLIN: I want to give you a poll.

MR. KUDLOW: A more growth-oriented message. There are some simple things -- dividend tax reform, capital gains tax reform, corporate tax reform in general. Help business because it's businesses that create jobs.

MR. MCLAUGHLIN: Gerry, I want to direct your attention to a poll that appeared this week. And it said that 66 percent of Republicans -- 66 percent of the people think that Republicans are too beholden to big business, and about 42 percent of Democrats -- 42 percent say Democrats are too beholden. Isn't that going to play out in the upcoming elections three and a half months from now?

MR. BAKER: Well, that's the big question. It's obviously the Republicans' hope, and they just -- you know, they want to get out of the way of this incredible bandwagon that is rolling through Washington. It's the Republicans' hope that they can get the -- they'll pass the bill through the House next week, they'll get out of town, and everybody will -- this bill will be on the statute books, everybody will forget about it, and then there will be no more scandals and we'll get away with it and they won't get hit.

MR. MCLAUGHLIN: You know --

MR. BAKER: That's a risk because the question is, if we get any more scandals, if we get any more of these big corporate problems, then the Republicans -- as you say, that is, rightly or wrongly, the public's perception is that that Republicans are closer to big business, and they'll be the ones who will suffer.

MR. MCLAUGHLIN: Before this reform jihad started on Capitol Hill, the Democrats were in a state of pervasive gloom. Now the mood has lifted. The Democrats can see the light. What is the light the Democrats are seeing?

MR. BLANKLEY: Well, they see the possibility, the distinct possibility of taking back the House and surely holding the Senate. We talked about --

MR. MCLAUGHLIN: On the basis of what?

MR. BLANKLEY: On the basis -- we talked about this briefly last week.

MR. MCLAUGHLIN: Yeah, but you got into trouble last week, did you not?

MR. BLANKLEY: I too narrowly focused --

MR. MCLAUGHLIN: What did you say?

MR. BLANKLEY: I said that I thought because the two parties were going to agree on this legislation, that --

MR. MCLAUGHLIN: That it would not be --

MR. BLANKLEY: That it would not be necessarily a bad --

MR. MCLAUGHLIN: -- an anti-incumbency mood. But now you think there will be an anti-incumbency mood.

MR. BLANKLEY: Yeah. After the show, thinking it through a little bit, I realized when you put together the president and the vice president's personal connection -- unfair as it may be -- to the scandal, the economic concerns, the right track, wrong track, going the wrong way, that there's a potential for a very substantial negative impact for the Republicans.

MR. MCLAUGHLIN: Is that troubling the White House?

MS. CLIFT: This is -- it's not --

MR. BLANKLEY: This is troubling every Republican in town.

MR. MCLAUGHLIN: Is this troubling the president? The president --

MR. BLANKLEY: He didn't call me. But a few others did. (Laughter.)

MR. MCLAUGHLIN: The president's negative rating has gone from 28 percent to 38 percent.

MR. KUDLOW: Yeah. He -- (inaudible) -- the stock market.

MS. CLIFT: Well, Frank Luntz --

MR. MCLAUGHLIN: I'm talking about the negative in the ratio to positive thing. You remember what Lee Atwater used to say, that if you get it near 40-60, 40 negative and 60 positive, you're in deep trouble.

MR. BLANKLEY: Those were all --

MR. MCLAUGHLIN: We've got to get out.

Exit question: Will there be any provision in this corporate governance reform legislation that will trigger a veto by President Bush? Any provision? Suppose it's electrocution of CEOs?

MR. KUDLOW: I don't think so at this stage.

MR. MCLAUGHLIN: He'd go along with it?

MR. KUDLOW: I believe he would.

MR. MCLAUGHLIN: Capital punishment for CEOs. What do you think?

MS. CLIFT: No. And I want to say that Frank Luntz, the Republican pollster who foresaw the tsunami that took away George Bush's reelection and that took away the Congress for the Democrats --


MS. CLIFT: He now sees a wave of irritated voters out there, that Winnebago generation, and he sees big trouble for Republicans.

MR. MCLAUGHLIN: What do you think?

MR. BLANKLEY: As I've said all along, I --

MR. MCLAUGHLIN: Will he sign any bill that's put in front of him?

MR. BLANKLEY: I would suspect he will, yes.


MR. BAKER: He shouldn't sign any bill that's put before him. And in fact, there are lots of problems with this bill and he will be right to veto it, but I'm afraid there's almost nothing --

MR. MCLAUGHLIN: You know that --

MR. BAKER: -- (inaudible) -- that he will not.

MR. MCLAUGHLIN: You know that politics always trumps policy. There is no way the president will not sign any bill. He will sign any bill that's put in front of him.

MR. KUDLOW: At the end of the day --

MS. ELEANOR: (Inaudible) -- policy.

MR. MCLAUGHLIN: Okay. Another "McLaughlin Y-2-0 Moment" to mark our 20th year.

The date: October 1987, 15 years ago.

The place: Wall Street.

The event: Black Monday. Panic selling. It sends the Dow tumbling 508 points in that single day, a staggering $500 billion.

(Begin videotape segment.)

MR. MCLAUGHLIN: Now, wait a minute. I want to know, what is the dominant cause? Can anyone give me the dominant cause of this crash? I ask you, Don.

DON REGAN: Interest rates.

MR. MCLAUGHLIN: Interest rates?

MR. REGAN: Yes, high interest rates.

BOB NOVAK: Lack of confidence in the president.

MR. MCLAUGHLIN: What do you say?

JACK GERMOND: I agree with my buddy Bob. (Laughter.)

MR. MCLAUGHLIN: Boy, there's an odd couple for you. What do you say?

MORT KONDRACKE: It's all of the above, John. But the basic thing was nervousness -- underlying nervousness about debt.

MR. MCLAUGHLIN: I got to tell you what it is. It was a sense on the street of drift on the part of the U.S. government -- Congress and the White House -- to meet the challenges of controlling and expanding the economy. Am I right or wrong?

MR. REGAN: Well, you're partially right. But -- (laughter).

(End videotaped segment.)

MR. MCLAUGHLIN: Saddam's Taunt.

IRAQI PRESIDENT SADDAM HUSSEIN: (From videotape; through interpreter.) You will not overcome us this time. Never!

This taunt against the U.S. is how Saddam Hussein celebrated the 34th anniversary of his rule. And just as U.S. Deputy Defense Secretary Paul Wolfowitz visited Turkey to get clearance for bases for the U.S. invasion of Iraq, Turkey said to Wolfowitz," Okay, conditionally -- like if you'll forgive our $5 billion of debt, plus a few other items."

Every other Arab nation has rebuffed the United States.

JORDANIAN KING HUSSEIN: (From videotape.) The possibility of Iraq going to civil war would be devastating. This is a huge country with tremendous resources, and we are concerned that the violence would get out of control.

EGYPTIAN FOREIGN MINISTER MAHER: (From videotape.) We are against it. We have declared that we are against it.

And get this: Besides Jordan and Egypt, even Kuwait -- liberated by the U.S. -- gives us a de facto "No" by requiring that any war against Iraq be done under the auspices of the United Nations. And in Europe, every nation, except maybe the UK, says no to an invasion of Iraq, including and especially Russia, where Vladimir Putin actually saluted Saddam Hussein this week: "I wish Saddam health and the Iraqi people success in bringing life back to normal."

And Bush's problems are not only abroad. Top committees in both the Senate and the House will hold hearings on Iraq before or after Labor Day as a prelude to the November elections with respected and formidable skeptics making themselves heard.

SENATOR CHUCK HAGEL (R-NE): (From videotape.) If anyone does not believe that you could further destabilize the Middle East far worse than it is today, then they've been watching too many Pee Wee Herman movies.

MR. MCLAUGHLIN: Gerry, let's suppose that the president and commander-in-chief decides to invade Iraq. What's the impact going to be on the economy?

MR. BAKER: It could be really damaging. We could have -- we've seen before when there's any turmoil in the Middle East, you get a sharp spike in oil prices. You get a general nervousness among investors because they don't like uncertainty. They don't like the thought of what may be -- what may be a prolonged and perhaps very difficult war. You could send stock prices down further; you send oil prices high. Corporate profitability will suffer. It makes it -- this actually -- what's going on in the economy I think does therefore become a very important factor in the set of calculations that are now being --

(Cross talk.)

MR. MCLAUGHLIN: Does that drain any of the hawkishness out of your veins, Tony?

MR. BLANKLEY: No. I mean, if, in fact, we need for strategic reasons of national security to invade Iraq, then that has to trump even difficult economic consequences. And it would have to be inadmissible that we're going to have a bad economic dip under those circumstances. The question is whether the policy judgment is going to be to go in.

(Cross talk.)

MS. CLIFT: The president has not made that case either here at home or around the world. And our allies and the Arab states are not convinced that this country would have the staying power to rebuild Iraq. Getting rid of Saddam would be the easy part; we haven't showed any staying power in Afghanistan.

(Cross talk.)

MR. MCLAUGHLIN: What about Mr. Blair? Would Mr. Blair join us in an invasion of Iraq, as you read it now?



MR. BAKER: Yes, he will, because in the end, he's a loyal ally to the United States. The British people are loyal allies to the United States.


MR. BLANKLEY: They also see --

MR. MCLAUGHLIN: What's the editorial opinion over there in Britain right now, if we got an invasion?

MR. BAKER: It's not favorable, but that's never stopped Tony Blair from doing what he wants to do. And he will do it.

MR. MCLAUGHLIN: Exit question: Which leader will be in power when the other is out of power? Will it be Saddam or George W.? Lawrence Kudlow. Quickly! Go for it.

MR. KUDLOW: George W. is going to take the oilfields and knock off the economic consequences on the way in to taking Saddam Hussein. And my sense is, the Special Forces have already begun. And it's bullish. It's bullish for the stock market, but most of all, it's bullish --

MS. CLIFT: (Laughs.) It's not.

MR. KUDLOW: -- for freedom. It's bullish for freedom!

MR. MCLAUGHLIN: You heard what General Kudlow said. Now what do you think?

MS. CLIFT: Yeah. Yeah. I mean, I think, coming up with a credible plan has been the obstacle so far and will continue to be the obstacle. As far as which leader stays in power longer, I say it's going to be a tie.

MR. MCLAUGHLIN: What do you think?

MR. BLANKLEY: I think there is a credible plan. There are a couple of credible plans -- one with the Kurds and one with a more direct force. Both might -- either one of 'em might work. Bush will go in, and he will be in office, and Saddam will be probably in -- (inaudible).

MR. MCLAUGHLIN: There's a lack of allied support in the region.

MR. BLANKLEY: No, we'll have all we need.

MR. KUDLOW: Right. Right, right, right.

MR. BAKER: Bush will outlive Saddam, which is a very good thing for the world. I am just am not convinced at all, as Eleanor says, that there is a sound plan. And I'm not sure at all that the rest of the world -- the condition of the world at the moment is in the right kind of state that would make a war against Iraq any time soon a very good for anybody -- (inaudible).

MR. MCLAUGHLIN: The U.N. will appoint inspectors, and Saddam will accept the inspector regime. And the air will go out of the balloon -- the bad balloon of going into Iraq. We'll be right back with predictions.


MR. MCLAUGHLIN: Predictions. Lawrence Kudlow.

MR. KUDLOW: Profits, the economy and the stock market will rise before long, as it always does in this great, free country of ours.

MR. MCLAUGHLIN: I feel better now.

MS. CLIFT: (Laughs.)

MR. MCLAUGHLIN: You're talking August 14, right?

MR. KUDLOW: I'm talking before the summer's out.


MS. CLIFT: (Inaudible) -- as the 2004 political convention guessing game begins, I think the Republicans go to New York, Democrats go to Boston.

MR. MCLAUGHLIN: Interesting.

MR. BLANKLEY: SEC Commissioner Pitt against the best feelings and support from the president will nonetheless get thrown overboard and fired --


MR. BLANKLEY: -- out of ruthless political need.

MR. MCLAUGHLIN: Even though he was never a lobbyist for the accounting firms?

MR. BLANKLEY: Notwithstanding any --

MR. MCLAUGHLIN: He represented them before the SEC. What do you say?

MR. BAKER: Vice President Dick Cheney will not be on the Republican ticket in 2004 -- not because of any personal problems at Halliburton, although that remains to be seen, but just because he will not be the right man to be with President Bush on the ticket in 2004.

MR. MCLAUGHLIN: What are you saying?

MR. BAKER: The Republicans will want someone who can be a successor to Bush in 2008, should he win. And Dick Cheney said he doesn't want to do that --

MR. MCLAUGHLIN: Well, you know, this is kind of a keen grasp of the obvious, isn't it, Gerry?

I predict --

MR. KUDLOW: He is completely innocent of all these -- (inaudible) --

MR. MCLAUGHLIN: Just a moment!

I predict the next foreign policy crisis of the U.S. will be the disintegrating government of the president of Pakistan, Pervez Musharraf. Next week, trade promotion authority: Will it finally become law? I think so.



MR. MCLAUGHLIN: Issue Four: From Afghanistan to the Big House.

U.S. ATTORNEY PAUL MCNULTY: (From videotape.) This plea agreement represents an opportunity for the government to get a very tough sentence, to get cooperation and to conserve precious resources for the future challenges we face in the war against terrorism.

MR. MCLAUGHLIN: John Walker Lindh has been sentenced to 20 years in prison after entering a surprise guilty plea on charges of providing military services to the Taliban. In exchange for his guilty plea, prosecutors dropped nine of the 10 charges against him, including a terrorism charge that could have sent the 21-year-old to prison for life.

Although Walker Lindh never fired on American forces, he broke U.S. laws by fighting on behalf of the Taliban. The al Qaeda terrorist network was protected by the Taliban. After making the deal, Walker Lindh's lawyer defended his client:

JAMES BROSNAHAN (attorney for John Walker Lindh): (From videotape.) Who did John Lindh ever hurt? He never hurt anybody. But he was a soldier of the Taliban.

MR. MCLAUGHLIN: Question: Why did the government really settle this case?

I ask you.

MR. BLANKLEY: I think there were two reasons. One, I think these are the best charges that they had sufficient evidence to confidently go to trial on. I don't think there was evidence that he actually bore the rifle against Americans. He bore arms with the Taliban, but I don't think the evidence is there.

The other fact was that 30 of the government's witnesses are in fact anti-terrorist operatives who were in the field and would have to be brought out of the field and hang around courtrooms for perhaps months for all the various hearings and pre-trial and trial, and that would have a significant impact on efforts.

So I think the balance of the two was that they got the best case they were sure of getting anyway.

MR. MCLAUGHLIN: Well, that's a good answer, but it's too legalistic.

The real reason why the case was settled was because of the desire to get him out of the newspapers. He was starting to look sympathetic with his close-cropped hair. If they had tried this in California, he would have been -- it would have been a very short sentence.

MR. BLANKLEY: He's going to go down as the second Benedict Arnold.

MR. MCLAUGHLIN: And the government -- the more the news came out, the government looked terribly abusive of him when he was in confinement. Is that not true?

MS. CLIFT: Well, the 20-year sentence is a huge come down for the government, which started out wanting to get him for treason. And the government did not have a case. I mean, this young man took up arms with the Taliban actually at a time when this country was friendly with the Taliban and the Bush administration was negotiating an oil pipeline.

MR. MCLAUGHLIN: Yes. But he didn't -- he did not --

MS. CLIFT: The government's case was extremely week, but --

MR. MCLAUGHLIN: He was participating in a murderous enterprise and undertaking and assault. He knew that, and he didn't warn the Americans --

MS. CLIFT: Not against Americans.

(Cross talk.)

MR. KUDLOW: John, where is your Jesuitical spirit, for heaven's sakes? Twenty years -- he started when he was 17 years old. He clearly did something very, very stupid. But the fact of the matter is, Lindh is not important. You can put him away, fine. Let's help the Iranian democratic revolution and let's go in and get Saddam Hussein and let's quit worrying about Lindh.

MR. MCLAUGHLIN: That's a pipe dream, it's an absolute pipe dream.

MS. CLIFT: Well --

MR. KUDLOW: I don't think so. It's closer than you think.

MR. BLANKLEY: Just to go back for a second --

MR. MCLAUGHLIN: I want to ask you a question. Do you think that -- he'll be 40 years of age when he gets out of prison. Will he live that long?

MR. BAKER: Yeah. I mean, I have no idea what his health is like or whether -- you mean whether someone is going to try to get to him in jail?

MR. MCLAUGHLIN: That's exactly what I mean.

MR. BAKER: I doubt it. It seems right to me, as Tony said, given the evidence, that it was right to send him to prison, rather than to seek more serious charges --

MR. MCLAUGHLIN: A quick --

MR. BAKER: And you know, he's going to serve that time in prison, and I hope he comes out --

MR. MCLAUGHLIN: Quick question: Why did he cop the plea? Why did he go along? He had a pretty good case building, especially in the light of what I said here.

MR. BLANKLEY: Oh, I don't know that that's the case. I mean, he may -- if you're a defendant, you may be very worried about the possibilities of further incarceration. You don't want to take your chances.

MS. CLIFT: Because there was also --

MR. MCLAUGHLIN: Was the death penalty still hanging out there?

MR. BLANKLEY: No, no. A life sentence.

MS. CLIFT: He was also up against --

(End of available audio.)