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THE MCLAUGHLIN GROUP HOST: JOHN MCLAUGHLIN PANEL: PATRICK BUCHANAN, MSNBC; ELEANOR CLIFT, NEWSWEEK; MORT ZUCKERMAN, U.S. NEWS & WORLD REPORT; CLARENCE PAGE, THE CHICAGO TRIBUNE TAPED: FRIDAY, JULY 18, 2008 BROADCAST: WEEKEND OF JULY 19-20, 2008

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DR. MCLAUGHLIN: Issue One: Bank Alarm.

Or is it panic? Are U.S. banks safe? Should we worry, Mr. President?

PRESIDENT GEORGE W. BUSH: (From videotape.) I understand there's a lot of nervousness. And -- but the economy is growing. Productivity is high. Trade's up. People are working. It's not as good as we'd like, but -- and to the extent that we find weakness, we'll move.

DR. MCLAUGHLIN: Indymac, a bank network in southern California, just collapsed. The run on Indymac started in June. Over an 11-day span, depositors withdrew $1.3 billion. Indymac is now being investigated by the FBI for mortgage lending fraud.

Question: What caused Indymac's downfall? Pat Buchanan.

MR. BUCHANAN: The subprime mortgage thing, basically; maybe even fraud, John. They're looking into that. But it's not going to be the only bank that's going to go under. There's going to be a winnowing of these banks. And if folks have got more than $100,000 cash in any account in any bank, they probably should move it around.

But John, the problem here is the Federal Reserve has got two problems. First is it's facing inflation and a sinking dollar, which argues for tighter money. At the same time, the economy is sinking, which argues for looser money. We are in a real box; this whole country is, John. And we're going to be a long time working it out and there's going to be a lot more casualties, and among them are going to be banks.

DR. MCLAUGHLIN: Is inflation the root problem?

MR. BUCHANAN: Inflation is one of the problems. But the housing is not inflating; it's deflating. That's one of the problems too, John. We're getting hit from both sides.

DR. MCLAUGHLIN: Eleanor.

MS. CLIFT: Well, we've borrowed a lot of money from China to buy oil from Saudi Arabia, and this is a moment of truth. One bank is not -- the president is right. One bank is not all that consequential, except as an indication of how heavily leveraged all of these financial institutions are.

This is the equivalent, really, of a worldwide margin call. We've built this daisy chain of financial institutions and we have not built a significant chain of regulation. And I think the secretary of the Treasury, Henry Paulson, tried to start this conversation a few months ago about government regulation. Now they're in a position where they virtually have to stage a government takeover because these institutions are too big to be allowed to fail.

DR. MCLAUGHLIN: Mort, what's the view from the billionaires' nest? (Laughter.)

MR. ZUCKERMAN: Reasonably relaxed, John, is the way I'd put it. But, look, I think we are faced with three crises -- two bubbles, one that burst and one that is being created. The bubbles that have burst are in the financial sector, in the housing sector, which really caused the bubble to burst in the financial sector. And the bubble that's occurring is in fuel and food. So that is creating a major economic crunch for us. The headwinds are very, very serious. But the thing that is still the most serious is the continuing decline, the plummeting of housing prices. That's what triggered the problem with this bank. That's what's triggering the problem with Fannie Mae and Freddie Mac. And that is a gigantic problem of trillions of dollars. And that is the one that nobody knows where that bottom is, and therefore nobody knows how far this will go.

Inflation, in my judgment, is not the problem. The core inflation, as they say, is under 3 percent. And when you have declining wages and declining expectations for people who are employed, you will not have runaway inflation or inflationary expectations. You do have it in food and fuel. That is also going to change.

DR. MCLAUGHLIN: Clarence, is it hard for depositors to know whether or not their bank is solvent?

MR. PAGE: Well, there are about 90 under investigation right now. About five have gone under so far. But the real question is, is my money safe? Pat is right about, you know, if you've got over $100,000 in a single deposit, or I believe it's $200,000 in a joint deposit or $250,000 in an IRA, you should diversify, move it around, if you're not feeling safe. But --

DR. MCLAUGHLIN: You mean, hold it to $100,000.

MR. PAGE: Yeah; well, $100,000 for a single deposit. It's important to note, though, that in all these years nobody's lost money on these accounts since the FDIC has been formed. Their money is basically safe. The reason why people go lining up at the bank is because they're scared. They don't have a lot of information, and so they get scared and they panic. But there's nothing to fear but fear itself. How about that? (Laughs.)

DR. MCLAUGHLIN: Do you have liquidity to the point where you have to mastermind disposing of a billion dollars in $100,000 accounts?

MR. ZUCKERMAN: Well, I appreciate the compliment. But let me put it this way. I don't think the issue is the loss of your deposits. The FDIC has protected these deposits.

DR. MCLAUGHLIN: Who protects the FDIC -- the Fed?

MR. ZUCKERMAN: Well, the backup --

DR. MCLAUGHLIN: The Fed?

MR. ZUCKERMAN: That's right. The backup is the federal government and the credit of the federal government.

DR. MCLAUGHLIN: How much do they have at their disposal? MR. ZUCKERMAN: Well, they have about $10 trillion of debt, but they can print as much money as they want. And therefore, they can provide the money to the people who had deposits. That's implicit in saving the commercial banking system. It's not there where the risk lies.

DR. MCLAUGHLIN: But the Fed does not come in after you exceed -- one exceeds the $100,000 limit.

MR. BUCHANAN: They don't have to.

MR. ZUCKERMAN: No, they don't have to. That's not their obligation.

DR. MCLAUGHLIN: Then you pay a percentage of a dollar, like 50 percent on the dollar. Is that correct?

MR. ZUCKERMAN: That is not the real risk to the economy. The real risk to the economy -- and almost everybody in the economy can protect their deposits. The real risk to the economy is plummeting house prices and house values that is driving the financial bubble.

DR. MCLAUGHLIN: You saw the people in line at Indymac, did you not?

MR. ZUCKERMAN: They will all get their money back. They're all going to get their money back.

MR. BUCHANAN: Let's talk about the American people.

You mentioned food and fuel. That's fine if you don't have to go anywhere and you don't have to eat. But the combined inflation was running at 13 or 14 percent. This is killing the American workers, the average guy, and it's going to kill the Republican Party if it's not controlled. And it's a very serious problem, Mort. It may not be serious if --

DR. MCLAUGHLIN: Can you hold on for one minute?

MS. CLIFT: I just want to say, the Republican Party has killed itself because of the policies it has created over the last eight years.

DR. MCLAUGHLIN: I want to show a check list of various aspects of the financial situation to make sure we've covered what we should be covering.

Big-time rue. Many factors are contributing to America's weak economy: Inflation up; U.S. dollar weak; housing prices declining; job market slow; energy and food prices up; getting a loan mostly difficult; auto industry collapsing; U.S. airlines posting big losses; Fannie and Freddie Mac destabilized. Which one of those do you want to attack, Mort?

MR. ZUCKERMAN: Well, to my mind, the biggest single exposure now is Freddie Mac and Fannie Mae. I mean, you're talking about trillions of dollars of debt, which has an implicit government guarantee.

DR. MCLAUGHLIN: Is it a problem? Is it a problem?

MR. ZUCKERMAN: You're damn right it is a problem. They've got leverage of 65 to 1. They could be wiped out. And the federal government will have to step in.

DR. MCLAUGHLIN: I thought it was settled. I thought we said we'd back them up.

MR. BUCHANAN: We are, John. We are going to back them up.

MR. ZUCKERMAN: That's the problem is if we do back them up. And this could cost us hundreds and hundreds of billions of dollars. MR. BUCHANAN: But Mort --

MR. ZUCKERMAN: That's exactly the problem.

MR. BUCHANAN: But we're going to back them up. The truth is we're going to back them up. And that's why the problem is the Federal Reserve and these huge outpourings of money and a sinking American dollar worldwide.

MR. ZUCKERMAN: That is not the problem.

MR. BUCHANAN: And the second thing is the housing crash, which is killing these banks.

MS. CLIFT: And the reason we're going to back them up is because much of the debt they hold is held by the Chinese.

MR. ZUCKERMAN: No, no.

MS. CLIFT: And if the Chinese lose confidence in the American market, then we're in trouble. How is that "No, no, no"?

MR. ZUCKERMAN: That is not the case. The Chinese have a very small proportion of our total debt. We have $10 trillion of debt. They may have between half a trillion and a trillion dollars. But that is something that they can cash in at any time.

The real problem is it wrecks our financial system. So you can't get money from the people who have money to the people who need to invest money. And we have a tremendous slowdown in the financing of American business.

MS. CLIFT: The reason --

DR. MCLAUGHLIN: What's the safest thing you can do with your money -- buy gold?

MR. BUCHANAN: Treasuries.

MR. ZUCKERMAN: No, Treasury bills.

MR. BUCHANAN: T-bills and gold -- well, it's a little late for gold, but T-bills --

MS. CLIFT: The reason a Republican free-market administration is basically staging what is close to a government takeover of nationalizing -- they're nationalizing Fannie Mae and Freddie Mac in all but name only is because they're afraid of the world markets losing confidence in the American markets. And then the whole house of cards collapses.

MR. ZUCKERMAN: With all due respect, if you want to talk about the politics of Fannie Mae and Freddie Mac, this was a Democratic honey pot for a long time. It was they who decided "You must let us run it as a private institution" and not really take the steps that you would have run it as a private institution. So that is not a fair judgment.

MS. CLIFT: But there's been a Republican Congress in charge for most of the '90s, and they have not bothered to regulate.

DR. MCLAUGHLIN: Are we in recession, Clarence?

MS. CLIFT: I'm not defending those institutions.

MR. PAGE: Well, we --

DR. MCLAUGHLIN: Okay, let her finish.

MS. CLIFT: I'm not defending those institutions. I'm just saying that this is a Republican free-market administration, and they are basically taking over these quasi-private entities.

MR. ZUCKERMAN: They have no choice. They have no choice.

DR. MCLAUGHLIN: Clarence, are we in recession?

MR. PAGE: Well, it certainly feels like a recession to a lot of people. The question is, you know, has there been growth? There has not. And so much of this is a state of mind. People don't see expansion in the economy. They don't see their own lives getting better. And so you've got a psychological recession which amounts to the same thing.

DR. MCLAUGHLIN: Who's to blame?

MR. PAGE: Who's to blame? Well, there's enough blame to go around, John. (Laughs.) Actually, there has been a bubble in housing as well as --

DR. MCLAUGHLIN: What about those subprime mortgages?

MR. ZUCKERMAN: Oh, absolutely. Listen, you know --

DR. MCLAUGHLIN: Did that trigger the whole thing?

MR. ZUCKERMAN: It was both the Democrats -- no, it wasn't the only one. We had a bubble in housing. We had housing that went up by 9 to 10 percent a year for the last six or seven years after being up only an average of 3 percent --

MR. BUCHANAN: The reason is the Fed, Mort.

DR. MCLAUGHLIN: Let him finish. Let him finish. MR. BUCHANAN: You have bubbles because the Fed pumps money in and it goes somewhere. It went into housing. It's gone into stocks. It used to go into dot-coms.

DR. MCLAUGHLIN: You want to shut down the Fed.

MR. BUCHANAN: The Fed did a lousy, lousy job for America. They printed more money and put out more money than the economy could accommodate, and that's why --

DR. MCLAUGHLIN: This is Bernanke. You're pointing the finger at Bernanke.

MR. BUCHANAN: It's not just Bernanke. It's the maestro as well.

DR. MCLAUGHLIN: Is it the treasurer? I mean, not the treasurer. Is it the secretary of the Treasury?

MR. ZUCKERMAN: No, it is not.

MR. BUCHANAN: Alan Greenspan as well as Bernanke.

MS. CLIFT: Everybody's been on a wonderful joy ride, and all the fancy fellows on Wall Street and all their leverage, this against that -- everything is leveraged against each other. And now one little bank falls and everybody realizes that, you know, we now have, as I said, the equivalent of a worldwide margin call.

DR. MCLAUGHLIN: Will there be any prosecutions --

MS. CLIFT: And the federal government is going to have to make good, and they should.

MR. ZUCKERMAN: There is undoubtedly fraud in some areas. But what happened was -- it wasn't just, if I may say, Wall Street. Every homeowner in America was buying homes beyond their capacity. And they were --

MS. CLIFT: I wouldn't blame the homeowners.

MR. ZUCKERMAN: No, I'm not blaming them. I'm just saying they had easy money. You had escalating prices in homes. And that bubble has burst.

MS. CLIFT: You had easy --

MR. ZUCKERMAN: Everybody played a role in that, not just --

MS. CLIFT: Wall Street played a bigger role than the guy out who was buying a house in middle America.

DR. MCLAUGHLIN: Do you remember what Phil Gramm lobbied for, and he got legislation that permitted banks to join other financial institutions? Do you remember how that was all woven together? Did that turn out to be very bad?

MR. ZUCKERMAN: No, it has not turned out to be bad. What turned out to be bad, I have to tell you, was the financial world, without question, got into ridiculous leveraging. In other words, Bear Stearns had leverage of 32 to 1; now, not as bad as Fannie Mae and Freddie Mac, which went 65 to 1 in leverage, which is --

MR. BUCHANAN: Why weren't they regulated?

MR. ZUCKERMAN: We did not regulate investment banks. We only regulated commercial banks.

MR. BUCHANAN: Then why did we guarantee them?

MR. ZUCKERMAN: We did not guarantee them. We guaranteed them to save the financial system, and it was the right thing to do.

DR. MCLAUGHLIN: Hey, Mort, what's the worst-case scenario? MR. ZUCKERMAN: The worst-case scenario is that this is beyond the control of the government even to do something about it. If you have Fannie Mae and Freddie Mac blow up, you could have a systemic crisis --

DR. MCLAUGHLIN: Do you see that happening, Mort?

MR. ZUCKERMAN: It is possible.

DR. MCLAUGHLIN: It is possible?

MR. ZUCKERMAN: Yes, it is really possible.

MR. BUCHANAN: John, you know what will happen then?

DR. MCLAUGHLIN: IS that all it is -- low-level possibility?

MR. BUCHANAN: John --

DR. MCLAUGHLIN: I want a prediction on how long this thing is going to last and how bad it's going to get.

MR. ZUCKERMAN: Well, you know I've been very bearish about this for a long time, and especially on this show.

DR. MCLAUGHLIN: Don't hold back.

MR. ZUCKERMAN: It's going to go on, in my judgment, for another couple of years. We're going to have the worst recession since the Great Depression. I've said that over and over again.

MR. BUCHANAN: You know what's going to happen, John?

MR. ZUCKERMAN: It'll be the worst and the longest.

MR. BUCHANAN: The Federal Reserve can print the money, and that's exactly what's going to happen at the end, whether it's Fannie Mae, Freddie Mac, or whatever you want to call it. They will push the money in. That's how they're going to save Social Security -- deflate the value or reduce the value of the American dollar, the way they're destroying it right now worldwide.

DR. MCLAUGHLIN: Is that an evil?

MR. ZUCKERMAN: That is nonsense.

MR. BUCHANAN: Of course it's an evil. It's robbery of the American people.

DR. MCLAUGHLIN: Taxpayers are underwriting the whole thing?

MR. ZUCKERMAN: Excuse me. That is -- DR. MCLAUGHLIN: Taxpayer money.

MR. BUCHANAN: You guys are going to get out of it okay, Mort. But the average guy ain't, because his wealth, his retirement and everything is going to be wiped out by a depreciated dollar.

DR. MCLAUGHLIN: Clarence, what's the worst-case scenario?

MR. PAGE: Well, I think -- well, that scenario of, like, Fannie Mae going down and all -- the federal government sees these institutions as too big to fail. They're going to back it up. And I think -- because it's not just overseas investors, but it's Americans who have to have confidence in their banks and in the system.

DR. MCLAUGHLIN: You mean, they're going to --

MR. PAGE: It's going to be backed up.

DR. MCLAUGHLIN: This default, this massive default, is going to be spread around among the taxpayers in order to carry the burden.

MR. PAGE: Right. And it'll work. It'll work, because --

DR. MCLAUGHLIN: These guys are out there trying to make a fast buck.

MS. CLIFT: Right.

DR. MCLAUGHLIN: They made their fast buck, and then the bottom falls out and we pick up the pieces.

MR. ZUCKERMAN: Exactly.

MR. PAGE: I agree with Mort that --

MR. ZUCKERMAN: That's exactly what happened. That's exactly what happened to the shareholders of Fannie Mae and Freddie Mac.

MS. CLIFT: That's how capitalism works. If there are profits, the guys on Wall Street get it. If there are losses, the taxpayers --

DR. MCLAUGHLIN: We can't improve on that. Exit question: Is the presidential election going to pivot on the economy? This is so obvious. Yes or no?

MR. BUCHANAN: Yes, it is.

MS. CLIFT: Yes -- very obvious.

MR. ZUCKERMAN: It's overwhelmingly the number one issue.

MR. PAGE: Painfully obviously. DR. MCLAUGHLIN: Overwhelmingly number one.

When we come back, oil drilling offshore -- Obama says no; McCain says yes. What do Americans say?

(Announcements.)

DR. MCLAUGHLIN: Issue Two: Drill Away.

The coast is clear for offshore oil. Drilling for offshore oil has been prohibited by the federal government for 18 years. This week George Bush lifted that 18-year ban. Now, to make this oil drilling happen, Congress also must okay it. Republican Bush called on Democrats in Congress to do their part by repealing their 27-year-old ban.

PRESIDENT BUSH: (From videotape.) Failure to act is unacceptable. It's unacceptable to me and it's unacceptable to the American people. Democratic leaders can show that they have finally heard the frustrations of the American people by matching the action I've taken today, repealing the congressional ban, and passing legislation to facilitate responsible offshore exploration.

DR. MCLAUGHLIN: President Bush is leveraging his power to politically embarrass the Democratic-controlled Congress.

Democrats generally oppose making life any easier for big oil, which would benefit from offshore oil. Democrats are also typically green. So Democratic House Speaker Nancy Pelosi denounced Mr. Bush.

"The Bush plan is a hoax. It will never reduce gas prices nor increase energy independence. It just gives millions more acres to the same companies that are sitting on nearly 68 million acres of public lands and coastal areas."

U.S. coastal waters are home to 86 billion barrels of oil -- 12 years of U.S. oil consumption. Sixty-seven percent of Americans favor offshore drilling.

Question: Will offshore drilling have any impact on the current price of a gallon of gasoline? I ask you, Clarence Page.

MR. PAGE: I wouldn't look for it, John. You're not going to see a real impact until years down the line. And the argument is over the oil versus the scenic beauty of our pristine coasts. That's the kind of an issue that's going to cause a lot of arguments on Capitol Hill.

The Democrats, I think, are going to hold fast for the near future. But the thing about offshore drilling is that it doesn't really affect the immediate price, but it's got real political salience. Bush comes out as being in favor of reducing the price of oil and our oil dependency. Democrats come out as being opposed to it. And he hopes Republicans --

DR. MCLAUGHLIN: Does that salience have any impact on the markets?

MR. ZUCKERMAN: Yes.

MR. PAGE: Immediately? I doubt it. But I'll defer to Mort here.

MR. ZUCKERMAN: Market prices are set by --

DR. MCLAUGHLIN: Futures.

MR. ZUCKERMAN: -- futures trading. Futures tradings are affected by how they think new supply will come on or how they think demand will be dropped. If we make a serious commitment to a lot of new supply, it's bound to affect it; maybe not in a week --

MR. PAGE: You're talking a decade from now.

MR. BUCHANAN: Politically, John --

MR. ZUCKERMAN: That's when the supply will come on.

MR. PAGE: Right.

MR. ZUCKERMAN: But the futures will be affected a lot earlier than that.

MR. BUCHANAN: John, politically it is a winner, I think, for Republicans. I think two-thirds of folks think we ought to start drilling. We do drill off Texas and off Louisiana, not off Florida and not off California. And I think Pelosi and the Democrats are coming off as ideological obstructionists when folks have at least an idea for future supply. And to demagogue the oil companies -- nobody believes that's going to get --

MR. PAGE: Well, the governors don't like it either.

DR. MCLAUGHLIN: What about the impact on OPEC?

MR. BUCHANAN: Well, OPEC is having trouble now because, frankly, demand is falling a little bit --

DR. MCLAUGHLIN: Right.

MR. BUCHANAN: -- because prices are $147 to $150.

DR. MCLAUGHLIN: Right. So what does that lead OPEC to do?

MR. BUCHANAN: That'll lead OPEC to cut back on production.

DR. MCLAUGHLIN: Correct.

MS. CLIFT: The price per barrel has been falling recently. That has nothing to do with the notion that we might be drilling offshore. Drilling offshore is a chimera. Did I pronounce it correctly?

DR. MCLAUGHLIN: Chimera.

MS. CLIFT: Okay. I knew I wasn't going to get it right. (Laughs.) Mythical beast.

DR. MCLAUGHLIN: You got the right word.

MS. CLIFT: Right, I got the right word. It doesn't do anything to affect the oil supplies. And it also diverts us from the real challenge, which is getting off of these fuels that we cannot sustain. And Al Gore made a very big -- DR. MCLAUGHLIN: On the subject of the real challenge, the presidential contenders. Barack Obama has a problem with offshore drilling. John McCain does not, and thinks it should be left up to the states.

SEN. BARACK OBAMA (D-IL, presumptive Democratic presidential nominee): (From videotape.) Offshore drilling would not lower gas prices today.

SEN. JOHN MCCAIN (R-AZ, presumptive Republican presidential nominee): (From videotape.) I think the federal moratorium should be lifted, but I also think that it is up to the states to make those decisions.

DR. MCLAUGHLIN: Why the states emphasis?

MR. BUCHANAN: Because Charlie Crist has come out for --

DR. MCLAUGHLIN: Florida governor.

MR. BUCHANAN: -- (inaudible) -- and Schwarzenegger has not come out for them. So McCain is still a friend of the California coast.

DR. MCLAUGHLIN: What's principally at play? Florida.

MR. PAGE: Florida. Well, you mean votes?

DR. MCLAUGHLIN: Yeah.

MR. PAGE: Well, yeah, because California --

DR. MCLAUGHLIN: Floridians don't like it because it's going to mess up their shorelines where the tourists are.

MR. PAGE: Right. Right. And they have a Republican governor. He doesn't like it either. (Laughs.)

DR. MCLAUGHLIN: So, therefore, McCain says, "I'll play to the states on this. Let the states decide." It's not a bad idea in theory, is it?

MR. BUCHANAN: He's playing to Charlie Crist.

DR. MCLAUGHLIN: Is the theory good? Is the statecraft good?

MS. CLIFT: No.

MR. ZUCKERMAN: No, it's not.

MR. BUCHANAN: Not overall.

DR. MCLAUGHLIN: Do you want to have it as a federal decision? MR. ZUCKERMAN: I want to have it as -- it's insane to send $100 (billion), $150 (billion), $200 billion a year to the worst people in the world because we will not produce the oil resources that we have locked up in this country, including offshore and including in Alaska. It will not happen in a day or a week.

DR. MCLAUGHLIN: Why won't you let the states decide? It's their shoreline.

MR. ZUCKERMAN: It's not just their states. It's a national issue for the United States.

MR. BUCHANAN: The outer continental shelf is America's --

MR. ZUCKERMAN: It is something that is critical to our future and to our economic future.

MR. BUCHANAN: The outer continental shelf belongs to the nation.

DR. MCLAUGHLIN: The Founding Fathers warned against this, Mort -- too much power aggregated in the central government.

MR. ZUCKERMAN: Too much power is now aggregating in Iran and in Venezuela and in Russia, who control the oil supply.

MR. PAGE: There's also -- (inaudible) -- field, too, though; don't forget.

(Cross-talk.)

DR. MCLAUGHLIN: Exit question --

MR. PAGE: Now they're starting to turn to alternative fuel, as we should have years ago.

DR. MCLAUGHLIN: The definition of victory on this issue is not whether or not the ban is lifted -- that is, offshore drilling -- but whose position the voters like better on that basis. Who will win, McCain and the White House or Obama and the Democratic Congress? Pat Buchanan.

MR. BUCHANAN: Well, clearly, I think this is one of the few issues in which Republicans, McCain and Bush, have the superior position. As a matter of fact, McCain would not have moved to this position --

DR. MCLAUGHLIN: McCain and the White House have the better position.

MR. BUCHANAN: Yeah. McCain would not have moved to this position unless the polls showed it rising in popularity.

DR. MCLAUGHLIN: Obama may be in real trouble on this, true?

MS. CLIFT: No, I don't agree. It's an easy yes to say yeah, we should drill more. But the intensity is not there. The intensity is on the other side. And so politically it is not a loser for Barack Obama. Plus he has a unique gift, actually, to be able to explain things and be reasonable. And that's part of his appeal.

DR. MCLAUGHLIN: Sixty-seven percent of the American people want to drill offshore. What do you think of that?

MR. ZUCKERMAN: Those polls have been climbing. That $4-plus a gallon, people are now saying, "Let's produce our own oil. Sooner or later it's going to affect the price. I think it's a definite winner for McCain; not that it's going to swing the election, because the economy is a much worse issue. MR. PAGE: I agree. This single issue, it's a winner for McCain. But it's not going to swing the election, because oil does not sit alone as an energy source. And when you've got even T. Boone Pickens now pushing wind, you know the debate is shifting.

DR. MCLAUGHLIN: Vox populi. Sixty-seven percent of the people want it. Make it happen.

We'll be right back with predictions.

MS. CLIFT: The votes aren't there on Capitol Hill.

(Announcements.)

DR. MCLAUGHLIN: The Democrats will pick up five Senate seats in November. Yes or no?

MR. BUCHANAN: Yes.

MS. CLIFT: At least.

MR. ZUCKERMAN: Yes.

MR. PAGE: Yes.

DR. MCLAUGHLIN: Answer: Yes.

Bye-bye.



END.

ayed a role in that, not just --

MS. CLIFT: Wall Street played a bigger role than the guy out who was buying a house in middle America.

DR. MCLAUGHLIN: Do you remember what Phil Gramm lobbied for, and he got legislation that permitted banks to join other financial institutions? Do you remember how that was all woven together? Did that turn out to be very bad?

MR. ZUCKERMAN: No, it has not turned out to be bad. What turned out to be bad, I have to tell you, was the financial world, without question, got into ridiculous leveraging. In other words, Bear Stearns had leverage of 32 to 1; now, not as bad as Fannie Mae and Freddie Mac, which went 65 to 1 in leverage, which is --

MR. BUCHANAN: Why weren't they regulated?

MR. ZUCKERMAN: We did not regulate investment banks. We only regulated commercial banks.

MR. BUCHANAN: Then why did we guarantee them?

MR. ZUCKERMAN: We did not guarantee them. We guaranteed them to save the financial system, and it was the right thing to do.

DR. MCLAUGHLIN: Hey, Mort, what's the worst-case scenario? MR. ZUCKERMAN: The worst-case scenario is that this is beyond the control of the government even to do something about it. If you have Fannie Mae and Freddie Mac blow up, you could have a systemic crisis --

DR. MCLAUGHLIN: Do you see that happening, Mort?

MR. ZUCKERMAN: It is possible.

DR. MCLAUGHLIN: It is possible?

MR. ZUCKERMAN: Yes, it is really possible.

MR. BUCHANAN: John, you know what will happen then?

DR. MCLAUGHLIN: IS that all it is -- low-level possibility?

MR. BUCHANAN: John --

DR. MCLAUGHLIN: I want a prediction on how long this thing is going to last and how bad it's going to get.

MR. ZUCKERMAN: Well, you know I've been very bearish about this for a long time, and especially on this show.

DR. MCLAUGHLIN: Don't hold back.

MR. ZUCKERMAN: It's going to go on, in my judgment, for another couple of years. We're going to have the worst recession since the Great Depression. I've said that over and over again.

MR. BUCHANAN: You know what's going to happen, John?

MR. ZUCKERMAN: It'll be the worst and the longest.

MR. BUCHANAN: The Federal Reserve can print the money, and that's exactly what's going to happen at the end, whether it's Fannie Mae, Freddie Mac, or whatever you want to call it. They will push the money in. That's how they're going to save Social Security -- deflate the value or reduce the value of the American dollar, the way they're destroying it right now worldwide.

DR. MCLAUGHLIN: Is that an evil?

MR. ZUCKERMAN: That is nonsense.

MR. BUCHANAN: Of course it's an evil. It's robbery of the American people.

DR. MCLAUGHLIN: Taxpayers are underwriting the whole thing?

MR. ZUCKERMAN: Excuse me. That is -- DR. MCLAUGHLIN: Taxpayer money.

MR. BUCHANAN: You guys are going to get out of it okay, Mort. But the average guy ain't, because his wealth, his retirement and everything is going to be wiped out by a depreciated dollar.

DR. MCLAUGHLIN: Clarence, what's the worst-case scenario?

MR. PAGE: Well, I think -- well, that scenario of, like, Fannie Mae going down and all -- the federal government sees these institutions as too big to fail. They're going to back it up. And I think -- because it's not just overseas investors, but it's Americans who have to have confidence in their banks and in the system.

DR. MCLAUGHLIN: You mean, they're going to --

MR. PAGE: It's going to be backed up.

DR. MCLAUGHLIN: This default, this massive default, is going to be spread around among the taxpayers in order to carry the burden.

MR. PAGE: Right. And it'll work. It'll work, because --

DR. MCLAUGHLIN: These guys are out there trying to make a fast buck.

MS. CLIFT: Right.

DR. MCLAUGHLIN: They made their fast buck, and then the bottom falls out and we pick up the pieces.

MR. ZUCKERMAN: Exactly.

MR. PAGE: I agree with Mort that --

MR. ZUCKERMAN: That's exactly what happened. That's exactly what happened to the shareholders of Fannie Mae and Freddie Mac.

MS. CLIFT: That's how capitalism works. If there are profits, the guys on Wall Street get it. If there are losses, the taxpayers --

DR. MCLAUGHLIN: We can't improve on that. Exit question: Is the presidential election going to pivot on the economy? This is so obvious. Yes or no?

MR. BUCHANAN: Yes, it is.

MS. CLIFT: Yes -- very obvious.

MR. ZUCKERMAN: It's overwhelmingly the number one issue.

MR. PAGE: Painfully obviously. DR. MCLAUGHLIN: Overwhelmingly number one.

When we come back, oil drilling offshore -- Obama says no; McCain says yes. What do Americans say?

(Announcements.)

DR. MCLAUGHLIN: Issue Two: Drill Away.

The coast is clear for offshore oil. Drilling for offshore oil has been prohibited by the federal government for 18 years. This week George Bush lifted that 18-year ban. Now, to make this oil drilling happen, Congress also must okay it. Republican Bush called on Democrats in Congress to do their part by repealing their 27-year-old ban.

PRESIDENT BUSH: (From videotape.) Failure to act is unacceptable. It's unacceptable to me and it's unacceptable to the American people. Democratic leaders can show that they have finally heard the frustrations of the American people by matching the action I've taken today, repealing the congressional ban, and passing legislation to facilitate responsible offshore exploration.

DR. MCLAUGHLIN: President Bush is leveraging his power to politically embarrass the Democratic-controlled Congress.

Democrats generally oppose making life any easier for big oil, which would benefit from offshore oil. Democrats are also typically green. So Democratic House Speaker Nancy Pelosi denounced Mr. Bush.

"The Bush plan is a hoax. It will never reduce gas prices nor increase energy independence. It just gives millions more acres to the same companies that are sitting on nearly 68 million acres of public lands and coastal areas."

U.S. coastal waters are home to 86 billion barrels of oil -- 12 years of U.S. oil consumption. Sixty-seven percent of Americans favor offshore drilling.

Question: Will offshore drilling have any impact on the current price of a gallon of gasoline? I ask you, Clarence Page.

MR. PAGE: I wouldn't look for it, John. You're not going to see a real impact until years down the line. And the argument is over the oil versus the scenic beauty of our pristine coasts. That's the kind of an issue that's going to cause a lot of arguments on Capitol Hill.

The Democrats, I think, are going to hold fast for the near future. But the thing about offshore drilling is that it doesn't really affect the immediate price, but it's got real political salience. Bush comes out as being in favor of reducing the price of oil and our oil dependency. Democrats come out as being opposed to it. And he hopes Republicans --

DR. MCLAUGHLIN: Does that salience have any impact on the markets?

MR. ZUCKERMAN: Yes.

MR. PAGE: Immediately? I doubt it. But I'll defer to Mort here.

MR. ZUCKERMAN: Market prices are set by --

DR. MCLAUGHLIN: Futures.

MR. ZUCKERMAN: -- futures trading. Futures tradings are affected by how they think new supply will come on or how they think demand will be dropped. If we make a serious commitment to a lot of new supply, it's bound to affect it; maybe not in a week --

MR. PAGE: You're talking a decade from now.

MR. BUCHANAN: Politically, John --

MR. ZUCKERMAN: That's when the supply will come on.

MR. PAGE: Right.

MR. ZUCKERMAN: But the futures will be affected a lot earlier than that.

MR. BUCHANAN: John, politically it is a winner, I think, for Republicans. I think two-thirds of folks think we ought to start drilling. We do drill off Texas and off Louisiana, not off Florida and not off California. And I think Pelosi and the Democrats are coming off as ideological obstructionists when folks have at least an idea for future supply. And to demagogue the oil companies -- nobody believes that's going to get --

MR. PAGE: Well, the governors don't like it either.

DR. MCLAUGHLIN: What about the impact on OPEC?

MR. BUCHANAN: Well, OPEC is having trouble now because, frankly, demand is falling a little bit --

DR. MCLAUGHLIN: Right.

MR. BUCHANAN: -- because prices are $147 to $150.

DR. MCLAUGHLIN: Right. So what does that lead OPEC to do?

MR. BUCHANAN: That'll lead OPEC to cut back on production.

DR. MCLAUGHLIN: Correct.

MS. CLIFT: The price per barrel has been falling recently. That has nothing to do with the notion that we might be drilling offshore. Drilling offshore is a chimera. Did I pronounce it correctly?

DR. MCLAUGHLIN: Chimera.

MS. CLIFT: Okay. I knew I wasn't going to get it right. (Laughs.) Mythical beast.

DR. MCLAUGHLIN: You got the right word.

MS. CLIFT: Right, I got the right word. It doesn't do anything to affect the oil supplies. And it also diverts us from the real challenge, which is getting off of these fuels that we cannot sustain. And Al Gore made a very big -- DR. MCLAUGHLIN: On the subject of the real challenge, the presidential contenders. Barack Obama has a problem with offshore drilling. John McCain does not, and thinks it should be left up to the states.

SEN. BARACK OBAMA (D-IL, presumptive Democratic presidential nominee): (From videotape.) Offshore drilling would not lower gas prices today.

SEN. JOHN MCCAIN (R-AZ, presumptive Republican presidential nominee): (From videotape.) I think the federal moratorium should be lifted, but I also think that it is up to the states to make those decisions.

DR. MCLAUGHLIN: Why the states emphasis?

MR. BUCHANAN: Because Charlie Crist has come out for --

DR. MCLAUGHLIN: Florida governor.

MR. BUCHANAN: -- (inaudible) -- and Schwarzenegger has not come out for them. So McCain is still a friend of the California coast.

DR. MCLAUGHLIN: What's principally at play? Florida.

MR. PAGE: Florida. Well, you mean votes?

DR. MCLAUGHLIN: Yeah.

MR. PAGE: Well, yeah, because California --

DR. MCLAUGHLIN: Floridians don't like it because it's going to mess up their shorelines where the tourists are.

MR. PAGE: Right. Right. And they have a Republican governor. He doesn't like it either. (Laughs.)

DR. MCLAUGHLIN: So, therefore, McCain says, "I'll play to the states on this. Let the states decide." It's not a bad idea in theory, is it?

MR. BUCHANAN: He's playing to Charlie Crist.

DR. MCLAUGHLIN: Is the theory good? Is the statecraft good?

MS. CLIFT: No.

MR. ZUCKERMAN: No, it's not.

MR. BUCHANAN: Not overall.

DR. MCLAUGHLIN: Do you want to have it as a federal decision? MR. ZUCKERMAN: I want to have it as -- it's insane to send $100 (billion), $150 (billion), $200 billion a year to the worst people in the world because we will not produce the oil resources that we have locked up in this country, including offshore and including in Alaska. It will not happen in a day or a week.

DR. MCLAUGHLIN: Why won't you let the states decide? It's their shoreline.

MR. ZUCKERMAN: It's not just their states. It's a national issue for the United States.

MR. BUCHANAN: The outer continental shelf is America's --

MR. ZUCKERMAN: It is something that is critical to our future and to our economic future.

MR. BUCHANAN: The outer continental shelf belongs to the nation.

DR. MCLAUGHLIN: The Founding Fathers warned against this, Mort -- too much power aggregated in the central government.

MR. ZUCKERMAN: Too much power is now aggregating in Iran and in Venezuela and in Russia, who control the oil supply.

MR. PAGE: There's also -- (inaudible) -- field, too, though; don't forget.

(Cross-talk.)

DR. MCLAUGHLIN: Exit question --

MR. PAGE: Now they're starting to turn to alternative fuel, as we should have years ago.

DR. MCLAUGHLIN: The definition of victory on this issue is not whether or not the ban is lifted -- that is, offshore drilling -- but whose position the voters like better on that basis. Who will win, McCain and the White House or Obama and the Democratic Congress? Pat Buchanan.

MR. BUCHANAN: Well, clearly, I think this is one of the few issues in which Republicans, McCain and Bush, have the superior position. As a matter of fact, McCain would not have moved to this position --

DR. MCLAUGHLIN: McCain and the White House have the better position.

MR. BUCHANAN: Yeah. McCain would not have moved to this position unless the polls showed it rising in popularity.

DR. MCLAUGHLIN: Obama may be in real trouble on this, true?

MS. CLIFT: No, I don't agree. It's an easy yes to say yeah, we should drill more. But the intensity is not there. The intensity is on the other side. And so politically it is not a loser for Barack Obama. Plus he has a unique gift, actually, to be able to explain things and be reasonable. And that's part of his appeal.

DR. MCLAUGHLIN: Sixty-seven percent of the American people want to drill offshore. What do you think of that?

MR. ZUCKERMAN: Those polls have been climbing. That $4-plus a gallon, people are now saying, "Let's produce our own oil. Sooner or later it's going to affect the price. I think it's a definite winner for McCain; not that it's going to swing the election, because the economy is a much worse issue. MR. PAGE: I agree. This single issue, it's a winner for McCain. But it's not going to swing the election, because oil does not sit alone as an energy source. And when you've got even T. Boone Pickens now pushing wind, you know the debate is shifting.

DR. MCLAUGHLIN: Vox populi. Sixty-seven percent of the people want it. Make it happen.

We'll be right back with predictions.

MS. CLIFT: The votes aren't there on Capitol Hill.

(Announcements.)

DR. MCLAUGHLIN: The Democrats will pick up five Senate seats in November. Yes or no?

MR. BUCHANAN: Yes.

MS. CLIFT: At least.

MR. ZUCKERMAN: Yes.

MR. PAGE: Yes.

DR. MCLAUGHLIN: Answer: Yes.

Bye-bye.



END.