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Dow Dives Over 500 Points; Lawmakers Demand Answers From AIG; Round Two: Second Presidential Debate

Aired October 7, 2008 - 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: We're following the breaking news, another horrible day on Wall Street.
The economy set for center stage tonight as well in a one-of-its- kind debate. Barack Obama and John McCain are getting ready to face each other and voters together for the first time.

Also, more on the breaking news. The Dow continuing to dive. Things are so bad in one credit sector, the government gets radical. It's taking an unprecedented move to help companies stay afloat in the short term.

Might your next paycheck come from some help from the federal government? We're all over this story.

And you might see the financial equivalent of the "Grinch that Stole Christmas." Like an economic scrooge, this crisis could hit holiday inventory at the nation's retailers rather hard.

I'm Wolf Blitzer at the CNN Election Center. You're in THE SITUATION ROOM.

But we begin with the breaking news, investors continuing to shed stocks, plunging the Dow once again more than 500 points. Look at the bottom of your screen. You'll see the numbers.

This coming after the government announces a plan that's bold, risky and will impact many Americans working for big corporations. In that unprecedented effort to keep countries afloat in the short term, the government will now buy massive amounts of short-term debt. Simply put, those debts allow companies, perhaps like yours, to pay for day-to-day operations like purchasing supplies and paying employees, but this move raises fear also at the same time of inflation.

President Bush is trying to ease those financial fears. Today he sought to reassure very anxious Americans, and he urged patience.

(BEGIN VIDEO CLIP)

GEORGE. W. BUSH, PRESIDENT OF THE UNITED STATES: Thawing the freeze in the financial system is not going to happen overnight, but it will be a process that unfolds over several stages. And obviously the first stage began last Friday when I signed the rescue package into law. And so the Treasury Department is moving aggressively to implement the new authorities. (END VIDEO CLIP)

BLITZER: Meanwhile, the Federal Reserve chairman, Ben Bernanke, hints the Fed may soon cut interest rates.

(BEGIN VIDEO CLIP)

BEN BERNANKE, FEDERAL RESERVE CHAIRMAN: Overall, the combination of the incoming data and recent financial developments suggest that the outlook for economic growth has worsened and that the downside risks to growth have increased. At the same time, the outlook for inflation has improved somewhat, though it remains uncertain. In light of these developments, the Federal Reserve will need to consider whether the current stance of policy remains appropriate.

(END VIDEO CLIP)

BLITZER: Let's immediately go to our senior business correspondent, Ali Velshi. He's here in THE SITUATION ROOM.

What does it mean, Ali, that in these final minutes of trading the Dow dives like it is, down about 500 points, 505 points right now? This was not supposed to happen.

ALI VELSHI, CNN SR. BUSINESS CORRESPONDENT: No. In fact, this is kind of remarkable, including the very late day sell-off that we saw, very suddenly down below 500 points. I mean, this is not what we should be normally talking about in the course of business, these drops.

Now, let me tell you what's going on.

Despite the president's comments, despite Ben Bernanke's hints that they're going to cut rates, and despite a major move by the Federal Reserve, we still saw this sell-off. Let me explain to you what this move is that we're talking about.

The Federal Reserve today said that it is going to move in to try to alleviate this credit crunch that that bailout bill was supposed to alleviate but hasn't yet done so. Here's how the system usually works.

Your company is central to this. It needs to borrow money on a short-term basis in many cases to make payroll and pay suppliers and things like that. They buy supplies, they pay their daily expenses, and one of those things that they have to pay is your paycheck.

Now, traditionally, if a company needed to borrow money for let's say a month or two months, they would go to an investment banker like a Morgan Stanley or a Goldman Sachs. And that investment bank would say, OK, X company needs $1 billion for two months. They would go to big investors all around the world -- hedge funds, pension funds, sovereign wealth funds, other countries who would then make that loan through the investment bank to the company.

This is the credit freeze we're talking about. This is what all dried up. So today the Federal Reserve says it is going to step in, and when we can't get this money, this is what it's going to do. Your company is now going to get that money directly from the Federal Reserve.

I can show you that because now this is what it's going to look like. It is unprecedented that the Federal Reserve will be directly lending to companies like yours, major American companies that need to borrow money -- Wolf.

BLITZER: You know, Ali, it's really pretty shocking when you think about it. When you think about it, 800-point net drop last week, 370 yesterday, 500 about today. What, 1,670 points in only a few days?

VELSHI: Yes.

BLITZER: This after the $700 billion bailout which was supposed to reassure the market out there.

VELSHI: Let me give you some good news, though. There's a word you should be looking for here -- capitulation -- the idea that everybody wants to be out of this market is getting out, and it's leaving it for those who want to be in.

One analogy is it has to feel like the last lifeboat has left. People are saying, I want to get out of the stock market, take my stock for any amount you'll pay me. Once we get to that, you could be forming a bottom in the stock market and we could start to see the resurgence. Stock markets resume gaining far ahead of the end of a recession. You'll see the stock market do it first.

BLITZER: I want you to stand by, Ali. I want to go to the markets right now.

Susan Lisovicz is standing by.

This collapse at the end of the trading day caught a lot of people by surprise, Susan, because it really wasn't supposed to happen, was it?

SUSAN LISOVICZ, CNN BUSINESS CORRESPONDENT: Well, you know, the Federal Reserve and the government in general, Congress, is doing everything they can to try to free up the credit markets, try to get the economy back on track. But the investment community, really, in the meantime just looks at what is happening. And what is happening is bad.

We had Bank of America today reporting its quarterly earnings early, reporting a nearly 70 percent decline. The CEO talking about recessionary conditions, saying it's going to cut its dividends. And there's real concern that Bank of America, one of the stronger players -- after all, it's the one that's absorbing Countrywide and Merrill Lynch -- if it's talking about raising capital, what does that say about all the other financial companies that have to report after this? And, yes, it ended on a very negative note. The three major averages down five days in a row, surpassing yesterday's lows. The S&P 500, so many of our mutual funds are tied to that, below 1,000 for the first time in more than five years. Bank of America shares down 26 percent.

We're not at capitulation yet. As one trader told me today, it's death by 1,000 paper cuts. It's an exhausting process.

BLITZER: Yes. Yesterday went below 10,000 for the first time in four or five years.

LISOVICZ: Now we're getting closer to 9,000 -- Wolf.

BLITZER: Right, it's 9,447 as we speak right now. The market is down 508 points. That number might still change because they're still doing some last-minute tabulation.

All right, Susan. Stand by over on the markets.

A lot of our viewers, no doubt, believe that greedy financial executives bear a lot of the blame for this current financial crisis. Today executives of one insurance giant faced a grilling on Capitol Hill.

Lawmakers demanded from AIG executives serious answers about that company's bailout by the federal government, and answers to what some see as shocking symbols of corporate excess.

Let's go to Brian Todd. He's been covering this hearing for us all day.

Brian, tell us what happened, because you caught up with one of these executives yourself.

BRIAN TODD, CNN CORRESPONDENT: That's right, Wolf. And he didn't have an answer for some of the examples of corporate greed. We're going to show you that in just a second, some very tough grilling by members of the House Oversight Committee for two men who presided over the failure of one of the biggest firms to go under in this financial crisis.

Martin Sullivan and Robert Willumstad, two former CEOs of insurance and financial giant American International Group, had to explain why their company took on enormous risks in a complicated market called credit default swaps and why they went $61 billion in debt. They blame their downfall in part on a change in accounting rules which forced companies to value securities at current market prices, even when they were in distressed situations. That led to some very angry responses.

(BEGIN VIDEO CLIP)

REP. CAROLYN MALONEY (D), NEW YORK: You were generating fees, making all of your employees rich, wrecking a great company, and tearing down our economy. And now turning to the taxpayers and asking us to bail you out. I think you should be apologizing to the American people for your mismanagement.

MARTIN SULLIVAN, FMR. CEO, AIG: Well, maybe it would be helpful if I can. First of all, I'm not blaming accountants.

(END VIDEO CLIP)

TODD: Martin Sullivan clarified that by saying he blamed unintended consequences from the accounting rule changes for part of AIG's demise.

But another controversy, this. It's a bill for $443,000 for a swank resort in California just days after the government bailed out AIG to the tune of $85 billion. The company paid more than $400,000 for some insurance execs to stay at this resort.

Going into the hearing, I asked former CEO Robert Willumstad about that.

(BEGIN VIDEO CLIP)

TODD: Can you tell us why they were there?

ROBERT WILLUMSTAD, FMR. CEO, AIG: No (ph).

TODD: Were you there, sir?

WILLUMSTAD: No.

(END VIDEO CLIP)

TODD: That was it. He didn't have an answer as to why those executives were there. He later said in the hearing if he'd known about that he would never have gone along with it.

The company says that's a yearly trip simply to reward insurance sellers who had performed well. Still, in that hearing Willumstad said he would never have gone along with it and, you know, he would just have put a stop to it. The other exec, Sullivan, said that if he had been CEO at the time, he would have asked serious questions about it -- Wolf.

BLITZER: Brian is working the story. He's going to be back with us with more. Pretty shocking testimony on Capitol Hill.

Many of you oppose this $700 billion bailout plan that was signed into law last week. According to our brand-new CNN/Opinion Research Corporation poll, 13 percent more Americans say it's a bailout for Wall Street than a rescue plan for ordinary Americans.

Also, one in five Americans say the government will never see a dime of that $700 billion again, while 51 percent say the government will get only a little when it resells those investments it acquires with the $700 billion plan.

But there is a bright spot. Our poll shows a slight majority of Americans say the plan will help struggling homeowners keep their homes. Let's hope.

Jack Cafferty is off today.

Up ahead, there could be unhappy holidays. When you shop for gifts this holiday season, the financial crisis could leave you empty handed. We're standing by to explain.

Also, we're under five hours from the second presidential debate. I'll speak with advisers from both sides. I'll ask Obama senior adviser David Axelrod if we might see an even more aggressive Obama tonight. And I'll ask the same of the McCain senior adviser, Nicolle Wallace. She's also here in THE SITUATION ROOM.

Stock markets diving once again today. That's the breaking news. Much more on that and a lot more right after this.

(COMMERCIAL BREAK)

BLITZER: Barack Obama arriving in Nashville today for tonight's high-stakes debate with John McCain exactly four weeks until Election Day. And CNN's national Poll of Polls now shows Obama with a five- point lead.

So what are the goals tonight for Senator Obama?

Let's go to Jessica Yellin. She's in Nashville watching this story for us.

I guess there's a lot of preparation, including last-minute preparation. What are we hearing, Jessica?

JESSICA YELLIN, CNN CORRESPONDENT: Wolf, according to the campaign, what we know, Barack Obama took a walk through the debate hall. And now he's gone back to his hotel, where his aides say that he's doing a little light prep and then some relaxing before the big event tonight.

The expectations game is on, and the Obama campaign is driving home their message that it is John McCain who needs a game-changer tonight.

(BEGIN VIDEOTAPE)

YELLIN (voice-over): Before the debate has even begun, the Obama campaign is calling foul, preemptively accusing John McCain of ignoring what they call the real issue, the economy.

SEN. BARACK OBAMA (D), PRESIDENTIAL CANDIDATE: I was a little surprised over the last couple of days to hear Senator McCain say, or Senator McCain's campaign say, that we want to turn the page on discussions about the economy.

DAVID AXELROD, SR. OBAMA ADVISER: They feel like if this campaign is a discussion of the economic crisis facing America, that he'll lose. And that they need to try and create a distraction to divert the discussion from the economy. YELLIN: The Obama campaign has released this ad...

NARRATOR: But with no plan to lift our economy up, John McCain wants to tear Barack Obama down.

YELLIN: ... and fired off a pre-debate memo predicting McCain will launch his nastiest attacks tonight, and arguing that Obama is the underdog because the town hall format favors his opponent.

Tonight, expect Obama to play economist in chief.

OBAMA: I think we have to extend unemployment insurance. I think it's still critical for us to move forward on an economic stimulus package, move swiftly, and try to restore confidence as quickly as possible.

YELLIN: With some digs at McCain. As one of the Obama's senior economic advisers puts it...

AUSTAN GOOLSBEE, ECONOMIC ADVISER, OBAMA CAMPAIGN: If this were a movie, Obama has sort of been the steady hand in the storm and McCain has been the storm.

YELLIN: Expect maybe a little less of this...

OBAMA: John, you're absolutely right.

YELLIN: ... and a little more of this...

OBAMA: We can't afford four more years of this. Enough is enough.

(END VIDEOTAPE)

YELLIN: Now, Wolf, the Obama campaign has maintained consistently that they'd rather talk about the issues. They say Barack Obama will not throw the first punch tonight, but if necessary he'll throw the last -- Wolf.

BLITZER: All right, Jessica. Thanks.

Jessica's in Nashville.

I'm joined now by a senior adviser to the Obama campaign, David Axelrod. He's also in Nashville getting ready for the debate.

David, thanks very much for coming in.

AXELROD: I'm happy to be here.

BLITZER: What do you expect? Will the fists be flying supposedly tonight?

AXELROD: All I can tell you is Senator Obama is coming to talk about our economy and the future of the country. You've spent much of your program talking about what happened on Wall Street today. Also on Capitol Hill today, the Congressional Budget Office said we've lost $2 trillion from our pension funds nationally in the last 15 months.

These are the things that are on people's minds tonight. I don't think they're coming to see WWF Wrestling tonight in this debate. They want to hear the next president of the United States talk about how we get out of the mess that these policies of the last eight years have put us in, and that's what Senator Obama's going to do.

BLITZER: I think that's what people certainly do want to hear, although there is a lot of mudslinging going out there.

Let's talk a little bit about one of the major complaints that Senator McCain and Governor Palin make against Senator Obama, that he's been sitting on the sidelines, he's not really been weighing in. The market's down another 508 points as we speak right now.

What has he done to try to ease this economic crisis? Is there anything he realistically as a United States senator should or could be doing?

AXELROD: Well, Wolf, the fact is that from the very beginning, and before the initial announcement a couple of weeks ago, Senator Obama has been in touch with the secretary of Treasury, in touch with the chairman of the Fed, in touch with leaders of Congress. He was very instrumental not just in helping to pass that package, but in shaping it in a way that would be more advantageous to taxpayers. Not the original blank check that the Bush administration wanted, but one that had safeguards -- safeguards to protect taxpayers as investors, oversight so that people couldn't regame the system all over again, help for homeowners in our housing sector.

So there's -- and most of all, let's -- safeguards to protect CEOs from walking away with windfalls as a result of taxpayer action. Those things happened because Barack Obama laid principles down to start with and worked assiduously to see that they were included in the package.

BLITZER: Is he surprised that since the package was approved, he voted for it, McCain voted for it, Biden voted for it, the stock market has gone down nearly 1,000 points since last Friday?

AXELROD: Look, I think he's very well versed in what's going on. And he understands that these are difficult times in uncharted waters. And it's going to take -- it's going to take some additional steps and strong leadership to reassure the credit markets and stabilize this economy.

And he's talked about the need for an immediate stimulus for Main Street, not just Wall Street, to get our economy moving again, and a series of other steps that we need to take. But look, whoever the next president of the United States is, is going to inherit a very difficult situation. And this is the issue of this election.

The McCain campaign said the other day that they wanted to divert attention from the economy because they can't win a race about the economy, but the fact is the voters will not be deterred from this. They can't afford not to hear a discussion about this. Their lives and livelihoods are very much on the line here in terms of the policies that are going to be in place. And they want to know where we're going to go. And that's really what Senator Obama's been talking about throughout this period.

He hasn't been lurching from place to place. Remember, Senator McCain said that -- Senator McCain said that the economy was strong two weeks ago, fundamentally strong. And then a couple of hours later he said we were in crisis. People want steady leadership now, and that's what Obama is providing.

BLITZER: We'll watch the debate tonight.

David Axelrod in Nashville.

Thanks very much for coming in.

AXELROD: OK. Good to be with you, Wolf.

BLITZER: All right. Thank you.

One of them is getting some good news right now only hours before their second debate, Barack Obama and John McCain. We have new battleground poll numbers showing who's up and who's down, and important changes to our CNN electoral map.

And some graduate business students no longer feel like masters of their own fate. We're talking to some MBA candidates who were headed to Wall Street but are now thinking twice.

We're watching all of this.

Plus, the markets down 500 points. The Dow Jones industrials, 508 points precisely now.

Stay with us. Breaking news right here in THE SITUATION ROOM.

(NEWSBREAK)

(COMMERCIAL BREAK)

BLITZER: To our viewers, you're in THE SITUATION ROOM.

Happening now, dwindling savings. As the stock market plunges, many Americans are seeing their children's college funds or their retirement accounts simply vanish. I'll be joined by financial expert Suze Orman with some advice on what you should be doing right now.

Also, is there a silver lining in this financial crisis? We're going to examine the upside to all the dismal news from Wall Street and tell you who stands to benefit.

And mudslinging out on the campaign trail. As the attacks become more nasty, what should voter really believe? We're going to fact- check the latest negative ads from both campaigns.

I'm Wolf Blitzer at the CNN Election Center. You're in THE SITUATION ROOM.

Just a few hours from now the two presidential candidates will take different roads at accomplishing the same thing -- connecting with everyday voters when it comes to the economy. John McCain and Barack Obama face off in Nashville for their second debate, but their first and only before voters together.

Let's go to CNN's Ed Henry. He's at the scene of the debate in Nashville. He's joining us live.

Set the scene for us, Ed.

ED HENRY, CNN WHITE HOUSE CORRESPONDENT: Well, Wolf, the economy has certainly put John McCain on the defensive. And now time is running out for him to really shake up this race. That's why the stakes are so high for him tonight.

(BEGIN VIDEOTAPE)

HENRY (voice-over): Economic fears are sinking John McCain in key battleground states, so he's vowing to hit Barack Obama hard on taxes in their second debate.

SEN. JOHN MCCAIN (R), PRESIDENTIAL CANDIDATE: We're going to have a town hall meeting, my friends. And I guarantee you, you're going to learn a lot about who's the liberal and who's the conservative, and who wants to raise your taxes and who wants to lower them.

HENRY: McCain has struggled to come up with a coherent message of his own on the crisis, so he's attacking Obama over who's been in favor of tougher government regulation.

MCCAIN: I guess he believes that if a lie is big enough and repeated often enough, it'll be believed. But the truth is, I was the one who called at the time for tighter restrictions on Fannie Mae and Freddie Mac.

HENRY: McCain excels in the town hall format and came off as less professorial than Obama when they went back to back at a faith forum this summer.

MARK PRESTON, CNN POLITICAL EDITOR: A lot of people would like to see John McCain. Certainly supporters would like to see John McCain be as loose as he was when he was out in California, when he was on stage with Rick Warren during the saddle back forum.

But sometimes McCain is too loose on serious subjects.

(BEGIN VIDEO CLIP)

SENATOR JOHN MCCAIN (R) PRESIDENTIAL CANDIDATE: That old Beach Boys song, "bomb Iran"? Bomb, bomb, bomb...

(END VIDEO CLIP) PRESTON: He's also walking a fine line when it comes to raising doubts about Obama without looking too negative. A delicate balancing act with McCain own supporters goading him recently to get tough.

(BEGIN VIDEO CLIP)

UNIDENTIFIED FEMALE: When are you going to take the gloves off and just go at him?

MCCAIN: How about Tuesday night?

(END VIDEO CLIP)

HENRY: Now, a good applause like for John McCain there to say he might take the gloves off tonight. He can do that at a rally. He can do that in his TV ads. But the fact is it's going to be difficult for him do it in the intimate setting behind me tonight. The two candidates are going to be there with undecided voters crowded around them. Those kind of attacks can really backfire with undecided voters if they're too harsh. It's a fine line, Wolf.

BLITZER: And they really don't have the opportunity, given the ground rules, the format for the debate tonight to interact much. They can't, for example, press each other with questions, can they?

HENRY: Right. It's going to keep going with independent voters, these undecided voters doing their own questions. Not really a lot of follow-ups. The moderator, Tom Brokaw can jump in with questions. He also may pose some Internet questions as well, but not as much back and forth as you say.

BLITZER: All right so that is going to restrict the opportunity for that kind of exchange. All right, thanks. Ed is in Nashville.

We have some brand-new poll numbers from CNN "Time" and opinion research corporation. Our poll from several key battleground states. And some important changes in CNN's electoral map.

In Indiana, for example, John McCain leads Barack Obama by five points. In Ohio, it's Obama with a three-point lead. In North Carolina the two candidates are tied at 49%. Which changes from lean McCain to tossup right now. Obama holds a five-point lead in Wisconsin, which is also now changing from tossup to leaning Obama.

In New Hampshire Obama has opened up an eight-point lead and that state now changes on CNN's electoral map from tossup to leaning Obama. We're also changing Michigan from leaning Obama to solid Obama. CNN now estimates if the election were held today, Obama would win 264 electoral votes, John McCain would win 174. 100 electoral votes remain in that so-called tossup column, 270 the magic number need to win the election. Let's go over to CNN's John King. He's looking at all the numbers. He's looking at the map for us.

John, as we take a look, it's pretty dramatic right now. Still four weeks from today is the election. There's still opportunity for things to change. JOHN KING, CNN CORRESPONDENT: Opportunity, but increasingly, Wolf, this is becoming Barack Obama's race to lose, if you will, because of the advantages. Let's make the changes on our map you just made on the big wall. This is where we were starting today. Obama 250, McCain at 189. But as you just noted we are now taking North Carolina from lean McCain and making it a tossup state so it goes back to yellow. So you see McCain loses those 15. And we are also as you just noted taking right here, Wisconsin and its ten electoral votes and leaning them in Obama's favor. 260-174. What does that tell you, Wolf? It tells you if this map stayed just like this Barack Obama can get to the presidency just by winning Ohio, 20 electoral votes there would get you over 270. Or Missouri, 11 there; that would be enough to do it.

Virginia would be enough with 13 or say a combination of Colorado if we turned that blue, and Nevada, five electoral votes. So even with smaller states like that, Barack Obama can win the presidency.

What it tells you is going into this debate. the economic focus has tilted the map, tilted the polling in favor of Obama. John McCain needs to change the fundamentals of the race, which is voters trust him more on the economy, and that is showing up in these state polls. Most of those states you just mentioned, North Carolina, are Bush states. The tossup states left, Florida, a Bush state twice, Ohio twice. Missouri twice.

John McCain is in trouble and on his heels in states George W. Bush carried twice.

BLITZER: Now you just came back from Ohio, which is obviously a key state no Republican has ever won the White House without carrying Ohio. How does it look for McCain in Ohio?

KING: And our new poll shows a narrow Obama edge there. We still call it a tossup but trending Obama's way and that is trouble for McCain. If you look at the light blue, this is the Democratic primary. And then all these working class areas, Hillary Clinton beat Barack Obama.

But Wolf, where I was in recent days was right out here. Ashland County. It's a tiny little county. Only 0.5 percent of the population. About 200 people in this country just lost their jobs over the weekend. They work at an Archway cookie bakery. They were told in the mail they lost jobs and their health insurance as of Monday. Many of the people I talked in this community said they are prepared to vote democratic. Even though if we go back in time and look this was a republican county back in 2004. Look up here. George W. Bush getting 65 percent of the vote in this county to John Kerry's 34 percent. But more and more people in this little Small County, and this is it, small town working class America saying they are frustrated by Republican economic policies. Not that they don't like John McCain, they just want something different. That is the big dynamic, Wolf, heading into the second of the three presidential debates that John McCain must turn around, must convince these people in small-town America who voted for Bush but who also have voted for Hillary Clinton that he is on their side.

BLITZER: John, stand by. I want to go to a senior McCain campaign adviser Nicolle Wallace. She is joining us now from Nashville where they're getting ready for the debate tonight. Are your internal polls, Nicolle, as gloomy for McCain as our national polls? And polls in these battleground states appear to be right now.

NICOLLE WALLACE, SENIOR ADVISOR, MCCAIN CAMPAIGN: You know I'm standing here scratching my head about what we just looked at. Nobody has voted yet, Wolf and I hope that doesn't put John King out of business because he is a great reporter and a great guy. But the truth is, people are angry.

These are serious times. And what on the election in November is change. And both of these men promise change. But only one of them has a record of fixing big things, of standing up to entrenched interests. The next president is going to inherit a national crisis. This isn't an economic downturn. There are serious looming and grave threats to the foundations of our economy. And John McCain is the only person who two years ago sounded the alarm about Fannie and Freddie which a lot of people diagnosed to be the center of the storm there.

And John McCain is the only one who stood up to people in his own party and the entrenched interests in Washington. And that's what it's going to take. Major structural reform of the corrupt and broken institutions in Washington and Wall Street.

BLITZER: The president, your former boss, when you worked at the White House, President Bush, he painted a hopeful picture shall we say earlier today. He said, yes, there are some rough times right now but he also said this. I'm going to play this clip and I want you to react. Listen to this.

(BEGIN VIDEO CLIP)

GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: We also know that we're the most dynamic economy in the world. We're a productive country. We're an entrepreneurial country. The small business sector is strong.

(END VIDEO CLIP)

BLITZER: All right, Senator McCain; is he on the same page with President Bush in that bottom line assessment?

WALLACE: Well, Wolf, let me tell you something about the small businesses in America. We've lost over 700,000 jobs this year. But small businesses in America have gained, they have added 350,000 jobs. It's remarkable. So at the center of the vision for the next president of this country should be policies that help strengthen them. They're the only people in America who are adding jobs. And Barack Obama has promised to raise their taxes, would decimate the last area of America's economy that's still flourishing. Our small businesses are adding jobs. They have added 350,000 and I see one of the most vital things that we need to look at is the differences between what Barack Obama would do to our small businesses, which would be to enact tax increases and mandates on health care that would decimate that last stronghold...

BLITZER: He says he's only going to raise taxes, hold on...

WALLACE: You can interrupt me anytime.

BLITZER: He says he's only going to raise taxes on families making more than $250,000 a year. Most small businesses, they don't make a profit of more than $250,000 a year, do they?

WALLACE: Well, families, that is a very small parsing of Barack Obama's tax increase strategy. Barack Obama would tax about 50% of the small business income in America. Again, it isn't a matter of what kind of tax increase small businesses can stomach. Small businesses in America shouldn't have to take on any burden to growth. They are really that only bright spot in America's very, very troubling and difficult economic forecast. So I would say, you know, zero tolerance policy for any of Barack Obama's tax increases on America's small businesses.

BLITZER: Senator McCain a few months ago said he was not going to get down and have a negative campaign. Yet in the last few days we've heard some very negative comments coming from him and from Governor Palin. Why the change?

WALLACE: I'm not sure what you're referring to. But you know, Barack Obama has spent a record number of dollars attacking John McCain with ads that are usually not even truthful. And he's set a record for Democrats and Republicans in this presidential campaign. So we're going to respond, we're going to set the record straight and unfortunately it's something we have to do more and more often, Wolf.

BLITZER: When is Governor Palin going to have a full-scale formal news conference?

WALLACE: When is she going to do what?

BLITZER: Have a news conference?

WALLACE: Have a news conference?

BLITZER: Yes

WALLACE: You know her priority is talking to the American people and talking to the voters. She's spent more minutes being interviewed by journalists than Barack Obama has this month. She's certainly - you know her life is an open book. She threw open the doors to her home to her high school. She invites reporters out with her on the trail. I hope it wouldn't be, Wolf, that you guys are insulted that CNN hasn't had one yet.

BLITZER: Well, we would love to have an interview with Governor Palin but we would also love to see her a news conference answering reporter's questions. WALLACE: Well, she's very eager to answer questions. She does interviews almost every day on the campaign trail. And she's giving them straight talk. She's telling them exactly what Obama said and pointing out where it's different than what he's done. That's her top priority. She does interviews every day out there.

BLITZER: Well, we'd love to have her in THE SITUATION ROOM if she'd like join us, we'd be thrilled to interview her. Thanks very much, Nicolle.

WALLACE: Thanks, Wolf.

BLITZER: When you shop for gifts this holiday season, might the things you want actually be on the shelves? The financial crisis could hit inventory at the nation's retailers and they could hit those retailers hard.

Also, who do you think is the stronger leader between Barack Obama and John McCain? We have the brand-new poll numbers with what you think.

What's happening in the U.S. Is causing fears of a worldwide recession. Could we be nearing some sort of global tipping point? Stay with us. You're in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: The holidays are fast approaching. Might Americans see the financial equivalent of the "Grinch That Stole Christmas"? The financial crisis could hit holiday sales, could hit those sales hard. CNN's Jennifer Westhoven is here in THE SITUATION ROOM. This concerns sales, inventory. What's going on?

JENNIFER WESTHOVEN, CNN CORRESPONDENT: Well I think this is one of the many ways Americans don't realize that the credit crunch could hit them. That when the holidays come there could be fewer items for you to buy on the shelves because the companies just can't get the financing.

(BEGIN VIDEOTAPE)

WESTHOVEN (voice over): The financial crisis that's gripped Wall Street and Washington could mean quieter holidays for everyone. Christmas may be scaled back this year as many American shoppers and stores struggle to make ends meet.

PETER MORICI, UNIVERSITY OF MARYLAND: Consumers face several challenges. High gas prices. Some have lost their jobs or have family members that have lost their jobs. And then there's the high cost of credit cards these days. Rates have gone up.

WESTHOVEN: That means tighter holiday budgets for millions of Americans. Retail analysts say this season will be the slowest growth in holiday sales since 2002.

On top of week spending, credit markets are locked up. Like all businesses, retailers are having a hard time getting credit. Credit that they need to buy holiday merchandise.

MORICI: When you go to Macy's and you look at a coffee pot, Macy's doesn't really own that coffee pot. They borrowed money to pay the vender and they will repay the vendor when you pay them. So they need what we call commercial credit.

WESTHOVEN: It's do or die for many stores. Squeezed on both ends by suppliers and buyers.

Economists say some businesses won't make it to the holidays. It all adds up to more pressure in weak job market. Hundreds of thousands of Americans make extra money around the holidays by taking a seasonal job. Experts say this year's hiring will likely fall well short of last year.

JOHN CHALLENGER, CHALLENGER, GRAY & CHRISMAS: This year I think it's going to be even worse. There won't be as many people in the stores and they won't be there as long.

WESTHOVEN: Analysts aren't saying the "Grinch "will steal Christmas all together.

SCOTT KRUGMAN, NATIONAL RETAIL FEDERATION: Let's put it this way, I don't think anyone's canceling Christmas. Holiday spending, it is important to consumers. It actually becomes necessity spending because it's emotion.

WESTHOVEN: But Americans may get a chance, much like those "Whos" down in "Whoville" to remember the true meaning of the holidays isn't about the gifts.

(END VIDEOTAPE)

BLITZER: That's the story. It's a serious issue, though. It's a very serious issue now for these retailers.

WESTHOVEN: It is and I think also how you would see it when you went shopping is you might see very deep discounts when you do your holiday shopping. You might also see actually longer lines. Because even though there may be fewer people in the stores there's also going to be fewer people to help you out.

BLITZER: Fewer products on those shelves. All right Jennifer, thanks very much.

In our strategy session Donna Brazile and Bill Bennett are standing by live. Voters say McCain is a stronger leader than Obama. Is that a key nugget that McCain can use to try to close the gap with Obama?

Whether you're 10 years or 40 years from retirement, the market gyrations right now must have you scratching your head. Personal finance guru Suze Orman is here live in THE SITUATION ROOM with answers to your questions. Stay with us. You're in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: What's behind Barack Obama's recent gain in the polls? Joining us in our strategy session, two CNN political contributors. Democratic Strategist Donna Brazile and national radio talk show host Bill Bennett. Thanks very much for coming in. In our new polls, let's talk about some of these numbers.

Right now who is a stronger leader? McCain 50 percent Obama 45 percent. But in September McCain was at 56 to 37 percent so there's been a narrowing, Donna, on that point. Obama still ahead in the national polls. How important are these poll numbers four weeks before an election?

DONNA BRAZILE, DEMOCRATIC STRATEGIST: Well, Wolf, they're only polls that the campaigns are following right now; those state by state polls. The goal is 207 electoral votes.

But in terms of characteristics you're looking for in a president, a strong leader, someone who shares your values, on your side, Senator Obama has been able to improve his numbers because he not only did well in the debates, but I think voters are listening to him on the issues. They feel much more comfortable with his vision for the country and also his leadership in helping us through this economic crisis.

BLITZER: And if you take a look at this question, Bill, who would display better judgment in an international crisis? 49 percent McCain, 48 percent Obama. In early September it was 55 percent for McCain, 42 percent for Obama. That's really narrowed, that who'd have better judgment in an international crisis.

WILLIAM BENNETT, NATIONAL TALK RADIO HOST: The issue that's on the table moves everything. The issue on the table right now is the economy. It's descended frankly like deadweight on the McCain campaign. John McCain is obviously a hero, international foreign policy are his fields. The economy has not traditionally been an area of strength for him.

BLITZER: What does he need to do?

BENNETT: It has to be now. They cannot change the subject. They have to address it tonight. The irony is he has a lot of good plans, a lot of good ideas about stimulating the economy. Flat tax is one of his ideas. We haven't heard much about that. He's got excellent criticisms, I think, of the Obama plan. Even the Obama adherents, Barack Obama himself, is saying he may want to delay putting in place his plan because it may not help this economy. That's a very important point.

BLITZER: They both may have to delay a lot given the enormous financial crisis the country is going through and this $700 billion bailout, which is eating up a huge chunk of cash.

BRAZILE: Tonight, Senator Obama and Senator McCain will be talking to real people, people with real lives.

BLITZER: Because it's a town hall format.

BRAZILE: And they are coming to this debate, they are undecided. They ant to talk about healthcare. They want to talk about jobs, economic security, home foreclosure. Bill is absolutely right. They can't change the subject. They need to address these issues so voters will feel comfortable...

BLITZER: They're trying to change the subject. They've said so publicly to raise questions about who Barack Obama is, his judgment. Right now on these questions, I'll put it on the screen, who would display better judgment on an economic crisis? And everyone agrees it's a horrible crisis right now, Obama 51 percent, McCain 42 percent. It was closer in early September.

BENNETT: Well, anybody who is big enough to be president is big enough to have the whole truth told about them. And I think that goes for McCain, it goes for Obama. Primarily about ecomonics. What are you going to do to help this economy? John McCain is going to show up and be very strong.

Again, I think he's got a lot that he can say and a lot that he can offer. But there's no avoiding this topic tonight. Play to your strength. Your strength is those positions.

BLITZER: What advice would you give Barack Obama tonight? Because all of us remember Bill Clinton in these town hall formats. He could really feel the pain of these people who stood up and many of them had pretty emotional stories. He was very good at that. What do you think about Barack Obama?

BRAZLIE: You know, Senator Obama has become a much better debater over the last couple months. Part of the reason why is because he understands that you can't talk like you're in the Senate. You must talk like you're around the kitchen table. While one team is throwing the kitchen sink, talk like you're at the kitchen table. He understands when Michele comes to him and says, "look at these bills, honey, how are we going to pay the bills?" So he needs to talk like he understands the problems of ordinary people.

BLITZER: I think their bill paying is pretty good in recent years.

BRAZILE: Well, we don't know about their 401K.

BLITZER: What advice do you have for McCain tonight if you were talking to him?

BENNETT: Focus like a laser on the economy. Lay out every piece of your plan and proposal. Explain why what you will do will get the economy going. Explain why what Barack Obama proposes will not and why it will probably have to be delayed. This is a town hall. This is the forum, Wolf, he's been asking for. He's asked for a dozen of these. He's got one tonight. He's got to hit it good.

(CROSSTALK)

BLITZER: The stakes are enormous tonight. You guys are going to be with us throughout the night. Thanks very much.

Go behind the politics with Bill Bennett this weekend here on CNN. A special will air Saturday at 6:00 p.m. Eastern. Replayed Sunday at 2:00 p.m. Eastern. "BEYOND THE POLITICS" with Bill Bennett here on CNN.

Americans are hurting. The president and other officials try to reassure. We're going to have the latest on the markets and the government's bold steps that impact many of you who work. Stick around.

And tonight's message will certainly be on the economy. That message from the candidates "we care." John McCain and Barack Obama both will try to project in their second debate. That includes questions from voters as well.

In some ways, McCain has a much bigger challenge based on the polling numbers right now. Stay with us. You're in THE SITUATION ROOM.

(COMMERICAL BREAK)

BLITZER: On our political ticket today, during tonight's debate, you'll be able to voice your opinions and interact with the best political team. Alex Wellen, our deputy political director for digital content is here to explain.

ALEX WELLEND, CNN DEPUTY POLITICAL DIRECTOR: Hey, Wolf. This is where you want to head over to the forum. This is where you can debate the debate. Let's get rid of that. Let's look at what we have here.

Roland Martin for example; he is going to be in there talking to you. Let's see what it is he has on his political badge, you'll create your own. He has his name, his political analyst, he's for Obama, he's a political junky. You can join a number of different leagues for liberals, for conservatives. And then let's look here. He has these top three issues. Social issues, economy and Iraq. These are his top three issues. You may have different three issues. It says where in the political spectrum he falls. For example, on Iraq he is all the way to the left. But for example, when it comes to social issues, he leans to the right.

So that is what's going to be happening. We also like I said will have Leslie Sanchez in there. She will be telling you about her thoughts. What we want you to do right now, create your political badge online and tell us what it is you want to see online tonight. That's at CNNpolitics.com at CNN.com/forum.

BLITZER: All right, we'll be there. Thanks very much, Alex.