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OLBERMANN: Writing on his blog for the "New York Times" this afternoon, the columnist, Paul Krugman awarded the top headline to MarketWatch`s Rex Nutting, "House to Wall Street: Drop Dead." He also resubmitted his own writing after the first bailout deal collapsed last Thursday, to quote, "We now have is a non-functional government in the face of a major crisis because Congress includes a quorum of crazies and nobody trusts the White House an inch. As a friend said last night, we`d become a banana republic with nukes." Our fourth story on COUNTDOW: What the "quorum of crazies and the banana republic with nukes" means for you. The aforementioned Paul Krugman joins us now. Thank you, again, for your time tonight, sir

PAUL KRUGMAN, NEW YORK TIMES: Hi, there.

OLBERMANN: All right. For the average American, is this cataclysmic? Has this now spread beyond those who have investments or people who already could not pay their mortgage?

KRUGMAN: Well, to a large extent, we are protected by the spirit of Franklin Roosevelt. I mean, you know, your bank account is safe. Your deposits are safe. Everything that`s thoroughly guaranteed is safe. Somebody said earlier on the program that -- will you be able to get money out of your ATM, yes, you will. For most people, this is going to be, obviously, if you got stock investments, it will be a problem. What we are worried about for most people is the effect on the economy. This thing is shutting down a significant part of the whole system by which credit is funneled to the, you know, to businesses. And I`m hearing stories of businesses having credit lines not cut off, but reduced. You know, businesses that can`t sell commercial paper. All this is -- we`re already heading into a recession territory. This is going to make it worse.

OLBERMANN: All right. So, those are some of the consequences we should expect.

KRUGMAN: Yes.

OLBERMANN: How should we react to them? I mean, to paraphrase the old joke about George Steinbrenner of the New York Yankees -- is this the time when we should not sit around and act rationally when a situation calls for panic?

KRUGMAN: Well, the question is, you know, what do you do to panic? I mean, again, you know, if you are in anything that`s thoroughly insured, and you don`t have to panic. And in terms of, I mean, politically, there`s an interesting question for the Democratic leadership now. What do they do? Because they accepted a pretty bad bill, better than nothing, I think, but a pretty bad bill because the Bush White House, Secretary Paulson, the House Republican leadership was supposed to bring Republicans on board for the bill. It didn`t happen. So, now, you know, I guess they do a revote probably on Thursday. If that doesn`t work, I guess, they go and write the bill they think ought to have been written and put it out there.

OLBERMANN: With the news from Australia that the stock market there is down 4 percent in the opening 15 minutes -

KRUGMAN: Yes.

OLBERMANN: Obviously, as you mentioned, you had written that this was not a great bill, but it was worth passing. Is there anything in particular that needs to be changed that will make it passable and maybe a little bit more plausible later on the week?

KRUGMAN: Well, you know, this bill was written -- later in the week, I think nothing could be done.

OLBERMANN: Yes.

KRUGMAN: Because this bill -- you know, basically, the Bush White House came up with a fundamentally-flawed approach. And then the Democrats had sort of have to work with this. And it was, you know, buying up toxic waste when they really should be doing is recapitalizing, they should be buying preferred shares. It`s -- you know, we can get in to technicalities. But they should be coming out from the other end. The fundamental approach was wrong and they should be doing more for homeowners. And one thing the Democrats can do is write a bill that will appeal to Democrats and pass a bill on party lines, which would include a lot more help for homeowners, would include bankruptcy, you know, the judge is able to rewrite mortgages and bankruptcy proceedings. A lot of things that the Democrats were objecting should have been in there. And, you know, just never mind the Republicans. But I don`t think that can be done this week. And meanwhile, now it`s going to be -- I look at credit market indicators, and boy, we`re in deep freeze right now. Things were starting to thaw a little bit at end of last week, gone now.

OLBERMANN: A question, to conclude, about Senator McCain. I`m going to have to read this because it`s so much in the last two weeks with him. He started on by saying the fundamentals were sound, then he said he was suspending his campaign to broker this bailout as the original bailout promptly collapsed, almost as soon as he said that. Then he said if there were no deal by today, we`d be in another Great Depression, then he claimed credit for this revised bailout deal this morning, then the deal fell apart this afternoon. If anything is actually doing worse than Wall Street right now, it`d be John McCain on the subject of Wall Street.

KRUGMAN: He is swinging so wild. I wrote about that in the "Times" this morning. It`s just, you know, at any given moment, he`s got very, very firm views. The problem is, wait 48 hours and they`ve gone 180 degrees around. So, no -- I mean, it`s bizarre. It`s been -- can I say this -- it`s pretty unpresidential, you know.

OLBERMANN: Yes.

KRUGMAN: And this is scary stuff. I mean, we`re scared and he is not helping.

OLBERMANN: Perhaps, that earlier reference to Mr. Steinbrenner and not sitting around and acting rationally when the situation calls for panic applies to the gentleman aforementioned. Paul Krugman of the "New York Times" and Princeton University, once again, thank you, sir.

KRUGMAN: Thank you.

OLBERMANN: You think Wall Street had a bad day? How about the Agatha Ruiz de la Prada show? Yes, that model does look surprisingly like Borat. And, the big expansion. So much McCain in the Membrane, we have to increase the size of the segment. McCain criticizes Obama for not using the word "victory" about General Petraeus and Iraq even though General Petraeus says he won`t use the word "victory" about Iraq. Next.

Originally broadcast, 9.29.08