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LARRY KING, HOST: Tonight, foreclosures -- they're at record levels and soaring. How bad is it? So bad that even an "Extreme Makeover" house is up for auction. Are you living the nightmare? If you're behind on payments, if you're drowning in debt, if you wonder how you'll ever climb out of the money mess, you can survive the crisis and even save your home. Tough advice for tough times -- tune in and take charge of your financial future now on LARRY KING LIVE. Before we talk about finances and helping you out, we'll talk about politics with two of the best in the business. In New York is Paul Krugman, "The New York Times" op-ed columnist, professor of economics and international affairs at Princeton and the best-selling author. His books include "The Conscience of a Liberal." And here in L.A. Ben Stein, commentator, economist, attorney, actor, television personality, best-selling author himself. His latest book, "How To Ruin the United States of America." Gentlemen, an interesting day in politics, especially when a rap artist, Ludacris, makes headlines. Watch.

(BEGIN VIDEO CLIP)

LUDACRIS, RAPPER & ACTOR (rapping): ... Give Luda a special pardon if I'm ever in the slammer. Better yet, put me in office, make me your vice president. Hillary hated on you so that (EXPLETIVE DELETED) is just irrelevant. Now Jesse talking slick and apologizing for what? If you said it then you meant it. How you want it, (INAUDIBLE)? Get off your (EXPLETIVE DELETED) black people. It's time to get out and vote, paint the White House black and I'm sure that's got them terrified. McCain don't belong in any chair unless he's paralyzed. Yes, I said it because Bush is mentally handicapped --

(END VIDEO CLIP)

KING: And in case you missed it, Paul, he did refer to Hillary Clinton as a female dog, or the slang term for that. What's going on here?

PAUL KRUGMAN, COLUMNIST, "NEW YORK TIMES," ECONOMIST: Oh, gosh, you know, I'm not going to try to psychoanalyze rappers here. He's certainly not doing Obama a favor. But, you know, if you were going to judge people by some of their supporters, every politician is in a lot of trouble.

KING: Ben, the Obama campaign has condemned the song, calling it outrageously offensive. Should Obama -- Ludacris is on his iPod. That's one of the people he listens to.

BEN STEIN, COMMENTATOR, ECONOMIST: Right. Right.

KING: Should he take it off?

STEIN: Oh, absolutely. It's insane. I mean this is a guy who saw a chance to get some publicity and to make himself even richer than he did at the expense of a very talented first African-American candidate for president -- major candidate. I think he should take it off. There's no excuse for this.

KING: Now, speaking of celebrities in politics, a McCain campaign ad features Obama, Paris Hilton and Britney Spears. It came out today. Watch.

(BEGIN VIDEO CLIP, MCCAIN CAMPAIGN AD)

UNIDENTIFIED FEMALE: He's the biggest celebrity in the world, but is he ready to lead? With gas prices soaring, Barack Obama says no to offshore drilling and says he'll raise taxes on electricity? Higher taxes, more foreign oil -- that's the real Obama.

(END VIDEO CLIP)

KING: Now, Paul, he uses Paris and Britney in that ad to begin it. Again, the same question, what's going on?

KRUGMAN: You know, what it really is saying is that McCain's got nothing. I mean they haven't got anything substantive to run on. You know, he's trying to say Obama's bad for the economy. It's, you know, we've had -- we've had a Republican administration for eight years. It hasn't done so well. You know, it might work. People -- you know, God knows, there's a little bit of maybe subliminal, you know, black man/white women. Who knows what they think is going to happen here. But this is really a totally substance-free ad. They're saying we should not trust Obama because lots of people like him?

STEIN: No, I think they're saying that he's a celebrity and he's a beautiful person and he's a sort of a Hollywood swinger, but he has no depth as a politician. I don't like the ad, frankly, myself. But he does have something to run on, Paul. I mean he has to run on the fact he has an extraordinary character. I mean he's a man who survived many years of horrifying captivity. He's a man who has been a brave, brave warrior for this country. He's a man whose son is fighting in Iraq and yet he never talks about it. This is a man of extraordinary character. It's true, his platform is a tiny bit thin. But as a human being...

KRUGMAN: Well, you know, and...

STEIN: ...he's extremely impressive.

KRUGMAN: I have to say, whatever respect I had for McCain's character is being eroded by the kind of campaign he's running. This is -- you know, this was a pretty ugly ad. You know, this was saying oh, we're going to -- we're going to tar Obama with nothing except we're going to say he's...

STEIN: With what? They're just saying...

KRUGMAN: ...celebrity stuff.

STEIN: They're saying he's a celebrity. Well, calling him a celebrity is not like a racist epithet.

KRUGMAN: Oh, come...

STEIN: I mean a celebrity is not really a bad thing. I'd like to tell you out here in Hollywood, people want to be called celebrities.

KRUGMAN: Yes, but this...

STEIN: So there's nothing bad about calling him a celebrity.

KRUGMAN: It's -- you know, the theme of the McCain campaign has come down...

STEIN: You're a celebrity, Paul.

KRUGMAN: Oh, boy. Yes. I get mistaken for Tom Friedman on and off. No, but the theme of the McCain campaign is he's not a regular guy, which is true. But, you know, McCain is not a regular guy either. And this is a ridiculous -- you know, we've got big problems in this country.

STEIN: But...

KING: One at a time.

KRUGMAN: ...and they're going to run on this basis?

STEIN: I think you put your finger on why it is a good ad, which I couldn't put my finger on right away. That is it. That's why McCain is campaigning in VFW halls and American Legion halls and in small towns. I think the message of the campaign is he is a regular guy and Obama is exotic.

KRUGMAN: But of course he isn't.

STEIN: And I think -- I think you put your finger on it very intelligently. That is the message. So there, you can't stand...

KRUGMAN: Well, no I mean it...

STEIN: ...I complimented you.

KRUGMAN: No, it's just...

STEIN: You're in shock because I complimented you.

KRUGMAN: Yes, I'm in shock because you complimented me. You know, this is -- this is a terrible thing. I mean this is, you know, the (INAUDIBLE)...

STEIN: Why is it terrible to...

KRUGMAN: Because this is...

STEIN: Why is it terrible to say McCain's a regular guy? He is a regular guy.

KRUGMAN: But he isn't, actually. He's not a regular guy.

STEIN: Yes, he is (INAUDIBLE).

KRUGMAN: He wears $500 shoes. He's a...

STEIN: He's a brave, wonderful (INAUDIBLE)...

KRUGMAN: He's a multi-millionaire. He's, you know, no more -- you know, anybody who wants to be president is not a regular guy. This is

STEIN: But he's almost an all-American...

(CROSSTALK)

KING: All right, let's move on, guys.

KRUGMAN: This is crazy.

KING: Obama has already put out a response ad and discussed McCain's ad on the trail today.

KRUGMAN: Yes.

KING: And watch this.

(BEGIN VIDEO CLIP, OBAMA CAMPAIGN AD)

SEN. BARACK OBAMA (D), PRESUMPTIVE NOMINEE: You know, I don't pay attention to John McCain's ads. Although I do notice that he doesn't seem to have anything very positive to say about himself, does he? He doesn't -- he seems to only be talking about me. You need to ask John McCain what he's for, not just what he's against.

(END VIDEO CLIP)

KING: Is it smart of Obama, Ben, to address the ad?

STEIN: I think he's got to address the ad. Somebody asked him about it. But, you know, I have to say, I'm really amazed at Paul diffidence. He has really nailed, I think, what this campaign is about. Why is it -- Obama is there talking to 200,000 people in Berlin, getting everybody screaming for him in Berlin. And meanwhile, Mr. McCain is in small town America. That is what this campaign is going to be about.

KING: Are you saying McCain is, therefore, the favorite?

STEIN: No, not at all. But I think if McCain can press this campaign theme -- I'm a regular guy, I'm an all-American guy, I'm not an exotic, beautiful person like Obama -- I think it's a winning strategy.

KRUGMAN: No, it's...

KING: Paul has this -- all this started, Paul, too early?

KRUGMAN: Is it -- what? Sorry?

KING: Has it started too early?

KRUGMAN: You know, this is about -- as people point out, this is exactly the time of year when the swift boat thing against John Kerry started, right? This is the time of year -- there's kind of a bit of a news lull. The Olympics haven't started yet. There's nothing substantive to run on. So, no. This is exactly when you would expect this kind of thing to start happening and so it is. And, you know, as -- I will agree with Ben that this might be effective. It's utterly fake. McCain is no more a regular guy than any, you know, than any multimillionaire -- than any guy who's got -- who imagines that he ought to be president is. But it might work.

STEIN: But he...

KRUGMAN: So I think Obama's got to be effective.

STEIN: But he's the kind of guy who could be very comfortable in a little bar or restaurant in North Idaho. I was just telling Larry, I spent a week just now in North Idaho. I could easily see McCain walking into any of those places and they would all greet him. He'd slap them on the back. They'd talk about their time in the service. And if he can get enough people in enough small towns to ban together and say that, he's got something going.

KRUGMAN: This is an illusion. It's an illusion. We were all told what a nice likable guy George Bush was. And, you know, he never was. This was just...

KING: All right, let me...

STEIN: But he won.

KRUGMAN: This is all fake.

KING: All right, let me get a break.

STEIN: But he won but he won twice.

KRUGMAN: (INAUDIBLE).

KING: Which of these candidates can get us out of the money mess and what are the gentlemen's thoughts on the vice presidency, next.

(BEGIN VIDEO CLIP)

OBAMA: To help end this housing crisis, I want to give additional tax deductions, mortgage interest rate deductions to homeowners who are not currently receiving them.

SEN. JOHN MCCAIN (R), PRESIDENTIAL CANDIDATE: It seems to me the American dream is to keep people in their homes and we've got to address it and address it soon.

(END VIDEO CLIP)

KING: Which candidate, Paul, has the better solution to the home and -- the home crisis in this country?

KRUGMAN: Well, you know, there's no -- you can't solve it, you can only mitigate it. And in terms of mitigating, you know, Obama's got more of an instinct that we've got to do something. He's more comfortable with economics. He's got a better team of advisers. McCain has admitted that he doesn't know much about economics. Now, he's denied having ever said it, but he did, in fact, say it. His close adviser until very recently was Phil Gramm, who says that we're just a bunch of whiners and that we're just having a "mental recession". So, you know, I mean -- and the track record. Look, the track record has been that the economy has done a whole lot better under Democratic presidents than under Republican presidents for several decades. The two worst employment records since Harry Truman in -- that presidents have acclimated in terms of job growth, both presidents with the worst job records have been named George Bush. It's kind of -- you know, history is on the side of believing that Obama is the guy who's going to do a better job of mitigating this.

KING: OK -- Ben.

STEIN: Look, George Bush, of course, inherited a recession from a fellow named Clinton, so he tried to get us out of that and succeeded very well for quite a long time. But there's no easy answer to this mortgage situation, this foreclosure situation. A heck of a lot of people bought houses they couldn't afford. That's the long and short of it. To have the taxpayers bail them all out...

KING: They passed that bill today, though. We're going to apparently bail them out.

STEIN: Well, we're going to bail out some of them. There are several million people who are approaching or in foreclosure. We're going to bail out a few hundred thousand of them. But I don't see why, frankly, the ordinary taxpayer or guy driving a truck should pay more income tax or pass on a bigger national dealt to bail out some high roller who bought a house he couldn't afford. I'm very much opposed to bailing out people who bought houses they couldn't afford.

KING: Were you surprised Bush signed that bill?

STEIN: I was not surprised. Bush generally will sign anything. I mean he had a little bit of a fallback when he vetoed a couple of things. But he will generally sign anything. But I'll tell you what, I think we've got to get Fannie and Freddie firmly in gear. We've got to say we stand behind them 100 percent. We've got to have the Fed and the Treasury say we stand behind all the big banks, we're not going to let hem fail. There is too much punitive activity by the Treasury and the Fed putting Wall Street on edge. Let's stand behind them. Nothing is going to be allowed to fail of any size.

KING: Paul, are you saying a president can't do much?

KRUGMAN: No. I mean presidents can do, over time, quite a lot. But the -- you know, the fact of the matter -- and I'm going to shock Ben by agreeing with him a bit here. Look, we had, by my rough estimate, about 25 million people bought houses that are now worth less than they were when they bought them. About 10 million people have got negative equity -- the house is worth less than their mortgage. That's going to rise. It might hit $20 million. That's a -- that's going to cause a lot of pain no matter what you do. But you can mitigate it. You can try and be there for the people who are in real, real distress, which is what this bill partly does. You can try to make sure the financial system keeps going. It's amazing to me, again, to hear Ben and President Bush sort of going along with this. There's a line there's no atheists in foxholes and there's no free market advocates in financial crises. So everybody is saying, you know, we've got to keep this thing rolling. And, you know, and then it's going to be a process. If we can get a good economic recovery going next year, if we can grab policies, a real, you know, stimulus policy that makes sure that people have jobs, that have incomes, that's going to cushion the blow some. But, look, we've had a terrible -- we had the mother of all financial bubbles, as people have been saying.

STEIN: Well...

KRUGMAN: The housing bubble was enormous. And it's -- there's no way you can make it go away painlessly.

STEIN: And we also had a tremendous tech bubble under my friend and yours, Mr. Clinton. But they're bubbles. And it's a terrible problem that we don't have enough government supervision. I'm going to shock you and say there's a gigantic flaw in Republican policy, which is not believing in regulation. A few hundred million dollars worth of regulation would have avoided this entire problem of the credit meltdown. Maybe $20 million, $30 million of decent regulation would have avoided this entire problem in the credit meltdown. It's going to cost the taxpayers tens...

KRUGMAN: All right.

STEIN: ...maybe hundreds of billions of dollars. Supervision and regulation are not...

KRUGMAN: Then ask yourself which candidates is more likely...

STEIN: I agree that that's a flaw in Mr. McCain's platform. He should be saying we're going to be supervising people. We're going to be the party of Teddy Roosevelt. We're not going to let the big boys on Wall Street suck the blood out of America and then walk home rich like rich fat pigs while the rest of America is suffering.

KING: OK. All right. A couple of other quick things, gentlemen.

KRUGMAN: Yes. I think that's an Obama slogan. (INAUDIBLE).

KING: You found one for him, he found one for you.

KRUGMAN: Yes.

KING: Paul, if you were in the camps of these people, who would you recommend they select as vice president?

KRUGMAN: Oh, you know, I can't. You know, I would -- I've never been able to convince myself that it matters much. I think Obama probably needs somebody who's just going to be, you know, convey that -- actually, I would say he needs somebody who is going to look strong on the economy. And there's -- there's a certain lady who ran for president who would probably look pretty good on that, but I guess she's out of -- she's out of consideration right now.

KING: Who do you like, Ben? Or who would you select?

STEIN: Well, I would say Mr. Pawlenty from Minnesota only, only...

KING: For McCain?

STEIN: For McCain, of course. For McCain. Only because Karl Rove told me he would make a good candidate. I don't know enough about it. But Karl Rove has forgotten way more than I knew. And if he thinks he's a good choice, fine. But I would say if not Pawlenty, a real live wire Southerner. The Republicans have got to keep the South. They've got to do everything they can to keep Virginia and Florida. That's their only chance of winning.

KING: And so therefore Mitt Romney no?

STEIN: No, Mitt Romney, no. I like him, but I don't think he can be it.

KING: Paul do you -- other than Mrs. Clinton -- if she's out, who do you think the campaign...

KRUGMAN: You know, there's lots of good...

KING: ...Obama should pick?

KRUGMAN: There's lots of good people. I don't, you know, I'm having a really hard time. I looked at all of the people and they all seemed like a little bit of a letdown. But that's, you know, that's because -- that's why they're vice presidential choices. I don't have a big -- by the way, let me say just about the -- Pawlenty, you know, we're having a little bit of a problem with infrastructure crisis. And I think people will raise the issue of the bridge that fell down. It's not entirely his fault, but he's not entirely blameless either.

STEIN: It's not his fault at all.

KRUGMAN: And it is going to be an issue. No, he neglected...

STEIN: He had nothing to do with it at all.

KRUGMAN: He neglected infrastructure spending. It's going to be an issue. So, you know...

KING: (INAUDIBLE) down.

KRUGMAN: But nobody's going to remember who the vice presidential nominees were for (INAUDIBLE)...

STEIN: And nobody's going to remember -- associate him with that bridge, either.

KING: Thank you both. We'll have you back again quite a bit, because you're two terrific guests. And the two of you ought to go on the road -- Paul Krugman and Ben Stein. What can you do to help yourself through these tough financial times? Some answers after the break.

(COMMERCIAL BREAK)

KING: Foreclosure rates are up more than 100 percent since last year and filings are up 120 percent. Today, the president signed a massive bailout plan. Lawmakers call it the most significant housing legislation in a generation. Two hundred and twenty thousand homes were lost to bank repossessions in the second quarter. That's a lot of families. We have an outstanding panel. In Dallas, Jeremy Brandt, founder and CEO of 1-800-CASH-OFFER. It's a real estate -- he's a real estate investor and short sale expert. In Detroit is Glinda Bridgforth, financial adviser, personal finance coach. And her latest book is, "Girl, Get Your Credit Straight." Here in Los Angeles, Jeff Lewis, house flipper and real estate speculator, star of Bravo's hit docu-reality series, "Flipping Out." And a return visit with John Assaraf, the entrepreneur and best- selling author. His most recent book, "The Answer: Grow Any Business, Achieve Financial Freedom and Live An Extraordinary Life," co-written with Murray Smith. He's co-founder of OneCoach, which provides small business coaching services. Jeremy, is there a way out of this?

Originally broadcast, 7.30.08