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LARRY KING, CNN ANCHOR: Tonight, nightmare on Wall Street. Financial giants fall. The carnage rocked stocks around the world and millions want to know -- who will my money be safer with?
SEN. JOHN MCCAIN (R-AZ), PRESIDENTIAL CANDIDATE: Fundamentals of our economy are strong but these are very, very difficult times.
KING: Is this the defining moment of the presidential campaign? Does either candidate have the answer?
SEN. BARACK OBAMA (D-IL), PRESIDENTIAL CANDIDATE: Too many folks in Washington and on Wall Street weren't minding the store.
KING: Plus, Meghan McCain talks politics, Palin and whether she's always agreeing with her dad, next on LARRY KING LIVE.
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KING: As we go on the air, stocks in Asia are tumbling and we have three outstanding guests to discuss this incredible day on Wall Street. In New York is Andy Serwer. He's managing editor of "Fortune" magazine. In Princeton, New Jersey is Paul Krugman, "New York Times" columnist, professor of economics and international affairs at Princeton. And also in New York is Stephen Moore, senior economics writer for "The Wall Street Journal," editorial page, author, the new book is "The End of Prosperity." All right Andy, if it's possible, in a nutshell, what's going on?
ANDY SERWER, MANAGING EDITOR, FORTUNE: Well, Larry, this is a really scary and tumultuous time. There's a tremendous amount of fear out there right now. And it all stems obviously from the mortgage meltdown, the sub prime. And also, a great amount of greed and fear going on on Wall Street. And also, ignorance of the derivative products, these are complicated financial instruments that these firms played with. It culminated in an incredible weekend of activity whereby Lehman Brothers went away and Merrill Lynch was merged into Bank of America. Unprecedented couple of days.
KING: Paul Krugman, just saying Lehman Brothers went away. How -- how incredible is that?
PAUL KRUGMAN, COLUMNIST, NEW YORK TIMES: Well, I mean, this is not really -- this is not the Lehman Brothers of 150 years vintage. This is a really, it's a newly-created, it's a 15-year-old firm with 150-year-old name but still it's a big player. I mean, this is the biggest bankruptcy arguably, you know, in - I don't know, decades. And this is a financial system that is coming apart at seams. They're trying to hold it together with chewing gum and, you know, duct tape but it's -- this is big stuff. I mean, you know, I'm glad that Ben Bernanke is a scholar of the Great Depression because we've got to worry about some of those parallels.
KING: All right, Stephen Moore, we also have Merrill Lynch being taken over by Bank of America. How do you read that one?
STEPHEN MOORE, WALL STREET JOURNAL: Well, it's part of the same pattern. You know, first we have Bear Stearns several months ago and then, of course, today we had Lehman Brothers going under. And Bank of America buying Merrill is another sign that -- and Andy is right. The reason, Larry, that these big financial institutions are going under is that they told in their portfolios major amounts of mortgage-backed securities and this whole financial crisis really dates back to two events. One is the crisis in the housing industry with the sub prime loans. These banks are holding huge amounts of loan that is have very little value and the other thing I think that we haven't even mentioned, Larry, is what's happened over the course of the last two, three, four years has been a decline in the value of the dollar and that has reduced the value of U.S. assets, whether it's stocks or housing or the things that we can purchase as Americans because our dollars are worth less.
KING: So Andy, who's to blame?
SERWER: There's blame enough to go around, Larry. You know, it's interesting. I think that the McCain and Obama campaigns are a little bit long on rhetoric and short on answers right now but they do talk about people being asleep at the switch on Wall Street and in Washington. Regulators clearly did not do enough here. And the CEOs of some of these firms believed their own voodoo. They didn't have hundred-year perspective. They got to be very, very complacent in their own thinking, thinking that they created systems that could weather any storm. But they didn't see the 100-year storm coming as Alan Greenspan calls it so they're to blame and also, Washington must shoulder some responsibility.
MOORE: Let's not forget -- let's not forget the other person I think it was to blame which is Alan Greenspan. I think if you look back at where this really crisis dated from, you look back at the early 2000s and mid-2000s where we had a very loose monetary policy, essentially what was happening is the Federal Reserve Board was subsidizing banks to make loans and that was the period, Larry, where a guy could walk in and get a mortgage and I think that was -- that -- the chickens coming home to roost for that loose monetary policy.
KING: Paul, I want to find out what's the effect on the guy every day on the street. But Paul, you want to comment?
KRUGMAN: I just want to say this is a great moment in history. Stephen Moore and I agree about something. If there's one single villain, if I had to identify - there are lots of people to blame, but if there's one single villain, it would be Alan Greenspan. I would put greater emphasis on the standing in the way of any oversight on sub prime, his repeat assurances that not only didn't we have a housing bubble, but it was impossible to have a housing bubble, his urging people to take adjustable rate mortgages. Boy, if there's one guy that really did his best to get us into the mess we are in, it's Alan Greenspan. And having him as the great sage right now is pretty wrangling.
KING: Let's hear Senator Obama on the economy. He said this today. Let's watch.
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OBAMA: Today offers more evidence, Colorado, that too many folks in Washington and on Wall Street weren't minding the store. You know, for eight years, we have had policies that have shredded consumer protections. That have loosened oversight and regulation and encouraged outsized bonuses to CEOs while ignoring middle class Americans.
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KING: And now we'll have our guests comment after we show you what John McCain said today dealing with all of this crisis. Watch.
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MCCAIN: We are going to reform the way Wall Street does business and put an end to the greed that has driven our markets into chaos. We'll stop multi-million dollar payouts to CEOs that have broken the public trust. And we'll put an end as I said to running Wall Street like a casino. We'll make businesses work for the benefit of their shareholders and their employees and we'll make sure that your savings, IRAs, 401(k) and pensions are protected.
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KING: Andy, are they both right?
SERWER: Yeah. They're both right, but they're really both not saying anything. Come on now. Both of the guys are being briefed by Treasury Secretary Paulson. I expect a little bit better than that. I mean, granted it's a moving target here, Larry, but, you know, let's see some substance. We should challenge both these candidates to come up with a real plan to address the huge problems facing our country right now.
KING: Let me get a break and we'll come right back and we'll ask about the effect on everybody or rather every day people and where do the candidates stand on the whole mess, next.
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OBAMA: This morning we woke up to some very serious and some troubling news from Wall Street.
MCCAIN: The American economy is in a crisis. It is in a crisis.
OBAMA: Too many folks in Washington and on Wall Street weren't minding the store.
MCCAIN: We're going to reform the way Wall Street does business and put an end to the greed.
OBAMA: Instead of prosperity trickled down, the pain has trickled up.
MCCAIN: We've got to fix it.
OBAMA: This country cannot afford four more years of this failed philosophy.
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KING: Paul Krugman, do you agree with Andy Serwer that neither one of these candidates are hitting the mark?
KRUGMAN: You know, there's a little -- that's a little bit of false symmetry there. I mean, Obama has been calling for increased financial regulation. He has some pretty decent-sounding proposals there. I have no idea what McCain's talking about. He's saying we're going to stop the executives from getting outsized bonuses. How are we going to do that?
SERWER: It sounds kind of partisan frankly, I mean right?
KRUGMAN: How's that supposed to happen? It's not -- you know, we are in charge. The president is in charge of drafting legislation that's going to regulate investment banks. Obama has talked about that. The president is not in charge of executive compensation. That sounds kind of socialist to me.
KING: Stephen, what do you think of their plans?
MOORE: Well I think look, one of the big problems with Washington that feeds this financial meltdown that we are experiencing is that Washington can't get his own finances under control. We have seen over the last seven years under Republicans and Democrats the biggest spending binge virtually in American history and now you've got a $500 billion budget deficit, you've got low growth and now you also have this mentally in Washington, Larry, that I think the public is rebelling against that every time there's a financial institution or a bank or an auto company or an airline company that's in trouble, Washington is going to provide a bail-out. I call it kind of this bail-out mania and the significance of what happened yesterday and I'll give Ben Bernanke and Paulson some credit, they did not put the taxpayers at risk for Lehman Brothers. They basically said we will let this bank fail. We are not going to bail it out. I give them a lot of kudos for that.
KING: Andy, what's the affect on a bus driver in Hialeah?
SERWER: There's a lot of stuff going on right now. First of all, the average stock investor is poor now. Obviously, the market went down. The housing market is not improving and most importantly there's a crisis of confidence, Larry, that seems to be growing in this country. I think that's very fair to say because of what's going on. People are questioning, you know, is their money safe? How safe is my savings and loan? What about my mortgage? All these kinds of things coming into play for the first time in many, many years and, you know, it really is a kind of scary situation.
KRUGMAN: Larry --
KING: Paul, does our bus driver friend have to worry?
KRUGMAN: Well, if he's got a 401(k), he has to worry. If he's got money that is not in insured - fully insured federal bank deposit he's got to worry. And also, he's got to worry about his job. I mean, one of the biggest effects this is going to have on a lot of ordinary working Americans is that it's throwing sand in the ears of the economic machine. I mean, we are seeing the credit market seizing up. You know the Fed's been cutting interest rates, the interest rates it controls for the past year and credit for businesses, interest rates that actual real people have to pay have been going up, not down. That's because this financial crisis, that's going to get worse.
MOORE: Larry --
KRUGMAN: So this is, you know, already in a recession, I think, and going to get worse because of this.
MOORE: We have been through this before. When Paul said earlier that this is like the Great Depression and I think Barack Obama said something like that, I think that's a bit too far. I mean, look. Remember in 1986, one day the stock market fell by 20 percent in value. Today it fell by about 4 or 5 percent. In 2001, we saw the huge meltdown in the technology bubble. What we're experiencing, folks, right now is a classic bubble bursting that happened in housing. We have been through this before. Yes, it is going to cause people to lose money that have money in 401(k) accounts, but they shouldn't feel panicked. I don't think they should feel that they have to rush out and put all their money under their mattresses because I still think the financial system is still fundamentally pretty sound.
SERWER: I think that's right, Larry. Can I just jump in? I think the issue right now what kind of makes me concerned and I know a lot of people agree with me including my fellow guests here, probably is that, you know, no matter what you think about Ben Bernanke and Hank Paulson, they are pretty competent. They kind of have a grip on what's going on and so far, they haven't been able to stem this crisis and I think that's a real concern.
KRUGMAN: Yeah, I will say -- look, I'm a big fan of Ben Bernanke's, partly because he used to be my department chairman before he was demoted to running the world. But Ben and Hank Paulson is a smart guy working for a not so smart administration, but they have been doing what they can. The reason we're not going to have another Great Depression is because these guys know about the Great Depression and they're not letting things get that much out of control. But it is alarming that this is now, we're now 13 months into the crisis and the dominos just keep falling.
KING: Is it going to get worse, Stephen?
MOORE: Boy, that is a really tough question to answer because, you know, in my opinion, Larry, it is not going to turn around until we hit a bottom in that housing market. I live in area in northern Virginia where we had a big run-up in housing for 10 years where housing more than doubled, almost tripled -- but now houses just aren't selling. And so until I think we hit that housing bottom, we're not going to see a strong stock market recovery.
KING: We'll be calling on all three of you again. Andy Serwer, Paul Krugman and Stephen Moore. When we come back, more on the political fallout of today's economic news and how it's going to impact the election. Don't go away.
Originally broadcast, 9.15.08