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SYNOPSIS:

ORMAN: The money went vaporized, because as the stocks go down, people take losses, the money is gone. Now here's the thing, we just heard the Congresswoman say we've got to settle this, we've got to do this. Oh, give me a break, everybody. You saw $1 trillion go away today. If something isn't done quickly here, you're going to see these markets lose far more than $1 trillion. Do not be surprised if you don't see these markets go down to like 8,000 -- it's very easily you will if they don't come up with something quickly. So when the market -- when stocks go down, money is lost. We lost $1 trillion today.

KING: All right. Suze is our favorite guest -- one of our favorites. And she'll be back. More with Suze coming up. But first, two brilliant economists -- two of our favorite people debate today's fiasco, when we return.

KING: Two terrific guests join us now. They've been with us before. Always great have them in. In Washington is Ben Stein, the economist, commentator, "New York Times" columnist, former presidential speechwriter, best-selling author. His latest book is "How To Ruin the United States of America." And he supports Senator McCain. In Princeton, New Jersey, Paul Krugman, the "New York Times" columnist, professor of economics and international affairs at Princeton. He's a best-selling author, as well. His most recent book is "The Conscience of a Liberal." All right, Ben, I know you've had your reservations about the bailout. What do you make of what happened today?

BEN STEIN, ECONOMIST, SUPPORTS MCCAIN: Not that surprising. I mean we have a president who has exhausted his credibility, a Treasury secretary who is severely disliked and whose highly contemptuous attitude not won him any friends on Capitol Hill. We have a plan that is a stinking plan, although it probably should have been passed anyway. We have a Wall Street which has taken some of the biggest salaries of all time for doing some of the worst jobs in the history of management of any enterprise. Small wonder that Americans are furious. But that being said, it should have been passed. Mrs. Pelosi should have counted the votes and made sure it was passable and would have passed if it were going to a vote.

KING: All right. We go to Paul Krugman. Your thoughts?

PAUL KRUGMAN, ECONOMIST & "NEW YORK TIMES" COLUMNIST: I'm shocked to say I think I dis -- I think I agree. See, I'm so used to disagreeing. I agree with Ben about just about all of that. This was not a good plan. This was a plan -- it was a horrible plan a week ago and it was made sort of not totally horrible by the changes. But it was still not a good plan. But we did need to do something. And this was the most astonishing scene. I mean this was -- you know, Republicans say they voted against it because Nancy Pelosi made a partisan speech. You know, it's like, ma, she's saying nasty things about me. And they voted down a rescue for -- you know, this is -- this was a terrible thing. You know, I don't know how this plays out now, but this was -- you know, we are -- we're playing with fire here. We really are at some risk of really, well, look, what my wife said was we're now a banana republic with nukes. That's her description of where we are right now.

KING: Ben, what do we do?

STEIN: Well, I think, first of all, you call Congress back into session immediately. This idea that we can't have a session Tuesday or Wednesday because of the Jewish holidays is nonsense. We don't have a state with an established religion and if we did, it certainly wouldn't be Judaism. So let's get everybody back to work immediately. I mean people work on Christmas, people work on Easter, people work on Sunday. Get back to work. Pass the bill. Let's have the Republicans say OK, we made our statement, but, look, this has nothing do with Fannie and Freddie. It has nothing to do with anything except that we've got to get credit flowing again. We'll keep a close eye on Mr. Paulson, we promise you, but let's get this darned thing running.

KING: OK...

STEIN: Let's get some confidence back in the system.

KING: By the way, he mentioned the Jewish New Year. Happy New Year to all our Jewish friends.

STEIN: Happy New Year to you, too, sir.

KRUGMAN: Happy New Year.

KING: And it is year 5769. We're an old people.

STEIN: Yes, very old.

KING: OK, Paul, what do we do?

KRUGMAN: Well, you know, there's two possibilities -- actually, I'm not so upset about this waiting until Thursday because I think that the carnage in the markets will help concentrate Congress' mind. So I think we have a much better chance of actually doing the right thing. You know, again, we've got to say this is -- as Ben says, it's a stinking bill, but it's better than nothing at all. Two more days won't kill the world economy. I guess we need something to focus. If it fails on Thursday, which is, I have to say, still a very real possibility, then I think back to the drawing board. Scrap the whole plan, write a plan which, given the way things are, is a plan that will -- that Democrats will sign onto and pass it with Democrats only and just say, look, we're being the grownups here.

STEIN: Maybe have a plan in which the money goes to the homeowners and therefore -- thereby they can pay their mortgages. That stabilizes the mortgage bundles in the debt markets. Debt stabilizes the banks and investment banks and insurers that hold them. And the process goes from the bottom up instead of from the top down. Maybe that (INAUDIBLE).

KRUGMAN: And one in which the federal government takes over the firms -- the financial institution that just have to be kept running, as they did with AIG just not that long ago, because we have to -- you know, what this plan was, in some ways, the hardest thing to sell, because it was saying Uncle Sam -- which is you and me, because we're the taxpayers -- is going to go and buy up all this toxic waste from the banking sector. And everybody, rightly, is asking well, you know, aren't we -- you know, isn't that something for nothing? I think it was designed so it would actually be not too bad. But it was the wrong place to start. So we can do this better. And we can do this -- you know, there are precedents. Sweden cleaned up a bad mess, and they did it pretty well, 15 years ago. We could do, you know, we could learn something from the Swedish model.

STEIN: Well, we could try stopping these nutty experiments. I mean Paulson had this nutty experiment of letting Lehman Brothers fail. Now he's got this nutty experiment of saying make me the czar of the whole economy and don't have give me -- don't have any oversight over me except a tiny little bit. Let's have something under the Constitution, not under the whim of Henry Paulson. And let's have it come from the little people up instead of from the very rich people down.

KING: Why, Paul, does President Bush appear not to have clout here?

KRUGMAN: Oh, you know, who believes him anymore? I mean the -- you know, when Henry Paulson speaks, people see the ghost of Colin Powell behind him saying there are weapons of mass destruction. When the president appeals for national unity, people think of all the times that he exploited 9/11 for partisan gain. And there have just been too many lies from this White House. Nobody -- nobody believes what it says. And the Republicans in Congress are, you know, they would like to pretend that the last eight years didn't happen. So they -- they're not going to be swayed by an appeal from that guy in the White House. They can't remember his name.

KING: We'll have...

KRUGMAN: What was his name?

KING: We'll have Ben respond. We'll be right back with Ben Stein and Paul Krugman. Whose fault is it that the bailout didn't work -- McCain, Obama, who? We'll continue this debate next.

UNIDENTIFIED MALE: Breaking news. Look at this -- a 777 point drop. 777 -- that's the biggest number we've ever seen on that board with a negative sign in front of it.

(END VIDEO CLIP)

KING: We're back with Ben Stein. He's in Washington. Paul Krugman, who's in Princeton, New Jersey. He teaches at that distinguished university. Who's helped presidentially by all of this, Ben?

STEIN: I'm not sure either one is helped. But I think that what happened today was a scream -- a howl of anger from America that these guys on Wall Street have sucked the blood out of this country like giant ticks and we are sick of it and we're not going to give them anymore money. That being said, the bill still needed to pass. I think Mr. McCain should have put his prestige on the line and said this thing has to pass. But as to Mr. Obama, I didn't see him really going all out for it. I did see him saying it should pass. I'd like to see the two of them get together on Capitol Hill Thursday and say please, guys, pass this thing. We'll fix the problems with it later. Please, guys, for the good of America -- it's a stinking bill, again, but please pass it for the good of America.

KING: Paul, would you bet on that happening?

KRUGMAN: I would be really surprised, because, you know, basically, McCain's only chance of winning this election is to make Obama seem unacceptable, because the issues are all going Obama's way. And to do a joint appearance with Obama, I think, would be a bad thing. You know, and the McCain campaign came out, you know, just after the bill failed, blaming Obama for it. And then two hours later McCain himself came out and said we shouldn't point fingers of blame here. So I think they're a little bit confused about what they want to do. And, look, it does -- in fact, the financial crisis is focusing peoples' minds back on real issues -- on the economy. We're not talking about who can dress a moose better. And that has been working to Obama's advantage. You can see that the political current has been running his way. I mean, what -- you know, Democrats are incredibly lucky. They're getting to run against Herbert Hoover all over again.

STEIN: I'm afraid that is cruelly true. We are seeing a treasury secretary who has made this president, who is basically a fine, kind man, seem like Herbert Hoover. This man should be out of Treasury yesterday, and they should get somebody in there, career civil servant, who will make this happen without the monstrous ego.

KING: Shouldn't Paulson have been way above par, based on his background?

STEIN: He should have been. He should have seen the whole problem with credit coming. He should have seen the credit default swaps catastrophe coming. Look, once we have solved the problem with the bad mortgage loans, we still have not cleaned up all of the problems with credit defaults swaps, which is probably ten times the problem of the mortgage default situation. So, we have still got a lot to lean clean up. There is an enormous mess out there that has happened because of deregulation. I think only McCain has the guts to take on Wall Street to make it happen, but he is, by nature, a deregulator. So he is, by nature, not the guy to do it. He's got to have somebody strong like Krugman with him there to help him.

KRUGMAN: Oh boy.

KING: Paul, he wants you to be involved.

KRUGMAN: Instead, he's got Phil Gramm talking to him. But look, I'm not that negative on Paulson, but he clearly -- Paulson botched it multiply in the last couple of weeks. He failed to rescue Lehman when it had to be done. Then he said, in reward for my failure, give me all the power.

STEIN: Exactly, exactly.

KRUGMAN: This was -- it was politically a complete tin ear. It's as if he's been asleep for the past eight years. There's no sense of how people feel about this administration, in particular.

STEIN: It is a stunning thing that he became head of Goldman Sachs. I don't know how that happened.

KRUGMAN: Yes, well.

KING: Paul, are you optimistic or pessimistic?

KRUGMAN: You know, I think it's -- look, even if this thing passes or something passes, this is a long, hard stretch. The bill was nowhere close to fixing up the mess. Ben is right on that. There's a whole bunch of stuff. I think we are looking at a weak economy, possibly a lot worse than weak for sometime to come. We will survive. In the long run, we'll be all right. But my favorite economist, the great John Maynard Keynes, said, in the long run we are all dead.

KING: Ben, how do you see it?

STEIN: I think it is a terrifying situation for people who have -- who have a limited time horizon, who are retiring or preparing to retire, who are retired. It is a terrifying situation. They have been done in, double crossed, had their savings stolen from them by incompetence in government and on Wall Street. And they have every right to be furious. I think for periods longer than ten years, it will be fine.

KING: Paul, is anybody in this crisis making money?

STEIN: Oh, yes.

KRUGMAN: Actually, right now, with a lot of short selling -- Ben, I'm not sure.

STEIN: The people who bought the credit default swaps are making trillions. The people who bought the credit default swaps are going to be the richest people in the world.

KRUGMAN: I did see that only one stock went up today.

STEIN: But the --

KRUGMAN: That was Campbell's Soup. I guess people figuring on soup lines coming pretty soon.

STEIN: The people that bought the credit default swaps are making literally trillions, literally trillions.

KRUGMAN: I don't think that's right. We can have that discussion another time.

STEIN: The insurers couldn't be losing trillions if the people who bought the insurance weren't making trillions.

KRUGMAN: That's not really true. But, OK. But no, look, it is pretty grim. This is an across the board economy in big trouble and the stock market is reflecting that.

KING: Paul, would you buy stocks tomorrow?

KRUGMAN: No. I'm sorry. I don't usually give such direct advice but no.

STEIN: If I had a ten year horizon to worry about them, certainly, yes. It ten years, it will be fine. But for the next few years, I would be cautious.

KING: All right. Where would you just put it in the bank?

STEIN: I would put it in the bank. I will probably buy stocks tomorrow. So I would buy them for my son, who's only 21. But for my own lifetime I would not buy them. I would buy bonds. KING: Thank you both very much. Paul, what would you do, quickly?

KRUGMAN: Buying bonds, actually. We did some recently and actually have done quite well, because interest rates are falling, as they tend to do when the economy is in big trouble.

KING: Ben Stein, Paul Krugman, two great guests, we'll have them back often. Sadly, they usually come back when there's problems. But there's problems. A great discussion continues on our new blog. Join in at CNN.com/LarryKing. Suze Orman returns to answer some blog questions, next.

Originally broadcast, 9.29.08