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MADDOW: Do you think they choose the particularly good-looking soldiers to stand behind the president at things like that or are all our soldiers that good-looking? Anyway, one of the soldiers in attendance during that speech today was Vice President Joe Biden`s son, Bo, who is currently serving in Iraq as a member of the Delaware Army National Guard. The president then met with Iraqi Prime Minister Nouri al-Maliki who clocked in as the roughly important world leader Obama has met with in the past week, then president headed back to the airport for the long, dark flight home -- a long, dark flight home to the stuff, frankly, that he was dealing with when he left. While you were out, Mr. President, there was an awful new jobs report showing the unemployment rate rising to 8.5 percent. The new labor secretary, Hilda Solis, is going to be on the show this hour to talk about that. Also, today, marked the beginning of earnings season, that time every three months or so when publicly traded companies report how much money they have earned, or in this quarter`s case, more likely, how much money they did not earn. The big one everyone was waiting for today was the aluminum company, Alcoa, their announcement today was not good. They lost roughly half a billion dollars in the first quarter of this year. Ah! In a brand new survey of CEOs that`s out today, the proportion of CEOs who say that they expect more layoffs at their companies in the next six months, that proportion is 71 percent. There is a silver lining here, maybe. As horrible as the job numbers are and as pessimistic as executives across the country appear to be, Americans broadly speaking are actually sort of increasingly optimistic these days. According to a new "New York Times"/CBS poll, back in mid-January, right before President Obama took office, the proportion of Americans who thought the country was headed in the right direction was only 15 percent. Now, it has more than doubled to 39 percent, who say we are on the right track. The percentage of people who think the economy is getting worse has dropped 20 points since Obama took office. Even the perception of the incredibly unpopular bank bailout is on the upswing. Last month, the proportion of Americans who said bailing out Wall Street would benefit all Americans not just bankers was just 29 percent. Now, just a month later, it`s up to 47 percent, who think the bailout will benefit everyone. Now, poll numbers like those are just a measure of the public`s mood. But when everyone talks about how important it is for people to have confidence in the economy, for people to expect that things will get better, is it possible that this little, inexplicable bout of public optimism could be a self-fulfilling prophesy? Joining us now is a man who is probably going to tell me to cut the Sally Sunshine routine and get real. Nobel Prize winning economist and "New York Times" columnist, Paul Krugman. He`s is a professor of economics at Princeton University. Paul, thank you very much for coming back on the show.

PAUL KRUGMAN, NEW YORK TIMES COLUMNIST: Well, hi. Good to be on.

MADDOW: Are you here to kill Sally Sunshine? Are you here to tell me that people feeling better doesn`t really matter?

KRUGMAN: Yes, basically. I mean, you know, what are you going to say? It`s not -- look, the trouble is -- now, better to have people slightly optimistic, you know? Sheer panic is not good for anything. But the fact of the matter is -- we have some real, real problems that are not going to go away through self-fulfilling optimism. You know, one of the little things that`s been reported now is the IMF has now, International Monetary Fund has upped its estimate of losses on bad loans to $4 trillion. You know, not so long ago, $1 trillion was considered an exorbitant estimate. So, the problem is that there`s a lot of real underlying mistakes that were made that have landed us in this mess. And the public`s optimism is good. People believe that Obama is likely to do the right thing. That`s all good, but it`s not enough.

MADDOW: Let me ask you about one other thing that looks from a distance like a silver lining that maybe isn`t. Last fall on this show, I remember asking you what I should watch for as an indicator rather than the Dow. The Dow is something that people are emotionally rewarded by, that they cued in to that on a day-to-day basis. But you suggested that watching the credit markets would be a more realistic thing to watch in terms of understanding the economy. "New York Times" today ran something that says muted signs of life in the credit market. Is that a reason for optimism?

KRUGMAN: Yes. That`s certainly better news. I mean, instead of things getting steadily worse -- the Dow is terrible, right? The stock market, by my count, has predicted six of the last one recoveries, right? It doesn`t mean anything. But the -- but these credit markets are a little bit better which still means that they are inconceivably bad by normal standard. I mean, loans are harder to get, perfectly legitimate business projects can`t get funded. But that line has moved a little bit, you know, we are dropping -- the overflow pressure of whatever is is dropping a little bit. So, that`s good. That`s real progress. Some things are improving -- or maybe the right way to say is that things are getting worse more slowly which is a good thing.

MADDOW: You described though that, essentially, the main problem here is that we did some things really, really, really wrong. We made huge errors. And part of what has to happen now is that we not only need to recover, but we need to put things back together in a way that rights those wrongs. What do you think the priorities should be policy-wise for the administration in fixing stuff that`s really wrong?

KRUGMAN: I think that we really need to completely overhaul the way we regulate the financial system. I mean, there -- one of the things -- you know, we could snatch defeat from the jaws of victory here. If we get an economic recovery but we don`t actually fix that system, then the same thing is going to happen to us. You know, we have -- we`ve been -- we spent the last 20 years lurching from bubble to bubble -- basically is the description. And if we don`t fix it, then, that will happen all over again. So, we need to really tighten the regulation. You have to make sure that people who lend money have to keep some stake in the loan so they don`t sell off the whole thing and then forget about it. You know, the excesses that got us to this point are ready to do it to us again even if we get out of this current trap.

MADDOW: Do you feel like what`s being put together thus far by Treasury Secretary Geithner and by Larry Summers and others doesn`t take an antagonistic enough approach toward regulations but also doesn`t set up the incentives correctly?

KRUGMAN: Yes. I think that they are -- you know, these are smart guys. Ask them. They`ll tell you. But there is this sense that comes from the administration still that they basically see this as, well, there were a few wrong turns taken, a few things went wrong and we`ll do some minor patches and we`ll throw a bunch of money at this to get the thing restarted. But, yes, I am not hearing both what -- you know, what you -- what`s in the public domain and the murmurs I hear that they`re not really looking for a root-and-branch reform which is disturbing.

MADDOW: We`ve heard now that they are not planning -- the Treasury Department is delaying the release of the results ...

KRUGMAN: Yes.

MADDOW: ... of the stress tests for the banks. Do you know what -- why that might be? And do you have an opinion on that?

KRUGMAN: No. But, I think, we can say pretty clearly if the stress tests were saying that everything was fine, they probably wouldn`t be eager to postpone the release of that. And, you know, this is a problem -- because suppose that, you know, one of the versions that we`re hearing is that they`ll release some generic information but not information on particular banks. And, boy, would that be a downer. That will be saying that basically there is still -- you know, what everyone is worried about is we talked about Japan in the `90s, keeping the zombie banks still shambling forward. And there is a lot of feeling that we got our, you know, American zombie banks now on the march. And this news was not good. It made that scenario look a little bit more likely.

MADDOW: Brains. Brains.

(LAUGHTER)

KRUGMAN: Now, I mean, what can you say, there`s a lot of night of the living dead in the way we all talk about the economy these days.

MADDOW: Yes, wow. Not heartening but it`s good to know.

KRUGMAN: Yes.

MADDOW: Paul Krugman, Nobel Prize-winning economist, "New York Times" columnist -- thank you for your time tonight. It`s always great to have you on the show.

KRUGMAN: Good to be on.

MADDOW: President Obama arrives back in Washington to face a Republican Party determined to block a lot of his nominees, a lot of his nominees like -- oh, say, the ambassador to Iraq. Why would we need one of those anyway? Senator Chuck Schumer of New York will join us right here in just a few minutes to talk about that.

Originally broadcast, 4.7.09