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MADDOW: Former half-term Alaska governor and Republican vice presidential nominee, Sarah Palin, can officially add a third line to her foreign policy resume tonight underneath own house`s own proximity to Russia and met the president of Columbia that one time. She can now list, gave a speech in Hong Kong. A couple of things to know about this speech which was delivered to a roomful of financial executives at an investors` forum -- first, the speech was closed to the press. However, we do have some appropriately grainy and shaky footage from somebody`s handycam.

(BEGIN VIDEO CLIP)

SARAH PALIN (R), FORMER ALASKA GOVERNOR: I`m going to call it like I see it and I will share with you candidly a view right from Main Street, Main Street USA, and how perhaps my view of Main Street representing perhaps a lot of other people, how that affects you, your business.

(END VIDEO CLIP)

MADDOW: Second interesting thing about this speech, Sarah Palin brought along as her advisor Randy Scheunemann, the controversial top foreign policy advisor from the McCain-Palin campaign. Mr. Scheunemann made himself famous for -- at least famous for D.C. at least, when it turned out that his lobbying firm signed a new contract with the Republic of Georgia, on the same day that John McCain, the candidate for president, spoke to the president of Georgia and released a statement supporting Georgia in what was about to become Georgia`s armed conflict with Russia. The implication was, that Georgia paid McCain`s advisor. McCain`s advisor later got McCain to say, "We are all Georgians." And therefore, for the low, low price of Randy Scheunemann`s company`s lobbying fee, Georgia almost bought the U.S. military as an ally in a war against Russia. That`s cheap. And Randy Scheunemann is who Sarah Palin brought on board to help her navigate foreign policy in her first speech abroad. In this speech -- which went on for a solid hour and a half before the question period -- Sarah Palin argued that the economic crisis that we`re in right now was caused by too much regulation of the financial world. Not a typo, too much regulation. Quote, "We got into this mess because of government interference in the first place. Lack of government wasn`t the problem. Government policies were the problem. The marketplace didn`t fail. It became exactly as common sense would expect it to. The government ordered the loosening of lending standards, the Federal Reserve kept interest rates low, the government forced lending institutions to give loans to people who couldn`t afford them." That`s how we got into this mess. Really? So the solution presumably is less regulation for Wall Street going forward? I do not mean to demean the former governor`s economic bona fides, but we do have an opportunity here to get a second opinion on this from the man who won the Nobel Prize in economics. Joining us now is Paul Krugman, "New York Times" columnist, economics professor at Princeton, and, of course, Nobel laureate. His totally readable, totally worth it, updated book, "The Return of Depression Economics and the Crisis of 2008" is now out in paperback. Paul, thanks for coming back on the show.

PAUL KRUGMAN, "NEW YORK TIMES" COLUMNIST: Hi there.

MADDOW: I know Sarah Palin isn`t the most relevant topic, but I`ve got to ask you -- too much governmental regulation in the markets?

KRUGMAN: May I ask you first, an hour and a half?

MADDOW: Ninety solid minutes before questions.

KRUGMAN: My God!

MADDOW: I know.

KRUGMAN: That`s half of Castro (ph). Anyway.

MADDOW: Is that what caused the financial crisis?

KRUGMAN: Hour and a half speeches, maybe.

(LAUGHTER)

KRUGMAN: You know, the first thing is that Governor Palin is not that far out of the Republican mainstream. I`m actually not sure she`s out of it at all on this. There are a lot of people who know insist that if we know government is bad, we know private sector is good, so it must have been government that caused the crisis. And the absence of any facts that actually sort of go in accord with that point of view don`t seem to matter. I mean -- of course, the way to think about it is that we had a pretty tightly regulated banking sector, from FDR up until Ronald Reagan, and a number of financial crises during that period, zero.

MADDOW: Yes.

KRUGMAN: Then we had Reagan deregulation, savings and loan crisis, further deregulation, East Asian financial crisis, and even more deregulation and -- well, here we are. So, yes, it`s a pretty amazing point of view for anyone to be holding, but a lot of people do hold it.

MADDOW: You say -- your "The Return of Depression Economics" is not just about how we got into this problem.

KRUGMAN: Right.

MADDOW: It`s also about sort of how to get out. You say in the book that even if there are some tiny green shoots of good news out there right now, we are still living in the world in which the usual rules of economic policy don`t apply. We`re living in the world, you say, governed by depression economics. What did the depression teach economists about how to get out of one or avoid one?

KRUGMAN: Well, it taught us a lot about how to avoid one, which is that you really have to, have to put some constraints. I mean, it sort of roughly, banking is very useful but extremely dangerous and banks have to have all kinds of -- you know, fencing put around them as a protection. They have to have some guarantees so that we don`t have bank runs, so people know their money is safe. But then, we also have some regulation so that bankers don`t take huge risks with other people`s money on a "heads I win, tails you lose" basis. We forgot all of that. The short line about how we got on to this crisis is we forgot what our grandfathers learned at great expense. Getting out of - now that we`re in the mess - that`s much harder. I mean, the last time, we got out of it with a world war, which is not something we hope to repeat.

MADDOW: The world war which wasn`t as a war - useful. It was useful because it was a huge economic outlet by the government.

KRUGMAN: That`s right. It was an enormous physical stimulus. It was, you know - we`re getting all worked up about Obama who would be spending at max about 2.5 percent of the gross domestic product. World War II, of course, was more than 40 percent of gross domestic product at its peak. So this is trivial stuff that we`re doing now. Luckily, it`s not confronting a great depression. But I get depressed sometimes about depression because the lesson of the depression seems to be that getting out of this sort of thing requires efforts on the scale that is outside the realm of what`s politically discussible right now.

MADDOW: Do you think that because there are some green shoots of economic recovery right now that further government action is even less likely?

KRUGMAN: Yes.

MADDOW: That the worst things are, the more political possibilities for it.

KRUGMAN: Yes. There is a certain sense. You know, the Rahm Emanuel line, "Never let a crisis go to waste." But you know, it`s starting to look like we did. And now, things are not good. Unemployment is high - it`s still rising. But the sense that we have got to act because otherwise the world might end is fading away and that makes it very hard to do stuff.

MADDOW: One piece of that recovery effort, but also the re-regulation effort that we try to focus on in this show is consumer protection.

KRUGMAN: Yes.

MADDOW: The president proposing new federal agency to regulate consumer financial products - things like credit cards and mortgages and all these other things that a lot of normal Americans have. Do you think those proposals are smart and do they go far enough?

KRUGMAN: Oh, they`re smart and they go far enough on that dimension. But that`s actually the smaller pieces of it. Much more important is regulating the amount of capital the banks have to hold on hand and regulating the way bankers get paid. The consumer protection ought to be the no-brainer simple thing - how could anybody object? Of course they are. So that`s - the reason consumer protection has become a touchstone here is because if we can`t even do that ...

MADDOW: Right.

KRUGMAN: ... what chance do we have of actually fixing the bigger things?

MADDOW: It`s the regulatory equivalent of like, you know, voting in favor mom and apple pie. The more complicated shouldn`t be.

KRUGMAN: That`s right.

MADDOW: Not much further down the road. Paul Krugman, Nobel Prize- winning economist, "New York Times" columnist, thank you very much for your time. It`s nice to see you. And I should also say that "The Return of Depression Economics and the Crisis of 2008" is out now in paperback. My recommendation, if you`re watching the show, is that you should probably read it. It`s very short. And I think you will thank me for the recommendation. Thanks, Paul.

KRUGMAN: Thank you.

MADDOW: OK. Today, I kept my window open in my office for most of the day, just so that I could hear the sheer number of sirens that blew all day, all day, all day long in New York City. It wasn`t anything scary. It was just that the leaders of the whole world were in town to go to the U.N., which actually is a tiny little bit scary but only Muammar Gadhafi could physically not stop himself from talking for a really long time. That story is coming up next.

Originally broadcast, 9.23.09