Secretary Paulson on "Fox News Sunday"

CHRIS WALLACE, HOST: I'm Chris Wallace, and this is "Fox News Sunday".

A financial crisis poses a serious threat to our nation's economic power.

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PAULSON: We must now take further decisive action.

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WALLACE: But will the government's new plan work? What should nervous investors do? We'll get answers from the man in charge of the bailout, Secretary of the Treasury Henry Paulson, live, only on Fox News Sunday.

Then when the markets tumble, the candidates rumble.

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MCCAIN: Raising taxes in a tough economy isn't patriotic. It's just plain dumb.

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OBAMA: Senator McCain, what economy are you talking about?

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WALLACE: Who has the right ideas to fix the economy? We'll ask two top congressional leaders, Republican senator Jon Kyl, and Democratic senator Charles Schumer.

Plus, with 44 days till the election, McCain and Obama prepare for their first debate. What are the keys to victory for both candidates? We'll ask our Sunday panel -- Fred Barnes, Mara Liasson, Bill Kristol and Juan Williams.

And our Power Player of the Week wants everyone to know disaster relief doesn't end when the storm goes away, all right now on Fox News Sunday.

And hello again from Fox News in Washington. Well, what a week it was for the financial markets, with a meltdown that officials said was the most serious since the great depression. Now Congress and the administration are working on a plan to rescue the markets and calm investors. For more, we turn to the man at the center of the crisis, Treasury Secretary Henry Paulson.

And, Mr. Secretary, welcome back to "Fox News Sunday".

PAULSON: Chris, good to be here.

WALLACE: Let's start with the problem. How dire is the situation if Congress does nothing?

PAULSON: The markets are fragile. We have a serious situation. Last week the credit markets were frozen and clogged up. And for a while there, American companies, industrial companies, weren't able to raise financing normally.

If we get to a situation where companies can't readily raise financing, where it's difficult for farmers and small business men to get loans, where people's retirement incomes are threatened, that's a situation we don't want to have.

And that's why it is very important we move quickly and stabilize the markets by buying these illiquid loans, these illiquid mortgage loans, from the financial institutions which are clogging up the system. So that will then let the institutions play their role.

WALLACE: Again, talking pre-bailout, as we sit here today, how many more financial institutions are in danger of collapse? And is this a financial crisis or is this a threat to the entire economy?

PAULSON: Well, this is -- I can't say that there won't be more financial institutions that will have problems here. But the key thing is to stabilize the markets.

And again, this is a situation that we can work through. We as a country have always worked through these situations, and we will.

But the concern I have is about the American people and the economy. In other words, we're not doing this to protect our financial institutions in and of themselves. We're doing it to protect the financial institutions because that's what is needed to protect the American taxpayer.

And unfortunately, the American taxpayer is right now at risk if there is a tough situation in the economy. So we're trying to reduce that risk to the American public.

WALLACE: All right. Let's turn to your proposed bailout. It's complicated. I want to go through a lot of parts of it, so if we can do a lightning round of quick questions and quick but responsible answers, I would appreciate it.

The draft legislation gives you $700 billion to buy troubled mortgage securities. How do you decide which to buy and what to pay for them? PAULSON: Well, Chris, that's a very important part, because what we're going to need to do is buy them in a way in which it unclogs the system and makes the system healthier, and do it at a price that protects the taxpayers.

WALLACE: So how do you decide what to buy and what to pay?

PAULSON: Well, we're going to have some professional asset managers and some real experts working with us. And we'll use a -- you know, we're working through the processes, but there'll be some form of auction process.

WALLACE: The legislation says that you can buy from any financial institution. Does that include hedge funds? Does that include foreign institutions with American affiliates?

PAULSON: The intent right now wouldn't be to buy from hedge funds.

But obviously, we would want to buy from financial institutions that are employing people and are an important part of our economy, because to the American people, if an institution that's doing business here is clogged and can't perform the role they need to do, it's a distinction without a difference, whether it's a foreign- or a U.S.- owned, as long as they have operations here.

Remember, our system is a global one, and I'm also going to be pressing our colleagues around the world to design similar programs for their banks and institutions where they are appropriate.

WALLACE: But I think one thing that people are concerned about -- for instance, the hedge funds which have been highly speculative.

PAULSON: Right.

WALLACE: You've got people who've made billions of dollars. They've got the private jets. Are you going to be spending taxpayer money to bail out these hedge funds?

PAULSON: It certainly is not our intent to be buying assets from the hedge funds.

But remember, step back on this program. All the assets we buy is with the intent of minimizing the risk to the taxpayer, because unfortunately, the taxpayer is already at risk if we have broader problems in the economy.

So what we're trying to do is reduce the cost and reduce the risk to the taxpayer through this action.

WALLACE: Well, let's -- that brings me to my next question in the lightning round. What guarantees are there that these securities will ever be worth anything, that taxpayers won't end up holding billions of dollars of bad paper?

PAULSON: Well, Chris, there are no guarantees, and the taxpayer is at risk.

But I think it is very important to understand the difference between what we're doing and an expenditure or an outlay. This is not a spending program.

This is a program where the government would buy illiquid assets, hold those assets and sell those assets, and the funds would come back into the treasury, and it would be extraordinary circumstances -- highly unlikely -- that the cost would be anything like the amount you spend for the assets.

And the cost will be determined by how quickly the economy recovers and how quickly housing prices stabilize. And again, I don't like the fact that we have to do this. I hate the fact that we have to do it. But it's better than the alternative.

And once we stabilize the markets, we then have to take actions to make sure this doesn't happen again. And we have a regulatory system that is broken. It's outdated. It's outmoded. It doesn't fit the world we live in. We have regulatory authorities that are broken and outdated and need to be updated.

There's a lot of work that needs to be done, a lot of reform that needs to be done. But first we need to stabilize the system and move quickly.

WALLACE: I want to get back to the question of protecting the taxpayer. Since we're bailing out these banks and investment firms, do you limit executive salaries?

And do taxpayers -- because after you take the bad debt off, these firms are going to become big again and make millions of dollars. Will taxpayers get a piece of the action, get a piece of equity, in firms as they start to make money?

PAULSON: Chris, that's a very important question. I'm going to take a little bit longer to answer that, because where we've come in, where the government has come in, the fed has come in, to failing firms and injected capital directly into those firms, there have been very strong steps taken to limit compensation, to protect the taxpayer -- the GSEs's, with AIG.

This program is much different in intent. This is not to just deal with institutions on the brink of failure. This is to protect the system by avoiding as much failure as possible.

And so what we want to do is go across the whole spectrum of financial institutions and buy assets so that the system isn't clogged.

WALLACE: But the answer is no, you're not going to be eliminating executive salaries.

PAULSON: But the -- I want to say it this way, because if we design it so it's punitive and so institutions aren't going to participate, this won't work the way we need it to work. Let's talk about executive salaries. There have been excesses there. I agree with the American people. Pay should be for performance, not for failure. We've got work to do in that regard. We need to do that work.

But we need this system to work, and so we -- the reforms need to come afterwards. And my whole objective with the plan we have is to give us the maximum ability to make it work.

WALLACE: All right. Your immediate challenge now is to get this through Congress. And Democrats are saying, "Wait a minute, if you're going to bail out Wall Street, you've got to bail out Main Street."

If they add, particularly, mortgage relief to this package, some way to help people deal with possible foreclosure, will the president sign it or will he insist on a clean bill?

PAULSON: I need to go back to the forest through the trees. This program, in and of itself, is designed to minimize the cost to the American public and the taxpayer -- much greater risk in not doing this than in doing it, number one.

Number two, we want this to be clean and we want it to be quick, and it's urgent that we get this done. So you know, it's very important that it be done that way.

WALLACE: But are you insisting on a clean bill? Are you saying that if the Democrats -- let me just ask my question, Mr. Secretary.

PAULSON: Yes.

WALLACE: If the Democrats insist there has to be a mortgage relief component to this package, is the president going to say yes or no?

PAULSON: Well, I -- first of all, I think there should be a mortgage relief component to this. We've been working very hard to keep homeowners who want to stay in their home and have the ability to stay in their home financially in their home.

We've had a lot of efforts, and I would sure -- I would be very, very surprised and disappointed if, at a time when the government owns a lot of these securities, we won't have more leverage to do that. And that should be a big focus.

WALLACE: Between this legislation and the earlier bailouts, we're talking about roughly $1 trillion that the government is taking on in new debt. What does that do to the economy? What does that do to the dollar? What does that do to inflation?

PAULSON: Well, let me -- I think you need to look at this carefully. Fannie May and Freddie Mac are situations where the government lived up to its responsibilities.

Those charters were created many years ago, those congressional charters, with their ambiguities and obligations, and if we hadn't stepped in very quickly to do that before this situation materialized, we'd be in a dire situation now, and fortunately we did that.

Now, in terms of these other situations, AIG and the -- and this plan, as I've said to you, you need to think about them differently than a normal spending plan, because this will be a purchase of asset and then a resale of asset, and then money coming in.

WALLACE: But it could be years from now.

PAULSON: Right. It will be years from now, so this will cause federal debt to increase, and then money to come in over time.

So there's no doubt that this -- that this plan is something that puts the -- is something that is going to increase the debt of the United States of America, the debt that we issue.

WALLACE: You said earlier, "I hate this plan. I hate the fact that I'm part of this plan."

A lot of taxpayers -- and I think you can sympathize with them -- are going to say, "Look, when the markets were going up, there was all this talk, particularly from a Republican administration, about free markets and deregulation, and people were making lots of money and living high on the hog. And now when they're in trouble, and I understand the reasons, because there's a threat to the entire economy, we have to bail them out."

Can't you see how that sticks in people's craws?

PAULSON: Of course I can. And if I had been Rip van Winkle and waken up, you know, I would say the same thing. It is this -- this sticks in my craw. But it is, by far, the least costly way to proceed for the American economy, for the American people.

And all I can say to the public is I don't just hate it, but we need to do something about it. The first thing we need to do is protect the system, stabilize the system.

Months and months and months ago, I had spent a long time putting out a regulatory blueprint to deal with this outdated, outmoded regulatory system we have. There are all kinds of policy prescriptions and reforms that need to be done.

This is a humbling, humbling time for the United States of America as we go around the world and talk to people about our financial system. We will work through this. We need to stabilize it first, and then we need to take steps to clean things up.

WALLACE: We've got a couple of more minutes, and I want to ask you a couple of questions. When you were last here in March, the Fed had just bailed out Bear Stearns, a company that ended up being sold and no longer exists, and I asked you the following question. Take a look.

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WALLACE: Are more Wall Street firms in danger, at risk, of going under?

PAULSON: Chris, I've got great confidence in our financial market, our financial institutions. Our markets are resilient. They're flexible. Our institutions, our banks and investment banks, are strong.

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WALLACE: Mr. Secretary, weren't you and other government officials too optimistic about the situation? And if you had acted sooner, could we have avoided a $1 trillion bailout?

PAULSON: Well, Chris, I'm not sure what we could have done sooner. We're dealing with a situation that people have said to me, and I agree with, in terms of the run-up in real estate prices and the correction -- you know, a once-in-a-50-year kind of a situation here.

And there is no way that we could have gone to Congress and got the authority to inject capital into the banking system by buying illiquid assets unless there was the clear and urgent and obvious need.

So although many of us looking at it said it could come to something like this, we are hoping to avoid it. And the key here was the speed of the housing price correction.

WALLACE: Finally, there are a lot of nervous people listening to you on this program right now. What guarantee can you give them that their life savings that are in a bank or in an investment firm will be safe with this bailout?

PAULSON: Well, let me say to the people that are watching, if you have money in an FDIC-insured bank account, $100,000 or less, no one in the history of that program has lost a penny, and you won't lose a penny in that program.

The next thing I will say to them is we moved very quickly to take actions to guarantee money market accounts using Treasury's authorities. So those accounts are safe.

The last thing I'll say to them -- there are no guarantees in terms of the overall economy, but this program is designed to work. I believe it will work.

And I just will say to the American people we can have confidence. We're a great country. We've worked through these problems. We're going to work through this problem.

And remember, it all goes to the American people. We're the most entrepreneurial, hard-working people. That's the root cause -- the root strength of our economy. I'm sorry we're in this situation, but we're going to work through it.

WALLACE: Mr. Secretary, I think that's a good place to leave it. I want to thank you so much for coming in and answering our questions. And as this situation develops, please come back, sir. PAULSON: Thank you. Thank you, Chris.

WALLACE: Coming up, now that a plan has been proposed, what will Congress do about it, and what about the political fallout? We'll ask two top Senate leaders right after the break.

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WALLACE: The White House is asking Congress to pass its bailout plan within a week, which, even if we weren't talking about $700 billion, would still be warp speed on Capitol Hill.

Joining us now, two of the key senators in the debate, Jon Kyl, the number two Republican who's on the Finance Committee and backs John McCain, and Senator Charles Schumer, chairman of the Joint Economic Committee and a supporter of Barack Obama.

Gentlemen, welcome back. Let's start with one of the core issues Congress will have to decide.

Senator Schumer, you just heard Secretary Paulson. Do you read that as a green light to add on some mortgage debt relief to this plan?

SCHUMER: Yes, and I've talked to Secretary Paulson, and I've told him that while his plan is a foundation and we certainly have to do something, we need changes in it relating to housing.

Chairman Bernanke -- no less than he -- said if you don't solve the mortgage crisis, you're not going to solve the financial crisis. We need to put the taxpayers first, ahead of bondholders, shareholders, executives.

I'm looking at something, and I've talked to Paulson about this -- warrants that would put the federal government first.

And finally, we need accountability. You know, the RTC, when it was founded, had a board. You need transparency. You need oversight to make sure this huge amount of money is spent without favoritism, in a fair way, and that people see what's going on as it happens.

WALLACE: And you say you're going to do this before you pass the bailout plan?

SCHUMER: I think -- you know, we're work all the time, all weekend. Jon and I are down here, and -- but it needs changes. It needs changes. I think we agree. WALLACE: If you hear some Democrats talk about a stimulus package -- infrastructure, you know, a variety -- unemployment relief, a variety -- even a bailout to the auto companies. Are you going to "Christmas tree" this bill?

SCHUMER: No, we will not "Christmas tree" this bill. The times are too urgent. Everyone has their own desires and needs. It's going to have to wait.

Now, as for a stimulus package, I think that is -- the economy is sinking. Unemployment, 6.1 percent. Many of us believe we need a stimulus package. Many of us believe this is the appropriate time to do it before Congress adjourns. We can't wait three months.

WALLACE: As part of the bailout?

SCHUMER: But it doesn't necessarily have to be part of the bailout. That's something that's being decided right now.

And I think our leaders both in the House and Senate are coming to the conclusion it should be alongside the bailout, but not part of it.

WALLACE: Senator Kyle, can you live with the kind of add-ons that Senator Schumer is talking about?

KYL: Well, first of all, I think that he is correct to say that these things should not be added on to this particular bill.

WALLACE: Oh, I think he did say that the mortgage should be added onto the...

KYL: Well, all right. We'll talk about that separately. But with regard to the stimulus package...

WALLACE: Stimulus, right.

KYL: ... look, there is a crisis in our country. And we've got to come together as House and Senate, Democrat and Republican, and deal with this crisis as Americans, for the American people, and not try to bring on all of our political agendas.

Republicans have a lot of political agendas we'd like to bring into this debate, too. What Secretary Paulson said is there's going to be time to do that. First, let's put the fire out, and then we can go deal with our favorite solutions to all of these problems.

Specifically, with regard to the mortgage issue, we already, in -- as of July 30th, passed a bill that provides up to $300 billion worth of relief for guaranteed mortgages that can be worked out with people. We've had what, seven weeks for that to work out.

My suggestion is we see how that can be melded with this. I think that's what you heard Secretary Paulson talking about.

When the government gets these tranches of mortgages that are purchased, and securities instruments, they'll be able better to figure out how they can deal with the individual mortgage workouts that Senator Schumer was talking about.

WALLACE: We're getting a little in the weeds here.

KYL: Well, we are. But the bottom line is...

SCHUMER: It's hard not to.

KYL: ... there's a way to do that, but I think we need to get some experience working with the issue rather than assuming that we can do it in this particular bill.

WALLACE: How confident -- and I'll start with -- but both of you briefly -- let me start with you, Senator Kyl.

How confident are you that this won't be bogged down in partisan wrangling and that Congress will pass the bailout, with whatever is added to it, within a week?

KYL: I think the chances are better than 50-50 that we'll get it done by the end of the week, and hopefully it won't be bogged down with too many extraneous and costly provisions.

WALLACE: Senator Schumer?

SCHUMER: Well, look. We have a patient whose arteries are clogged, and the first thing you want to do is avoid a heart attack. So we have to do something. And I think the odds are even higher than 50 percent we'll get something done.

But part of that is based on the fact that when I and others have talked to Secretary Paulson, he has said he is open to changes. And I would call changes necessary, as I said, in three areas. I call them THO.

Taxpayers. They have to come first.

Homeowners. We have to do something about the mortgage crisis, not just foreclosures but the price of housing, which is affecting everyone on Main Street.

And oversight. We need some accountability here.

If we can do those three things, and I think we can do them fairly quickly, we can get this done.

WALLACE: Obviously, the financial crisis has become part of the presidential campaign. This week with all the economic turmoil, Democratic vice presidential candidate Joe Biden defended Obama's idea of raising taxes. Let's watch.

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KATE SNOW: Anybody making over $250,000...

SEN. JOSEPH R. BIDEN JR., D-DEL.: You're going to pay more.

KATE SNOW: ... is going to pay more.

BIDEN: You got it. It's time to be patriotic, Kate. Time to jump in. Time to be part of the deal. Time to help get America out of the rut.

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WALLACE: Senator Schumer, is that Democratic policy, that paying higher taxes is patriotic?

SCHUMER: Well, I think you have to show the whole program. What Senator Obama...

WALLACE: We're not going to show the entire program.

SCHUMER: No, no, no, but talk about the whole program. I don't mean you show it on here.

WALLACE: No, but I'm talking about his specific comment...

SCHUMER: I wouldn't expect you to show the positive parts of the program here, Chris, but...

WALLACE: No, I'm -- do you mean -- I'm talking -- you're talking about Good Morning America? No, we're not going to show the entire program. This is Fox, sir.

SCHUMER: Anyway, Obama's plan is very simple. He wants to provide real tax relief, significant tax relief for the middle class...

WALLACE: Senator, I'm not asking you that question.

SCHUMER: Wait a second.

WALLACE: Well, no. I'm asking you a question. Well, forgive me. I'm asking you a specific question. I'd like you to answer it.

SCHUMER: I'd like to give an answer.

WALLACE: But I -- the question is does -- do the Democrats believe that it is patriotic to pay higher taxes? Simple question.

SCHUMER: It is important to have a tax plan that gives relief to the middle class first and foremost, not relief to the highest end, as John McCain does. And that's what Biden believes, and that's what Obama believes.

WALLACE: Do you regret the way Biden...

SCHUMER: Oh, I don't -- you know, Joe Biden put it in his way. But if you look at the tax plans of Obama and McCain, there is no doubt if you're looking at the average middle class person, they do much better under the Obama plan, and they're going to like it better. WALLACE: Senator Kyl, is it somehow unpatriotic if people want to hold on to their own money?

KYL: You know, whether patriotic or not I don't think is the point. I'll agree with Chuck on one thing about that. I think the question is what's a good idea.

And when the times are as difficult as they are right now, when we're worried about extra burdens on people, that's the last time in the world that you increase their taxes.

And we're not just talking about the so-called middle class. We're talking about the people who invest in America -- the small business owner, for example, whose taxes would go up under Obama. You can't let that happen.

And so even the Obama campaign, I understand, is now beginning to reevaluate the certainty with which they're suggesting that taxes are going to go up on the investor group in the United States.

SCHUMER: Let me just say...

KYL: It would be a bad idea.

SCHUMER: Yeah. Let me say one thing, and I agree with John about this. First job is to fix this big mess. But a president's elected for four years, a vice president for four years.

To talk about their general philosophy and where they go on taxes, if, God willing, we get out of this mess -- very legitimate.

WALLACE: But would you say, if you were taking on a $1 trillion in new debt, that maybe raising taxes isn't the way to go?

SCHUMER: Well, look. I think it's the state of the economy in general. When the economy is in decline, you don't want to raise overall taxes. In fact, those of us who believe in a stimulus package are saying you ought to pump money into the economy.

But again, in a four -- I think one of the important points in this presidential debate is the policy on taxes, and I think as Americans learn the contrast between Obama and McCain, they're going to favor the Obama plan, which aims the tax cuts, should we be allowed to have them given the economy gets better, at the middle class.

WALLACE: Meanwhile, John McCain laid out this week what he thinks is the cause of the current crisis. Let's watch.

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MCCAIN: We're going to put an end to the reckless conduct, corruption, and unbridled greed that have caused a crisis on Wall Street and America. We're going to put a stop to it.

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WALLACE: Senator Kyle, is that the Republican view, that corruption and unbridled greed on Wall Street have caused this crisis?

KYL: I'm sure that greed, the desire to make more money and not to be too careful about how you do it, was a factor. I think Senator McCain is right.

Now, the question is unbridled. Ordinarily, we have a system in which the desire to make more money is a free market principle that we all agree with. We'd all like to do better. But it's got to be controlled so that the kind of thing that occurred did not occur.

And what I would note is that from 2002 right on through until recently, the Bush administration and Republicans have sought to further -- or have sought to put regulations on the government- sponsored entities, Freddie Mac and Fannie Mae, the groups that I think everybody agrees started this whole problem by the securitization of these mortgages, and they were stopped at every turn by Democrats.

My point here is that if we're talking about the free market and regulation, this is one area where Republicans were willing and desirous to regulate. Democrats were not.

WALLACE: We've got less than a minute left, and I give it to you.

SCHUMER: You know, John McCain in one week went from sounding like Milton Friedman to Huey Long. That kind of language that he used you've never heard it from him before.

And I would just say in this last week, John McCain's economic pronouncements have been erratic. First day, he says -- Monday, he says the economy's strong. Second day, he's against the bailout of AIG. Third day, he's for the bailout of AIG. Fourth day, he calls for the firing of Chris Cox, without saying what the policy changes are. Chris Cox is just...

WALLACE: The head of the SEC.

SCHUMER: ... head of the SEC, but he's an appointee of the president. And the fifth day, he has this populist rhetoric which we've never heard from him, and he sounds like Huey Long.

I don't think it gives people confidence in John McCain's stewardship of the economy.

WALLACE: All right.

Real quick?

KYL: The bottom line is Republicans have been calling for regulations on Freddie Mac and Fannie Mae since 2002. Democrats have resisted it.

My friend Chuck Schumer, in fact, even said that the new regulator that we finally got in place shouldn't come into being until next year. Thank God he was in place to find out what the books of those companies were really like so we could take them over.

WALLACE: Senator Kyl, Senator Schumer, we're going to have to leave it there. We want to thank you both so much for coming in today.

KYL: Thank you.

SCHUMER: Thank you.

WALLACE: Up next, our Sunday panel tries to make sense of the wild week on Wall Street, and we'll get their take, and how McCain and Obama have responded. Back in a moment.

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BUSH: America's economy is facing unprecedented challenges, and we are responding with unprecedented action.

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WALLACE: That was President Bush trying to rally the nation behind his plan to bail out Wall Street.

And it's time now for our Sunday group of Fox News contributors, Fred Barnes of The Weekly Standard, Mara Liasson of National Public Radio, Bill Kristol of The Weekly Standard, and Juan Williams, also from National Public Radio.

Well, Bill Kristol, as a true conservative, what do you make of the president's plan to spend up to $1 trillion -- even in Washington, that's real money -- $1 trillion to bail out the financial community?

KRISTOL: I'm not against extraordinary action in extraordinary times. I'm not a dogmatic free market guy.

But I actually am a little shocked. I was inclined to support this. I was inclined to think that you've got to do what you've got to do in a crisis. People like me supported the Clinton administration when they intervened in '97 and '98 in the Southeast Asian crisis, the Long-Term Capital crisis.

I'm actually shocked, having now read up on this in the last 24 hours, at how little thought I think, honestly, has been given to this bailout.

There's a devastating critique of it by Sebastian Mallaby in the Washington Post today. There are ways to recapitalize banks and deal with the run on the banks.

This does not strike me necessarily as the right way to do it.

WALLACE: Why, specifically? What's your problem?

KRISTOL: It's -- well, as you -- as your interview with Secretary Paulson showed, how are they going to price these bad loans they're buying? I mean, what -- how do they know what they're getting?

Is buying bad loans from existing institutions the way to go, or shouldn't we recapitalize banks, put capital behind the banks to reassure people, and let the banks work out these loans over a long period of time?

WALLACE: Juan, there were some critics, probably mostly from the left, who said this week it's capitalism on the way up for the markets and socialism on the way down.

WILLIAMS: There's no question about it. I mean, the thing that, of course, continues to gall everyone is the high executive compensation packages that these guys who destroyed companies walked away with.

They're not being asked to come back and being put in the dock and said, you know, be responsible, here is some accountability for what you've done, which is what capitalism is supposed to be about.

Now, the alternative, though, to what Bill is proposing is I'm not clear, and I think that's why you have to go with Henry Paulson at this point. There has to be something done about this economy, especially about the credit crunch.

You cannot have a successful American economy without consumer involvement, and consumers are not going to feel free to spend unless they know they have some access -- accessibility to cash.

WALLACE: Fred, how confident are you -- and obviously, I mean, the astonishing thing about this document -- I have it here somewhere in my pile of papers -- it's three pages long. It basically says, "Here's a blank check for $700 billion, Mr. Secretary Paulson, go do with it what you want."

How confident are you that this bailout will work? And how confident are you that the taxpayers aren't going to get stuck holding hundreds of billions of dollars in bad paper?

BARNES: Well, confident would not be the right word. And as Secretary Paulson said to you, there are no guarantees.

A lot of it is Paulson. You're going to have to trust him to go in with these financial institutions and buy their bad assets at a very low rate -- is what he'll try to do.

But, look. You have to -- what was the situation we faced? We faced a financial panic. You don't beat around the bush and call people at Brookings Institution and find out what their suggestions are. You have to do something quickly to stop the fire -- to put the fire out, as Senator Kyl said.

So I think they've done the right thing. Now, the -- look. This will go to Congress, and we'll see what we wind up with.

About 99 percent of the time, I agree with Bill, but his -- with the proposal that you just give banks some more capital, and they keep all the bad loans on their books and try to work them out -- that's what Japan tried in the 1990s, and you had a stagnant economy for more than a decade in Japan.

The whole point here was to quickly stop the panic so you didn't have a financial collapse that spread into the real economy and hurt people.

WALLACE: Let's pivot to the political fallout of all of this, Mara, and I want to put up the latest Gallup poll, which is pretty striking, although these polls have been going back and forth.

You see there that the latest poll shows Obama now leading McCain 50 percent to 44 percent -- incidentally, 50 percent ties Obama's all- time high in the Gallup poll.

Mara, do you think this is just the traditional Democratic advantage when the country is having economic problems? Or in some way do voters think that Obama is handling and responding to the crisis better than McCain?

LIASSON: I think the vast bulk of that uptick for Obama is the traditional advantage. However, it was helped by John McCain's missteps this week. To say the economy is fundamentally strong, which Obama just pummeled him for for days -- I think that helped.

I think it's not just the Democrats' traditional advantage. I think Barack Obama has gotten a lucky break here. I think events have conspired to not only play to the Democrats' traditional advantage on this issue, but McCain, who is kind of sometimes pretty shoot-from- the-hip, has flailed a bit this week and really helped.

Obama has been very cautious, some Democrats think even maybe too cautious, just wanting to study everything first. But I think this has definitely helped Obama.

WALLACE: What do you think, Bill? I mean, you do have the comment about the fundamentals are strong on Monday, and I forget which day it was, but in the middle of the week, suddenly McCain said that Chris Cox, the head of the Securities and Exchange Commission, had betrayed the public trust, which is about the worst thing you can say about a public official, without any evidence that he's done anything other than enact the policies that he was supposed to enforce.

KRISTOL: Yeah, McCain had a bad week. But actually, this coming week will totally transform things or will overtake that. For one thing, there is this package going to Congress. What will the positions of Senators Obama and McCain, who are both sitting senators, be on it? I don't think it's so clear. I would have said yesterday or Friday again, everyone's going to get together and support this thing. But I at least -- maybe I'm wrong. Maybe people will decide this is the right way to go. I'm sufficiently skeptical.

But personally I've heard from several other conservatives, but not even just conservatives, just sort of Brookings-type economists, saying, "This is not the most -- the way to go." The panic has been stopped. The panic has stopped for now. It's not clear to me Congress has to act this week.

WALLACE: But the panic has been stopped because people think that there's a solution.

Are you saying that you think John McCain might possibly come out against the Paulson bailout?

KRISTOL: Well, that would be an -- that's the question of the week, isn't it?

WALLACE: Well, I mean, do you think there's any reason to believe that's possible?

KRISTOL: I think it's possible, yeah.

WILLIAMS: I don't think that's responsible. I don't know how he could do that, because there needs to be reassurance for the American people at this point...

KRISTOL: So your position is that Bush or the secretary of the treasury, who's been in there two years -- who, as Chris showed on this show, has been reassuring people that's everything's fine, who presided over the housing bubble -- and that we are just supposed to give him a $700 billion blank check, and then give the next secretary of the treasury a $700 billion blank check to buy assets from investment firms that they will then dispose of?

WILLIAMS: Your point is well taken.

KRISTOL: I agree with you guys...

WILLIAMS: There is no oversight...

KRISTOL: ... you need to stop -- you need to stop the panic. But is the only way to stop the panic for Congress to write a blank check for $700 billion?

WILLIAMS: They need fast action, and obviously we're in a political season. And if you extend this, it becomes all the more politicized.

And you can't say that the Republicans or conservatives haven't been reckless in lack of regulation. Chris Cox is not faultless in all of this, and I don't think that the administration is faultless.

But there's -- something has to be done. And I think everybody has a sense -- let's go beyond politics for a moment and help the economy.

WALLACE: All right. We have to take a break here, but with all the focus on the financial crisis, another big event has almost gone unnoticed.

Coming up, we'll preview Friday's first debate between McCain and Obama. What does each man need to do? We'll ask our panel when we come right back.

(COMMERCIAL BREAK)

WALLACE: On this day in 1981, Sandra Day O'Connor was unanimously approved by the Senate to be the first female Supreme Court justice. Chosen by President Reagan, she was often the critical swing vote until her retirement in 2005.

Stay tuned for more panel and our Power Player of the Week.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

RONALD REAGAN: I will not make age an issue of this campaign. I am not going to exploit for political purposes my opponent's youth and inexperience.

(LAUGHTER)

(END VIDEO CLIP)

WALLACE: That reminder from 1984 of how presidential debates can be real game changers.

And we're back now with Fred, Mara, Bill and Juan.

Well, it is Sunday, so let's handle the upcoming debate the way they do -- the announcers in the NFL.

Fred, let's start with you. McCain -- what's the key to victory in this first debate on Friday?

BARNES: Well, I think it's on foreign policy, so in -- but in McCain's case, I think he needs to look like a peace maker.

I mean, we all know he's very strong on military issues and hard power and so on. And there's a great Reagan example. Remember how Reagan used to talk about his foreign and national security policies? Peace through strength. And that's the goal.

Look, we're achieving it. McCain can say we're achieving it in Iraq right now through strength.

And secondary, we need a strong economy, and we achieve that through trade around the world. That's a part of it that Obama doesn't seem to share.

WALLACE: Mara, McCain's key to victory on Friday?

LIASSON: I think that McCain has to be careful about how he responds to Obama, who I believe will try to get under his skin. I think he can't look angry.

I think that he has been kind of revved up on the campaign trail, and I think Obama has been trying to, at least in ads, and I wouldn't be surprised if they do it in some zingers -- try to accuse McCain of being dishonorable and running a dishonorable campaign, thinking that's the way to kind of set him off.

WALLACE: So don't look angry, don't look hot.

LIASSON: Yeah.

WALLACE: Bill?

KRISTOL: I think it's always good in these debates to appeal to authority, to a higher authority. And McCain has a pretty good one in saying that Obama is naive, inexperienced and irresponsible in foreign policy, and that's Hillary Clinton, who got 18 million votes these last several months, who is not, if maybe you noticed, on Senator Obama's ticket.

And I think McCain should quote Hillary Clinton at every chance that he can, to establish the proposition that Obama is not ready and tough enough to be president.

WALLACE: I assume you also think that the words "troop surge" should be mentioned by McCain every once in a while.

KRISTOL: Absolutely, to remind people about that real conflict they had in the Senate, in real time, where McCain was right and Obama was wrong.

WALLACE: Juan?

WILLIAMS: Well, that's the -- that's the key for me, is foreign policy experience -- that John McCain has to really hit hard on the idea that he is an experienced hand, and especially when it comes to foreign policy, and then come to the surge argument and say demonstrably, "Look at the surge. Look at the success of the surge," keep repeating that ad infinitum.

And then, finally, tie it to the economy and say, "You know what? In order for us to be stable and economically prosperous here at home, we have to have peace abroad. And that's what I'm bringing to Iraq rather than simply pulling out."

WALLACE: All right.

Let's turn to Obama and the keys to victory for him on Friday, Fred?

BARNES: Well, it's pretty obvious what he has to do. He needs to sound and look like a commander in chief. And this won't be easy for Obama.

You know, I mean, so far what we hear from him is well, he'd like to fight a war in Afghanistan and Pakistan against the Taliban there, and we know that, and add troops. But he's got to talk credibly about other issues that a -- a commander in chief.

He needs to appeal to the military, which is a constituency, so he's credible with them. Being credible as commander chief is something he hasn't achieved before, so if he doesn't in this debate it'll be a first.

WALLACE: So I mean, specifically, the kind of thing that you think he should do to -- because if you look in the polls, that's the one area where McCain has a huge advantage, who do you think is ready to be commander in chief.

BARNES: Yeah, he...

WALLACE: What does -- how does he...

BARNES: He needs to talk about more than Afghanistan. He needs to talk about what we're going to do with hard power in Asia, in Europe. You know, we have troops in Asia, in South Korea.

What does he mean when he says we're going to leave some troops in Iraq? How many is that going to be? But look, there's a language that a military understands from a president, and he hasn't spoken it so far.

WALLACE: Mara?

LIASSON: Yeah, I think this is the debate, because it's on foreign policy, where Obama comes in as the clear underdog. This is, as you said, his one biggest area of weakness in comparison to McCain. And I think he needs to be pretty crisp, strong.

I think he needs to be not so professorial in his answers. And I think they're working on that. Nuance is kind of his strong point, but I don't think it's the strongest suit.

WALLACE: Yeah, I want to ask you about that. You say they're working on it, because if you look at the Saddleback debate with Rick Warren...

LIASSON: There was the...

WALLACE: ... McCain -- it seemed to me if that had been the first presidential debate, this election would be over. McCain was strong, crisp, sound bytes, and Obama...

LIASSON: That's the object lesson for the debate. In other words, that's not -- that's exactly the opposite approach that Obama needs to take.

WALLACE: So can they get Obama...

LIASSON: You can't ruminate about things. He has to be clear and crisp and, as Fred said, project the aura of a commander in chief.

WALLACE: Bill?

KRISTOL: Well, on my theme of appealing to authority, I think the authorities Obama is going to cite to bolster his credibility are Dick Lugar, the senior Republican in the Senate with whom Obama sponsored some legislation. I think you'll see a lot of -- he might even hint that someone like Lugar might be his secretary of state.

Chuck Hagel, the Republican from Nebraska, who I think will end up supporting Obama.

I wouldn't see him -- be surprised to see him cite Colin Powell or other generals -- Tony Zinni, who -- I think Zinni is supporting Obama. Powell is undecided.

I think Obama will try hard to say that I am a responsible bipartisan character in terms of foreign policy.

WALLACE: And briefly, how do you think Obama -- since you know McCain's going to bring up the surge, how does Obama handle that?

KRISTOL: I think he should just concede that thank God, it worked better than most of us expected, but we still -- it was still a mistake to go to war in Iraq, and we still have to get out as quickly as possible.

WALLACE: Juan?

WILLIAMS: The key is tie McCain to President Bush's foreign policy and say there was a terrible mistake made getting into this misbegotten war, look at the cost not only in terms of life, but look at the cost in terms of American treasure, which has had direct relationship to our economic problems here at home today.

Look at the high cost. Look at the fact that the government is in deficit and that that has a direct impact on the inflation and the like, and say, "You know what? I've got better judgment. I've proven it all along. And if you want more Bush, here's your man, John McCain."

WALLACE: Fred, I talked to a top strategist in the Obama camp Friday who compared this debate to Reagan in 1980 or George W. Bush in 2000, where you've got a less experienced man going up against a more experienced man on the issue of foreign policy. Argument: If he just holds his own, he wins. Do you buy that?

BARNES: No, I don't necessarily buy that, because look. In some elections, there's sort of a default position where the debates don't matter. If they're inconsequential, then we know who's going to win. And I think Reagan was going to win in 1980 anyway, despite...

WALLACE: It got a lot easier when he was able to stand on the stage...

BARNES: It got easier, but...

WALLACE: ... with the president.

BARNES: ... you know, when you win by 10 points, he was obviously going to win anyway.

There's no default position here. I don't think it's enough for Obama just to be reassuring. That's not going to -- then he'll be in the same position he is going into it, you know? We won't know. The rest of the campaign will mean a lot more. And it doesn't guarantee that he's going to win or even come close to that.

WALLACE: Mara, what do you make of that?

LIASSON: Yeah, I think he probably has to do more than that. But on the other hand, look at what's happening in the economy. Look at what's happening -- foreign policy all of a sudden has taken a back seat.

Even though most elections for president are commander in chief elections, everything is changing. And I think maybe the stakes for that reason are a tiny bit less high for Obama in this debate.

WALLACE: Bill, we're told that the Obama camp actually wanted the first debate to be on foreign policy to deal with the commander in chief issue and the last debate to be on the economy, so that would be the last thing in voters minds. Do you think that's a smart idea?

KRISTOL: Yeah, and I think McCain has to beat Obama Friday night. I think a draw is a victory for Obama.

WILLIAMS: Well, I'm not sure about that. The delicate issue is here Obama -- Mara spoke about McCain's anger. Obama can't really, you know, dump on McCain too heavily. Otherwise, he comes off as the angry black guy.

I think he's got to be sophisticated, capable, commanding, and I think he's -- he can do it.

WALLACE: Well, it should be interesting. Panel, that's it for now. See you next Sunday when we get to review just how the candidates did and to second-guess them.

Up next, our Power Player of the Week.

(COMMERCIAL BREAK)

WALLACE: We've spent most of the past hour talking about the fallout from the financial crisis. But there's another serious side effect we haven't mentioned. Here's our Power Player of the Week.

(BEGIN VIDEOTAPE)

MCELVEEN-HUNTER: When the cameras go dark, people believe that the needs have passed. But the reality is there are people left behind.

WALLACE: Bonnie McElveen-Hunter is chairman of the American Red Cross, and she's explaining the serious financial situation they're in now.

MCELVEEN-HUNTER: This is an organization that is $200 million in debt.

WALLACE: The problem? It's been a bad year for disasters -- wildfires in California, floods in Iowa, and hurricanes along the Gulf Coast. The Red Cross has spent $260 million responding to emergencies while raising only $60 million in donations.

MCELVEEN-HUNTER: The needs continue to shelter, to feed. I think that it's not that the American people don't care. It's just that they don't know.

WALLACE: What they don't know, for instance, is that after Hurricane Ike, the Red Cross put 2,000 people in the field, that they're still providing shelter for 35,000 people, and so the Red Cross has taken out a loan of $160 million. And for only the third time in its history, it has asked Congress for another $150 million.

MCELVEEN-HUNTER: Whatever the needs are in the field and the need for support all comes through here on a major disaster.

WALLACE: In the disaster operations center, you get a sense just how big the Red Cross is, 700 chapters all dependent on private donations.

(BEGIN VIDEO CLIP)

MCELVEEN-HUNTER: I know, I saw. It was devastating. Unbelievable.

(END VIDEO CLIP)

WALLACE: McElveen-Hunter sees several reasons those donations are lagging -- tough economic times and problems within the organization -- five CEOs in the past six years, criticism of its response to Hurricane Katrina.

McElveen-Hunter oversaw the layoff of a third of the headquarters staff.

MCELVEEN-HUNTER: I think that we've all recognized that we've got to get more efficient, more effective, and that we have got to be leaner.

WALLACE: And three months ago, the Red Cross got a new president, respected manager Gail McGovern.

McElveen-Hunter is a successful business woman herself...

(BEGIN VIDEO CLIP)

MCELVEEN-HUNTER: Great job. Appreciate it.

(UNKNOWN): Thank you, ma'am.

MCELVEEN-HUNTER: Thank you.

(END VIDEO CLIP)

WALLACE: ... head of Pace Communications, a major publishing company. President Bush named her ambassador to Finland seven years ago, where she organized summits of women business leaders from around the world.

MCELVEEN-HUNTER: The ability of women to lead in private enterprise is -- plays to all their strengths of building coalitions, of building -- of recognizing and honoring others and their contributions.

WALLACE: Are you suggesting that men have big egos?

MCELVEEN-HUNTER: I would never suggest that, would you?

WALLACE: But at the Red Cross, there's something more, a deep sense of purpose.

MCELVEEN-HUNTER: All we really keep is what we've given away. For me, the Red Cross is a great place to join the 700,000 other volunteers that make this organization unique.

(END VIDEOTAPE)

WALLACE: If you would like to donate to the American Red Cross, you can go online to RedCross.org, or you can make a contribution over the phone. The number is 1-800-Red-Cross.

Now this program note. We'll have complete coverage of the first presidential debate on Fox News Channel starting Friday night just before 9:00 p.m. Eastern. Please be sure to watch.

And that's it for today. Have a great week, and we'll see you next "Fox News Sunday".