This is a rush transcript of "Special Report With Brit Hume" from October 7, 2008. This copy may not be in its final form and may be updated.

(BEGIN VIDEO CLIP)

GEORGE BUSH, PRESIDENT OF THE UNITED STATES OF AMERICA: Thawing the freeze in the financial system will not happen overnight, but it will be a process that unfolds over several stages.

BEN BERNANKE, CHAIRMAN, FEDERAL RESERVE: All told, economic activity is likely to be subdued during the remainder of this year into next year.

(END VIDEO CLIP)

BRIT HUME, HOST: "Subdued" usually means, when the Fed chairman says it, that means recession, folks.

Some thoughts on this and how it effects the candidates and who they need to deal with it tonight from Fred Barnes, Executive Editor of The Weekly Standard, Nina Easton, Washington Bureau Chief of Fortune magazine, and Bill Kristol, Editor of The Weekly Standard.

Let's talk a little —

MORT KONDRACKE, EXECUTIVE EDITOR, ROLL CALL: And me

HUME: Oh. I'm sorry, I'm so used to doing three, I forgot you were here. You're sitting right next to me, too.

And Mort Kondracke, who is the Executive Editor of Roll Call, all FOX News contributors. Thank you, Mort, for reminding.

Let's talk a little bit about the economy now and the measures that have been taken, and what we all think about where this is going. It seems to me that a recession has now become a given, and the question is, you know, how bad?

KONDRACKE: It's grim. The lenders, the people who have money to lend, are not lending because they're terrified. It is a fear issue, mainly, and it is an international fear issue. And the result is that economic activity will grind to a halt at the rate things are going.

I don't think either of the candidates has an answer, or they would give to Ben Bernanke instantly, to somehow get the lenders to start lending again. I assume, I hope that when the bailout plan or the rescue plan gets up and running that it will restore some confidence, but that hasn't happened yet.

So tonight, I would guess they're going to battle about who is to blame for the situation and who has the character and the policies to improve it. I'm sure McCain is going to say that —

HUME: We will talk about the debate in a little while, but I really want to stay focused on the situation.

KONDRACKE: It's grim, that's the bottom line.

HUME: Apart from the $700 billion, which is to be used to absorb these toxic assets, there is a tremendous amount of liquidity has been pumped into the U.S. economy by the Fed in a variety of different ways, and one wonders, Bill, whether we can't have some hope that that will begin to take effect even before this longer-range measure begins to work.

BILL KRISTOL, EDITOR, THE WEEKLY STANDARD: It could, I think, and I think there could be a coordinated rate cut in the next couple of days with the Europeans. It seems like the European central bank is now — who knows?

But people I talk to who know a lot about this are worried that the European central bank is refusing to cut rates. And it is a global situation, and there needs to be a coordinated injection of liquidity, it seems, into the system.

The Germans, I saw, backed up all of the savings accounts in Germany with a federal guarantee, something that we might consider doing more of that here, we increase the limit from $100,000 to $250,000 for the FDIC.

Anyway, I don't know. But we are in a recession. It is a going to be nasty recession. It could be a 1974-type recession. It already is in the stock market. That was about a 45 percent drop in the market, and we're already at about 32 percent in one year.

HUME: That's from the peak, though.

KRISTOL: From the peak, but that's how they are measured, I think, usually from peak to trough.

So it is bad, but maybe we're through the worst of it. And as soon as everyone decides it is really, really horrible, then we are presumably at the bottom and we can have a nice rally.

HUME: That is a stock market rally, and that's not the same thing as the economy. The stock market tends to be a leading indicator, doesn't it Nina, where you see the stock markets starting to tank usually ahead of economic trouble.

The stock market has, as it is famously said, predicted like 11 of the last five recessions. So it is not always a perfect indicator of economic conditions ahead.

NINA EASTON, WASHINGTON BUREAU CHIEF, FORTUNE MAGAZINE: And it only plunged 825 points on the passage of the bailout, as opposed to people saying it was going to plunge 2,000 points —

HUME: If it didn't pass.

EASTON: If it didn't pass.

I think the point of action that is probably going to shift, though, overseas and you're going to be looking at the possibility — not the probability, but the possibility that the Europeans are going to have to nationalize banks.

HUME: The European bank is a little different from the Fed in that the European central bank does not act as a lender of last resort the way our Fed does.

EASTON: They don't have the same level of control over the whole monetary system that we do.

And we have taken the steps-this is a global credit crisis. We have taken the steps that we need to take at this point, you know. And it is going to take some time to work this out. We were the first to go into this crisis. We are better poised than a lot of other parts of the world to come out.

HUME: Why is that?

EASTON: Because we passed the package. Assuming that —

HUME: In other words, we are further down the road on cures.

EASTON: We had a better ability to take governmental action, and our system is set so that we can. We did that.

Once that kicks in, presumably, if we're to believe Henry Paulson and Ben Bernanke, once we are able to take some of those troubled assets off those balance sheets and free up credit, then things should start struggling along, stumbling along.

There is a terrific opportunity, if we can get into this after this, I think for a presidential candidate to show leadership on this, because so far they haven't.

HUME: Well, both McCain and Obama, though, are confronted with the possibility that they could demagogue this thing because it was unpopular, and neither of them did that, really, Fred, did they?

FRED BARNES, EXECUTIVE EDITOR, THE WEEKLY STANDARD: You mean the bailout package?

HUME: Yes.

BARNES: No, they didn't, and that's to their credit. They weren't particularly big players in it, although McCain wanted to be and Democrats wouldn't let him.

If it turns around and everything goes well —

HUME: Well, the House Republicans wouldn't let him, either, really.

BARNES: I don't know about that. But if you want to go back to the economy-

HUME: Go ahead.

BARNES: If everything all of sudden starts going well, that will be subdued. That's a great goal to shoot for, having a subdued economy for the rest of this year and well into next year.

And, Brit, when we talk about liquidity, it is really two things. It is actually money being shoved out, but it is also confidence. And you have to have confidence. You can have all the money you want in your bank, and if you don't believe you can lend it safely banks aren't going to lend it.

And I think they are way too skittish now. There are lots of worthy borrowers out there who probably are having trouble getting loans.

HUME: Somebody had a good analogy, which was the Big Mac analogy. You drive into a McDonald's and you place an order for a Big Mac in one window and you have to pay there. You are going to get your return on it at the next window. But if you don't believe the return is going to be at the next window, that's the end of that.

BARNES: You're not going to pay.

I really thought the market, at least I was hoping that the market would turn up today. I mean —

KRISTOL: Fred was on the phone the last few days placing those buy orders to his brokers right and left!

And the calls started to come in and they said, and receptionist was saying "Mr. Barnes? I don't think he works here."

I guess we shouldn't joke about this.

HUME: Do you think it is a buying opportunity right now?

BARNES: Of course it is.

HUME: Bill?

KRISTOL: I don't know. A lot of people lost money with early betting.

HUME: You would say not yet.

KRISTOL: I don't know.

HUME: Mort?

KONDRACKE: Clearly the stock market will go back up at some point, but when is the question.

HUME: You have to have money, cash, guts and time.

Who will do better in tonight's town hall style debate? That's next.

(COMMERCIAL BREAK)

HUME: And so they debate tonight in Tennessee in a town hall format presided over by Tom Brokaw, who presumably will name the questioners and pick some of the e-mailed questions from the many thousands that have come in.

What sort of a deal will this be? John McCain is the guy behind. Fred, what does John McCain need to do to try to make this debate matter?

BARNES: Well, I think he has to do a couple of things.

Brit, this isn't a classic town hall meeting where people just show up and the candidates call on people that ask questions. And that is unbridled. You get some wild and crazy questions. I don't know whether we'll get those.

Tom Brokaw decides what the questions are. There will be hundreds and hundreds of them sent in.

HUME: And he also picks the audience members.

BARNES: And then there are 80 people in the audience. That's not the same as a free-wheeling town hall meeting. It is extremely structured, and I would be surprised if they get questions on abortion, gun control, immigration, same-sex marriage.

I would like to hear questions on Jeremiah Wright and Charles Keating. I think we will get all these questions about the economy.

And here is what McCain has to do — when was the last time we had a terrible downturn in the economy, a really bad one? It wasn't that early Bush recession, it was '81 and '82, the Reagan years. And what did Reagan do? He cut taxes. The Fed, after squeezing out inflation, loosened.

HUME: Finally loosened.

BARNES: Finally. And then you had a free trade environment.

And what happened? We had a spectacular recovery. Now, I think that is exactly what will work here.

EASTON: What John McCain should not do is what he did in the last debate, which is change the subject from financial crisis to research on bear DNA earmarks. He just lost any opportunity to show any leadership. Not that Barack Obama did all that much better.

But here is an opportunity for John McCain, as Fred said, I agree, to come in, to show a proactive approach, to says something like let's convene a Breton Woods two, and I'm going to show leadership in the world economy, and we're going to rewrite the rules and internationally we're going to make a bold move.

He should also say let's reform Washington. but he needs to go after these things in a big way, and instead, I fear he is going to go after William Ayers or character issues that, really, for most Americans at this point is just beside the point.

KRISTOL: I totally disagree. He should go after Obama, and he should say, look, this is a crisis that is hard to solve. We don't know sitting here what we will have to do on January 20. We both will get the best advice we can get.

He should make Fred's point. Generally speaking lower taxes, less spending, and free trade are good policies.

And then he says who do you want to be in charge of a crisis? The crisis is a double edged sword. It has clobbered McCain for the last couple of weeks. But there is Obama now, the frontrunner.

And we saw this in the Democratic primaries. Voters tend to get a little nervous when they-do you really want to close the deal and anoint this man, this inexperience, liberal Democratic Senator, with his dubious associations in his past, as the next president of the United States.

HUME: You mean Ayers and all that?

KRISTOL: Yes. McCain needs to tie together that it will be a very tough four years and we need a president with judgment and good character, and tie the crisis into Obama's character.

KONDRACKE: And so Obama has a bomb that he hasn't dropped yet, and that that is the old Reagan question, are you better off now than you were eight years ago. Clearly their not better off —

HUME: But Reagan was against an incumbent.

KONDRACKE: But then you tie McCain again to Bush.

HUME: That's certainly not a bomb he has not dropped.

KONDRACKE: No, he has done that, but he hasn't asked the question. And you ask the question and then you tie it, and then say here's what I'm for. I'm for a stimulus package right now to help the average guy out of this, whereas — and I'm for tax cutting, too. I'm for tax cutting 95 percent of the people. He's for tax cutting for the very rich, etc.

My plan is to create jobs. His plan is to reward the rich.

I think that's the way he's going to go.

BARNES: But that's crazy.

Look, how is he going to have these tax cuts and how he is going to pay for all his spending? After all, Obama voted for the bailout package, $700 billion.

HUME: But the question really, by that time you will never get that far in the debate, though. By the time he says what he says, and Obama says what he says, it will be goodnight.

And this is goodnight, too. That's it for the panel.

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