This is a rush transcript from "The Beltway Boys", October 11, 2008, that has been edited for clarity.

MORT KONDRACKE, FOX CO-HOST: Coming up on "The Beltway Boys," time's running out for John McCain to change the direction of the presidential campaign as Barack Obama widens his lead.

FRED BARNES, FOX CO-HOST: McCain and Palin are ratcheting up the personal attacks. We'll outline the political risks and rewards of this strategy.

KONDRACKE: But the number one issue dominating the race — the tanking economy. We'll tell you how each candidate is responding, and whether the rescue plan will work.

BARNES: Plus, how the presidential race is affecting the ballot campaigns.

KONDRACKE: All that coming up on "The Beltway Boys" right now.

I'm Mort Kondracke.

BARNES: And I'm Fred Barnes. And we're "The Beltway Boys."

KONDRACKE: We are, yes. And today's hot story is total collapse. And that, of course, is a reference to the financial markets and to Republican prospects in the election next month.

The Dow has lost about 40 percent of its value over the past year. That's not just the nest eggs of CEO's. That's also you're and my retirement account and everybody else's account and college savings and all the rest. It's really depressing for everybody. There's a global panic underway. Nobody knows what the bottom is. And we're headed into a recession almost certainly almost certainly. All that's piling on right now.

And here's what George Bush said in order to try to calm people down. Watch.

(BEGIN VIDEO CLIP)

GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: It's an anxious time. But the American people can be confident in our economic future. We know what the problems are. We have the tools to fix them. And we're working swiftly to do so. Our economy is innovative, industrious and resilient because the American people, who make up our economy, are innovative, industrious, and resilient.

(END VIDEO CLIP)

KONDRACKE: I don't know that people are believing him, but — or if anybody's listening to him anymore.

But, in any event, in addition to all the economic bad news, there's bad news from even Afghanistan where the intelligence reports indicate we're having a terrible tough time.

BARNES: Mort, I'm a lot more worried about the economy than Afghanistan.

KONDRACKE: I know. But it's one thing after another. And all this is happening on a Republican president's watch, and the victims, political victims of it are Republicans, especially John McCain.

The latest FOX poll shows Obama, Barack Obama, with a 7 point lead and McCain had an edge in early September. On the question of who do you trust more on the economy, Obama has a 15-point lead, up 5 points from late last month.

BARNES: I would say a couple things, Mort. One, Obama has done nothing. He just sat by and he's gained incredibly. He hasn't done anything on the economy. Now people think he's better. You're right, exactly where the financial crisis hits the political community, it harm's Republicans, they're the incumbent party. Indeed, as you said, Republicans are in deep trouble. I think they have to worry about a wave sweeping across — a political wave sweeping across the country the way it did in 2006 when they lost governorships, senate seats and when they lost all of Congress, the ones they had before. And the result being a President Obama and large majorities for Democrats in the House and Senate.

Now, this prompts me to say a couple things. One is the result of that, if it happens — I call that the worst case scenario, but it's more credible now than it was a few weeks ago, that in a center right country, I don't think American people really want the liberal agenda. But they may get it anyway because they're upset during the financial crisis. I don't think they want to get rid of secret ballots and union elections or eliminate all restrictions on or limits on abortions or raise taxes much higher on the people who actually invest and create jobs. I don't think they want that.

Secondly, I think McCain has a possibility here for attack ads. And, one, have the three amigos. Obama's one, but then there's Nancy Pelosi and Harry Reid, the House speaker and Senator majority leader. Look, Obama's very popular but they aren't. Who would be in charge — if this question were asked in the ad — who would be in charge in Washington with those three being the top three leaders. Would it be inexperienced and somewhat passive and weak, Barack Obama or these tough hardened left liberal warriors, Nancy Pelosi and Harry Reid? I know who I think would be in charge and it would be Reid and Pelosi.

KONDRACKE: That would be a good strategy for McCain. Unfortunately, that's not the strategy he's observing. What the McCain high command has decided, and McCain himself, is they're not going to go quietly into defeat the way Bob Dole did in 1996. They are going to fight like hell if they have to.

And Barack Obama correctly analyzed the Republican strategy. Here, watch.

(BEGIN VIDEO CLIP)

SEN. BARACK OBAMA, (R), PRESIDENTIAL CANDIDATE: Senator McCain's campaign announced last week that they are trying to turn the page on the discussion about our economy and spend the next final few weeks in this election attacking me instead. And his campaign actually said this. I quote them. They said, "If we keep talking about the economy, we're going to lose."

(END VIDEO CLIP)

KONDRACKE: And the result of it is, you know, some attacks from Cindy McCain and Sarah Palin and John McCain. Watch these.

(BEGIN VIDEO CLIP)

CINDY MCCAIN, WIFE OF JOHN MCCAIN: The day that Senator Obama decided to cast a vote to not fund my son when he was serving — (BOOING) —sent a cold chill through my body.

GOV. SARAH PALIN, (R), VICE PRESIDENTIAL CANDIDATE: It goes right back again to the candidate's judgment and who he would choose to associate himself with in the past. Perhaps the president makes a question who he would associate himself with in the future.

SEN. JOHN MCCAIN, (R), PRESIDENTIAL CANDIDATE: I think the American people would say whether Obama has been truthful with Mr. Ayers and with others very frankly.

(END VIDEO CLIP)

KONDRACKE: Well, those were references to Obama's vote against the funding the troops in the Iraq war. Bill Ayers, the former Weatherman terrorist, domestic terrorist, unrepentant, who Obama did have an association with in Chicago, and by not mentioning specifically Jeremiah Wright, that others presumably refers to his pastor, who was an anti-white racist, anti-American racist whose church Obama attended for 20 years. I think those are all legitimate issues even if they are changing the subject from what American people most want answers to, which is the economy.

What is not legitimate is what's going on in the crowds that Obama and Palin and Cindy McCain are addressing. You get shouts, racial slurs, shouts of kill him, shouts of trader, shouts of radicalism. And you don't get Sarah Palin and John McCain scolding the crowd and saying we're above that, we don't indulge in that kind of stuff, we don't accept that sort of thing.

BARNES: You talk about one side of the street and the stuff that the Obama people who have not been corrected, have not been said, hey, stop that, by Obama is equally nasty. And these are some of the top supporters from Obama, not just stray comments from a crowd, where they have gone after McCain's first marriage, his age, his war record, what being a POW might mean for him now as president. They've attacked the Republican fund- raisers as dirt bags. George McGovern criticized him for having his plane being shot down in Vietnam. McGovern said, hey, I flew bombers in World War II, I didn't get shot down. They've attacked his military family, that somehow that makes him, because he comes from one, the wrong guy to be president.

Howard Dean, the Democratic national chairman, said he's part of the corruption problem in Washington. That might have been Tom Harken. It was one or the other. So it's at least a two-way street here. There's nasty stuff on both sides.

Mort, you know why McCain supporters, Republicans, conservatives are so furious, particularly because the mainstream media is trying to single- handedly lift up McCain and carry him across the goal line.

KONDRACKE: Obama.

BARNES: What'd I say, McCain? I meant Obama. Not McCain. Not McCain, you're right about that.

And the media's obsessed with Sarah Palin, trying to trash her in every possible opportunity. They certainly cover her a lot. I think we know a lot more about Sarah Palin, her biography, her college days, than we do about Barack Obama because the media does not want to go back and cover Barack Obama, particularly his college days. We know nothing. We can't get his college thesis, which would be interesting.

Now, the McCain people are left with attacks on Obama. That's the only way they can bring this stuff out, both in public statements and TV ads. Watch.

(BEGIN VIDEO CLIP)

AD NARRATOR: Obama's blind ambition. When convenient, he worked with terrorist Bill Ayers. When discovered, he lied. Obama, blind ambition, bad judgment.

(END VIDEO CLIP)

KONDRACKE: So the bottom line here is that — I'm not one of those who says this is over, that McCain has definitely lost it. The Barnes rule is politics are never a straight line projection of the president. Something could happen.

You know, it would take time. It would take something like a 3,000 point jump in the stock market to bring McCain back. I didn't even think that would work.

BARNES: That would work. That would. I'd sure love to see it. It would sure hasten my retirement. Maybe yours. Not really. But that would help.

At the very least, for McCain to have a chance to win, we need some break in the financial crisis, at least the stock market not continuing to crater. We need at least that.

KONDRACKE: Coming up, will Barack Obama's coattails mean a Democratic sweep in the Senator? We'll tell you. And what exactly is ACORN and why is it tangled up in so many voter fraud cases? We'll give you the scoop next.

(COMMERCIAL BREAK)

(FOX NEWS BREAK)

BARNES: Welcome back to "The Beltway Boys." It's time for the "Ups and Downs."

Down, ACORN. I'm not talking about those things that drop from trees. It's the community organizing group that's implicated in voter fraud schemes in 13 states. Just this week, Nevada officials raided ACORN's Los Vegas offices, noting some forms submitted by ACORN workers including the names of Dallas Cowboy players. I'm glad they weren't Red Skins players.

KONDRACKE: Look, if ACORN was involved in systematic voter fraud, and there's indications ACORN is because it's happened in state after state, then they out to be prosecuted. It's as simple as that. On the other hand, there is voter suppression. In several states, for example, there's a practice called caging, which is you send a prospective voter a registered letter and it says you have to report to a post office or a county office or something or else you will be dropped from the voter rolls. Some people never get there and they get dropped from the voter rolls. That's an attempt to keep people from registering and voting. It's just as underhanded.

And I don't know which is the greater problem...

BARNES: Yes, you do.

KONDRACKE: ... voter suppression, Republican voter suppression or voter fraud.

BARNES: Yes, you do, Mort.

KONDRACKE: No, I don't. I really don't.

BARNES: Mort, you know in your heart of hearts you know better than that.

KONDRACKE: I don't. I don't.

BARNES: You just have to say that. I understand it.

KONDRACKE: No.

BARNES: I don't hold it against you. The fact is ACORN's been doing this stuff for years. And who have they been doing it for? Democrats.

KONDRACKE: Democrats, yes.

BARNES: Now, have Democrats attacked them? Has Barack Obama gone after them? He was once their lawyer or was a lawyer in a case they had. Has he gone after them? No. Democrats like what they're doing. They want them to register. You know, if they do a few thousand or hundred thousand people registered illegally — you know, Tony Romo, Emmett Smith and Michael Irving, all those people, the Dallas Cowboys.

KONDRACKE: Those bad guys.

BARNES: They're perfectly satisfied with that. I'm waiting for Democrats — they're willing to attack what they call and you call voter suppression things that they blame Republicans for doing. But ACORN, no harsh word is said.

KONDRACKE: Well, I've never heard a Republican criticize voter suppression either.

BARNES: Should Democrats...

KONDRACKE: Of course, they should.

(CROSSTALK)

BARNES: (Inaudible)

KONDRACKE: Absolutely. And Republicans should stop voter suppression.

BARNES: Go ahead.

KONDRACKE: Down, Senate Republicans. They are facing an uphill battle to hold seats in the Senate as Democrats are now within shouting distance of a 60-seat filibuster-proof majority.

Now, I have a rhetorical question for you. What ever happened to the Republican realignment that I believe you said was underway about four or five years ago.

BARNES: It's over.

(LAUGHTER)

Temporarily. But it did happen. OK, did you finish that? Did you explain how the Republicans held seats on this?

KONDRACKE: Well, you can see in blue how many Republican-held seats are the likeliest to be Democratic pickups. Another three new ones in which Democrats now lead in recent polls over Republicans, those are the ones in yellow, Oregon, North Carolina and Minnesota and now Kentucky looks shaky.

BARNES: By my count there are eight recent seats where Democrats are now in the lead. That would get Republicans down to 41 seats and, really, almost prevent their ability to filibuster.

The most important thing they did in the last two years in Congress, was they had 49 seats and they could get the 41 votes in order to filibuster and block legislation. Now, I mean 41, if they had every Republican join in, they could do it. But that never happens. You're always going to have slippage of two or three or four. So I think if Democrats win eight seats, which they could, the filibuster strategy would be gone. And that means that liberal legislation would fly through the Senate like — as people might say, like a knife through butter. Just cut right through there.

KONDRACKE: It absolutely, does mean that. The Democrats even think they have a chance to pick up the Senate seat in Georgia, Saxby Chambliss' seat and also a seat in Mississippi, which is currently occupied by Roger Wicker. That would be 11. I don't think they're going to win 11.

But you're right, what's going to happen, for two years at least, the unions are going to get whatever they want, trial lawyers are going to get what they want, taxes are going to go up, spending going to go up and regulations going to up. We'll see two years hence, how people like it.

BARNES: Coming up, Warren Buffett as treasury secretary. Really! Forget about Wall Street. California Governor Arnold Schwarzenegger says his state about to run out of money and it's getting ready to ask the Feds for a $7 billion loan. Will more states follow? More on that, next.

(COMMERCIAL BREAK)

BARNES: Welcome back to "The Beltway Boys." We're continuing with our "Ups and Downs" for the week

Up, Warren Buffett. The billionaire investor is buying up shaky stocks during the fiscal emergency, including shares of such struggling companies as G.E. and Goldman Sachs. He's also high on the list for treasury secretary for both presidential candidates. Watch.

(BEGIN VIDEO CLIP)

MCCAIN: A supporter of Senator Obama is Warren Buffett. He's weighed in and helped stabilize some of the difficulties in the markets and with companies and corporations.

OBAMA: Well, Warren would be a pretty good choice, Warren Buffett. I'm pleased to have his support.

(END VIDEO CLIP)

KONDRACKE: I mean, it's pretty remarkable for John McCain, asked who his treasury secretary would be to name somebody who's supporting Obama. That wasn't exactly a vote of confidence in his own team.

But, in any event, Warren Buffett is 78 years old. He would have to divest himself of his entire vast portfolio, which by itself would sink half the stock market. I don't think it's going to be him.

Obama's leading candidate, as I understand it, reading in the papers and everything else, is Timothy Deitner (ph), who is the president of the New York Federal Reserve and is a well thought of person, and probably Peter Wallson if McCain got elected, at the American Enterprise Institute, used to be a Treasury official Both good.

BARNES: Both would be great choices, no question about it. Warren Buffett would be a terrible choice. Warren Buffett is romantically involved with tax hikes. He loves it. He always wants to increase taxes. Always claims they're not going to affect economic behavior. They don't affect his. He's worth $50, 60 billion and he gives his money away, so he doesn't pay taxes. He's not subject to the normal incentives of economics, that's for sure. He's not subject to the normal incentives of economics, that's for sure.

But there is something he could do and I think other billionaires could do that could help the country, help the economy, help the stock market, and do collectively what J.P. Morgan did singularly about 100 years ago and step out publicly and ostentatiously say, we're buying, we're in the stock market and we're buying. Warren Buffett could do that, Bill Gates could do it, George Soros, members of the Walton family, members of the Printzger (ph) family, Larry Ellison, Michael Dale, Paul Allen, it's a great list. They can all get together, go on the floor of the New York Stock Exchange and say, we're buying. It would have enormous effect.

KONDRACKE: You guys are listening out there? Do what Fred says to do. I want to see the market go up.

Down, California. The fiscal crisis is hitting the Golden State hard. Next week, Governor Arnold Schwarzenegger is expected to ask the federal government for a $7 billion loan to keep it afloat.

BARNES: If he gets it, you know what, every governor is going to come and they'll want a loan, too. Because all the states do the same thing, that is, when times are good, they spend all the money, increased programs, when times are bad and tax revenues are down, they have a problem. How are we going to finance this? We'll get the federal government to do it.

There is one thing that will work. Cut spending.

KONDRACKE: Listen, what will help, especially when the recession hits, is a fiscal stimulus package that partly involves aid to the state to get going on a construction projects that can start right away.

BARNES: There aren't any of those.

KONDRACKE: Yes, there are roads. Oh, no, they're ready to go right now. You have all those construction guys who used to be in the home building industry, can go to work building highways right away.

BARNES: Mort, that's so 1930s.

KONDRACKE: You'll see.

BARNES: Don't go anywhere. "The Buzz" is coming up next.

(COMMERCIAL BREAK)

BARNES: What's "The Buzz," Mort?

KONDRACKE: The polls all indicate with the general public Sarah Palin has lost a lot of her appeal, but among Republicans that's not true. I think that if John McCain wins, or even if he loses or wins, she is the future of the Republican Party. She'll be the biggest attraction at Republican fund-raisers, and McCain's being as old as he is, may not run for re-election if he gets elected. And I think she's the front runner for the 2012 Republican nomination.

BARNES: She's a star. There aren't many stars around, at least right now in the Republican Party.

Mort, I'm sure you've notice this, how unfair politics is. It's always been that way. But these poor Republicans during this financial crisis, they suffered so much and it continues to bother them. And Obama's gone up in Senator candidates and everything. And the Democrats haven't done anything. They've been in the right place at the right time. That's the way it's always been.

KONDRACKE: Sorry, Fred.

That's all the time for "The Beltway Boys" for this week. Join us next week when the boys will be back in town!

Watch "The Beltway Boys" Saturday at 6 p.m. ET and Sunday at 1 and 6 a.m. ET

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