This is a rush transcript from "Your World With Neil Cavuto," January 9, 2009. This copy may not be in its final form and may be updated.

NEIL CAVUTO, HOST: Live from our nation's capital again — Senate Democrats in a tizzy over this whole Blagojevich mess and how to deal with the growing Senate mess — all this as the president-elect tries to pass a huge stimulus plan he says is needed to clean up this economic mess, which, for Wall Street, was a mess.

Welcome, everybody. I'm Neil Cavuto, coming to you live from Washington again, this time with a treat for you, an exclusive reaction to what has been going on in the world, and particularly in that dome behind me.

I'm talking to the Republican presidential nominee, John McCain of Arizona.

Video: Watch Neil Cavuto's interview

Senator, very good to have you. Thanks for coming.

SEN. JOHN MCCAIN, R-ARIZ.: Thanks for having me on, Neil. Thank you for not mentioning the loser.

CAVUTO: Yes.

(LAUGHTER)

CAVUTO: I was wondering, too, I mean, all this pomp and pageantry getting ready for the big event...

MCCAIN: Yes. Yes.

CAVUTO: ... is it tough?

MCCAIN: No, it really isn't. It is what the incoming and elected president deserves. And it has sparked a degree of enthusiasm that we have seldom seen.

I understand there are very — record numbers of people that are coming to town. And, so, I — I think most Americans and you and me are hoping for the best in these very difficult times. I — I think you would have to go a long way back in history, maybe to the inauguration of Abraham Lincoln, to look — I just thought of this — to look at a president taking office in more challenging times, maybe Franklin Delano Roosevelt at the — during the Depression.

CAVUTO: Right.

MCCAIN: So, you would have to — there's not many times in history — let me put it that way — that a president has come to office with as many challenges as the president-elect does. And that is incumbent then upon all of us to try and do what we can to work with him.

CAVUTO: All right. You mentioned Franklin Roosevelt. Many argue that the president-elect is trying to outdo FDR, in terms of stimulating and spending our way out of this. The earliest estimates are, Senator, $800 billion, at a minimum. Maybe we will get up to a trillion.

MCCAIN: Before it gets to Congress.

(LAUGHTER)

CAVUTO: Exactly. Are you worried that this is a process run amuck?

MCCAIN: Yes. But I also think there are some things we might do, such as — as the president-elect has already committed to — no earmarks, but maybe, as importantly, perhaps, Neil — and I would strongly recommend this — that we could have a break point here that, say, after two quarters of positive economic growth, that a kind of a Gramm-Rudman would kick in, a requirement for balanced budgets, to put us back on the path and eliminate wasteful and unnecessary spending.

I know that — you know that is a phrase around here. But if you had a — an amendment in this package, if you had a provision in this package, once the economy has recovered, then we are required to reduce spending and get on the road to a balanced budget within a certainly reasonable length of time, I think that might restore a little bit of confidence. There is a concern.

(CROSSTALK)

CAVUTO: Do you think, behind me, those guys will ever do that?

MCCAIN: I think that they will do things that they have never done before, in light of the pressure they are feeling from their constituents right now.

You say it every day, and I will say it again. These are the most challenging times in our lifetimes — in our lifetime. And I'm not saying it's at parallel with the Great Depression. We have not reached nearly those numbers yet — unemployment of 25 percent, et cetera. But they are certainly far worse than any recession that you and I have ever seen.

CAVUTO: But do they warrant this type of money? Now, we have already spent trillions, Senator...

MCCAIN: Yes.

CAVUTO: ... between the financial rescues and what we are doing for the auto guys.

MCCAIN: Which have been very disappointing, yes.

CAVUTO: Well, but my point is, are things so drastic that we can't even wait to see the results of that before we pile on?

MCCAIN: I think you can make a strong argument, talking to most economists, including Marty Feldstein, that unusual action is required in these most unusual times. The question is, will we do it right?

I'm very disappointed in the first $350 billion of TARP. There's not been accountability, transparency and, apparently, we have shifted priorities from time to time. And I never voted for a bill that would bail out the auto industry.

CAVUTO: So, you were not for that?

MCCAIN: I was certainly not — I do not see any provision in that bailout that calls for...

(CROSSTALK)

MCCAIN: ... bailout.

CAVUTO: Well, why did you vote for that, by the way, when you knew that there was still no oversight in place?

MCCAIN: Well, we were told there would be oversight and transparency, et cetera. We should learn that lesson. We should have that in place before we give the money from now on.

But the second point is, we watched, you watched, America watched a 700-point drop in one day of the Dow Jones average, a $1.2 trillion disappearance of Americans' savings, retirement, et cetera.

(CROSSTALK)

CAVUTO: But I'm told that your knee-jerk reaction to that was, you were against it. It was against everything in your DNA, and that — that those in the administration approached you, as the Republican presidential candidate, and said, you have got to be for this because there could be serious hell to pay if our standard-bearer rejects this.

Is that true?

MCCAIN: No.

I think the argument — and it wasn't initiated by them — I called Paulson, Bernanke, et cetera, that I was told by them — and I think they are still correct — that, unless we take some action, that you can see a precipitous and calamitous situation evolve quickly in the markets.

And that was happening. And the ripple effect we are just feeling today: unemployment up to 7.2 — first was obviously the collapse of the market, and then the ripple effects that are still going to be felt in the months ahead.

CAVUTO: But, you know, Senator, your critics have been saying all the more reason to have opposed this, because, in retrospect, if it was to help all of the things you just mentioned, it clearly has not.

MCCAIN: Well, I was also committed and remain committed to the proposition that it was the housing market that was the catalyst for this fire. And it is going to be the housing market, when values — home values — stabilize, that we will begin to see the end of this severe recession.

And I — I would — I — the secretary of the treasury announced his first priority was the housing market. And, then, of course, we went...

(CROSSTALK)

CAVUTO: But what did he show you at the time, Senator? Did he say, look, Senator, if we don't do this, there is going to be a global credit freeze; we're going to go into...

MCCAIN: Yes. There already was.

(CROSSTALK)

CAVUTO: Right. Right. But, in retrospect now, many thought he overplayed this dismal hand, and that you went along with it, and that this senator known for being anti-earmark was — was then competing with a guy on how to out-trump the earmarks.

(CROSSTALK)

MCCAIN: Look, I don't think — if you and I walked on the street today, I don't think there is one out of 100 Americans that know whether I voted for or against the bailout, OK?

But there are...

CAVUTO: Maybe two.

MCCAIN: Yes.

(LAUGHTER)

MCCAIN: Look, millions of Americans who are feeling the impact of this incredible scenario, which, if you wrote a novel, nobody would read it. I mean, this incredible housing bubble that we created, with the complicit behavior of Congress, people like — in all due respect — Congressman Frank and Senator Dodd and others, that are now in charge of putting out the fire.

CAVUTO: What did you think of that?

MCCAIN: Oh, I think it was unconscionable that we would really put so much pressure on the industry and prop up Fannie and Freddie to the — and encourage them to be engaged in this behavior. I don't know anybody that disagrees with that and the chain reaction throughout. But...

CAVUTO: But now you're for mortgage relief, for helping the very folks who got in deep, right?

MCCAIN: I have — look, I have always been for a thing that we did in the Depression: the homeownership loan corporation. Buy up these loans. I understand that Citi is doing something like that now.

CAVUTO: Right.

MCCAIN: Buy up these — these home mortgages, and give them back to people at rates they can afford.

Now, your response to that is, well, what about the person and family who are making their payments?

CAVUTO: Right.

MCCAIN: What is their home value going to be affected if that house next door is empty — OK?

CAVUTO: But hasn't that already been factored in the markets?

MCCAIN: That's been happening.

CAVUTO: Right.

MCCAIN: Yes. So, we have to stop it. We have got to stop the slide in home values, so that we can stabilize it and do a lot of other things now, but certainly reverse that.

CAVUTO: But, you see, what has gotten weird, Senator, is that you, Mr. Anti-Big Government...

MCCAIN: Yes.

CAVUTO: And I have heard from Jack Welch — the former CEO of GM — talking to him earlier today, Senator, saying much the same thing, that, well, now, you know, government could be the solution.

It just seems an anathema to everything you have been about.

MCCAIN: Well, again, all I can say to you is that I want to see the stimulus package. I want to see what it does. I want to see what kinds of provisions we have in it, that, once the economy recovers — and our economy will recover. I mean, the — I still say...

(CROSSTALK)

CAVUTO: What does your gut tell you? This year? Next year?

MCCAIN: I don't know. I don't know. You know, I can't predict that.

CAVUTO: Well, you mentioned the package. You want to see the package. Senator Jeff Sessions was sitting in this seat yesterday, Senator, with me and telling me the $300 billion or so in tax cuts in this proposal are not really tax cuts. They are tax credits. They are not long-term tax relief. So, it is a misnomer to say they are.

MCCAIN: Well, first of all, I would like to see business taxes cut.

We have a business tax now of 35 percent. Ireland has eleven. We are going to have to export-driven recovery. That has got to be part of this recovery. And, if it is cheaper to do business overseas, companies and corporations are going to go overseas. We used to be the lowest business tax in the world.

CAVUTO: Right.

MCCAIN: And now we are amongst the highest.

Second of all, I would like to see a number of things, including the R&D tax credit made permanent, instead of holding up the business community every two years. The business tax credits, which would encourage employment, the...

(CROSSTALK)

CAVUTO: By the way, that is a measure that is included in the president-elect's proposal.

MCCAIN: Yes. Yes. Yes.

CAVUTO: But we know that John Kerry, your friend, is — is not a fan of that.

So, could — could — could the president-elect have more trouble with his own party than with your party?

MCCAIN: I think the president is going to marshal public opinion. Right now, his approval ratings and hopes of American people are very high. And, of course, in tough times, in perilous times, where people are losing their job, we don't — you saw the numbers today.

CAVUTO: Right.

MCCAIN: We are up to 7.2 — that that will, I think, I hope, make us work together and come up with something that the American people and the business community and the markets and the people that continue to buy our notes will continue to have confidence.

I really worry. What happens if — if the Chinese and others stop buying American paper? What happens then? You know, then we have to pay more to borrow money from other countries.

(CROSSTALK)

CAVUTO: Very good point, Senator. But you are going to make it harder for them to do so, right, because you are asking them to pay a lot more because the deficits and debt are going to get a lot bigger.

(CROSSTALK)

CAVUTO: And we have already seen signs that they're not. So, is it incumbent upon this incoming administration to have a stimulus package that is more skewed toward tax relief than added spending? Or what would you want?

MCCAIN: I would like to see it more skewed toward tax relief.

I do think that whatever spending it is, you can translate into job creation. I'm all for wiring rural America. You know, I'm all for many of the things for green technologies. I'm for all those...

(CROSSTALK)

CAVUTO: Well, what about roads and bridges and...

MCCAIN: But they don't — they don't create jobs.

(CROSSTALK)

CAVUTO: What about that stuff, the infrastructure stuff?

MCCAIN: I think there are some of those that are — quote — "shovel-ready." I also think there's a lot of museums and footpaths and bike paths and other things out there that are lurking that they want to — and museums, other things that they want to fund.

CAVUTO: So, there are shovels for other things...

(CROSSTALK)

MCCAIN: So, there has to be complete transparency. There has to be a complete justification.

CAVUTO: Right.

MCCAIN: There has to be. But it has to be gauged to job creation. And those jobs are permanent jobs as well, not just a one-time deal. Just like if you give Americans — we proved this once before — if you send them all a check, they are either going to save it or spend it, and it has very little impact on — on the economy.

We have got to have job creation, capital formation and encouragement of small and large businesses.

CAVUTO: Well, there seems to be little of that at this point. So, the reason why I mention this point, the government — according to Barack Obama — is really the only entity that can deal with this right now. And — and many have interpreted that, Senator, as a sign that we have done a 180 from, you know, Ronald Reagan's famous statement, you know, the government isn't the source of hope; it is the problem.

MCCAIN: It's the problem, yes.

CAVUTO: So, all of a sudden, we have reversed that. It is a new age, a bigger-government age.

MCCAIN: I'm not sure that we have reversed that. And Ronald Reagan did raise taxes, as — as you may recall.

CAVUTO: Right.

MCCAIN: And Ronald Reagan did some things that maybe you and I wouldn't agree with.

But the point is, we don't want to — I love and cherish what Ronald Reagan did for America, not only on economic policies, but certainly bringing an end to the Cold War. But this is now the 21st century. And we have to look at these challenges in a way that I believe we can met — be met by job creation, by lower taxes, which doesn't have to do with government — it has to do with encouragement...

CAVUTO: Right.

MCCAIN: ... of — of businesses — and by — look, Neil, Americans are very angry about what happened right now. And we have to have more oversight and transparency.

And we have to look at Secretary Paulson's recommendations to bring these regulatory agencies into the 21st century, OK?

CAVUTO: So, when Barack Obama appointed his regulatory czar — I don't know who came up with the czar concept. We have car czars and regulatory czar, but, nevertheless...

MCCAIN: That's one word, czar, that I'm — we are growing a little weary of.

CAVUTO: Right. Right.

MCCAIN: But, anyway, go ahead.

CAVUTO: But what do you think of that, somebody who just oversees all of this?

MCCAIN: I'm not sure we need another czar. But we need to bring these agencies together and understand that financial transactions take place at the speed of light, we are in a global economy, that the present oversight and regulatory agencies were designed for the 1930s, '40s, '50s, '60s, maybe, but certainly not the 21st century.

And we have to make them so that we can keep up with the global economy, as well as our national economy.

CAVUTO: Let me ask you, have you spoken to the president-elect?

MCCAIN: Sure, yes. As you know, I had a meeting. And I had a phone conversation with him after a recent trip I took to Iraq and Afghanistan.

I want to help the president succeed.

CAVUTO: And what have those conversations been like? What have you discussed?

MCCAIN: Very cordial. And the — the Iraq-Afghanistan one was obviously about Iraq, Afghanistan, Pakistan. It was right after the Mumbai massacre.

And, so, look, I'm not here trying to argue that this president is perfect or that I'm not — there still are not disagreements. But I do think that his national security team is an excellent one. I think many of the other choices that he has made are good. I certainly...

CAVUTO: Leon Panetta at CIA is an excellent one?

MCCAIN: Yes. Leon Panetta has great experience as chief of staff of the White House.

(CROSSTALK)

CAVUTO: A lot of people say not enough experience in these areas.

MCCAIN: I don't agree with that. I think that Leon Panetta is highly qualified.

And, in — in all due respect — I think it is not bad from time to time to have someone from outside of the intelligence community, but with strong managerial experience as chief of staff of the White House, to be — head up one of these agencies. So, I think he's got some good balance there.

CAVUTO: Was there any truth, Senator, that there was a lot of interest in you playing a role in this administration?

MCCAIN: No.

CAVUTO: No?

MCCAIN: No.

CAVUTO: OK.

You are very big — and, again, announcing today, with Senator Feingold, McCaskill and others, an earmark reform, an issue you championed. Do you think that Barack Obama's request to Congress — actually kind of read like an order — that, you know, you can't pile on with this stuff? But one man's, you know, vital project is another man's pork, right? I mean, how do you distinguish?

MCCAIN: We know what an earmark. We all know what an earmark is. And I'm very pleased that the president-elect said no earmarks. We know what they are.

CAVUTO: But will your colleagues honor that?

MCCAIN: I think they will. Again, I think that he will have enough — certainly, there will be enough of us on both — certainly, Dr. Coburn and I and others will be fighting very hard.

And let me just — on the overall issue of the stimulus package, again, Neil, I'm not saying I will support it, but I'm saying it deserves consideration, particularly when we are hearing more and more details, including 40 percent of it would be in — quote — "tax cuts."

Now, they may not be in the form of the tax cuts that you want, and — but, hopefully, we could make them into tax cuts that will truly stimulate the economy. So, I want to see what it says. All of us should. We have not heard enough details. But these are extraordinary times that require extraordinary measures.

CAVUTO: So, would it mean the extraordinary position of Republicans holding their noses and voting for something because they would look like obstructionists if they do not?

MCCAIN: No, what I will hope is that there would be enough agreement amongst all of us that you would get a very large vote in favor of a package that we can go to the American people and say, this will right this economy of ours, which is in such distress today.

CAVUTO: All right.

Is it your sense, then, that, if we don't act rapidly — the argument is that there has to be something agreed to and in action in early February — then there is all hell to pay?

MCCAIN: If we want to work a five-day workweek, which is an unusual thing around here...

(LAUGHTER)

MCCAIN: ... and maybe have some late-night sessions, I think we can get it done, Neil. I do.

But I wouldn't make such haste. One — I think every senator should have their right to propose, debate and vote on amendments. I think that should be — now, if we have to day in for long periods of time in order to do that, I would not cut off debate or the ability of every senator to represent the people of his state. Or her state.

CAVUTO: Let me ask you, because you have this side soap opera going, with Blagojevich and whether Burris is going to be seated. Do you think it should be resolved quickly, so, as Barack Obama seems to be saying, move on with the people's business?

MCCAIN: Well, I hope so. And I — it is not my business, either one. But, in the case of Senator Burris, I don't see where he — what grounds you deny him being seated.

CAVUTO: So, you would seat him?

MCCAIN: Certainly, because I think that he's been legally appointed. He — by a governor who has not been...

(CROSSTALK)

CAVUTO: But a governor who might be impeached — thereby negating his appointments.

MCCAIN: I don't know if you can negate it that way. I'm not the constitutional scholar of the Illinois State Constitution. But it seems to me that the individual was chosen in a legal manner, who I have never met, by the way.

CAVUTO: OK.

You feeling OK besides that?

MCCAIN: What's that?

CAVUTO: You're feeling OK besides that?

MCCAIN: I'm feeling fine. And I'm honored to have gotten the nomination of my party. I'm proud.

I know we have got a lot of work to do, we Republicans. I would just remind you, in 2004, we had 55 seats. And that's only been four years. We can come back.

CAVUTO: All right.

MCCAIN: We have just got to get our act together. We will.

CAVUTO: John McCain, thank you very much.

MCCAIN: Thanks, Neil.

CAVUTO: Senator John McCain piled up a lot of votes this election, just not quite enough.

(LAUGHTER)

MCCAIN: Yes.

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