This is a rush transcript of "Special Report With Brit Hume" from July 2, 2008. This copy may not be in its final form and may be updated.


HENRY PAULSON, U.S. TREASURY SECRETARY: To date, almost 95 million payments tota ling over $78 billion have been sent. Consumer spending data in May show these payments are helping families weather this period of slow growth and higher food and gas prices.

Still, the U.S. economy is facing a trio of head winds — high energy prices, capital markets turmoil, and a continuing housing correction.


BRIT HUME, HOST: And that is the trio of problems that has given rise to the new assertion that, well, it may not be a recession, but it is something called a "slow moving recession," "slow motion recession."

Some thoughts on this now from Fred Barnes, the Executive Editor of The Weekly Standard, Jeff Birnbaum, columnist for the The Washington Post, and the syndicated columnist Charles Krauthammer, FOX News contributors all.

The economy obviously isn't good, and it certainly isn't booming, but the question is how bad is it — Fred?

FRED BARNES, EXECUTIVE EDITOR, THE WEEKLY STANDARD: It is pretty bad. The thing I guess I worry about the most is the stock market, which has dropped a lot in the last several months because the stock market is a bet on the future. And I think to investors, largely based on oil prices, the future doesn't look that great.

That doesn't mean there's going to be a recession, however. A recession is the specific thing. It is two quarters, consecutive quarters of negative growth. In other words, the economy is shrinking rather than growing.

And a lot of people predicted one in the first — including Mort Kondracke, who is not here — and I bet him at the time earlier in the year —

HUME: I hope you bet him a lot.

BARNES: — It was only $10 — that there wouldn't be a recession. Over the years, I would say — maybe I'm a little off, but about five of the six projected and predicted recessions never happened.

HUME: What do they say about the stock market — the market has predicted 11 of the last five recessions?

JEFF BIRNBAUM, COLUMNIST, THE WASHINGTON POST: I think it is fair to say that there is a lot of doom and gloom that is exaggerated about the economy. There is a lot to be upset about, but not as upset as there are indications.

We are now in a bear market, it's fair to say — by the measure of a bear market, that is the stock market as measured by the Dow Jones Industrial Average, at least, has declined by more than 20 percent since its height last fall. That would be a bear market.

And so, that's not good news, and it is an indication of the same thing we see in consumer confidence, which is also at the lowest rate as measured by the University of Michigan in a quarter century.

But we are not in a recession, and, in fact, it's fair to say, I think, that after this summer, some of the biggest problems that we're facing may begin to reverse themselves.

The rising prices of gasoline, for example, are likely to begin to decline, as — in fact, because of the prices have been so high, especially the prices of oil, that is squashing demand, and, naturally, demand for gasoline goes down after the busy summer months.

So as we're moving into the fall election, for example, the biggest indicator of bad troubles with the economy is likely to begin to fall off, that is, the high price of gasoline. I would be very surprised if it didn't decline somewhat.

And also housing prices, which have been declining, will probably begin to reach their bottom sometime this fall. So at least some economists see a turning around of economic hard times once we get into the fall and toward the end of the year.

CHARLES KRAUTHAMMER, SYNDICATED COLUMNIST: The use of the phrase "slow motion recession" is so clever and deceptive. It is a way to use the word recession when there is actually not a recession. Our growth is slow, but it's positive.

What to me is amazing is that our growth is still positive at a time when we have these two shocks — the oil shock, which is comparable to what happened in the mid '70's and late '70's, which caused terrible recessions, real recessions with high unemployment. And we have the additional shock of the housing collapse and the subsidiary financial turmoil.

You would expect those two effects together — they could still send us into a tailspin, but it certainly hasn't happened.

What is amazing to me is the resilience of the economy. In the '70's when we had the oil shock alone, we had incredibly high unemployment. Unemployment today is just a tad over the level at which we used to speak about full employment, at four to five percent. The economy is holding up.

The one thing I worry about, however, is that the effect of gasoline prices, high prices, is cascading. It takes a while. It starts now with the huge decline in consumption, people trading in their cars. So it has had a devastating effect on the auto industry, a terrible effect on the airline industry.

And now, of course, all products that are made of petroleum, and chemicals as well, are also increasing as well as other commodities.

HUME: And the cost of transporting all products is up.

KRAUTHAMMER: Exactly. So if affects everything.

And that effect is going to increase unless you get a precipitous drop in the price of oil, and I don't see any indication of that. The tensions in the Middle East alone and the problems in Nigeria alone are making the traders in oil extremely nervous.

It's hard to he see how you're going to get a collapse in the price, which is what we really need.

BIRNBUAM: I don't know, Charles, that there would be a collapse in the price, but there could be a decline in the price —

HUME: I don't think anybody sees it going to $80.


BIRNBUAM: Well, to the extent that Congress can do anything, and they are focusing on one thing that probably we should discuss here, which is to try to squeeze down the amount of speculation in the purchase of oil.

They can put more transparence into these trades, and they can widen margin requirements, meaning it would be more costly to buy these energy contracts.

BARNES: That's not the problem. There are things you can do.

KRAUTHAMMER: The problem is not too many speculators, it's too little oil. We got to drill.

BARNES: Indeed.

And we say we're going to drill, promise we're going to drill, and that will have an effect on the market right there.

BIRNBUAM: No question — more drill is required, the price goes down.

KRAUTHAMMER: We're in favor of speculation.

HUME: Or in favor of exploration.

BARNES: And get more supply in the short run just from the Saudis.

HUME: June was the deadliest month for U.S. troops in Afghanistan since the conflict began. So what's going on? All-stars on that, next.



GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES OF AMERICA: One reason why there have been more deaths is because our troops are taking the fight to a tough enemy. They don't like our presence there because they don't like Americans denying safe haven.

ADM. MIKE MULLEN, JOINT CHIEFS CHAIRMAN: We all need to be patient. As we have seen in Iraq, counterinsurgency warfare takes time and a certain level of commit many. It takes flexibility.


HUME: And what were those two gents talking about? They were talking about Afghanistan, where the level of U.S. casualties, or deaths, this past month was the highest since the fighting there began back in 2001.

We're back with our panel on this subject. So are we are now in a situation where things have improved dramatically in Iraq only to deteriorate to the point in Afghanistan that we are in danger of losing — Charles?

KRAUTHAMMER: I don't think we are in danger of losing in Afghanistan, but I think we have to accept the fact that I think it will be a long, perhaps intractable conflict.

What we achieved is scattering al-Qaeda. They're hiding in caves. They have trouble communicating, and they obviously are not a tenth as active as they were before. And they no longer have the safe haven of having a sovereign government, and that's an important achievement.

However, we have to remember Afghanistan has never been controlled from the center, unlike Iraq, which has had central control. The Pashtoon tribes have always been independent, and they're the ones who are harboring the guerillas. The northwest provinces of Pakistan, which is adjacent, have never been under anyone's control going all the way back to the British empire.

So it's an area that is relatively lawless, and the idea is that Democrats have of injecting a huge amount of American troops Soviet style as a way to win that war I think is a terrible mistake. I think we have to accept that there is going to be a low level of guerilla activity for a long time.

There's a war that is actually winnable. That's the war in Iraq. And to assume we're going to win Afghanistan by some multiplication of troops I think is a mistake.

BIRNBAUM: Look, you can't ignore the war in Afghanistan and this bad month — and it is just one bad month in Afghanistan in terms of the U.S. fatalities — is an indication of the difficulties, the troubles with Barack Obama's position and the Democratic position on Afghanistan.

HUME: Some would argue its trouble for Bush's position.

BIRNBAUM: But they're arguing that the focus should be on Afghanistan and not in Iraq, essentially, that Afghanistan is where the real problem is, the Taliban is there. This month, I think, proves how difficult that problem is, and how difficult it is to stop the Taliban.

And, to focus just on this one month is, at the same time, I think, also misleading. There's been tremendous success in Afghanistan. The Taliban has been scattered. They are not nearly the force they once were.

HUME: They ran the country.

BIRNBAUM: They ran the country, and now it is completely the opposite. They are a small insurgency that are doing better lately because they have this temporary reorganization. But they are not winning.

Beating them back completely, however, will be an extremely difficult task that the Democrats are underestimating.

BARNES: Mounting a counteroffensive in southeastern Afghanistan, you ever look where that is? Maybe there is some more remote places in the world, but I can't think of one right off.

HUME: I can — ANWAR!


And they mount a counteroffensive, and American troops are going to fight against it, and it will produce more casualties.

But look, this is where al-Qaeda, as Charles was indicating, the border between Pakistan and Afghanistan. That's where we want them to be.

And, look, the main thing they can't do from there, that they don't seem to have been able to, is mount a serious terrorist attack in the west, in Europe or the United States, or even parts of Asia. They just haven't been able to do that.

They could do that when they had a safe haven in a country. They can't do it, it seems, from where they are flow.

HUME: So they have a haven, but it's an unsafe haven.

BARNES: Charles is right, you can never win there because the Taliban or somebody else will always have some guerilla effort going. But, on the other hand, most of Afghanistan, or a good bit of it, is under the Karzai government. And that's a huge improvement.

HUME: Will the American public accept some protracted, low-level, violent conflict in a place like Afghanistan?

BARNES: Yes they will because it doesn't take so many troops. We have 160,000 it got up to in Iraq.

HUME: But let's assume you get an Obama presidency, and the pressure will be on to get out of Afghanistan. The history of this thing is that the Democrats tend to support these things when they're going well and not when they're going badly.

BIRNBAUM: There is that possibility, which would maybe open the way for the Taliban to make real inroads, not what they have done now, which is temporary.

Or Afghanistan could become Obama's Iraq, at least at the early stages. It could be the place where he could be bogged down. And it's a legitimate question.

HUME: Speaking of Obama, by the way, we made an error earlier when we were reporting on the home loan that he got. We said it was before he was in the Senate. It turns out it was after he joined the Senate. And we regret that mistake. I'm not sure what it means, but we wanted to get it straightened out.

And that is it for the panel.

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