This is a rush transcript of "Special Report With Brit Hume" from March 26, 2008. This copy may not be in its final form and may be updated.


HENRY PAULSON, TREASURY SECRETARY: I'm constantly asked how much longer will this take to play out and I'm also asked if this is the worst period of market stress I've ever experienced. I respond that every period of prolonged turbulence seems to be the worst until it is resolved. And it always is resolved.


BRIT HUME, HOST: That, from the treasury secretary today, who also warned against trying to keep the housing correction from running its course. Some thoughts on this issue now from Mort Kondracke, executive editor of Roll Call; Nina Easton, Washington bureau chief of Fortune magazine; and the syndicated columnist, Charles Krauthammer, FOX NEWS contributors all.

Well, what about this? The president also was saying today that late in the year, when the consumer spending induced by the package that Congress passed and he signed, kicks in, that we will have a recovery. What about it, Nina? What about this whole question of the mortgage mess, the spending down, possible recession and the end of it?

NINA EASTON, FORTUNE MAGAZINE: Right. And whether all the hype over it reinforces the consumer negative feeling. I think there is something to be said for the argument that there is a lot of hype going on, that it's a campaign year, so things are made to look even worse than they are. That said, I think what spooks regulators and thereby spooks the public is the uncertainty built into this particular time. And what I mean by that is the housing sector and the mortgages, these risky mortgages that were lent not by lenders and they're not sitting on their balance sheets, you can look at them. These were risky mortgages that are were sliced, diced, sent off into investment banks and into these arcane financial instruments.

So, if you look at Hank Paulson going back, you know, six, seven months, they say they don't know — these are off balance sheets — they don't know to what extent the exposure is going to spread, they don't know how bad it's going to be. So, I think...

HUME: Well, we are in the situation now where there are lower interest rates where you're getting refinancing going on and consumers are getting out of some of these loans.

EASTON: They are getting — and I think it's starting — some of that is starting to kick in, there's no doubt and I think, you know, there is one top fed official said, just a couple of days ago, that you know, we're going to see negative growth this part of the year, but some more positive growth in the next part of the year.

MORT KONDRACKE, ROLL CALL: Well, you've got the real economy, the grow the growth rate. Whether there's going to be a recession, and then you've got the financial markets, which are all clogged up with these securities that nobody is sure how much toxic waste is in them, and eventually, you're going to have to get the — the toxic waste has to get removed...

HUME: I guess, he's warning against not letting trying to cut this housing correction short, that it needs to run its course.

KONDRACKE: Right. What the Treasury Department maintains that 93 percent of all mortgages are being paid off just fine. There are seven percent that are in some sort of trouble and there's always a certain number that are going to be in trouble, and if you start messing around and trying to stop this process, and like Hillary Clinton wants to freeze all foreclosures and freeze interest rates, I mean, violating contracts, raising questions about whether contracts apply anymore, that that will delay the process, and overregulation could make it even worse, and even if it's too stringent, do what Sarbanes-Oxley did, for example, to the corporate — to corporations, moved a lot of the financial services markets to London, and you don't want our financial services industry to collapse, so all of that is involved here, and nobody knows how bad it's going to be or how long it's going to be.

CHARLES KRAUTHAMMER, SYNDICATED COLUMNIST: Look, Paulson is right, that you don't want to interrupt the decline in prices of houses, because it will correct itself, ultimately. I mean, what's really interesting is that while prices were rising astronomically, geometrically and out of control, everybody was enjoying it, and nobody thought that somehow abnormal, that, one, the commodity is rising and not falling. Ultimately it does, and it is now and it will help in a correction. If you lower the price of a widget, people will come out and buy widgets.

The problem is, as Nina indicated, the larger issue is what's being hidden here, and what Paulson assures us is that these are things that correct themselves, they always have. The problem is that we have a new structure in the world economy. We have two new items, which is the number of players is larger, because of India, China, the third world, you have a lot of development, so it's not just a small club, and secondly, you have information technology which allows transactions of incredible speed, and incredible complexity where a lot of these debt instruments are opaque, nobody understands them.

Goldman, I think, today, came out with an estimate that there may be half a trillion in losses that financial institutions have yet to find and declare. Now that, even in Washington, that's real money, and it's because all that stuff is hidden that everybody is scared. Normally, I'd say the odds are it'll correct itself, but, you know, even the Patriots lost the big game, so you know, odds aren't always decisive.

KONDRACKE: The other factor here, is how long does it last? Does it last until November? And are we in shaky territory, such that it could affect the election? John McCain made a speech yesterday in which he said, in effect, let's do nothing. He's the same guy who, by the way, was one of the big backers of Sarbanes-Oxley a couple of years ago, so...

HUME: That's a law, by the way, that was passed that regulated the financial industry in a way that proved to be gross overregulation in the eyes of any...

KONDRACKE: Right, exactly. So, now he wants to do nothing and, you know, some people who were rooting for him are wondering is this the same guy and what's going on here?

HUME: When we come back, John McCain urges the U.S. to listen more to other nations. We'll listen to his foreign policy — major foreign policy speech that was billed, today. Stay with us.


JOHN MCCAIN (R), PRESIDENTIAL CANDIDATE: We have to strengthen our global alliance as the core of a new global compact, a league of democracies that can harness the vast influence of the more than 100 democratic nations around the world to advance our values and defend our shared interests.


HUME: And in that league of democracies, Senator McCain would not include Russia. He would include countries like India and Brazil, both of whom have democratic systems and both of whom have, at least to some extent, in the case of Brazil, market economies. India is, I guess, a market economy and it has always been a democracy. So, what about his ideas, a kinder, gentler diplomacy, perhaps, with our allies, but what else? What about this speech — Charles.

KRAUTHAMMER: Well, I like the idea of the league of democracies, and only in part because I and others had proposed it about six years ago. What I like about it, it's got a hidden agenda. It looks as if it's all about listening and joining with allies, all the kind of stuff you'd hear a John Kerry say, except that the idea here, which McCain can't say, but I can, is to essentially kill the U.N.

No one is going to walk out of the U.N. There's a lot of emotional attachment to it in the United States, so we're not going to leave. How do you kill it? You establish a parallel institution of democracies that actually does stuff, that actually acts in the world, and that is not acting either against our interests or doing nothing, as the U.N. almost all the time does. And that's a good idea.

He secondly proposed that we kick Russia out of the G8. That's a mistake. Again, you don't kick them out. Keep the G8 as a useless institution of, you know, windbagging and talking. Establish a parallel institution with the other seven, add, as he proposed, Brazil and India, and create a new — give it a new name, and that way...

HUME: Make it an economical alliance, as well.

KRAUTHAMMER: With an economical alliance. In other words, what we need are new — we tried after World War II, universal institutions, including everybody. The problem is if you include everyone, Cuba, Chavez and all these guys, it's going to end up either useless or bad, as we've learned in the U.N. experience, so the new idea, which is 50 years late, but I think is coming now, is establish institutions of real democracies and act together with them in that structure.

HUME: If you can.

EASTON: But I have to say, I mean, as a political document in an election year, there was sort of this — is a change of tone trying to talk about collective will and being persuaded by our allies, the centerpiece of John McCain's foreign policy, current foreign policy, and the thing that we really think about in the 2008 election is Iraq. And when I read this, I kept picturing the prime minister of Germany and president of France locking arms, shortly after, or shortly before the invasion of Iraq, talking about we're going to unite against this war. What John McCain has done in that situation, was he going to be persuaded by his Democratic allies? So, I think it begs some real policy questions, even though he took this high-minded tone of collective will.

KONDRACKE: Yeah, I think in tone he means to separate himself from Bush-Cheney-Rumsfeld, that sort of dismiss our allies and go our own way and all that. He's in favor of...

HUME: Which is a considerably exaggerated claim in the first place.

KONDRACKE: Well, but, you know, the president out of hand rejected Kyoto and didn't have a successor treaty, which McCain wants and he wants to close down Guantanamo and all that. But, at the end of the day, Nina's right. I mean, he is going to be judged, as Bush has been judged, on the success or failure of Iraq and...

HUME: So, this — this — these proposals made no contribution publicly for him?

KONDRACKE: No, I think it did. I think it moved toward the smart power movement, which is the moderate to liberal foreign policy establishment — smart power is going beyond military to foreign aid and diplomacy and all that.

HUME: (INAUDIBLE) use to call soft power?

KONDRACKE: Well, it's — yeah, it's soft power, but not rule out military.

KRAUTHAMMER: It's soft power, it's mostly useless. Look, this was a speech that was kinder and gentler. It was all about tone, and it was vintage McCain. Tough on Iraq, and then he gives you a bone, global warming, he gives you a bone in Guantanamo, so he looks like he's different, but essentially, as Nina indicated, it's all about Iraq and he'll be judged up and down Iraq in the end.

EASTON: I think it was a speech that reflected one number, 60 percent of American public, American adults still oppose the Iraq war.

HUME: Do you agree with that, Mort?

KONDRACKE: It depends on what happens with Iraq. The other question is...

HUME: Then let me give you another number, though, that may play into this. He asked the question, pulling out of Iraq on a certain timetable without regard for conditions. That's the condition — that's the Obama and basically the Clinton position. That garners the support of a full 18 percent in a recent poll, so that's not a winner either, it would seem.

KONDRACKE: And, I think the other big issue that he didn't really address in this speech is how far are you going to go to stop Iran from developing a nuclear weapon? He didn't say whether he's willing to use military force...

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