This is a rush transcript of "Special Report With Brit Hume" from September 16, 2008. This copy may not be in its final form and may be updated.


SEN. BARACK OBAMA (D-ILL.) PRESIDENTIAL CANDIDATE: We just woke up to news of financial disaster. And this morning he said that the fundamentals of the economy are still strong.

Senator McCain, what economy are you are talking about?



SENATOR JOHN MCCAIN (R-ARIZ.) PRESIDENTIAL CANDIDATE: My opponents may disagree, but those fundamentals, the American worker and their innovation, their entrepreneurship, the small business—those are the fundamentals of America, and I think they're strong.


BRIT HUME, HOST: Well, that's a lively debate.

Some discussion of it now with Bill Sammon, FOX News Washington Deputy Managing Editor, Mara Liasson, National Political Correspondent for National Public Radio, and FOX News contributor and syndicated columnist Charles Krauthammer. All of us are FOX News contributors here, I guess, including me.

Let's talk a little bit about—we had Lehman Brothers meltdown, goes belly up, Bank of America acquires Merrill Lynch for, what, a premium above over what it was trading for, but what I'm sure the managers at Bank of America thought was a bargain at $29 a share, something like that.

Everyone is worried about AIG, the insurance giant tonight, and the Dow Jones took a 4 1/2 percent hit.

McCain and Obama are arguing about the fundamentals of the economy. Who has the high card in this debate, Bill?

BILL SAMMON, FOX NEWS WASHINGTON DEPUTY MANAGING EDITOR: Well, on a day when the DOW drops 500 points, it's probably not smart to get caught saying "the economy is fundamentally sound." Now, granted, he had caveats. He talked about markets in turmoil, and there is all these other challenges facing the economy.

But Obama strips away the caveats, latches onto the one controversial statement, and drapes it around McCain's neck. — This doesn't help. McCain is best when he's talking about national security or Sarah Palin. When we're talking about the economy, that's not a good day for him.

His challenge is to pivot and say "OK, the economy is not that great. What would you rather have, a tax hike cut or tax cut in a weak economy?" That's how he can win.

MARA LIASSON, NATIONAL POLITICAL CORRESPONDENT, NATIONAL PUBLIC RADIO: You know, McCain tried to recover from that and talk about how the economy is at risk because of these things, not that the fundamentals are not strong.

I think it was a bad thing to say today, but —

HUME: But, he has been saying that right along.

LIASSON: he's been saying that right along.

HUME: Let me put it another way, do most of the American people believe that fundamentally we have a strong economy?

LIASSON: Yes, fundamentally. The things he lists as the fundamentals are incontrovertibly strong, yes.

HUME: But generally speaking, is it really at the end of the day a good argument to be the one saying that our economy is fundamentally weak?

LIASSON: That — I think that's a bad argument. Obama isn't quite making that...

HUME: Well, he's ridiculing the idea that it's strong. What does that mean?

LIASSON: ...on a day like today that McCain doesn't get it or he is somehow out of touch.

The way that McCain is trying to deal with this particular financial crisis is to talk about it as a crisis, because he is known as a guy who can handle a crisis, and he's been running an ad to that effect.

Obama, I think, is banking on the traditional Democratic advantage in tough times.

CHARLES KRAUTHAMMER, SYNDICATED COLUMNIST: I think it is a matter of definition. If the fundamentals mean productivity and relative stability of the various sectors of the economy, excluding the financial— our exports are up, we had growth even this quarter — in spite of downturns.

Our economy is not collapsed under the twin threats of the banking collapse on the one hand and high oil on the other hand. So it's fundamentally strong.

But I agree, as a candidate—a president always has to say it is fundamentally strong. If he stands up and says it isn't, that's the end of the economy. But if you're a candidate you don't have to say it. I think it was a political slip, but it's a defensible economic argument.

The real problem is that this crisis is opaque. Nobody really understands the contours. When we had the S&L collapse at the end of the '80's, it was a huge issue, but we knew what a bank was and we knew what its debt was and we had a number.

Today the reason that people are scared because of Lehman and AIG is we're not sure who holds what paper...

HUME: And what the paper means.

KRAUTHAMMER: ...and what all of these crazy debt instruments mean.

And that's why everybody is worried. It is matter of groping around in the dark. And it is always the case on Wall Street that if there is a lack of knowledge, you get panic.

SAMMON: Well, there is the knowledge, though, that the basic fundamental problem is that these companies took on too much of these bad mortgages. People took out mortgages they couldn't afford, and these companies, you know, acquired these mortgages, and then it turns into a credit crisis.

And I think people understand that. They may not understand the extent of it, but I think we're not talking about a fundamental reordering the U.S. economy, here. We're talking about probably part of a painful but understandable correction in the grand view...

HUME: You know, Mario Gabelli, he's a Wall Street legend, really, an investor, and now he has been around a long time was saying today that this is a market correction, and it is really at this point not even that severe as market corrections go, considered what we've lived through.

KRAUTHAMMER: Well, it's Monday.

HUME: I understand.

KRAUTHAMMER: Let's see what Tuesday is.

SAMMON: Four and a half percent today on the Dow. But, remember, back in, I think it was 1987 — 22.8 percent in a single day. So it kind of puts it in context.

LIASSON: Look, back to the candidates. When you really look at what they are proposing to do, they are both proposing some kind of consequences, more regulation, tougher oversight, and there is not a huge, huge difference between them.

Now, Obama will argue that in the past, McCain has wanted to take more of a hands-off approach to this, but there is not a huge amount of difference.

HUME: Will Obama, in your judgment, Mara, continue to argue this is a good time now to impose higher taxes on corporate America?

LIASSON: He has already backed off of that to a large degree. He's already told — he said to George Stephanopoulos "No, no, no," when asked would you still raise taxes if you came in and the economy was in a recession.

No, he has backed off that, and I expect him to continue to do that.

HUME: But isn't that a centerpiece of his economic proposal?

LIASSON: His centerpiece, I think he would say, is tax cuts for 95 percent of Americans. And yes, he is asking for a termination of the Bush tax cuts for people over $250,000.

HUME: And never mind that nowhere near 95 percent of Americans actually pay income taxes.

The presidential campaign seems to be getting nastier, and the Obama campaign is not happy about it, and they were ripping. We will talk about that next.



UNIDENTIFIED MALE: The dishonest smears that he repeats even after it has been exposed as a lie, the truth be damned—a disgraceful, dishonorable campaign.

After voting with Bush 90 percent of the time, proposing the same disastrous economic policies. It seems deception is all he has left.



UNIDENTIFIED MALE: John McCain has even said Social Security is a disgrace. I couldn't disagree more. Our Social Security isn't a disgrace. It's a compact, a trust between generations of Americans. It's a reflection of our values.


HUME: Well, as you can see from the first ad, the Obama campaign is pretty unhappy about what it says is the web of lies being woven by the McCain campaign against Obama and his team.

And, as you can see from the second ad, the McCain campaign may have a reason to gripe about Jimmy Roosevelt's complaint in the Democratic National Committee ad that McCain had said Social Security is a disgrace.

What McCain, in fact, did say was the way that we have neglected Social Security and failed to address its problems a disgrace, a different matter entirely.

So we're in a battle now, a debate, I suppose, to see who is taking the lower of the low roads here. Your thoughts, Charles?

KRAUTHAMMER: Well, I think we have reached about the 8th grade schoolyard taunting and insult level, which is about where you are exactly in mid-September. That's what you get every-quadrennity.

Look, I'm not surprised. I think what has happened is you get a media posse saying 'oh, the Republicans are mean again.' But this also happens every four years in which the liberal press concentrates on the Republican attacks.

What you saw in that Social Security ad is disgraceful, the way that was distorted — as you indicated. McCain had said the status of Social Security and the way it has been funded is a disgrace.

And to say he called Social Security a disgrace is a pure distortion, and it's added on to the Democratic distortion of saying McCain wants 100-year war in Iraq.

Both sides, as Karl Rove has said, have gone over the line consistently. But again, that's what happens in campaigns.

LIASSON: I think McCain has more of them in the shorter period of time recently. I think over time, you can probably track them one for one.

But, you know, the ad about Obama being for comprehensive sex education for kindergarteners has been checked and found to be deceptive, because he didn't vote for a bill for that. He voted for a bill to teach—

SAMMON: I disagree. It had both. It stuff in there about predators, and it had comprehensive sex education for kindergarteners.

LIASSON: For K through 12. Not comprehensive sex education meaning a K through 12 curriculum.

SAMMON: That includes K for kindergarten. "K" stands for kindergarten.

So you can say he voted for this bill and it included this thing that I'm going to object to. And the fact that it also included some other thing that no one objects to doesn't undo the truth of that ad. I think that's a defensible ad.

HUME: I think it's a defensible ad, too, but let's get to the deeper question is a lot of political advertising is arguably true and arguably false.

And the question becomes when the media starts tut-tutting, I don't hear a lot of tut-tutting in the mainstream media. Those quotes from the Obama ad about McCain were all from mainstream media outlets, and they're all accurate quotes. That's the kind of thing that the McCain campaign said about it today, about its campaigning.

SAMMON: That's the difference between the two sides here, because you will never see an ad like that on the other side because the mainstream media is not calling out Barack Obama on the 100-year war, on the Social Security disgrace, or on what he did today by isolating that quote about the fundamentals of the economy being strong and stripping away the caveats.

The media never sees anything wrong with that. But when McCain takes liberties with the truth like "lipstick on a pig," which I think was a deceptive ad.

HUME: No doubt.

SAMMON: That was totally off the mark, because he said that here is Barack Obama saying this about Palin and he wasn't saying that about Palin.

So that's the difference is the media calls McCain on it but doesn't call Obama on it. They both play fast and loose with the facts.

LIASSON: I think Obama was called at the time on the 100-years war, and that's why you don't see it in an ad today. Lots of Democrats said that, and it was taken out of context. He was talking about 100 year like South Korea or Germany.

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