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CNN LATE EDITION WITH WOLF BLITZER

Interview With Henry Paulson; Interview With Senators Leahy, Feinstein

Aired March 16, 2008 - 11:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


WOLF BLITZER, HOST: It's 11 a.m. here in Washington, 8 a.m. in Los Angeles, 6 p.m. in Baghdad. Wherever you're watching from around the world, thanks very much for joining us for "Late Edition." We'll get to my interviews with Senator Patrick Leahy and Senator Dianne Feinstein in just a moment.
But first, Republican presidential candidate John McCain has landed in Iraq only a few hours ago. Let's get some details on what's going on. We'll go to our chief national correspondent, John King. He's joining us now from our Baghdad bureau.

What is going on, John? The Republican candidate all of a sudden in Iraq.

KING: Well, Wolf, the Republican candidate would make clear that he's in Iraq as the senior senator from Arizona and the ranking Republican on the Armed Services Committee. He is here in Baghdad with two of his Senate colleagues: the Democrat turned Independent Joseph Lieberman from Connecticut and Republican Senator Lindsey Graham of South Carolina.

Both those senators happen to be not only members of the Armed Services Committee, but also big supporters of the McCain presidential campaign. Still, this is an official Congressional delegation trip. It is paid for by the U.S. taxpayers. Because it is a Congressional trip, we've seen no pictures of Senator McCain yet or his colleagues.

We do know they are meeting with General David Petraeus, the U.S. commander here in Iraq, with the U.S. ambassador, Ryan Crocker, and with senior Iraqi officials. Among them, we are told, will be the prime minister, Nouri al-Maliki.

Now, Senator McCain says he has every right, every reason, and in fact, he would argue, every responsibility to be here as a senator asking key questions face to face in advance of those hearings in the United States Senate next month, where General Petraeus and Ambassador Crocker will come back and update the Congress and the American people on what they believe to be some progress, and General Petraeus would say significant progress of the so-called surge policy.

But, Wolf, because this trip is being paid for by the taxpayers, because Senator McCain is the presumptive Republican nominee, there are some asking questions about that. And McCain campaign aides make no secret of the fact they would like at the end of this for the American people to see a senator who they say is quite comfortable and authoritative on the world stage.

He's here in Iraq. He will move on to Jordan, to Israel, and to France and to Britain as well. But here in Iraq, Wolf, remember, John McCain says he's here as a member of the Senate, but it is a defining issue in the campaign.

It is John McCain who says either Hillary Clinton or Barack Obama would wave what he calls the white flag of surrender by rushing to get troops out of Iraq at a time when John McCain, and he will make the case here, says the surge policy is working, and that while he would like to get the troops home, if they need to stay, Senator McCain says as a senator or as the next president, he would make the tough decision to keep them here. Wolf?

BLITZER: All right, John. Thanks very much. John's going to be coming back and joining us in our next hour as well. Hillary Clinton and Barack Obama are focusing in on the next big issue that -- the next big contest, that is. That would be the delegate-rich state of Pennsylvania after getting roughed up this past week by various racial controversies.

Joining us to talk about the race for the White House, the Democratic nomination specifically, first and foremost, Senator Dianne Feinstein of California. She's a strong supporter of Hillary Clinton. She's joining us from our San Francisco bureau. And here in Washington, Senator Patrick Leahy of Vermont. He's a strong supporter for Barack Obama. He's chairman of the Senate Judiciary Committee.

Senators, to both of you, thanks very much for joining us. Let me get your quick reaction, Senator Leahy. Do you have a problem using taxpayer dollars to fund this visit by John McCain to Iraq?

LEAHY: Well, that's something for Senator McCain to answer. Of course, senators have a right to go to various parts around the world. In fact, the only way you can come in there is doing it this way with military planes. He is there with two key members of his campaign committee.

BLITZER: Both are members of the Armed Services Committee as well.

LEAHY: Both are members of the Armed Services Committee, but both key advisers to his campaign. He will go on to Britain, where he'll do a significant fund-raiser for his campaign, although he has said that from Britain back here, he'll do that at campaign expense.

BLITZER: But are you suggesting this is inappropriate?

LEAHY: No, I'm not suggesting it's inappropriate. I would hope they might ask a very serious question there. He has been a very strong supporter, as has Senator Clinton, of the war in Iraq. They were supposed to start paying for some of this themselves, the Iraqis were. We read today that billions of their oil revenues are going to fund the insurgents and the shooting of Americans at the same time we're asked -- we Americans, with gas at $4 a gallon almost -- we're asked to pour more money into Iraq. I think it's in doing a photo op, not ask some hard questions. This war is not going as well as Senator McCain has said. Even if he does say it, we might be there for 100 years.

BLITZER: Let me ask Senator Feinstein. Do you have a problem with Senator McCain's visit to Iraq now, taxpayer-funded visit?

FEINSTEIN: No. He's entitled to go as a member of the Armed Services Committee, in fact its ranking member. I think it would have probably have been better if he took members who were not so closely identified with his campaign. But this is indicated to be a Congressional visit.

Obviously the world's going to watch it, and we'll know whether it's exploited for other reasons. I don't believe it will be, but we'll see.

BLITZER: As a supporter of senator Clinton, Senator Feinstein, do you see any significant differences where she stands on Iraq and a potential for a U.S. troop withdrawal, as opposed to Senator Barack Obama?

FEINSTEIN; Actually, they've both said their intention is to get us out as soon as possible. I think Senator Obama had said more quickly. I think Senator Clinton has recognized that once you begin redeploying 160,000 troops, it takes a period of time just for reasons of strategic lift, if nothing else.

And there are considerable assets in Iraq that have to either be dismantled or secured, so logistically, moving out completely takes more time. And how you do it is important. I think Senator Clinton has been more attuned to some of the particulars of being able to move large numbers of troops out, securing it and trying to stabilize Iraq as much as possible.

I do agree with what Senator Leahy said. I think that, you know, this surge where it has worked militarily has not worked politically. And what's left in Iraq is a government that is incompetent. The front page of the New York Times points out massive, massive oil fraud.

We had a hearing in defense appropriations which dealt with some of it. I mean, the estimate is $9 billion of oil revenues are missing.

BLITZER: Let me let...

FEINSTEIN: Now, the Times contends it's going in to fuel the insurgency. Well, if this is allowed to happen, it doesn't matter what the surge does. The insurgency will continue. BLITZER: Senator Leahy, is there a significant difference right now looking forward, moving forward as far as Iraq is concerned between Senator Obama, whom you support, and Senator Clinton.

LEAHY: Oh, there's a very significant difference. Among others, the biggest difference, of course, is that Senator Clinton supported the war in Iraq.

BLITZER: No, I'm talking about moving forward.

LEAHY: Well, let me finish. And Senator Obama opposed the war in Iraq, and I have to think he's far more inclined to get us out of there. The hearing that Senator Feinstein discussed, and she was a very active and very valued part of that hearing, was one I chaired on it.

We find all this money, American taxpayers asked to give a blank check to a failed policy in Iraq. We're asked to over and over again. And the Iraqis are never going to do anything, really, to put their own country together until they know we're leaving.

BLITZER: So, the big issue...

LEAHY: As long as you as an American taxpayer and I are paying the bills, why shouldn't they?

BLITZER: So, basically, what you're saying, that you're convinced that Barack Obama would get U.S. troops, about 140, 150,000 there right now, U.S. troops would come home more quickly under an Obama administration than a Clinton administration.

LEAHY: I think you let these brave men and women come back to be with their families and tell the Iraqis, the United States has been there longer than World War II. It's time for you to start pulling some of your own weight.

BLITZER: You accept that, Senator Feinstein?

FEINSTEIN: No, I do not. I think Senator Leahy would know that. Of course, Senator Obama was not in the Senate when the authorization to use military force came up.

FEINSTEIN: And he can say whatever he can say, but the fact of the matter is he wasn't there.

I think Senator Clinton, as a member of the Armed Services Committee, you know, and as a senator who has really done her due diligence, really worked very, very hard -- I had dinner with her, Thursday night, when we had this 13 hours of votes.

And I said, Hillary, what are you most proud of?

And she said, you know, I'm most proud of what I've done, following 9/11, for the state of New York.

And if you take a look at that, and you take a look at how robustly she worked, day after day, week after week, to achieve a goal, which was the rehabilitation...

BLITZER: But, Senator...

FEINSTEIN: ... you see the kind of president she would be. BLITZER: Because the argument that the Obama people make is that she was wrong in 2002, when she voted to authorize President Bush to go to war, at a time when Senator Obama, not yet in the U.S. Senate -- he was speaking out against such authorization.

FEINSTEIN: Well, that's fine, but, remember, you had a dominant majority -- you had almost three-quarters of the Senate that voted to give the president the authority.

I think there were different expectations of how that authority was going to be used. A big lesson was learned.

I was one of them. I've said I believe, for me, it was a huge mistake. But I read and re-read the intelligence. I actually believed what I read. That was a big learning experience in itself.

Now, having said that, the point is, we are where we are; how do we get out?

And that's where I think technical expertise is going to play a role. And I think her history on the Armed Services Committee will play a role.

BLITZER: You were one of those.

FEINSTEIN: They have both said they're going to bring us out. I hold them both at their word.

BLITZER: Senator Leahy, you were one of those who voted against the authorization.

LEAHY: I did.

BLITZER: And I guess you feel vindicated right now?

LEAHY: Well, I read the same intelligence. I read all the intelligence. Bob Graham, who had been the chairman of the Senate Intelligence...

BLITZER: The former senator from Florida.

LEAHY: From Florida, a conservative Democrat -- he voted against the war, based on what the intelligence. Those of us -- we looked at it.

Now, I do agree with Senator Feinstein that Senator Clinton's worked very hard for the state of New York. I hope she can remain the senator from New York for a long, long time, working with a President Obama.

But the fact is, those of us who looked at this knew it was a terrible mistake to go into Iraq. We knew we would be stuck there, and we voted against it.

Now, Senator Feinstein, to her credit, said the vote was a mistake. Senator Clinton has never said it was. You have to learn from mistakes.

And on this question of experience, Wolf, the two most experienced people I've seen in Washington, in years, are Dick Cheney and Donald Rumsfeld. And their experience has led hem to make disastrous mistakes.

BLITZER: We've got to leave it there for a moment, but we're going to continue this conversation. Much more coming up with the senators. We'll ask them, also, about issue number one, right now. That would be the U.S. economy. Who's better equipped to deal with the economy?

And who's better equipped to beat John McCain in the fall?

"Late Edition" continues, right after this.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

PRESIDENT GEORGE W. BUSH: If the Congress truly wants to send a message that will calm people's nerves, they'll adopt the budget I submitted to them, and make it clear they're not going to run up the taxes on the working people and on small businesses and on capital gains, and on dividends, and on the estate tax.

(END VIDEO CLIP)

BLITZER: It's issue number one for voters here in the United States right now. We'll be speaking about that, my interview coming up, in the next hour, with the Treasury secretary Henry Paulson. We'll talk about the ailing economy.

But let's talk about it right now with these two senators, Dianne Feinstein and Patrick Leahy. They're both joining us here on "Late Edition."

Senator Feinstein, are you ready to accept the president's recommendations on how to deal with the ailing economy?

(LAUGHTER)

FEINSTEIN: Well, I don't know what he's done so far that's worked. So we'll have to wait and see.

BLITZER: He says no new taxes.

FEINSTEIN: I think this -- this president, for the first time in history, has funded a war, not with new revenues but on the debt, and has run up the debt from a projected surplus, when President Clinton left office, to $9 trillion.

We've spent a half a trillion dollars on a war that is funded on the debt of this country. Now the economy's running into trouble. And it's a very difficult time. Because the debt is so high. You've got gas prices now approaching $4, oil at over $100 a barrel. You have this massive subprime marketplace coming apart. You have mortgage brokers in the subprime market that aren't licensed, that tell people all kinds of things, and they buy these homes...

(CROSSTALK)

BLITZER: Well, let me Senator Feinstein -- let me interrupt. The Bush tax cuts, which were approved in 2001 and 2003, they're supposed to lapse in 2010, unless they're renewed. Should they be renewed?

FEINSTEIN: Not in this situation, they should not be renewed. We should begin to put the budget back in balance. We should begin to reduce the debt.

You know, people have thrown brick bats at the Clinton administration, but the fact is, the last four years of the Clinton presidency, this country was in surplus; the budget was in surplus, and it was projected to have a $5.6 trillion surplus over the next 10 years. We now have $9 trillion of debt facing us.

BLITZER: Let me ask Senator Leahy. At a time of economic distress, which is under way right now, would it be wise to effectively increase taxes, which would be the case if those tax cuts were allowed to lapse? LEAHY: First off, the analysis by Senator Feinstein is absolutely correct. I totally agree with what she said. You know, the Bush administration has tripled the national debt.

The amount of -- we're spending over $1.5 billion every single day, between paying the interest on the Bush debt and the Bush war in Iraq. So that's something to keep in mind.

BLITZER: So what do you say about these tax cuts?

LEAHY: The huge top-level tax cuts, when people are getting $50 million and $60 million and $70 million a year to run a company into bankruptcy, no, they don't deserve a huge tax cut.

BLITZER: So, at what level would you let those tax cuts lapse?

LEAHY: I think the Democrats have said that there are certain tax cuts that we will target to the middle class, and we'll do a research and development tax cut; we'll do a small-business tax cut.

But these high-end tax cuts -- I mean, it helped out a whole lot of the supporters of President Bush, but it does not help the economy.

BLITZER: Senator Feinstein, John McCain, who has been an outspoken opponent of what are called these earmarks, you know, pet projects, what some call pork barrel spending -- he failed, together with his colleagues, to get legislation passed to put a moratorium on these earmarks for the coming year.

BLITZER: Listen to what he says. I want to play this little clip for you.

(BEGIN VIDEO CLIP)

MCCAIN: Americans want this process stopped. They want the wanton waste and mismanagement of their tax dollars stopped. And it indicates the absolute requirement for the next president of the United States. I commit to vetoing every single bill that as a pork barrel or earmark project on it.

(END VIDEO CLIP)

BLITZER: Senator Feinstein, you and Senator Leahy voted against that legislation on Friday. Senator Clinton and Senator Obama joined Senator McCain in voting for it. Why did you oppose a freeze on those so-called earmarks?

FEINSTEIN: Well, for two reasons. The first is, we have put some reforms in place with respect to transparency, with respect to preventing earmarks from being added outside of the committee bill and the committee report in the dark of night, matters of transparency, additional points of order that would rest against the bill. This would be the first budget in which those things would have an opportunity to function.

But let me just tell you about what I represent. I represent a state of 37.5 million people. It's the largest economic engine in the United States. We pay much more in taxes than we get back in federal services. I am importuned with 3,000 requests every year. I'm on the Appropriations Committee. Senator Leahy is on the Appropriation Committee.

I try to prioritize them, see that they have a regional impact, they go for things like sewer systems, water, plugging leaking levees up in the San Joaquin and Sacramento rivers. Water programs, sewer programs, interior programs, agriculture programs and on and on. Now, you can either say that the president is the only one that does a budget, and the Congress is entirely left out of it. The only way the Congress is in it is if the Congress can make selective and critical and prioritize adds to the budget.

BLITZER: Let me let Senator Leahy weigh in. Why were senators McCain, Obama and Clinton wrong on this issue?

LEAHY: First, to go to what Senator Feinstein said. I compliment her. I do serve on the Appropriations Committee with her. She's very careful. Things she asks could easily pass the Senate. She's been very, very responsible in that.

You know, Senator McCain, I'd like to see straight talk on this. He has voted for the largest deficits in the nation's history. He has voted for the largest earmarks from President Bush, blank check earmarks, and now we find that billions went to contractors tied to the Bush/Cheney administration. And we can't find out where it is.

He has voted for...

BLITZER: But he himself doesn't have these earmarks. LEAHY: No, well, wait a minute. This is almost a non-sequitur in here. He voted against the plan to balance the budget and made a surplus back in President Clinton's time. He has voted for the biggest deficits, the biggest expansion of the national debt in history.

So, don't talk about the earmarks. And these earmarks, what are they? A lot of people say if we're going to spend literally trillions in Iraq, we're going to let them get away with siphoning off all their oil revenues and send the bill to us, shouldn't we have some of that money come back for things we need in America?

If we have crumbling bridges, if we have hospitals, maybe medical research for Alzheimer's or diabetes, cancer, so on, for the -- you know, the president's cut out money for police here on his earmarks. He cuts out money for police in America to send the money to a corrupt police force in Iraq. Some of us try to bring that money back in earmarks back to the police forces in America.

BLITZER: This debate is going to continue. Senator Leahy, thanks for coming in. Senator Feinstein, always good to have you on "Late Edition" as well. Thanks to both of you.

Coming up, how should the president approach the economy? We're going to get two very different views from top economic advisers to both the Clinton and McCain campaigns. "Late Edition" continues right after this.

(COMMERCIAL BREAK)

BLITZER: With the economy now the number one issue for American voters, all three presidential candidates are emphasizing their various economic plans. We're joined now by two top economic advisers to two of those campaigns. Gene Sperling was the chief White House economic adviser during the Clinton administration. He's now a strong supporter of Hillary Clinton's campaign. He's advising her. And Douglas Holtz-Eakin is an economic adviser with the McCain campaign.

I want to welcome both of you to "Late Edition." Thanks very much for coming in. Let me play a bit of what the treasury secretary, Henry Paulson, told me just a while ago about the state of U.S. economy. Because I asked him whether or not we were already in a recession. (BEGIN VIDEO CLIP)

PAULSON: We know the economy has slowed down. The American people knows it's slowed down. So the important thing is, what do we do about it? And we have an economic stimulus plan. It's going to make a real difference.

(END VIDEO CLIP)

BLITZER: All right. He refused to say whether or not the U.S. economy already was in a recession. It's not in a recession if you look at the technical definition of a recession, which is two quarters or six months of negative economic growth. What do you think? Is the country already in a recession? SPERLING: I think if I had to guess, I'd say yes. I mean, recession is fundamentally contraction. It means you're kind of going backwards.

Look at private-sector jobs. They've been negative. The private sector has lost jobs three months in a row for a total of 140,000 lost jobs. Manufacturing index contraction, services contraction. We know home prices are down 23 percent.

So I guess as the expression would go, if it kind of walks like a recession and squawks like a recession, I'm betting and Senator Clinton's betting that we are in a recession.

BLITZER: Doug, what do you think?

HOLTZ-EAKIN: It's really tough out there. I mean, if you talk to any American family, you talk to small businesses, who are the heart of the economy, they're seeing trouble getting financing. They're seeing trouble selling their goods. And we're seeing pressure on prices.

So, this is tough time. And it is important to chart a new path moving forward, get faster growth.

BLITZER: Senator McCain says this is about the worst time possible to increase taxes on the American public at a time of such economic distress. I'll play a little clip of what he said in Pennsylvania the other day.

(BEGIN VIDEO CLIP)

MCCAIN: Right now, we've got to take some steps which are very, very necessary. And the first thing we want to do is not raise your taxes, so the tax cuts have to be permanent. We can't raise your taxes in a time of economic difficulty in America.

(END VIDEO CLIP)

BLITZER: Now, if Hillary Clinton had her way, or Barack Obama, for that matter, they would let some of the Bush tax cuts of 2001-2003 lapse. And that in effect would be an increase in taxes for some Americans. In terms of the economic picture, would that hurt the economy?

SPERLING: Let's make a few things crystal clear. Number one, Senator Clinton and, I don't believe, Senator Obama, are calling for having any taxes go up, right now, while we are in recession or in the threat of recession.

Number two, both senators...

BLITZER: But they are saying, in 2010, when these tax cuts lapse...

SPERLING: Let me finish.

(CROSSTALK)

SPERLING: Let me finish.

BLITZER: ... when the tax cuts lapse, they would let them lapse, at least some of those tax cuts.

SPERLING: Well, again, the first question was, right now, while we're in this difficult time period -- and I'm saying Senator Clinton is not for having any taxes go up when we're in this kind of economic weakness.

Secondly, she has supported letting about 90 -- the tax cuts that affect about 98 percent of Americans, that were passed by President Bush, be extended. So she is for extending all the middle-class tax cuts that affect people under $250,000.

Third, she has put forward very strong new middle-class tax cuts for health care, to help people have a universal 401(k), savings account for higher education.

So the only real difference between Senator Clinton and Senator McCain is a big one. It is, after 2011 and beyond, should we spend another $100 billion just for tax cuts for the well off?

Number two, should we also, as Senator McCain's proposing, have an additional $100 billion in tax cuts for corporations, with no strings attached?

And number three, do that while Senator McCain is saying we should perhaps keep us in Iraq for 100 years?

That's $300 billion of additional deficit a year that you're seeing from Senator McCain. BLITZER: All right. Well, that's a lot of good questions for you, Doug. Go ahead and answer.

HOLTZ-EAKIN: Well, there's obviously very big differences between Senator McCain and Hillary Clinton.

Number one, he understands how the economy works, and it's shocking to me...

BLITZER: Because he opposed the tax cuts, both in 2001 and 2003. He said -- was one of only two Republicans, Lincoln Chafee and him, who opposed those Bush tax cuts.

But now he says keep them for...

HOLTZ-EAKIN: Senator McCain has always understood that it's the small businesses in America and the kind of private sector energy that is the heart of success.

And in 2001 and 2003, what he saw was, yes, tax cuts, but the kind of practices where Senator Clinton has 177 earmarks, for $2.4 billion, no control over spending. That places a great burden on America's businesses. So, going forward... BLITZER: Because, if you read his speeches on the floor, when he voted "nay" on those Bush tax cuts, he thought they were disproportionately skewed toward the wealthy. And that was one of the reasons why he didn't like them.

HOLTZ-EAKIN: Oh, he ran in 2000 on a tax cut. That tax cut put the middle class...

BLITZER: But now he says they should stay permanent.

HOLTZ-EAKIN: But he has also got the same principles, in eliminating the alternative minimum tax. The middle class should never pay that tax. And to have it hit them now is especially bad.

I find it really amazing that Gene would argue we can't raise taxes because it's going to hurt the economy; we might be in a recession, but let's go hurt the economy later. What's the difference?

BLITZER: What is the difference?

SPERLING: I'm surprised Doug would say that. Because I think Doug does understand that it's very important for our country to have fiscal responsibility.

We know, in the 1990s, President Clinton cut taxes, but he also asked those at the very top to pay a little bit more as part of getting fiscal discipline, stronger confidence. We had one of the most booming recoveries in our history.

What Senator Clinton is proposing is simply that, if we want to do things that are important for our country, like have universal health care for everyone, bring down health care costs, have strong homeland security, then we have to do so in a fiscally responsible way.

So she says, when you look at 2011 and beyond, should we be spending an additional $100 billion just on people making over $250,000, when we have these top national priorities?

And should we be giving an additional $100 billion, as Senator McCain proposes, for a broad corporate tax cut that doesn't even do anything about the fact that, right now, most corporations pay at probably half the rate they're supposed to.

HOLTZ-EAKIN: The U.S. corporation (OFF-MIKE) tax is the second highest in the world. It hurts our workers because our companies can't compete internationally.

Our workers are further hurt by the fact that our unemployment insurance and training programs are out of date and not helping them for the 21st century.

Our workers need better education. Our workers need the ability to have some health insurance that goes with them from job to job. BLITZER: Does Senator McCain, and your team in the campaign, have confidence that the Bush administration knows what they're doing right now, in terms of dealing with this huge economic crisis?

HOLTZ-EAKIN: President Bush has really performed a remarkable feat, in getting this stimulus package through Congress in what I would say is record time. It's focused on tax relief, investment incentives, and a minimum of wasteful spending. I think that's sensible...

(CROSSTALK)

BLITZER: Would Senator McCain be doing anything differently right now?

HOLTZ-EAKIN: I think we have to look at the lessons that are learned from this episode. I mean, we had a big I.T. bubble in the late 1990s. We had a fallout after that. Now we've had a housing bubble, and we've got a fallout after that. What are the lessons that we need to learn?

Well, right now, we need more capital into our banking systems, so that these firms have a good foundation. At exactly that moment when we put capital in, if you do the right thing economically, Senators Clinton and Obama would say thank you by hitting them as hard as they can with the tax code.

BLITZER: So I just want to nail down that point. In 2010 or 2011, if the economy still is in a rut, you wouldn't support eliminating those tax cuts for the wealthy?

SPERLING: You know, I think that, if things were as bad as they are right now, you might decide that, you know, you have to look at the circumstances you face.

Hopefully -- we all hope that, by the year 2011, we're pulling out. And I think, if people see that -- you know, remember, some of these would not be in that tax increase.

For example, Senator Clinton says, let's not completely repeal the estate tax; let's give every couple no estate tax for $7 million and less of their estates.

So if you have $7 million estates you want to leave, you pay zero taxes. But for those super-high, super-hundred-million-dollar estates, she'd say, let's take that money and give tax cuts to 50 million, 70 million families so they can save.

That's not a net tax increase. That's actually giving more tax cuts to more middle-class families.

BLITZER: We're going to continue talking about this, in the next hour, with the Treasury secretary, Henry Paulson. But, unfortunately, we've got to leave it right there, guys. Douglas Holtz-Eakin, thanks for coming in. We'll have you back. Gene Sperling, thanks to you as well. We'll have you back, as well. SPERLING: Thank you.

BLITZER: A good, important discussion, issue number one.

And you're going to learn more, a lot more about this number one issue facing the United States right now, the ailing U.S. economy, how it affect you. "Issue No. 1" airs all this coming week at noon Eastern, right here on CNN. It's a new program, noon Eastern. You're going to want to see it.

But, up next, we'll go on the campaign trail for a live report on the Democratic presidential candidates. Hillary Clinton and Barack Obama: What are they doing today?

Stick around. We'll be right back.

(COMMERCIAL BREAK)

BLITZER: Senator Barack Obama was campaigning in Indiana yesterday, yet another sign the Democratic nomination battle could go well beyond next month's Pennsylvania primary on April 22.

Let's go to our White House correspondent Suzanne Malveaux. She's out on the campaign trail, watching what's going on. She was in Indiana yesterday, joining us from Chicago this morning.

What is the latest on the Democratic race for the White House, Suzanne?

SUZANNE MALVEAUX, CNN CORRESPONDENT: Sure, Wolf. What we're seeing here this weekend, perhaps one of the most challenging and frustrating times for the Obama campaign. I've spoken with insiders who say, look, he's really trying to stay on message, but he is getting ahead, trying to deal with two things.

The Tony Rezko trial, that of course the Chicago businessman who's been charged with alleged extortion and fraud. We saw Barack Obama sitting down with the editorial boards of the Chicago Tribune as well as the Sun-Times to try to answer some unresolved issues, just what his relationship was to Rezko.

He admitted that there was more fund-raising that Rezko had done for his campaigns, but there was no any kind of wrongdoing or favors that were exchanged. He has also been faced with this barrage of questions over the comments made from his pastor, Jeremiah Wright. He's been trying to distance himself, repudiate those comments. Controversial, obviously they were critical of the U.S. government. So he's had to deal with that as well.

He is trying to push his message forward, but at the same time really kind of bogged down in those two issues. What we see on the Clinton side is she has really kind of enjoyed this respite, if you will, after her own difficult week, Geraldine Ferraro making her own controversial comments. Now Senator Clinton is on the trail. She has been in Pennsylvania, she's celebrating St. Patrick's day and the parade, giving a major speech on Iraq tomorrow in Washington. She has been able to kind of stay on message and keep focus here. So, both of these candidates looking at very different places where they are right now, but looking ahead at Pennsylvania as well as Indiana. Wolf?

BLITZER: And this contest showing no sign of ending anytime soon. Thanks very much, Suzanne, for that. Once the Democratic nomination is decided -- that could happen at the convention at the end of this summer in Denver -- will Barack Obama be able to patch up his differences with Hillary Clinton, and vice versa?

You're going to want to hear what Senator Obama told me this past week. much more "Late Edition" right after this.

(COMMERCIAL BREAK)

BLITZER: You're watching "Late Edition." I'm Wolf Blitzer in Washington. With senators Barack Obama and Hillary Clinton fighting for the Democratic presidential nomination down to the wire, some Democrats are worried that the protracted battle could weaken the party's chances in the general election against John McCain. I spoke with Senator Obama this past week in "The Situation Room."

(BEGIN VIDEOTAPE)

BLITZER: Are you worried, Senator, that this race between you and Hillary Clinton is getting too nasty, and whoever gets the nomination could have problems down the road unifying the party, going into the convention and going beyond to the general election against John McCain?

OBAMA: Well, look, Wolf, I think if you've watched how we've conducted our campaign, we've been very measured in terms of how we talk about Senator Clinton. Obviously, I think I would be the better nominee, and I've been very clear about why I think I would be somebody who brings about change by bringing people together and overcoming the special interests. But I've been careful to say that I think Senator Clinton is a capable person, and that, should she win the nomination, obviously I would support her.

You know, I'm not sure we've been getting that same approach from the Clinton campaign, but I'm confident that once we decide on a nominee, we go through the convention that in fact, the party's going to be unified. Because people recognize we've got to have a significant shift from the Bush policies of the last seven, eight years. And John McCain represents a continuation of George Bush as policies that have wrecked the economy and have put our foreign policy on a very uneven footing.

BLITZER: You're ahead in the pledged delegates. You're ahead in the total delegate count right now, at least by our estimate, and I think by all the major news organizations' estimate. If that were to continue, would you consider her, Hillary Clinton, as a possible vice presidential running mate?

OBAMA: Well, as I've said, Wolf, I think it's really premature for any of us to be talking about VP nominations where we're in the midst of a really important contest. And what I think the voters are still looking for is, who's going to be the best advocate for them? Who is going to help them stay in their homes if they're threatened for foreclosure, who's going to help make college more affordable? Who can overcome some of the toxic atmosphere that's existed in Washington over the last eight years?

And that has been our continuous message. If I'm the nominee, then I'm going to go through the process of figuring out what vice president would be most able to continue with those same themes if something happened to me, who could lead the country, who could serve as commander in chief.

And obviously, Senator Clinton's a very capable person, and as I've said before, she'd be on anybody's short list.

(END VIDEOTAPE)

BLITZER: All right. Speaking with me earlier in the week, Senator Barack Obama.

Coming up next, five years after the war in Iraq, what is the conflict's impact across the entire Middle East? We're going to get special perspective from The Washington Post's Robin Wright. She's the author of an important new book.

Stay with us. "Late Edition" continues right after this.

(COMMERCIAL BREAK)

BLITZER: Welcome back to "Late Edition." When the United States led the invasion of Iraq five years ago this coming week, many supporters hoped it would be the start of democracy throughout the region. That has certainly not yet happened.

Robin Wright is a Washington Post reporter who has traveled to, written extensively about the Middle East over these many years. Her new book is entitled "Dreams and Shadows, the future of the Middle East." Thanks very much for coming in, Robin. Thanks for writing this book.

WRIGHT: Thank you.

BLITZER: Let's talk a little bit about the region right now. On Thursday, General Petraeus, the U.S. military commander in Iraq, said this. He said, no one feels that there has been sufficient progress by any means in the area of national reconciliation" in Iraq. What's happening there right now? Is this about to get better, about to get worse? You know the region.

WRIGHT: I think we're all very disappointed that the Iraqis have not taken advantage of the surge to deal with the critical issues of reconciliation between Sunni and Shiite, to hold or set deadlines for holding provincial elections so that power is decentralized. All of this has been moving in "slow mo." And there's a real danger if there isn't real progress in the next couple of months that the Iraqis are going to just slip and slip and slip and slip.

BLITZER: And so , do you see any light at the end of this tunnel that's called Iraq?

WRIGHT: Down the road. But you know, I think the great problem is, because we didn't know what was happening inside Iraq in 2003, we weren't prepared for what transpired. We relied on a group of exiles, the leader of whom had not been to Iraq since 1958, and he left when he was a teenager.

And one of the reasons I wrote this book was because of that failure. I wanted to go back to the region and find out what was happening inside countries, what potential there was for opening up both politically and economically.

BLITZER: Here's what you write in "dreams and Shadows," among other things: "The United States had originally calculated that ousting the Middle East's most notorious dictator" -- that would be Saddam Hussein -- "would shake arrogant regimes and passive populations out of their political lethargy. It was instead quite the opposite. Everywhere I went, I heard a similar refrain from people of all political parties and religious affiliations: In Iraq, the world's mightiest democracy had undermined -- even sabotaged -- prospects for political change."

Those are pretty strong words.

WRIGHT: Well, I think history will look back on the invasion of Iraq as the greatest foreign-policy mistake the United States has ever made. And the tragedy long-term for us is not just Iraq. It's the colossal impact it's had across the region in scaring people about what happens when you engage in political change and the dangers of fomenting greater instability rather than providing greater opportunity.

BLITZER: John McCain, who is in Iraq right now even as we speak, he keeps saying this, and I'll play a little clip of what he's saying out on the campaign trail.

(BEGIN VIDEO CLIP)

MCCAIN: If we set a date for withdrawal and withdraw immediately, as Senator Obama and Senator Clinton keep saying they want, then I believe that Al Qaida will prevail and tell the world they beat the United States of America. And I believe that conflict will be spread, and I believe we will be back with greater sacrifice of American blood and treasure.

(END VIDEO CLIP)

BLITZER: What do you think?

WRIGHT: Well, I think we have to be very careful how we withdraw from Iraq. We went in with a kind of steamroller momentum. We were naive about what we anticipated and what could be achieved in a very short period. The danger is, Americans are tired of Iraq, and there's a real danger if we do anything hastily, that we set ourselves up for actually having to go back into Iraq down the road, in the same way we had to go into Afghanistan a second time.

Clearly, the region would like to see American troops out of Iraq. So would I, but there is a danger that we have to do this thoughtfully.

BLITZER: And there is now enormous fear about Iran, what might happen in Iran. This past week, all of a sudden, the commander of the U.S. forces in the Middle East, the Centcom commander, Admiral William Fallon, announces he's resigning amid suggestions he was deeply concerned about where the president and others in the administration were moving toward Iran. What's happening on that front?

WRIGHT: Well, I think the administration is still limited. Whatever happened with Admiral Fallon, it's going to be very difficult for the Bush administration to justify any kind of military action against Iran, given what the National Intelligence Estimate said late last year, that Iran had stopped a weaponizing nuclear program.

The danger, of course, is it's still enriching uranium, so Iran still has the potential to develop a capacity.

BLITZER: They could start weaponizing. If they haven't yet, they could start weaponizing very quickly.

WRIGHT: They could down the road. That's correct.

BLITZER: Here's what you write in your book, Page 15: "Jordan's King Abdullah warned me about the danger of an emerging Shiite arc or crescent stretching from Iran through Iraq into Syria and Lebanon, the kind of domino theory that once scared the West about communism."

How prevalent is that fear among the Sunni Iraqis like Jordan's King Abdullah?

WRIGHT: I think it's common among the leaders. I'm not sure it's common among the people. After all, there are many communities throughout the Middle East where Shiites and Sunnis have lived together peacefully. Iraq opened a Pandora's box and, because of the transfer of pourer, because it was not done in a more inclusive way, because the Sunnis were not brought into the process early on, they felt excluded. And it fomented a kind of tension that plays out to this day.

BLITZER: One of the really insightful -- there are a lot of insightful parts of the book, but one was the new hope that you see for the region despite all of bad news that's coming out there, and we listed a few of them -- we'll put it up on the screen -- why you say you have some new hope. There's the YouTube generation, no single truth, unexpected allies, soccer moms, moderate Islamists. Elaborate a little bit why you're not as gloomy on the future of the Middle East as some other observers might be.

WRIGHT: Well, I've been covering this region now since the 1973 war, and I'm normally pessimistic about it and therefore normally right. But what I found in going back and spending a year, going to all 22 countries, as well as -- the Muslim countries as well as Israel -- was that there is, within societies, a budding culture of change.

There's a tension of change, a crisis of change. It's not going to be easy, and it's only beginning, but the fact is that a lot of people inside these societies have become taking action themselves, carving out whole new political space, challenging autocratic regimes.

It's clear that most of the leaders in the region are now out of sync with their people, and that the majority -- all of public opinion polls, all the anecdotal information indicates that people really are interested in greater opportunity, in greater participation in political systems, and will take the actions required to get it.

BLITZER: The book is entitled "Dreams and Shadows, the Future of the Middle East." The author, Robin Wright. Robin, thanks for, a, coming in, b for writing the book.

WRIGHT: Thank you so much.

BLITZER: There's much more ahead on "Late Edition," including the treasury secretary, Henry Paulson, on the Bush administration's plans to try to help a struggling U.S. economy. "Late Edition" continues at the top of the hour.

(COMMERCIAL BREAK)

BLITZER: This is "Late Edition," the last word in Sunday talk.

(BEGIN VIDEOTAPE)

BLITZER (voice over): Economic jitters.

BUSH: We've got an active plan to help us get through this rough period.

BLITZER: Is the U.S. economy already in recession?

We'll talk with Treasury secretary Henry Paulson.

It's the fifth anniversary of the war in Iraq. We'll get perspective on mistakes made, lessons learned, and what's ahead, from the former U.S. administrator in Iraq, Paul Bremer.

The politics of race.

SEN. BARACK OBAMA, D-ILL.: I think it was an unfortunate remark.

SEN. HILLARY RODHAM CLINTON, D-N.Y.: I rejected what she said, and I certainly do repudiate it.

BLITZER: And the politics of war.

MCCAIN: If we leave Iraq, then the costs will be astronomic.

BLITZER: We'll assess the race for the White House with three of the best political team on television. "Late Edition's" second hour begins right now.

ANNOUNCER: Live from CNN in Washington, this is "Late Edition" with Wolf Blitzer.

BLITZER: And welcome back to the second hour of "Late Edition".

This week, the United States government had to step in to bail out a major New York investment house, and the stock market went on another roller-coaster ride, more proof why the economy is now issue number one in the minds of the American public and on the presidential campaign trail.

So what's coming up next? I discussed that and more with the secretary of the Treasury, Henry Paulson, when we sat down just a short while ago.

(BEGIN VIDEOTAPE)

BLITZER: Mr. Secretary, thanks very much for joining us. Welcome back to "Late Edition."

PAULSON: Wolf, it's good to be here.

BLITZER: These are tough economic times right now. The last time we spoke, on January 27th, you insisted the country was not yet in recession, was not in recession. Are you still convinced of that?

PAULSON: Wolf, the last time I said the growth had slowed down. I thought we were going to grow slowly. The risks are to the downside. I'm not focused, right now, on what you call it. Economists will argue about this for months and months.

We know the economy has slowed down. The American people knows it has slowed down. So the important thing is, what do we do about it?

And we have an economic stimulus plan. It was passed early, very early, right after a third quarter when we...

BLITZER: Is that enough to get the job done?

PAULSON: Well, it is going to make a real difference.

BLITZER: The checks aren't even going to be mailed out until mid-May, right?

PAULSON: Well, let me just say, the -- we are going to be beginning pumping money into the economy the beginning of May, you know, in terms of electronic payments and checks by mid-May.

And I will tell you, that is doing something, because it is going to be largely out by the end of the summer, the checks.

BLITZER: Will that be enough?

That is the question. Is there any addition stimulus that you need to do?

PAULSON: Well, that plan was sized so as to make a difference, but not go so far we're going to jeopardize the long-term priorities, the budget issues and so on.

But there are a number of things we are working on. We are working hard to prevent avoidable foreclosures. Housing is the biggest risk to the downside.

We are working hard to minimize the spillover from the financial market's turbulence into the real economy.

So we have got a lot of things we are working on. And I think that's...

BLITZER: All right. I'm going to go through those specific points with you, because they are critical.

I just want to point out, Warren Buffett said, on March 3rd: "I would say, by any common sense definition, we are in a recession."

And in this poll that The Wall Street Journal released the other day, asking 51 economic experts whether or not the United States economy is in a recession, 71 percent of them said yes; 29 percent say no.

But, at this point, I just want to be precise, while the technical definition that economists use for recession has not been met, two successive quarters, six months, in other words, of negative economic growth, at this point you are not saying the country is or is not in recession?

PAULSON: I'm not focused on that. I'm -- we know that the economy has slowed down. We know it. Everyone knows it. Warren Buffett knows it. The American people know it.

The critical issue is, what are we going to do about it? And we have been on this one early, Wolf.

BLITZER: Let's talk about jobs, because jobs are not going in the right direction. So far, in January and February this year, 63,000 jobs lost in February. That brings it up to 85,000 jobs lost for the first two months of this year, no job creation.

How worried are you about that specific aspect of the economy?

PAULSON: Well, it's not welcome news, but remember, we had 52 months where we added jobs to the economy. Unemployment is 4.8 percent today, well below any kind of historical average. So jobs are important and the stimulus package is aimed at that.

If the stimulus package works the way economists are projecting it's going to work, it will add 500,000 to 600,000 additional jobs this year.

BLITZER: On foreclosures -- home foreclosures, people losing their homes, February 2007, under 140,000 foreclosures; February 2008, 223,651. And there is enormous fear, as you know, that those numbers are only going to go up in the coming months.

PAULSON: Wolf, again, we have been focused on that early. And I'd just take a little bit longer on this answer, because we had a number of years where there was unsustainable appreciation in home prices: California, Florida, Arizona, Nevada.

And we're seeing a correction right now. But even in those good years, where the markets were going up, there were 650,000 foreclosures a year.

Last year, roughly 1.5 million foreclosures; some people, this year, projecting 2 million foreclosures. We're all over this.

But I want to say to you that most Americans, 92 percent of the homeowners are making their mortgage payment every month on time. Foreclosures are 2 percent.

BLITZER: Is there anything else the Treasury Department should be doing right now to deal with this enormous problem of people losing their homes?

PAULSON: Well, what we are doing is, first of all, we are working with Congress to get them to pass legislation that's up there that is going to be critical.

We have asked for FHA modernization legislation which will help provide financing to 300,000 subprime borrowers who are struggling making a mortgage payment.

The House has passed it. The Senate has passed it. But so far, they have been unable to get together and give the president legislation to sign.

We're -- I would say, GSE oversight legislation is important. Fannie Mae and Freddie Mac are critical. They...

BLITZER: But let me just interrupt, because, I mean, you say 300,000, but if you say they're going to be 2 million foreclosures this year, that's not necessarily going to deal with the whole problem.

PAULSON: Well, let me mention -- I'm going to say something about Freddie and Fannie, but let me come back to your question.

The issue that we're all focused on is the subprime area. Forty percent of the foreclosures that we have had so far, in the third and fourth quarter, were in adjustable rate subprime mortgages.

That's 6.5 percent of the mortgage total, but 40 percent of the foreclosures. We have a wave of mortgage resets coming, mortgage -- borrowers who are going to have their interest rate go up.

We have a program designed to deal with that. And we have the industry come together. And if you are a mortgage -- a subprime mortgage holder, and you can make your initial payment, and you can't afford the reset, and you want to stay in your home, you are going to get a modification or a refinancing. That's the way the program works.

BLITZER: Once it's passed by Congress.

PAULSON: Well, no. This -- no, I'm talking about a program that the administration put in place, working with the industry. It took no legislation from Congress. We've had -- a million people so far have help as a result of this program, since July. Modifications...

BLITZER: So you think that there is some light at the end of this foreclosure... PAULSON: I'm telling you that there is no silver bullet to keep home prices from going down or to prevent all foreclosures. But we've got programs in place that are working, that are making a difference, and are going to continue to make a difference.

BLITZER: What about the value of the U.S. dollar?

I'll give you some statistics right now. It's hit an all-time low against the euro. It sank below 99 yen. That's the weakest since 1995. It's plunged below 1 Swiss franc for the first time ever.

What, if anything, are you doing about the value of the U.S. dollar, which seems to be falling rather rapidly?

PAULSON: Wolf, you've heard me before, I believe very strongly that this -- that the strong dollar is in our nation's interests. We have a strong dollar policy. I make the points repeatedly that every economy goes through some ups and downs.

We're going through a tough patch right now in our economy.

PAULSON: Our long-term fundamentals, I think, are strong. And they compare favorably throughout the world. When you look at the long-term economic fundamentals, those will be reflected in the value of our currency.

And what are we doing?

We have policies in place, and we're advocating policies to enhance confidence in the U.S. economy. And what are those policies?

They're pro-growth tax policies. They're being open to foreign investment. We welcome foreign investment. We welcome trade. We want to pass trade agreements like the Colombia Free Trade Agreement.

And so I have great confidence in our economy, in the long-term fundamentals.

There's a lot of discussion about what's going on in the short term. But trust me. Our economy is structurally sound, and our long- term economic fundamentals compare favorably with other major nations around the world.

BLITZER: So, a year from now, you think the dollar will be stronger, versus the euro, for example?

PAULSON: I've said what I'm going to say on that. I have said that we advocate policies that are pro-growth policies, that enhance confidence in our economy. And we believe a strong dollar is in our nation's interest.

BLITZER: Tell the taxpayers who are watching right now why you decided to bail out, in effect, Bear Stearns, the fifth-largest investment house in the United States, which, only a couple of days ago, seemed to be on the verge of collapse, primarily because of its investments in these mortgages, which are obviously a disaster.

PAULSON: Well, to -- again, to step back, I have great, great confidence in our capital markets and in our financial institutions. Our financial institutions, banks and investment banks, are strong. Our capital markets are resilient. They're efficient. They're flexible.

We've been going through turmoil in the capital markets for a while.

BLITZER: Because nobody saw Bear Stearns... PAULSON: We -- I'll say this, that, from the beginning, I have said, as we work through this period, if this was like other times in the past, there are going to be bumps in the road. There are going to be unpleasant surprises. You are going to find that an institution or so has problems. And when they do have problems, you work to deal with it.

BLITZER: Why did you bail out Bear Stearns?

PAULSON: OK. Now, I -- first of all, there are ongoing discussions right now. I've been on the phone for a couple of days straight, throughout the weekend. But people are going to need to look and see what -- and I'm not going to project right now what that outcome of that situation is.

But, to talk about it more generally, I'm as aware as anyone is of moral hazard. I'm also aware of the importance of keeping our economy strong, of orderly capital markets, of the stability of the financial system doing things that promote that orderliness and minimize the disruption. And we made -- to me, this was not a difficult decision...

BLITZER: To help Bear Stearns?

PAULSON: I really support the Fed's work here. To me, this was not difficult because the priority, at a time like this, has got to be the stability of our financial system and minimizing the likelihood that this disruption spills over into the real economy.

BLITZER: Let me rephrase the question then. If you wouldn't have bailed out Bear Stearns, would there have been a problem with Goldman Sachs, your former company, or J.P. Morgan, or some of the other huge investment houses?

PAULSON: I will repeat what I've said. Our financial institutions are strong. Our investment banks are strong. Our banks are strong. They are going to be strong for many, many years. I believe our capital markets are the envy of the world. They are flexible. They're innovative. They put capital behind people and ideas. They promote growth.

And I believe it's also -- the way in which, in our country, we respond to deal with issues when they come up, I think, is also commendable. So...

BLITZER: And -- because we're almost out of time, but very quickly, if you wouldn't have bailed out Bear Stearns, what would have happened?

PAULSON: Wolf, I'm not going to speculate about what-ifs. I'm just going to say our clear priority, right now, our number one priority, with everything we are doing in the economic arena, is to minimize instability, minimize spillover into the real economy. And I think that is pretty clear from the actions you have seen the government take.

BLITZER: Secretary Paulson, you have got a huge problem on your shoulders right now. Good luck.

PAULSON: Thank you.

BLITZER: And don't forget, you can learn more about how the number one issue facing the country right now affects you. "Issue #1" airs all next week, on CNN, for our North American viewers, noon Eastern, right here.

Coming up next, we're going to have a rare interview with a key U.S. strategist on Iraq, as we approach the fifth anniversary of the war in Iraq. I'll speak live with Ambassador Paul Bremer. He's the former administrator of Iraq during a very critical period.

"Late Edition" continues at the top of the hour.

(COMMERCIAL BREAK)

BLITZER: Welcome back. After almost five years of war and the loss of nearly 4,000 U.S. troops, the U.S. military commander in Iraq, General David Petraeus, said this week Iraq's leaders so far have failed to take full advantage of the reduction in violence that resulted from the so-called military surge in troops.

And there are new reports that show that violence is actually beginning to increase somewhat, as the front line troops start to head home.

So where is the U.S. in Iraq after five years?

Joining us now to discuss this is Ambassador Paul Bremer. He was the director of the Coalition Provisional Authority in Iraq during those crucial years immediately after the invasion, spent a year working there.

Ambassador, thanks for coming back.

BREMER: Good to be with you, Wolf.

BLITZER: You write, in the New York Times today, on the op-ed page, this. I'll read it to our viewers.

"Prewar planning provided for fewer than half the number of troops that independent studies suggested would be needed in Iraq. And we did not have a plan to provide the most basic function of any government, security for the population."

I would have pushed sooner for a more effective military strategy. Because, from 2004 to the end of 2007, Al Qaida took advantage of this gap.

Those are three important points that you made in that little paragraph right there. Why weren't there enough troops deployed to begin with?

BREMER: Well, you know, Wolf, I think part of the problem, both in terms of the number of troops and the strategy involved, a legitimate concern on the part of the military leaders, particularly the Army, that they would become overstretched -- and, indeed, it put a lot of strain, not only on the regular Army, but, as we have seen, on the National Guard and on the Reserves.

BLITZER: But General Shinseki, who was the chief of -- the Army chief of staff, he wanted more troops. And he was, sort of, rebuked, at the time, by Paul Wolfowitz, among others, for even suggesting the U.S. might need hundreds of thousands, as opposed to 150,000.

BREMER: Well, I had the luxury of being a businessman during the runup to the war.

BREMER: So I don't know what happened all but during the war. I did say before I left for Iraq that independent studies showed we needed perhaps twice as many troops as we actually had at the time.

BLITZER: 300,000.

BREMER: Yeah, or more. And we didn't have them there, and in fact, we never got them. It's really only when the president changed the strategy and put into effect the surge a year ago that we've seen some good news on the violence front.

BLITZER: Second point, you say we did not have a plan to provide the most basic function of any government. There was a plan in place that retired General Jay Garner would go in and start to deal with the civilian infrastructure immediately after the military objectives were achieved. There was a plan. What was the problem?

BREMER: Well, the plan for a reconstruction was based on, as it turned out, false assumptions. We assumed there would be large-scale humanitarian disaster, we assumed Saddam would set fire to the oil wells, we assumed there would be large-scale refugee movements inside the country. None of these things actually happened. So, General Garner, who is a wonderful, patriotic man, found himself in a situation where the planning that had been done before the war was based on assumptions that...

BLITZER: And that's when they sent you in?

BREMER: Well, that's when I arrived. And I found that in fact the situation on the ground was far worse than we thought. The economy was completely devastated, and we had quite a job trying to reconstruct it.

BLITZER: The basic criticism leveled against you is that you took charge instead of letting Iraqis take charge.

BREMER: Well, I've seen that argument. I just don't agree with it. Within 60 days of my arrival, we put in place an interim Iraqi government. I gave them full authority. They appointed the ministers who ran the government for the rest of the time I was there. I never overruled a minister my entire time I was there, though I had the authority to do it.

BLITZER: Here's what Richard Perle writes in the same page of The New York Times today, and I want to give you a chance to respond: "With misplaced confidence that we knew better than Iraqis, we sent an American to run Iraq. L. Paul Bremer underestimated the task but did his best to make a foolish policy work. I had badly underestimated the administration's capacity to mess things up."

Those are pretty strong words from someone who was seen as a major architect of this whole strategy.

BREMER: Well, I know Richard, and his views deserve to be heard. He's a respected observer. I think he's actually wrong because he makes the case in this article -- you didn't put that part up -- that we should have simply handed over right away to a group of exiles. The problem with that is, first of all, the exiles were unpopular or unknown in Iraq.

BLITZER: Ahmed Chalabi among others?

BREMER: Among others. They were unrepresented. There were no women among the exiles we were talking to, no Christians, there were -- the Sunnis were underrepresented, and of course, we knew we had to get the Sunnis involved.

So, the president decided -- actually, before I came into the government -- correctly on a longer-term process which admittedly meant a longer occupation but which gave the Iraqis a chance to put in place the program that they've followed since then: elections, a constitution and so forth. So, I think the president's decision was the right one. It's the one we followed.

BLITZER: There's another book that's about to be released by Doug Feith, who was a top civilian official at the Pentagon, also seen as one of the architects of this strategy. The book is not yet out, but The Washington Post obtained a copy and wrote this on March 9: "Bremer is said to have done more harm than good in Iraq. The key mistake that the United States made in Iraq, Feith asserts, was 'the mishandling of the political transition.' The good that Bremer did, he concludes, 'was outweighed by the harm caused by the fact of occupation.' "

Now, you want to respond to that criticism from Doug Feith?

BREMER: I do. It sounds like the architects are running away from their building here. But it's the same point. Basically what Feith is saying is we should have simply handed over right away to a group of unrepresentative exiles, and I just disagree.

I think the president's decision to take the time to build the political structure was the right one. You had a country which had no constitution, no electoral law. There had been no comprehensive census for half a century.

We needed to help them put in place the basics of the rule of law and a constitution. And we took the time to do that. And I think it was the right thing to do. BLITZER: When we spoke when your book came out, "My Year in Iraq," you wrote in the book, "I'm concerned that a lot of the Pentagon's frenetic push on the political stuff is meant to set me up as the fall guy."

You want to elaborate on what you meant when you wrote that? Do you see yourself as having been set up as the fall guy?

BREMER: A lot of the pressure to immediately hand over to these exiles that we just talked about came to the fore in September and October of 2003. And the comments that you're quoting from my book were in that time frame.

And in effect, some of the people in the Pentagon, including Mr. Feith, were pushing very hard to simply turn over and get out. And I felt that was irresponsible, and I told the president I thought it was irresponsible. In the end, the president agreed with me.

BLITZER: Let's look ahead now, where we go from here, the next five years presumably. In your book, "My Year in Iraq," you wrote this: "Your guys don't seem to understand how ineffective the Iraqi government is turning out to be. Those people couldn't organize a parade, let alone run a country."

That was your initial sense right after the military phase was completed. Are they any better today, the Iraqi government of Prime Minister Nouri al-Maliki? Can they get their act together and do that they need to do?

BREMER: I think they can. I mean, after all, they've had three Iraqi governments now, two of them elected. That's pretty rare in the region.

They're working under a constitution which is progressive and better than any constitution in the region. It's just a piece of paper, and they've got to live up to it.

I know the prime minister. I don't know him well. I knew him as an assistant to some of the other leaders. I think he's doing as good a job as he can in a very difficult situation. Reconciliation, situations like this, is not easy, particularly after the Sunni domination of Iraq for several millennia. It's not easy.

BLITZER: I want you to respond to Barack Obama. He said this on Thursday, looking ahead, if he were president as far as his strategy in Iraq. Listen.

(BEGIN VIDEO CLIP)

OBAMA: The strategy of invading Iraq has been and continues to be a strategic failure of enormous proportions. My conclusion is at a enormous cost of blood and treasure that has also weakened our economy. It hasn't made us more safe.

(END VIDEO CLIP)

BLITZER: All right. What do you think?

BREMER: Well, I respectfully disagree with the senator. I think under the circumstances the president faced and the country faced in 2003 with our intelligence agencies, the agencies of France, Germany, Russia, Israel, Britain all thinking that Saddam had weapons of mass destruction and concerned about the possibility that Al Qaida terrorists, Islamic extremists would get their hands on this stuff, I think the decision to go into Iraq was the right one at the time.

BLITZER: You still think it was the right decision?

BREMER: Yes, I do.

BLITZER: Despite everything we now know that there were no weapons of mass destruction, that any connection between Al Qaida and Saddam Hussein was very minimal if there was anything serious there. You still think it was the right thing to do?

BREMER: I do. I think it was the right thing to do, and I think Iraq is on the road now to becoming -- it will take time -- a democratic government in the middle of the Middle East, which is, in itself, quite an accomplishment.

So, I respectfully disagree with the senator. And I think it's not clear -- he makes the argument -- I don't think it's true -- that we are less safe than we were before. I don't think that's true. We have lost almost 4,000 Americans' lives there, and that's a tragic cost that we have had to pay.

BLITZER: Ambassador Bremer, thanks for coming in.

BREMER: Good to be with you.

BLITZER: In just a moment, we're going to go and get a live report on the Republican presidential candidate, John McCain. He's right now in Baghdad. He arrived only a few hours ago. Our John King is there as well.

We'll talk to John right after this. "Late Edition" continues.

(COMMERCIAL BREAK)

BLITZER: Earlier this morning, three U.S. senators, Lindsey Graham, Joe Lieberman, and John McCain arrived in Baghdad.

Is this a fact-finding mission or is it merely a campaign stop?

Our chief national correspondent John King is joining us from our Baghdad bureau. He's flown over there as well.

John, there's controversy already emerging, whether taxpayer dollars should have paid for McCain's trip to Iraq right now. Give us a lay of the land. What's going on?

KING: Well, Wolf, first, what Senator McCain is up to here in Iraq. He is meeting today -- he has been here most of the day, along with Senator Lieberman and Senator Graham. They are meeting with the commanding general here, David Petraeus. They are meeting with the U.S. ambassador, Brian Crocker, and also with a series of Iraqi officials, we are told, including Prime Minister Nouri al-Maliki.

Now, Senator McCain says he has every right, every reason and, the way he puts it, every responsible to be here, as a member of the Senate Armed Services Committee; Senator Lieberman and Senator Graham, also on the committee.

But there are questions being raised because Senator Lieberman and Senator Graham also are supporters of the McCain presidential campaign. And not only is Iraq a big issue before the Congress -- General Petraeus and Ambassador Crocker will be there next month to testify, to give a status report on what they think about the lack of progress and the progress, political and security-wise here in Iraq.

But, as you well know, it is, of course, a defining issue on the campaign trail. Senator McCain supported the surge, takes credit, as a Republican candidate, for standing up to former defense secretary Donald Rumsfeld at the White House and demanding changes in the strategy.

And he also says that either Senator Clinton or Senator Obama would "wave the white flag of surrender," in his words, in pulling the troops out of Iraq too quickly.

So, while senator McCain says he has every right and it is a legitimate use of taxpayer money for him to be here, because of his job in the United States Senate, there's no doubt about it, Wolf. Iraq is a defining issue in the campaign.

And his own campaign aides have said they hope the American people do see him traveling this week, not only here in Iraq but on to Jordan, Israel, and European capitals, and see someone, in Senator McCain, who is comfortable and authoritative on the world stage. So it will be a debate that continues, no doubt, when Senator McCain gets home. But his bottom line is, his day job is still the ranking Republican on the Senate Armed Services Committee, and he wants to get a firsthand look and firsthand briefings on the situation here in Iraq.

BLITZER: And correct me if I'm wrong, John. He still believes, or he does believe, that the war in Iraq, where it stands right now, on this, the fifth anniversary, potentially is a winning issue for him in the fall, against either Hillary Clinton or Barack Obama. Is that right?

KING: He does believe that it is a dramatic opportunity for him to raise the question of judgment and who has the stature and the standing, the experience to be commander in chief.

He believes, now -- and remember, Wolf, if we were having this conversation a year ago, when McCain's campaign was, in many quarters, given up for dead because the situation in Iraq was so dire -- in part; the immigration debate also played a part -- but he believes, now, that, even to Americans who oppose the war, he can make the case that, because of the surge, things are better, far from perfect, but better, and that the next commander in chief will have a better path for ultimately getting U.S. troops out of Iraq and leaving behind a stable Iraq, not a beautiful Iraq, perhaps, but a stable Iraq, because of the troop surge.

That is the contrast he thinks he can make against Senator Barack (sic) and Obama, saying their plan would simply pull the troops out too fast, and Iraq would, in his view, collapse back into chaos.

BLITZER: All right, John, be careful over there.

John King, reporting for us from Baghdad.

Up next, here on "Late Edition," our political panel will be here to hash out a week worth -- the political dialogue got bitter, and a governor caught. "Late Edition" continues right after this.

(COMMERCIAL BREAK)

BLITZER: This week, the ups and downs on Wall Street were certainly matched by the surprises out there on the campaign trail. Here, on a rare day off the presidential campaign, three of the best political team on television.

Joining us, our congressional correspondent Dana Bash, our senior political correspondent, Candy Crowley, and our senior political analyst, Gloria Borger.

Guys, thanks very much for coming in.

Let's talk, a little bit, about the politics of race. All of a sudden, it's coming up, almost every few weeks or so. The Reverend Jeremiah Wright, who was the spiritual leader, in effect, for Barack Obama and his family -- they've got tapes, all over the place, of sermons he's delivered. Among other things, he said this.

(BEGIN VIDEO CLIP)

REV. JEREMIAH WRIGHT, TRINITY UNITED CHURCH OF CHRIST: Who cares about what a poor black man has to face every day in a country and a culture controlled by rich, white people?

(END VIDEO CLIP)

BLITZER: Now, he's railed against the U.S. on a whole bunch of other issues. And Barack Obama, Friday night, went out, spoke to our Anderson Cooper, and he said this.

(BEGIN VIDEO CLIP)

OBAMA: I strongly condemn the statements that have been shown on the tape. I have to confess that those are not statements that I ever heard when I was sitting in the pews at this church.

(END VIDEO CLIP)

BLITZER: Now, some of his critics are already saying that there's an element of unbelievability there, that he was sitting in that church for 20 years; he never heard this pastor say words like that?

CROWLEY: Well, he surely must have heard something like that. I mean, there's a style here. There's a message here. And clearly, he's heard something like that.

The question is, how does this come across?

You know, it's -- to me, it's less about the words. It's how is it going out there -- particularly when these are the only clips you see. One must assume that there were also clips when he talked what most of us would -- the rest of us would see as, you know, standard gospel.

But I think this, again -- and the reason it's a race matter is, I think, this comes across quite differently to many African-Americans than it does come across to whites. And that's why you get the race issue again.

BORGER: And I think, particularly in a presidential campaign, where you talk about loving your country, patriotism, et cetera, some of these sermons come across as sort of anti-American, in a way.

And I think, again, those independent voters that Barack Obama, if he were to become the presidential nominee, is looking toward might really be repelled by what Reverend Wright says. And I think that, you know, people are going to try and find out just when was Barack Obama sitting in the pews of that church, and just what did he hear and when did he hear it?

CROWLEY: And then, how much is Barack Obama responsible for and tied to? BLITZER: Well, that's another (inaudible).

(CROSSTALK)

BASH: Exactly, and just by way of comparison -- I'm not even sure if it's that fair of a comparison -- you know, a lot of people talked about the fact that John McCain was endorsed by two pastors who have said explosive things about the Catholic Church, even about, you know, America. And those are people who McCain didn't even know, barely even knew.

This is a pastor who not only did Barack Obama know, but, Candy, as you were talking about earlier, was his spiritual leader, somebody who absolutely defined who Barack Obama is now as a religious person and even as a leader.

BLITZER: There's another element in this whole politics of race that came up with Geraldine Ferraro this past week, also saying some things that forced the Clinton campaign basically to dump her from the finance committee. She defended her remarks, and her remarks to summarize, and I'm paraphrasing, were, Barack Obama wouldn't be where he is right now if wouldn't be for the fact that he's black. But here's how she defended herself.

(BEGIN VIDEO CLIP)

GERALDINE FERRARO, FORMER DEMOCRATIC VICE PRESIDENTIAL CANDIDATE: I do think this is a mistake on the part of the Obama campaign. They didn't have to do this, and they did it to hurt Hillary. I just think that that's bad. I think it's bad business. I think it's bad politics, and I was accused of being divisive. I think that kind of tactic, those tactics are divisive.

(END VIDEO CLIP)

BLITZER: All right. Explain what's going on here.

CROWLEY: Well, what you're hearing is an argument we hear every two or three weeks on the campaign trail: Who's brought up the issue of race. The Obama campaign will say to you, listen, we did not call her racist. We thought it was, in Obama's words, ridiculous to suggest that he wouldn't be where he is, you know, were he white. I mean, he said, look, I'm a black guy named Barack Obama. I mean, you know, I can't say that that has helped me get to where I am. So, you know, this is just at play another sort of moment when who's playing the race card to what end and, again, to me, a sign that we're nowhere near over the subject of gender or race.

BASH: And especially because it's not like she gave an interview to The Washington Post and The New York Times. This was in the Daily Breeze in Torrance, California. And it was done a week or even two before it was brought to light by I believe the Obama campaign.

So, you know, everybody is kind of saying, I'm not playing the race card, they are, back and forth. But I think it seems as though everybody's got a little bit of dirt on their hands on this. BORGER: And you know, I think this worries people in the Democratic Party who want to win. And they're saying, look, you know, if we're going to continue to split our coalition right down the middle, and we're going to get one side or another angry about the other candidate, then we're going to be in more trouble than we should be in the fall.

CROWLEY: Well, women and African Americans, it's hard to find two more core blocs within the Democratic Party. And as long as the party is split along that way, they've got problems.

BLITZER: All right, guys. Hold on for a moment, because we have a lot more to talk about. They're going to continue our conversation. When we come back, we'll bring you what the supporters of the two Democratic contenders have to say in our very popular "in case you missed it" segment.

Much more of our political panel coming up as well. "Late Edition" continues after this.

(COMMERCIAL BREAK)

BLITZER: Now, in case you missed it, let's check some of the other highlights from the other Sunday morning talk shows here in the United States. On ABC, the House speaker, Nancy Pelosi, responded to concerns that a withdrawal of U.S. troops from Iraq would result in chaos.

(BEGIN VIDEO CLIP)

REP. NANCY PELOSI, D-CALIF.: They have chaos. You know, the point is, they have political chaos. They have not resolved their difficulties.

How much longer are we supposed to wait? Now, both of our candidates for president as well as a bipartisan majority in the House and Senate have said that we must begin a redeployment of our troops out of Iraq.

(END VIDEO CLIP) BLITZER: On Fox, two key supporters of the Democratic candidates discuss the impact of the racial controversies that embroiled both campaigns this past week.

(BEGIN VIDEO CLIP)

SEN. CHRISTOPHER J. DODD, D-CONN.: We can spend our time talking about Geraldine Ferraro and Jeremiah Wright, but the issues are, where does Barack Obama stand, what are these major issues we face in the country. That's what people are really worried about. We've got a major, major problem in our nation, and we need to get back on track again.

(END VIDEO CLIP)

(BEGIN VIDEO CLIP) SEN. CHARLES E. SCHUMER, D-N.Y.: The dramatic differences between Hillary Clinton and Barack Obama and John McCain are not only large, but they're right at the center of what's worrying people. When people are basically content, these kinds of minor issues, unimportant issues, in my opinion, play a major role. But when people are worried about the future of this country as they are now, we're going to see a very interesting campaign.

(END VIDEO CLIP)

BLITZER: Highlights from the other Sunday morning talk shows here or "Late Edition," the last word in Sunday talk. When we come back, round two of our political panel, the best political team on television, ready to assess the fallout from John McCain's current visit to Iraq, the Eliot Spitzer sex scandal and more.

"Late Edition" continues right after this.

(COMMERCIAL BREAK)

BLITZER: I'm Wolf Blitzer in Washington. Once again, I'm joined by three of the best political panel on television: Dana Bash, Gloria Borger and Candy Crowley. Gloria, is it smart, is it smart for John McCain to be showcasing Iraq right now?

BORGER: Well, I think it's good politics for John McCain. While the other two candidates are battling it out over identity politics as we were just talking about in the last segment, McCain can go and prove his commander in chief bona fides by making his umpteen...

BLITZER: Even on an unpopular issue like Iraq?

BORGER: Well, it's not unpopular with Republicans, and polls show that Americans believe...

BLITZER: But he has the Republican nomination sewn up.

BORGER: Well, but polls show that Americans believe that the surge is working, and more and more believe you shouldn't have a precipitous pullout. And if he's trying to appeal to those independent voters, you know, it's a way for him to also get a little publicity, too.

BASH: Exactly. And you talk to the McCain campaign, and they insist -- whether they're right or not, who knows -- that any day, any minute that he is talking about national security, no matter what kind of debate it is, it's good for John McCain.

They insist that they believe that that is the case now and will be going into the fall, when he's talking about the Democrats. But you're exactly right. Look, what they say behind the scenes is that this is a trip that he would have taken, win, lose or draw, that this is a Senate-related trip and that he would have gone, no matter what. It was long planned.

But the reality is that they are very much pumping up the fact that he's out there. He's going to have images and pictures on the world stage while Democrats are battling it out back here. The hard thing for them to explain, though, and I really haven't gotten a full explanation, is, what happens when he comes back through London, and he stops not just to meet with Gordon Brown, but he's going to have a political fund-raiser, a $1,000-a-plate fund-raiser.

So, they're saying it's an official trip. It's not officially political, it has political benefits. But he's making it political by doing that.

BLITZER: What do you think, Candy?

CROWLEY: Well, I think probably what they'll say is we'll bill this portion of the trip, what always say. Well, this leg we'll give to this...

BASH: (inaudible)

CROWLEY: Yeah. I mean...

BLITZER: And the campaign will reimburse...

CROWLEY: Right. Will reimburse, you know, this part. But I mean, absolutely. And not only do I think that John McCain probably is right about Iraq, I think still when you...

BLITZER: Right about what part of...

CROWLEY: Right about Iraq being the central issue, or national security being the central issue. Hillary Clinton clearly thinks in this particular race at this particular time that national security is the issue. Otherwise we wouldn't have had the red phone ad.

So I think that all of them are looking to the fall knowing that yes, you've got to talk about the economy, but at the bottom, if you don't have a job, that's one thing, if you don't feel secure in your own nation, that's something else. So I think that's always there as a huge undercurrent if not bubbling up at some point.

BLITZER: There was talk this week, Gloria, about a McCain-Romney ticket. Is that a dream team for the Republicans?

BORGER: Well, if they liked each other, it might be. I think that Romney has some conservative credentials that he earned during this campaign, tried to portray himself as the conservative alternative to John McCain.

Some conservatives were still a little wary about that, I might add. But if you look at the great group of people who are out there in the Republican Party, you'd have to say Romney would have to be on John McCain's list.

BLITZER: And then there was talk of Colin Powell being a possible vice presidential running mate.

BASH: Well, right. It's because I was actually there. John McCain was asked about Colin Powell, the same day he was asked about Tom Ridge. The day after he was asked about Joe Lieberman. You pick a day and he's asked about three of four potential running mates.

And he usually gives the same stock answer: I'm just starting with the process, we'll see, we've got a long road. What was fascinating , though, about Romney is that he went off script on Romney. This all came about because Romney himself in a TV interview said, well, there's no hard feelings between us and I would -- something along the lines of, I would be honored to be his vice president.

BLITZER: Anybody would be honored.

BASH: And what was funny about McCain's response to that is, he really had some fun with that. He came on his plane and he sort of joked about, oh, it really seems like he really want to be my running mate. So he was (inaudible) but the reality is...

BLITZER: Candy -- hold on a second. I just want to get your quick thought. Is there going to be any political fallout on the presidential race from the Eliot Spitzer sex scandal in New York State?

CROWLEY: I can't see it. A lot of people asked me if Hillary Clinton -- I said, you know, what has she got to do with it? I mean, no, I don't think that there's any fallout in the presidential race at all.

BLITZER: Do you agree?

BORGER: Yeah, I do. I totally agree. I just think it's going to give people more ammunition who believe that all politicians are hypocrites, which is conventional wisdom at this point anyway.

BLITZER: It increases the level of cynicism out there against politicians because this was presumably the last guy a lot of people thought could get caught with this.

BASH: Absolutely. And they started to -- you saw the National Republican Congressional committee which, you know, funds and helps Republican Congressional candidates. They sent out a series of e- mails calling on the Democratic Congressional candidates in New York to send money back to Eliot Spitzer.

CROWLEY: Well, it does take a little heat off Republicans. He does have a D after his name, and we've been sort of watching Republicans get in messes like this, so you know, but I mean...

BLITZER: This is a bipartisan problem.

BORGER: And he's gone. If he hadn't resigned, sure. But he's gone.

BLITZER: All right, guys. Thanks very much. Candy, Gloria, Dana, good work. BLITZER: And don't forget, if you'd like a recap of today's program, you can get highlights on our "Late Edition" podcast. Simply go to cnn.com/podcast. And coming up at the top of the hour, "This Week in Politics with host Tom Foreman.

(COMMERCIAL BREAK)

BLITZER: That's your "Late Edition" for this Sunday, March 16. Please be sure to join us again next Sunday and every Sunday at 11 a.m. Eastern for the last word in Sunday talk. Remember, I'm also in "The Situation Room" Monday through Fridays 4 to 7 p.m. Eastern. Until then, thanks very much for watching. I'm Wolf Blitzer in Washington.

For our international viewers, stand by for world news. For those of you in North America, "This Week in Politics" with Tom Foreman starts right now.

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