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Dow Closes Down About 500 Points; Obama on 'Crisis' Test; Battleground State Polls

Aired October 22, 2008 - 16:00   ET

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


WOLF BLITZER, CNN ANCHOR: Happening now, John McCain in New Hampshire, promising another comeback and talking to me at length about the toughest issues, the hottest controversies out there. He's defending Sarah Palin amid new evidence that she's a big drag on his campaign.
Barack Obama's confronting the dustup creating by his running mate. Will he be quickly be tested by crisis if he wins the White House? Obama talking about national security and Joe Biden.

A new movement in some of the most important battleground states. We have new presidential polls from says the that could decide this race only 13 days from now.

I'm Wolf Blitzer. You're in THE SITUATION ROOM.

As the stock market was sinking once again today, John McCain told me all he can do is laugh at suggestions that his economic message has not been consistent. I sat down with Senator McCain in the battleground state of New Hampshire just a little while ago, and I pressed him about whether he would sign on to a second multibillion- dollar plan to try to inject cash into the economy.

Listen to this.

(BEGIN VIDEO CLIP)

BLITZER: Do you agree with Ben Bernanke, the chairman of the Federal Reserve, who said this week -- he said that it's now a good time for a second economic stimulus package, seeming to join hands with Nancy Pelosi and Harry Reid? Is it a good time to do that, to come up with another $150 billion stimulus package?

SEN. JOHN MCCAIN (R-AZ), PRESIDENTIAL CANDIDATE: I would be glad to look at anything that could be helpful to our economy. I respect Ben Bernanke. I'm sick and tired and the American people are sick and tired of the pork barrel spending.

(END VIDEO CLIP)

BLITZER: In a statement released only yesterday, by the way, Senator McCain suggested that any new stimulus plan coming from the Democratic-controlled Congress would be packed with wasteful spending and would not pass his test.

We're going to bring you all of the interview I conducted with Senator McCain over the course of the next three hours. Part one this hour, part two in the 5:00 p.m. Eastern hour, and part 3 in the 6:00 p.m. hour. He has some strong words about Colin Powell's criticism of him and whether the Wall Street bailout was socialism.

We're also going to be getting immediate reaction from the Obama campaign. David Axelrod, the chief strategist, standing by to join us live. He's going to be listening to this interview, and we'll get his reaction, as well.

Meanwhile, another big red flag for the McCain campaign today coming from Wall Street. The Dow Jones industrials closing down about 500 points only moments ago. They're still tabulating the final sales, the final trades.

Here's another economic fact that really hits voters where they live less than two weeks before Election Day -- mass layoffs. Mass layoffs involving 50 workers or more rose to the highest level last month since just after the 9/11 attacks seven years ago. The Labor Department reports more than 2,200 mass layoffs in September, compared to just under 500 in August.

Poppy Harlow is standing by over at the Nasdaq. Ali Velshi is standing by in New York.

Ali, let's talk a little bit about what's going on. This overall economy -- and you see the numbers, down right now 509 points on this day. People are deeply worried, and I assume that's going to have a shadow over these final 13 days of this election.

ALI VELSHI, CNN SR. BUSINESS CORRESPONDENT: More importantly, Wolf, we won't get a full month unemployment report until November 7th, after the election. So the candidates are going to need to respond to what's going on, on the ground.

In September, which is -- we have a delay in these numbers. We saw, as you said, the biggest number of mass layoffs, 50 people or more from a single company since the month of September in 2001.

Now, here's the thing. Normally when you see layoffs, the stock market actually does well because it indicates that companies are keeping themselves trim. We had oil way down today, we had the U.S. dollar at a two-year high, and still, you saw the sell-off in the market because we've lost so many jobs this year, 750,000 this year alone. And that's not counting the ones we've just seen in October.

We saw more than 7,000 at Merck yesterday. We saw more than 1,500 at Yahoo! We're going to have a big number again.

Well, those are people who are not contributing taxes. They may be net beneficiaries, and they're certainly not spending.

So what is happening is investors are saying these companies that they are investing in, well, how are they going to do well if people can't continue to buy things? That's problem number one.

Now, the good news, Wolf, is that we have seen these late-day plunges a lot of times in the last month. We did see the market come back from its lows, closing around 8,522. It was down near 8,335. So it's come back almost 200 points just in the last few minutes.

The importance of that is that it is testing resistance levels at the bottom. That's a technical term that shouldn't matter to too many people, but it is a good sign that maybe we are finding the bottom of this market -- Wolf.

BLITZER: Another bad day on the Dow Jones industrials.

Let's go to Poppy. She's over at the tech-heavy Nasdaq. How bad was it over there, Poppy?

POPPY HARLOW, CNNMONEY.COM: Yes, it was pretty bad. We're getting the final numbers right now. But as it stands now, the Nasdaq has closed at its lowest level in five years, below the October low we saw a few weeks ago, the lowest point since June, 2003.

I called the tech analyst. I said, "What's going on?" He said to me -- and I quote here -- "Unreasonable expectations are meeting economic reality." Disappointed investors resulting from that. They're selling stocks, and they're selling them in droves. It's hitting the Nasdaq really hard. Again, it's down about 40 percent this year -- Wolf.

BLITZER: Poppy, thanks very much.

Can't overemphasize the political ramifications from all of this, as well. Senator Obama briefly veered away from his near constant focus on the economy. On this day, he zeroed in on national security. He held a meeting with his top foreign policy advisers. The backdrop? The battleground state of Virginia.

CNN's Jessica Yellin is there working the story for us. All right, Jessica. What's behind the decision to go from the economy to national security on this day?

JESSICA YELLIN, CNN CORRESPONDENT: Well, Wolf, Barack Obama said he was planning to meet with his national security advisers for weeks. He said it was to keep him apprised of developments in the international scene. But you know this comes just as his running mate has made headlines for a comment that the McCain/Palin campaign has seized on to argue that Barack Obama is not ready to be commander in chief.

(BEGIN VIDEOTAPE)

YELLIN (voice-over): Rousing cheers for Barack Obama in a state that was once considered a long shot.

SEN. BARACK OBAMA (D-IL), PRESIDENTIAL CANDIDATE: There are no real parts of the country and fake parts of the country.

YELLIN: With his healthy lead in Virginia, Obama turned today to shore up a perceived weakness, his national security experience. Obama spoke to reporters after holding a private meeting with his top foreign policy advisers.

OBAMA: To succeed, we need leadership that understands the connection between our economy and our strength in the world. Our economy supports our military power. It increases our diplomatic leverage. And it is a foundation of America's leadership in the world.

YELLIN: This turn to national security comes on the heels of his endorsement by Colin Powell.

OBAMA: General Powell is one of our finest soldiers and statesman. He has been a source of advice. And I look forward to drawing on his counsel.

YELLIN: But it also comes as his running mate makes headlines telling donors that if Obama is elected...

SEN. JOSEPH BIDEN (D-DE), VICE PRESIDENTIAL CANDIDATE: We're going to have an international crisis. A generated crisis to test the mettle of this guy.

OBAMA: You know, I think that Joe sometimes engages in rhetorical flourishes (ph). But I think that his core point was that the next administration is going to be tested regardless of who it is.

YELLIN: And it seems designed to address any lingering security concerns among late deciding voters.

STU ROTHENBERG, ROTHENBERG POLITICAL REPORT: I think there's still a sense that Senator McCain's greatest strength is national security. That's the one area where he has an advantage over Senator Obama. And so I think all that will Barack Obama is trying to do now is neutralize that issue because on every other issue, the Democrats are way ahead.

(END VIDEOTAPE)

YELLIN: And Wolf, Homeland Security Secretary Michael Chertoff himself is now on the record saying that he believes terrorists will see the change in administration as an opportunity to attack the U.S., or at least attempt to attack U.S. interests, no matter which man becomes president -- Wolf.

BLITZER: All right. We'll watch that so closely. Jessica in Richmond, the capital of Virginia, where it's very close.

By the way, we're standing by to hear from the vice presidential candidate Joe Biden. He's campaigning in the battleground state of Colorado today. We'll go out there and listen in to what he's saying. He's been the recipient of a lot of criticism from Senator McCain and Governor Palin.

In the meantime though, let's go to Jack. He's got "The Cafferty File" for us -- Jack.

JACK CAFFERTY, CNN ANCHOR: Some things don't seem to change a lot, Wolf. We're learning more and more about Alaska Governor Sarah Palin. You know, the Republican vice presidential candidate who's running on a platform of reform.

First, there's that on going investigation into whether Governor Palin abused the power of her office in order to fire the former public safety commissioner of Alaska. Now we learn the Republican National Committee spent $150,000 on Governor Palin's wardrobe, hair and makeup shortly after John McCain named her to be his running mate. This included one $75,000 shopping spree in Minneapolis; $4,000 spent during the month of September alone on her hair and makeup; and big tabs run at places like Saks and Neiman Marcus.

But here's the best part of what we're learning. The Associated Press reports Sarah Palin charged the state of Alaska for some of her children's travel expenses since she became governor. More than $21,000 worth of airfares and hotels, all on the Alaska taxpayers' dime, according to AP.

AP reporting that Palin altered expense reports to indicate that her children were traveling on official business. The kids weren't even invited to some of these events they were flown to.

How do you present yourself as any kind of candidate of reform when the practices you employ puts you in the very same category of every other two-bit, sleazy, opportunistic politician that has come before you.

Here's the question: Should Sarah Palin reimburse Alaska taxpayers for her children's travel and entertainment expenses?

Go to CNN.com/caffertyfile. You can post a comment on my blog -- Wolf.

BLITZER: Jack is back. We can see, Jack. Thanks very much for that.

And to our viewers, I want to make sure you stand by for my in- depth interview with Senator John McCain. The senator also answered questions from our viewers submitted online.

(BEGIN VIDEO CLIP)

UNIDENTIFIED MALE: My question to you is about tax cuts. How can you explain to the American people that tax cuts are going to solve our economic issues, might it be for the rich or the poor, whomever it is for, when they really haven't worked for the last eight years?

(END VIDEO CLIP)

BLITZER: You're going to want to hear Senator McCain's answer to that and a lot more, what he has to say about your Social Security, when you should retire. The interview, that's going to be coming up.

We're about ready to roll out some fascinating new battleground state polls as well. Is Senator Obama gaining ground? Are Senator McCain's fortunes turning?

And President Bush announces a global economic summit after the election. Will the next president be invited?

Stay with us. You're in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: All right. We're just getting some new battleground state polls coming into CNN, coming into THE SITUATION ROOM. These are the states that could potentially tip the presidential race one way or another.

Let's check out these numbers.

Up first, North Carolina. Take a look. Obama, 51 percent. John McCain 47 percent. A 4-point advantage for Obama in North Carolina.

Let's go to the next state right now. Nevada, Obama 51 percent, 46 percent for McCain. Also a 4-point grab in Nevada.

Let's go to Ohio, a key battleground state. In Ohio right now, Obama 50 percent, McCain 46 percent. This is from the CNN/"TIME"/Opinion Research Corporation poll. All of these numbers just coming in. A four-point lead for Obama in Ohio.

Up next, Virginia. Virginia, one of the major battleground states, 54 percent for Obama, 44 percent for McCain. Wow. That's a 10-point advantage for Obama in Virginia in the CNN/"TIME"/Opinion Research Corporation poll.

And finally in West Virginia, a traditionally red presidential state, McCain maintaining a significant lead there, 53 percent to 44 percent for Obama in West Virginia.

Let's get some analysis of what this all means. We'll go to our chief national correspondent, John King -- John.

JOHN KING, CNN CHIEF NATIONAL CORRESPONDENT: Wolf, all five of these states where we have new battleground polls are considered must wins for camp McCain, yet it is Barack Obama leading in four of the five. Let's take a closer look, beginning with North Carolina.

What Obama is doing so far in early voting, he needs to continue to do, is run up African-American turnout down here in the Charlotte and Fayetteville area. Also up here. College campuses and African- Americans critical to Obama's chances. Not since Jimmy Carter has a Democrat carried North Carolina. Obama with a narrow lead going into the final days.

The numbers here in Virginia are quite stunning. And as you know quite well, most of the vote, about 25 percent of the vote in the state of Virginia, will come from up here in northern Virginia. Barack Obama at the moment running ahead of McCain, 2-1. Some evidence of a Sarah Palin effect. Moderates are breaking Obama's way, and 9 percent of Virginia voters who identify themselves as Republicans say they plan to support the Democratic candidate for president.

The one bright spot for McCain in our new polling is over here in the state of West Virginia. A good lead there, but again, more trouble as you move west into the state of Ohio.

What is most troubling for the Republicans out here, a dead heat in the Cincinnati/Dayton area. This is where Republicans must build a cushion in statewide races. Also, in this state as well, it is 10 percent of voter who's identify themselves as Republicans who say they plan to vote for the Democratic candidate. So more trouble for John McCain there.

And lastly, we head west, out to Nevada. This is a state, again, only five electoral votes, but a must win for McCain. By a more than 2-1 margin, Barack Obama is running ahead among non-white voters. A large Latino influx into the Las Vegas area in the last four years. That is benefiting Obama at the moment.

And another troubling sign for the Republicans, Bush narrowly carried the state four years ago. Based on his margin up here in the northwest, you see here, four-point advantage for George W. Bush four years ago. At the moment, John McCain is running only two points ahead. A dead heat in that state, as well.

Four of the five states, Wolf, must wins for McCain, and heading into the final days, a lot of troubles for the Republicans -- Wolf.

BLITZER: Yes, a steep climb for him. John, thanks very much.

We have, by the way, also a new national Poll of Polls that's just coming into THE SITUATION ROOM suggesting some tightening, a little bit of tightening in the race. It shows Obama ahead of McCain by seven points among likely voters when you average all the latest nationwide surveys. Obama was up by nine points in the same Poll of Polls only yesterday. A slight, slight tightening.

When Sarah Palin joined John McCain out there on the Republican ticket, she certainly helped move the polls his way. She solidified that conservative base for McCain. Now, apparently, she's having a little bit of a different effect.

Let's go to Dana Bash. She's in Ohio right now. It's a key battleground state.

What's going on there now where you are, Dana, first of all? And tell us about Sarah Palin, the latest indicators of what she's doing for this ticket.

DANA BASH, CNN CONGRESSIONAL CORRESPONDENT: Well, where I am, Wolf, to answer your first question, is I'm at the site of the second rally that John McCain and Sarah Palin will have in Ohio. The crowd is gathering here.

But as we speak, John McCain is talking at the first rally, and the crowds there are absolutely huge. And there's no question that is because of the Palin effect. That is why the crowds really have gotten larger and larger, since she's been on the ticket. But this problem for John McCain is the negative impact that Palin seems to be having on voters who don't come to the rallies.

(BEGIN VIDEOTAPE)

BASH (voice-over): With or without Sarah Palin by his side, John McCain warms up his crowds with this...

MCCAIN: I'm so proud of the enthusiasm that Sarah Palin has sparked across this country.

BASH: But what started as pure praise for his running mate has morphed into a staunch defense aimed at swing voters, increasingly less likely to vote for McCain because of Palin, especially Independent female voters McCain aides had hoped she would appeal to, like Susan McGraw.

SUSAN MCGRAW, INDEPENDENT VOTERS: I don't think he's ready for the big boys, you know, should something happen to McCain.

BASH: Palin's negatives among key voters are climbing at a stunning rate. A fresh Pew Research Center poll shows just last month, Independent voters' unfavorable view of Palin has spiked, going from 27 percent to 50 percent. Even more dramatic among Independent women, from 28 percent to 56 percent with an unfavorable opinion of Palin.

GOV. SARAH PALIN (R-AK), VICE PRESIDENTIAL CANDIDATE: Our opponent is someone who sees America as imperfect enough to pal around with terrorists who targeted their own country?

BASH: Pew's Andrew Kohut says rhetoric like that has backfired.

ANDREW KOHUT, PRESIDENT, PEW RESEARCH CENTER: And obviously she's been front and center in going after Obama, and I think it's hurt her.

BASH: And a new NBC News/"Wall Street Journal" poll suggests worry about Palin's experience is really dragging McCain down. On a list of concerns about McCain, questions about Palin's qualifications ranks first, even higher than his link to Bush policies. But Palin remains wildly popular with the party's base. And Republican leaders in GOP strongholds like Hamilton County, Ohio, insist she's still a plus.

MARK TRIANTAFILOU, HAMILTON COUNTY, OHIO, GOP CHAIR: And when people find out she's coming to this region, you know, our phones ring like crazy. So, you know, we still see tremendous energy. People are excited about her candidacy.

(END VIDEOTAPE)

BASH: Now, it's a tradeoff that some pollsters and even some Republicans say may prove too costly, Wolf. And that is, of course John McCain needs his base. And there's no question that Sarah Palin helps him with that. But he also really needs suburban voters and Independent voters, and evidence is mounting that Palin is hurting John McCain with those people -- Wolf.

BLITZER: And we're going to be speaking about that extensively with Senator McCain. The interview that I conducted with him in New Hampshire we're about to start rolling out here in THE SITUATION ROOM.

We're going to get immediate reaction from David Axelrod, from the Obama campaign, as well. That's all still coming up. Dana, we'll get back to you.

A Republican senator in a grueling battle to keep his job, but he's facing stiff competition from a challenger who's faced off with him before. We're going to have the latest on this heated rematch.

And voters in Georgia getting a jump-start on Election Day. They're standing in line literally for hours to cast their ballot early. We're going to tell you why. Lots of enthusiasm there and elsewhere.

Stay with us. You're in THE SITUATION ROOM.

(NEWSBREAK)

(COMMERCIAL BREAK)

BLITZER: To our viewers, you're in THE SITUATION ROOM.

Happening now, John McCain, there's a report out there that he actually is the candidate of choice for some al Qaeda supporters. We're looking at this story. You're going to hear what the McCain camp is saying about this supposedly unwelcome endorsement.

Stand by. We're going to get to that report. Brian Todd working that story.

Election day in October. Thousands standing in line to cast their votes early. So what's the rush? We'll work the crowds, find out what's motivating them to get a jump-start. Stand by for that.

And disaster at sea. The U.S. Navy releasing a scathing report about a devastating fire about on board a U.S. nuclear carrier. Investigators blame massive safety errors that could be going on right now in other nuclear carriers. We're going to have a live report.

I'm Wolf Blitzer. You're in THE SITUATION ROOM.

The breaking news this hour: another big nosedive on Wall Street. And it is fueling voters' economic pain, only 13 days before they choose the next president of the United States.

I sat down with Senator John McCain in Manchester, New Hampshire, today to talk about issue number one, the economy, and much more.

(BEGIN VIDEOTAPE)

BLITZER: Let's talk about taxes right now.

MCCAIN: Sure.

BLITZER: It's a key issue. Among other things, you would like to cut -- and correct me if I'm wrong -- the corporate tax rate from 35 percent to 25 percent. Is that right?

MCCAIN: Absolutely. Absolutely.

BLITZER: Because what he says and what Democrats, a lot of Democrats, say, that would be a corporate bonanza for ExxonMobil. They would get an extra $4 billion.

Here's the question. Should ExxonMobil be excluded from that cut in the corporate tax rate?

MCCAIN: Oh, of course not. We should -- we should be cutting corporate tax for every business in America.

You know, Barney Frank just said, we're going to take some of that money away from the rich people. That's what Obama is all about. That is what this is about. Let me tell you -- let me tell you, we tried a windfall profit tax back during the days of Jimmy Carter, OK? We tried it. It didn't work.

But the important thing is, if you talk to the CEO of FedEx, Fred Smith, if you talk to the CEO of Cisco, John Chambers, you talk to Meg Whitman, former CEO of eBay, you know what they will tell you? They will tell you, they pay their full 35 percent. And you know what else they will tell you? When they have the ability to go overseas, unfortunately, they do go overseas.

And you know why? Because we're paying -- they're paying 35 percent, full-freight, no evasions or escapes from the taxes. They're paying full-freight. And they will show you their tax returns. And guess what? If they go to Ireland, they're only paying 11 percent. So, where are they going to go where they can create wealth and create jobs? It's simple, fundamental economics.

So, to somehow allege that a company or corporation that can be international is not going to go where they pay the lowest taxes and can create the most jobs is just foolishness. The last time we practiced this kind of isolationism and protectionism that Senator Obama espouses and higher taxes was a guy named Herbert Hoover.

BLITZER: We have another question from a viewer, Frederick Allier (ph) of Doylestown, Pennsylvania. He says he's an independent. Normally, he says, he votes Republican, but he says he lost -- you lost his vote this time because of what he called negative campaigning. Here's his question.

(CROSSTALK)

MCCAIN: Have you got anybody who says they have changed their mind, and they support me?

BLITZER: Yes. Yes, there are.

MCCAIN: You got a question from them, Wolf? I would love to hear that.

(LAUGHTER)

BLITZER: Here's -- here's -- here's his question.

(BEGIN VIDEO CLIP)

UNIDENTIFIED MALE: My question to you is about tax cuts. How can you explain to the American people that tax cuts are going to solve our economic issues, might it be for the rich or the poor, whomever it is for, when they really haven't worked for the last eight years?

(END VIDEO CLIP)

MCCAIN: All I can say to him is that, look at history. Look at history.

You raise taxes during economic crisis times, as we did in -- in -- back in the time of Herbert Hoover, you send the country into a depression. I'm not going to do that.

We have a fundamental difference of opinion. Some people think you have got to spread the wealth around. You have got to raise taxes. As I said, Barney Frank and others said, we're going to get those rich people and we're going to take the money from them? Fine, if that's what they want to do.

And I can hardly -- it's -- it's incredible to think of Speaker Pelosi, Harry Reid and Barack Obama with the tax-and-spend policies that they did in the past and that they espouse now and might happen in the future. It invigorates me to keep my campaign going, and going hard. I don't want that to happen to America.

BLITZER: Social Security, it's a potential problem out there for our children and grandchildren.

MCCAIN: Sure.

BLITZER: And you have said, nothing is off the table as far as coming up with some solutions, long-term solutions, to Social Security.

(CROSSTALK)

MCCAIN: That's the way you negotiate, and that's the way you negotiate and get solutions.

BLITZER: Right now, there's a cap at $102,000 for Social Security payroll withholding tax. Are you open, as part of an effort to save Social Security, to letting that -- that cap go up?

MCCAIN: I'm obviously against it. And I want to tell you again, the way you succeed in negotiations -- and I have done it many times across the aisle, whether it be Ted Kennedy, or Russ Feingold, or Joe Lieberman, or -- or anybody else -- is, you sit down and you negotiate.

You go in with your negotiating positions. I will go in with my negotiating oppositions. My position is that I won't raise taxes on anybody.

BLITZER: What about increasing the retirement age from 65?

MCCAIN: I am going in that I won't -- I will have -- there are things on the table we will negotiate.

Ronald Reagan, Tip O'Neill, 1983, went in, negotiated, and came out and saved Social Security. Guess what? That's what the American people want from us. That's what I have done all the time I have been in the Congress of the United States.

And -- and -- and, so, for me to say that anything, but I'm going to do what I saw two great leaders, Tip O'Neill and Ronald Reagan, do is -- it's just foolishness.

BLITZER: So, raising the retirement age..

MCCAIN: The Democrats -- the Democrats insist -- the reason why we couldn't -- couldn't get agreement in 2005 is because the Democrats insisted, as a precondition, that we raise taxes.

So, guess what? We never sat down at the table together. The Americans want us to sit down together, Wolf. And, so, all I can tell is, I will sit down with them. I have worked with them before. I will sit across the table from them.

I'm against tax increases. I'm against a lot of the bad things that -- that -- that a lot of the people support. But I will get a result, and we will save Social Security.

BLITZER: And how do you feel about raising the retirement age?

MCCAIN: I feel very strongly that I will sit down with the Democrats, and we will negotiate out something that will save Social Security, because that's our obligation to future generations of Americans. And you can ask me, you know, for the next half-hour, if you would like.

BLITZER: All right.

MCCAIN: I mean, that would be kind of fun. And my answer is going to be the same. I will sit down and negotiate, the way have I done in the past, which Senator Obama has never done, whether it be in judicial nominations, or whether it be in immigration reform, or ethics or lobbying reform. He always went home to the Democrat leadership.

BLITZER: Let's talk a little bit about your support -- and correct me if I'm wrong -- you did support President Bush's plan to overhaul Social Security and allow Social Security recipients to use about 10 percent of their Social Security savings in the stock market. That collapsed, obviously. It didn't go forward. Knowing what we know now about the volatility of the stock market, is that still a good idea?

MCCAIN: The reason why the talks collapsed is because the Democrats insisted on agreeing to tax increases before we sat down. So, let's -- let's -- let's understand history.

(CROSSTALK)

BLITZER: What about private Social Security...

(CROSSTALK)

MCCAIN: OK. That's what they wanted to do.

BLITZER: ... investments in the stock market?

MCCAIN: And all this other stuff was -- was worth negotiating.

And I will protect, as president of the United States, the Social Security benefits of retirees and future retirees. I will protect those benefits and I will do whatever is necessary to protect those benefits. And I have said that time over time.

Every -- every even-numbered year, the Democrats run out, scare the senior citizens, say, they're going to raise your taxes, they're going to destroy Social Security -- same old stuff. I have seen it for, oh, so -- more years than I can count.

I'm not scaring any senior. I'm going to preserve their -- and protect their Social Security benefits, despite what ads may be run, and the senior citizens, as well as all citizens in this country.

(CROSSTALK)

BLITZER: And the notion of a 10 percent, using 10 percent in the stock market?

MCCAIN: They know me about -- about how I'm going to fix Social Security, and I'm going to make their Social Security the best I can, and we will preserve the benefits that they have, and I will protect Social Security.

BLITZER: And the 10 percent?

MCCAIN: And I will protect Social Security.

BLITZER: All right.

MCCAIN: And I will sit down at the table with the Democrats. And, by the way, we can keep -- you know, this is -- I will give you this -- this is -- I'm telling you, I'm going to protect Social Security.

(CROSSTALK) BLITZER: All right.

MCCAIN: And that's what I have done my entire career. And I will do what Ronald Reagan and Tip O'Neill did. And that is save Social Security and make Americans aware that, unfortunately, present- day retirees are -- have -- working Americans today are not going to receive the same benefits as present-day retirees, unless we fix it. Now, I think I can do it, convince the American people that we will sit down together.

(END VIDEOTAPE)

BLITZER: All right, there's a lot more ahead of my interview with Senator McCain. We spent some time together, as I said, in Manchester, New Hampshire. And I also pressed him on whether he -- he thinks he would be tested by crisis in the first six months -- six months -- if he were to become president of the United States -- Joe Biden suggesting, as you know, that Barack Obama would be so tested. We're going to get to that. That's coming up in our next hour.

We're also standing by. We're going to get immediate live reaction, Democratic reaction, from Senator Obama's chief strategist, David Axelrod. He's going to be joining us after this entire interview airs here in THE SITUATION ROOM.

But, coming up, battleground New Hampshire, the Senate race there is proving to be a slugfest between a couple of political pros with lots of history.

And, in our "Strategy Session": Two voting groups that John McCain once seemed to hold in the palm of his hand now are swinging toward Barack Obama. We will assess.

And, later, more of my interview with Senator McCain -- he says he's already passed the test, and he suggests Senator Obama would fail that test.

Stick around. You're in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: In the race to 60 filibuster -- a 60 filibuster-proof Senate, political attacks and heated exchanges at a closely watched debate. I'm not talking about the presidential race. That's all happening right now in a Senate battle in New Hampshire that's pitting incumbent Republican Senator John Sununu against Jeanne Shaheen. I was in New Hampshire earlier today.

This is a contest with a decidedly deja vu feeling.

Let's go to CNN's Dan Lothian -- Dan.

(BEGIN VIDEOTAPE)

DAN LOTHIAN, CNN BOSTON BUREAU CHIEF: Wolf, both of these candidates say they're fighting for the middle class and are focused on energy and the economy, but these normally low-volume politicians are fully engaged in a heated rematch that's only intensified in recent weeks.

JEANNE SHAHEEN (D), NEW HAMPSHIRE SENATORIAL CANDIDATE: Shaheen.

UNIDENTIFIED FEMALE: You have my vote.

LOTHIAN (voice-over): Call it the great political rematch, Shaheen vs. Sununu. They first duked it out for the U.S. Senate seat in 2002, a heated, neck-and-neck battle right to the end. Democrat Jeanne Shaheen, New Hampshire's governor at the time, lost to Republican Congressman John Sununu by just 20,000 votes, 4 percentage points.

Now, in '08, Sununu's campaign sign is the same, but the political landscape has changed.

ANDREW SMITH, UNIVERSITY OF NEW HAMPSHIRE: It used to be a solidly Republican state. Right now, I would say it leans a little bit Democratic.

LOTHIAN: That would seem to favor Shaheen.

SHAHEEN: Tell all your friends I need their help.

LOTHIAN: But her nearly year-long double-digit lead in the polls has shrunk to a virtual tie, just four points ahead, which is within the margin of error.

SHAHEEN: So that you can get home modifications.

LOTHIAN: This week, both candidates sparred over Social Security and the economy at an AARP debate. It's a political must-watch event, because this race, like six years ago, is competitive, with blistering TV ads. And some say Sununu's seat is vulnerable.

Democrats smell blood.

SMITH: The Democrats are looking for -- to -- to strengthen their majority in the Senate.

LOTHIAN: Shaheen's weapon, take advantage of George Bush's low approval rating by linking him to her opponent.

(BEGIN VIDEO CLIP)

GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: John Sununu was with me from the beginning.

(END VIDEO CLIP)

SHAHEEN: He's voted with Bush and against the interests of New Hampshire families, and that's what we're pointing out in this campaign.

LOTHIAN: Sununu calls that attack simplistic partisan rhetoric, and believes his record proves he's an independent-minded Republican.

(BEGIN VIDEO CLIP)

NARRATOR: He led opposition to a Republican energy bill.

(END VIDEO CLIP)

SHAHEEN: But Sununu isn't above taking his own shot at linking his opponent to a national figure and an issue that could become a political liability, charging that Jeanne Shaheen would raise taxes just like, he says, Barack Obama.

SEN. JOHN SUNUNU (R), NEW HAMPSHIRE: Jeanne Shaheen has proposed higher personal income taxes. She wants to bring back the death tax. That would hurt family businesses here in New Hampshire.

LOTHIAN (on camera): As for the tightening poll numbers, well, Shaheen says that she isn't worried, that polls are going to go up and go down, and that the only poll that matters is the final count on Election Day -- Wolf.

(END VIDEOTAPE)

BLITZER: Dan Lothian in New Hampshire for us watching this race.

Coming up in our "Strategy Session," we're digging deeper into our national poll numbers. Independents and older voters are swinging right now toward Barack Obama. So, how does John McCain get them back? Can he?

And Obama's back in the Commonwealth of Virginia. He will be speaking there live. We're going to go there live as well.

Stay with us. You're in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: Older Americans and independents, they're two critical voting blocs that polls now show are actually leaning toward Barack Obama.

Let's discuss in our "Strategy Session."

Joining us, Jennifer Palmieri with the Center For American Progress, and Republican strategist Ed Rollins. He's a CNN political contributor.

Ed, look at these numbers -- and I will put them on the screen -- among independents, a critical -- a critical group, back in September, McCain was ahead 51 percent to 43 percent. But now Obama is ahead, 52 percent to 46 percent. It's going to be hard for McCain to win if he can't get a majority of those independents, don't you think?

ED ROLLINS, CNN SENIOR POLITICAL CONTRIBUTOR: That's the key. The key has always been the independent voters. The key -- was in 2004 and obviously in 2000. So, there's no reason it wouldn't be again. He's got to get those voters back.

I think there's been some erosion since the economic stuff all started. It's worked to his disadvantage.

BLITZER: Among older voters -- and I will put these numbers, Jennifer, up on the screen as well -- we see a similar flip. Back in September, Obama was behind significantly among older voters, 50 and older, 41 percent for him, 57 percent for McCain.

If you take a look now, it's 54 percent for Obama, 44 percent for McCain. How come he's doing so much better among a group that votes in disproportionately large numbers?

JENNIFER PALMIERI, DEMOCRATIC STRATEGIST: Yes, it's particularly striking.

I think that what has happened since that -- the previous poll had been taken is two things. One was the debates. And the other is really the -- the true onset of the financial crisis. And I think that a lot of the older voters -- and particularly the independents -- were waiting to see how Obama did in the debates to see if he met their commander in chief test.

And I think that he proved in the first debate that -- for a lot of people, that he met the commander in chief test. Then I also think they saw how he handled the financial crisis, and probably with, you know, exerting -- distributing -- excuse me -- exhibiting more leadership than -- than -- sort of calm measured leadership, than McCain did.

And I think that that's why you see those voters moving towards...

BLITZER: Among those two groups.

PALMIERI: ... yes, both groups moving towards Obama.

BLITZER: Ed, do you accept that?

ROLLINS: I mean, I accept it. I mean, I don't think -- I don't think Obama met the commander in chief. I think he may have met the economist in chief, which is very important today.

I think the bottom line is -- is that these voters are probably hurting the most. A lot of senior voters are very nervous about the economy. Many of them had -- had retirement funds that were based on the stock market, and they're very nervous. And they need to be reassured. And I think John McCain is going to do everything he can in the remaining days here to reassure them that he's going to protect what they have, protect their Social Security, protect the Social Security for their kids and their grandkids.

BLITZER: You noticed, in the exchange I had with him on Social Security, I -- I pressed him repeatedly on whether or not he still supports President Bush's proposal to allow Social Security recipients, or -- or American taxpayers, to put up the 10 percent of their Social Security savings in these private accounts in the stock market, and he really didn't want to answer that question, only issuing a statement that he will do whatever is necessary to protect Social Security.

Is that reassuring enough, Ed, do you think?

ROLLINS: Well, thank goodness we didn't do that. Thank goodness -- we would be in a terrible mess today if -- if we lost 10 percent in the stock market of the Security. So, that was one thing that the president proposed that obviously the Congress chose differently, and it worked to the benefit of the -- I think his bipartisan commission idea, which is how we solved it before, his ability to work across the aisle, and his reassuring that he's going to keep taxes low and he basically is going to protect retirees' Social Security is a very important message.

BLITZER: Jennifer, listen to this little clip. I'm going to play it for you. Listen to this.

PALMIERI: OK.

(BEGIN VIDEO CLIP)

BLITZER: And how do you feel about raising the retirement age?

MCCAIN: I feel very strongly that I will sit down with the Democrats, and we will negotiate out something that will save Social Security, because that's our obligation to future generations of Americans.

(END VIDEO CLIP)

BLITZER: All right.

Neither he nor Senator Obama really want to talk about raising the retirement age, although, if these negotiations were ever to get off the ground, given the fact that, 40 years ago, people weren't living as long as people are living right now, what -- would this be something on the table, going from 65...

PALMIERI: Right.

BLITZER: ... to 66, or 67, shall we say?

PALMIERI: Right.

I think that was obviously a very well-rehearsed answer from Senator McCain. And he has been -- he has been sort of all over the place on Social Security. He was -- he was for privatization in 2005. He has -- he has supported in the past raising the retirement age.

And that's not -- I mean, I agree with Ed that older voters want to hear a reassuring message on Social Security. Unfortunately, he doesn't have one for -- that McCain doesn't necessarily have a very reassuring...

BLITZER: But he does go in, Ed, and saying, look, everything is on the table, and I will negotiate from my...

PALMIERI: Right.

BLITZER: ... my perspective. But, obviously, in the course of negotiations, things change.

(CROSSTALK)

ROLLINS: I do think it's important he talk about what his perspective is.

And any -- any alteration of the age or raising the -- the amount you're going to tax, it has to be -- has to be put out a while. You can't say to someone who's 63, 64, who plans on retiring in a year or two, that that's not going to happen. You have got to go back and make it a 10-year past, a younger group.

BLITZER: Right.

ROLLINS: And you have got to basically slowly and lay out your positions in a very accurate way. You can't say, everything's on the table. You're going to be the president. So, you have got to walk in there and basically say...

BLITZER: All right.

ROLLINS: ... this is what I want.

PALMIERI: I think it...

(CROSSTALK)

BLITZER: Hold on, Jennifer. Unfortunately, we have got to leave it there.

PALMIERI: OK.

BLITZER: But we will have many opportunities down the road.

(CROSSTALK)

PALMIERI: Thank you.

BLITZER: Jennifer Palmieri, Ed Rollins, guys, thanks very much.

ROLLINS: Jennifer, nice to see you. Thank you.

BLITZER: A disaster at sea, a nuclear carrier on fire -- a scathing report now from the U.S. Navy on the mistakes and the missteps that led to this $70 million blaze.

Plus, a pro-al Qaeda Web site gets into the American political game, the extremist blogging that has the McCain campaign responding. Brian Todd working this story.

Stay with us. You're in THE SITUATION ROOM. (COMMERCIAL BREAK)

BLITZER: On our "Political Ticker" today: a fresh look at John McCain's days as a prisoner of war in Vietnam.

The French National Archive has now posted, online, extended footage of McCain being interviewed by a French TV reporter while he was a POW, shirtless, unshaven and bedridden, said to be the widest distribution ever of a four-and-a-half-minute interview since it first aired four decades ago.

Remember, for the latest political news any time, you can always check out CNNPolitics.com. That's also where you can download our political screen saver.

Let's go back to Jack for "The Cafferty File" -- Jack.

CAFFERTY: Wolf, the question this hour is: Should Sarah Palin reimburse Alaska taxpayers for her kids' travel and entertainment expenses?

Lauren writes: "She should repay the taxpayers of Alaska. This kind of entitled behavior is what I expect from entrenched politicians, not a maverick reformer. Many of us moms have to travel for our jobs, but no one I know gets reimbursed for family members who tag along. Even if she did not violate any laws, her behavior was highly unethical."

LaVerne in Los Angeles, California: "Sarah Palin should reimburse the Alaska taxpayers for her family's travel expenses. She wants everybody to think that she is just like everyday people, yet the McCain campaign spends $150,000 on clothes for her and her family. How many everyday people shop at Neiman Marcus and Saks? And then they stage a political stunt by just dropping in to Wal-mart to pick up Pampers for her baby."

John writes: "It's too late. Palin can apologize, reimburse all she wants. We have already seen what kind of a reformer she is."

Barrows says: "Let me remind you that Governor Palin informed us with glee that she was someone who would fight against the misuse of government funds by officials. Well, I would like to know how she defines misuse, because, clearly, she has her own definition for a lot of terms."

Jack in Washington writes: "I have got to tell you, Jack, this reform she's claiming got me all confused and worked up. This lady is running around in a frenzy criticizing Obama for tax cuts for the middle class, when she's the first one to spend taxpayers' money on her family. How hypocritical is that?"

Christine in Edmeston, New York: "So she took the money out of the Alaskan taxpayers' pockets for her own use. What's the problem? Hey, Joe the plumber, look. It's Sarah Palin showing you what distributing the wealth really means." And Buki writes: "How can someone who calls herself a reformer spend $150,000 or so on wardrobe in two months? That's my household income for four years."

If you didn't see your e-mail here, you can go to my blog at CNN.com/caffertyfile, and look for yours there. There are thousands of e-mails pouring in to these parts -- Wolf.

BLITZER: Wow. OK, Jack, thanks. See you in a few moments.

To our viewers, you're in THE SITUATION ROOM.