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SYNOPSIS: A polite debate between Paul and Lou Dobbs on the American financial crisis, where Paul argues for fiscal stimulus and that now is not the time to worry about deficits

DOBBS: President-elect Obama today told the American people at his first news conference as president-elect that his top priority is to create jobs and to help our struggling middle class when he does take office. My guest tonight writes in his column in "The New York Times" that the president-elect should work quickly and aggressively to achieve his goals. Joining me now is Nobel Prize-winning economist and "New York Times" columnist Paul Krugman. Paul, good to have you.

PAUL KRUGMAN, NOBEL PRIZE-WINNING ECONOMIST: Good to be on.

DOBBS: And again, congratulations on your Nobel Prize. That's wonderful.

KRUGMAN: It's pretty nice, thank you.

(LAUGHTER)

DOBBS: Got it. Well, as we listened to, you know, not even the first press conference today, but to watch Barack Obama as president-elect on Tuesday night, I mean, it's a sobering set of challenges that he faces. He's obviously keenly aware of them. The idea of more stimulus, though, in this economy, as he called for upon taking office, I mean, we've got over $2 trillion in stimulus, when you look at what the Fed has done with the banking system and what will be spent as the result of the bailout. How much more stimulus do we need?

KRUGMAN: Lots, unfortunately. And this is -- this is like you've got some kind of infection and you tried all the usual antibiotics and they haven't worked and so now you go for the really heavy stuff. I'm sorry, but this is -- this is bad. This is clearly the worst thing in 25 years and it's probably the worst in 70 years. This is, this is bad.

DOBBS: The worst in 70 years, I mean, that covers some pretty profound area, when we're talking about the depression, a banking system that came to a halt, capital -- capital markets that were effectively defunct.

KRUGMAN: Well, you know, the thing is, we -- the modern banking system is mostly not banks. It's stuff that functions like banks but it isn't treated like banks, the shadow banking system. And that has really collapsed. I mean when you think about -- auction rate securities. That was a $300 billion effectively banking system that's -- disappeared. Asset backed commercial paper was $1.2 trillion. It's now $600 billion. $600 billion of banking disappeared. This is big stuff and it takes...

DOBBS: By the way that's worth the support of now the Federal Reserve in the -- in the commercial paper.

KRUGMAN: That's the only thing that's kept it from going down further, that's right. So we're doing -- there's nothing -- Ben Bernanke has done everything he can, but we need, now -- we need, now, Uncle Sam.

DOBBS: We need Uncle Sam. We've got Uncle Sam to this degree. We've got a $700 billion bailout. We've got just approaching what will be about $900 billion of capital injection into the Federal Reserve. We've got another $500 billion in Fannie Mae, Freddie Mac. I mean, the list goes on ...

KRUGMAN: But all of that is financial.

DOBBS: I understand.

KRUGMAN: Right? And what's happened is, really, until the last two months is now the epicenter of the earthquake has shifted from the financial system -- from Wall Street to Main Street. And now comes the time when you really have to do -- we now need to talk about jobs. We need to talk about stuff that's really going to support Main Street.

DOBBS: Is it possible, is it conceivable, Paul, that the mistake was focusing on the financial economy rather than the real economy to begin with?

KRUGMAN: You need to do both. I mean, it's like -- the financial system, you can't have a working economy if that falls apart. You've got to rescue the banking system. But for whatever reason, we didn't do it soon enough or just too much accumulated, trouble, now we've got to rescue the rest. It's awesome. I mean, I don't like the prospect of, you know, more than $1 trillion deficit but I don't see how we avoid it.

DOBBS: It looks like we're on the path of $1 trillion to $1.2 trillion - estimates make great sense. But even with that deficit, which should be stimulative (ph) beyond belief, we still have a president-elect talking about trying to encourage job creation, which is a short-term approach, but one can't clearly see a path to a short- term approach to job creation. We've watched manufacturing today is now down to a level of 1942 in this country. We haven't got the way -- I can't find a way in which there is a direct correlation between the money the federal government can spend and the jobs that can be created for our middle class.

KRUGMAN: Well, a lot of what we can do is, for starters, construction. There's a lot of infrastructure that needs to be built or repaired. A lot of things you can do there. You just had earlier in the program all about the state and local governments cutting. That's slashing -- give them some money so they don't have to do that. It's actually destructive -- it's doubly destructive now. Not only cutting services but we're also destroying jobs by doing that. So there's a lot that Uncle Sam can do. Now, manufacturing is a concern. You know, exports has been one of the good things for our economy. But now the rest of the world is in trouble so that's a problem. But you do, you know, lots of stuff. There's no single answer.

DOBBS: If we continue, then, we do spend -- what do you think will be spent, another trillion dollars?

KRUGMAN: I'm guessing four to five percent of GDP, which is basically saying $600 billion to $700 billion of stimulus.

DOBBS: I'm going to round it up to $1 trillion.

KRUGMAN: Well, there's other stuff. We're going to be ...

DOBBS: So now we're talking about that level of stimulus. Matching the size of the entire federal budget in one year in stimulus. And when we talk about those jobs, infrastructure, we have a president who, for eight years, has been talking about we have jobs that Americans won't do. One of those jobs is construction. We have a situation which Wal-Mart, when we drive purchase of goods in the consumer market, we're talking about Chinese goods. We're not getting the multiplier effect back because we don't have that production. It's a very difficult formula, isn't it?

KRUGMAN: There's parts of it. I mean, think you're exaggerating. Even buying stuff from Wal-Mart, most of the price of what you buy from Wal-Mart is not Chinese. Most of it is U.S. value- added. It's true, some of this will spill over, but, you know ...

DOBBS: I don't want to argue with a noble prize winner, but point of fact, Wal-Mart is the third largest exporter from China and most of those goods are from China.

KRUGMAN: But, in fact, there's a lot of -- we can argue the number but it's -- but, you know, you can see the fact that the multiplier still works you can see by the fact that we're in such big trouble right now. If it was all from China, then the collapse of our housing bubble wouldn't have done so much to our economy.

DOBBS: What can we do for that housing bubble?

KRUGMAN: Housing was overbuilt, overpriced ...

DOBBS: I wish it were a bubble. I misspoke. For the collapse of the housing bubble?

KRUGMAN: There's a line economists sometimes use. You don't have to fill a flat tire through the hole. We don't have to reflate the things that were over-inflated and collapsed. But we do need -- we can do a lot. Again, infrastructure, we can do a lot of spending -- it's not easy. But -- and nobody says we're going to bring prosperity. We're really just talking about trying to minimize the damage.

DOBBS: All right. Well, I wish we could end on a happier note. But, Paul, thank you very much, as always, we appreciate your insightful analysis and, again our congratulations to you. Paul is the author as well of the book -- I don't even like to use the title. But the book is "The Return of Depression Economics and the Crisis of 2008." Paul, thanks a lot for being here.

KRUGMAN: Thanks a lot.

DOBBS: Up next, President-Elect Obama holds his first knew conference calling for swift action to help our struggling middle class. Democratic leaders in Congress calling for a lame duck session and a second stimulus package. What will they do and will it work? Three of the best political analysts join us here next. We'll be right back.

Originally broadcast, 11.7.08