SEN. LINDSEY GRAHAM, R-S.C.

REP. RAHM EMANUEL, D-ILL.

JACK WELCH, FORMER CEO, GE

STEPHANOPOULOS: Good morning and welcome to “This Week.”
SEN. BARACK OBAMA, D-ILL.: If you are willing to knock on doors and make phone calls and organize…

STEPHANOPOULOS: … and on the air…

UNKNOWN: It doesn’t have to happen. Vote McCain.

STEPHANOPOULOS: … fighting out the final days. Our debate this morning with the candidates’ closest allies — Senator Lindsey Graham for McCain and Congressman Rahm Emanuel for Obama.
UNKNOWN: Stabilization of (inaudible) prices is still many months in the future.
STEPHANOPOULOS: … stocks drop again. Have the markets hit bottom? How much pain lies ahead? What will it take to get the economy back on track? We’ll ask a man they call America’s CEO, Jack Welch.

George Will, Sam Donaldson, Cokie Roberts and Peggy Noonan analyze all the week’s politics on our roundtable. And, as always, the Sunday Funnies.

STEPHANOPOULOS: Heading into this final full week of the presidential campaign, Barack Obama is holding a steady lead. Our latest ABC News tracking poll shows him with a 9-point advantage over John McCain . One big reason — fewer Americans now call themselves Republicans. Four years ago, the parties were even — 37 percent of likely voters were Democrats; 37 Republicans. Today, Democrats are still at 37 percent, but Republicans have dropped to 29, the biggest gap in a generation.

With that, let me bring in our debaters this morning, two of the candidates’ closest friends and advisers. Senator Lindsey Graham of South Carolina. He’s actually in Iowa with John McCain today. And joining us in the studio, Congressman Rahm Emanuel . Welcome to you both.

Senator Graham, let me begin with you. As you saw in that poll there, the GOP brand has really taken a beating. How can you get them back in this final week without turning off moderates and independents?

GRAHAM: Well, I think the independent voter will decide the election, and Senator Obama doesn’t show much independence when it comes to saying no to the Democratic leadership since he’s been in Congress. His budgets increase spending, they increase taxes, and all Americans — Republicans, Democrats and independents — generally don’t like the idea of having taxes increased on anyone in a weak economy or making Washington larger.

So we have to make our case to the independent voter that John McCain is truly an independent, stood up to his own party, will keep your taxes low, and rein Washington spending in, and I think that’s a winning message for us. It’s not time to raise taxes or increase spending.

STEPHANOPOULOS: Congressman Emanuel, he raises the issue of taxes. Senator McCain and Governor Palin are also raising the prospect of having Democrats in control of the entire government. Take a look.

SEN. JOHN MCCAIN, R-ARIZ.: We can’t have Obama, Pelosi, Reid running Washington and running our country.

GOV. SARAH PALIN, R-ALASKA: If big government spenders control the House and the Senate, and heaven forbid, the White House too, they will be unchecked.

EMANUEL: Now I’ve got gray hair, and I started this at 6’2’’ and 250 pounds, and that’s all I got left.

So I’m looking forward to representing the people of the North Side of the city of Chicago.

STEPHANOPOULOS: It’s about the answer I expected. Thank you both very much.

Now we want to dig into the issue that has been defining this race — the economy. Fears of a global recession set off another selling spree in global markets this week. The Dow is down another 10 percent; European markets 9 percent; Japan’s Nikkei index 15 percent, and all three are farther away than ever from recent highs. It’s just been a crushing month in the markets.

And with that, let me bring in a man who has successfully navigated one of America’s largest corporations through the global economy, the former chairman and CEO of General Electric, Jack Welch.

Good morning, Mr. Welch.

WELCH: Good morning, George. STEPHANOPOULOS: You know, in BusinessWeek this week, as the markets were closing, you and your wife Suzy Welch wrote that we believe the main thing to be pessimistic about today is pessimism itself. So is that a sign to you that these markets, that this selling is a sign of irrational panic?

WELCH: Well, there’s some of that in there, George. But we’ve had a highly leveraged world that is now in the process of deleveraging. First, we had the financial institutions around the world way overleveraged with complex instruments, now deleveraging, and we have at the other end the consumer, who has had a lot of credit card debt that is coming back in the balance. So we are going to have some very tough times.

The next three quarters will be extremely tough. The fourth quarter of this year, we could have negative growth in the 3 to 4 percent range, unemployment growing. But what we try to write about was this isn’t a ‘29 period, this isn’t ‘80, ‘81. There’s light in the tunnel, and we’ll be in the — late in the second half of ‘09, we’ll be coming through it.

STEPHANOPOULOS: What will be a sign to you that we are starting to come through? What are you watching right now in both the markets and the broader economy that would show that we’ve hit a bottom in the markets and that we’re starting to see — to turn the corner, see that light at the end of the tunnel in the economy?

WELCH: Well, we’re starting to see some of the bank actions taken by the Fed unfreeze credit. We are in fact seeing LIBOR coming down. We are seeing new home sales dropping still, but existing home sales flattening out. People are starting to see buoyancy (ph). When that, in fact, when the banks stop getting open with credit, and that will come in ‘09 and late this year, you will start to see people putting their toe in the water and starting to invest in housing. And when housing stabilizes — and don’t forget, we haven’t gotten into the two big elements of the program that has been passed by Congress. We’ve done the first thing, which is stabilize the banks, but we haven’t stopped the foreclosures. That program is not in place. It takes some time to get that organized. It takes some time to get the auction process in place to deal with the waste that’s on balance sheets.

So those programs are just going to be kicking in. Everybody thought the day the Congress voted, OK, we’re all set now. But we’ve only began to get these fixes, and that’s why it’s going to take us several months to get through this deleveraging process.

STEPHANOPOULOS: You’re a good free market guy. How comfortable are you with this government program? Government buying interests in the banks, the government now saying it’s going to be buying interest in insurance companies. It’s already taken over the largest insurance company in the world. How comfortable are you with this? And also with the idea of the government starting to pick winners and losers. Lehman is a loser, National City Bank is a loser. The other banks get their investment. Is that the way we should be going? WELCH: Well, I’m comfortable that the government has to step in when the free market gets off the rails. It’s happened in this country for over 100 years, George. We’ve nationalized railroads in the war. We’ve bought banks in the ‘20s.

The nice thing about our government, compared with France — everyone says we’re going to be France. We’re not going to be France. We go in and go out.

WELCH: In 1984, we were into Continental Bank, after they — in Chicago — after they had made terrible loans to the oil industry. We invested, the government did, took it over, and then sold it to Bank of America quickly.

The same thing occurred with the RTC in the early 90s. Now, every instrument that we have put in, in this troubled time, we have put in onerous terms for banks if they don’t get out.

So they’re going to work like hell to get the — to get the government out of there. Because, once the — the terms get by five years, the loans becomes to the banks that they’re going to want to be out.

STEPHANOPOULOS: Meanwhile…

WELCH: (inaudible) like France.

STEPHANOPOULOS: Meanwhile, the auto companies are coming in and doing everything they can to get the government help, GM and Chrysler saying they need some government loans to pull off their deal.

This will be another massive intervention.

WELCH: Well, the more you move into the industrial sector, the more you pick and choose there, the more trouble you get.

STEPHANOPOULOS: And why?

WELCH: Because I don’t thing you can start to — the reason why you have to fix the financial system — the financial system is fundamental to the global economy.

Without it, the global system, you can’t borrow; you can’t build; you can’t create jobs.

The whole game is about jobs. And, George, if I might just digress a minute, you were talking taxes with Mr. Emanuel and Lindsey Graham , a little while ago.

The New York Times, this morning, ran the greatest ad John McCain could every have. It was the lead column in the righthand side. It talked about the crisis that is coming, the unemployment that is coming. But then it featured the state of Rhode Island. And it talked about Rhode Island. They had a two-page article in the paper, in, of all places, the Times.

Rhode Island is the most highly taxed state in the nation. It talked about the fact that Rhode Island — 80 percent of Rhode Island’s industries are small businesses, employing less than 20 percent.

Rhode Island has an enormous corporate tax rate of 9 percent. It has the highest unemployment tax.

Small business is being murdered…

STEPHANOPOULOS: Since you raised that question and that article, the article also points out how big, huge corporations like your former company, General Electric, Xerox, Pratt & Whitney, Merck, Yahoo, Whirlpool, Bank of America, Coca-Cola, all cutting jobs.

Is that necessary?

Should that be the first place to go when we face a downturn?

WELCH: Well, they’ve held on a long time, as (inaudible) volume has stopped, but you’re going to have to cut jobs.

But we pulled out of Rhode Island 15 years ago because of the crazy tax burden there. And that is something you can’t do in these times.

So I’m a jobs voter. Everything I think about for this country is about jobs. That’s why I support the financial system. That’s why I support putting lower taxes at a time like this.

STEPHANOPOULOS: One final, quick question. Fortune Magazine has an article out, this week, saying, G.E., General Electric, is under siege.

Is it in any danger of going under?

WELCH: Oh, my God, no. It just happens to have a financial component. Anything with the word “finance” in it, right now, is part of this fear element.

This fear element will be taken out of the country as the country sees all the actions that are going to be taken over the next nine months, and have been taken.

We will have tough times. But we will see a sunny late ‘09, early ‘10 period. We’ve been through this before. We’re getting the actions that we need. And this country will come out as a better, deleveraged society, with improved regulations, maybe a little slower growth, but a much better foundation.

STEPHANOPOULOS: We will end on that note of optimism. Jack Welch, thank you very much.