Transcript: 'This Week' Economic Debate

Even when we were debating the stimulus, we kept saying over and over again there was going to continue to be significant job loss. It's a matter of whether or not we can keep from that job loss being as severe as it could be had we not done the stimulus.

STEPHANOPOULOS: But, Senator, by the assumptions of President Obama and his team are -- that we would have 8.1 percent employment -- unemployment all year long, we saw that already this month. We know it's going to get worse, at least the president has said, before it gets better, so he's not going to be able to save the 3.5 million jobs he talked about.

BAYH: Well, it's a little soon to conclude that, George. And we may need -- need to have to recalibrate what we do as we go along as the facts change. He did inherit one heck of a mess, and it's gotten worse over the last couple of months.

The depth of domestic problems was worse than expected. The global nature of the recession, with Europe and China now struggling, was worse than we expected.

But let's give this a little time. I was with Ben Bernanke a couple of times this week. He does think that some things in the credit markets are beginning to get better, but there is a lag between when you put policy into effect and when it actually starts having an effect in the real world.

And the second lag, George, perhaps most important, is the psychological one. It does take some time before things -- before people realize that the substance is actually getting better. My guess is that'll start later this year or the first part of next year, and we're moving aggressively to make sure that it does.

STEPHANOPOULOS: The question, Senator Shelby, is, what is going to create that confidence? What is going to change the psychology of the markets right now? You want to...

SHELBY: I believe, if we can straighten out the banking system and get banks lending again and get confidence in our banking system -- the American people don't trust the banks. They know -- they're not investing in the banks. The banks aren't lending. And without lending, this -- this country's economy is based on credit, you know, credit to small business, medium-sized business, and that's not happening today.

We've got to do it, and we've got to do it right. TARP certainly didn't do it. I opposed that; a lot of people didn't. But -- but we can't go down that road again. And what I fear is, is Paulson II or TARP II or TARP III.

STEPHANOPOULOS: Well -- well, we've seen Secretary Geithner and the president say that now we're going to take a middle-ground approach. They've out the beginnings of their plan on the banks. You don't approve of that?

SHELBY: I don't think it'll work. I think that they've got to close some big banks. They don't want to do it. We're -- we're going down the same road Japan was going down.

STEPHANOPOULOS: So you're in the same place -- I had Senator Lindsey Graham on the problem a couple of weeks ago. He said we're going to have to close, nationalize some of the big banks.

SHELBY: I don't want to nationalize them. I think we need to close them...


STEPHANOPOULOS: So when you say "close," what do you mean by them?

SHELBY: Close -- close them down, get them out of business. If they're dead, they ought to be buried. We bury the small banks; we've got to bury some big ones and send a strong message to the market. And I believe that people will start investing in banks. People aren't...

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