The NewsHour with Jim Lehrer

JIM LEHRER: Good evening. I`m Jim Lehrer.

On the NewsHour tonight: the news of this Tuesday; then, a look at Fed Chairman Bernanke`s inflation warning and what it did to Wall Street; a NewsHour report from Denver on the rising number of home foreclosures; analysis of the Islamic militia victory in Somalia; and, on this primary Tuesday, a preview of the upcoming mid-term elections.

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JIM LEHRER: Wall street lost more ground today after Monday`s major sell-off. It was all triggered by inflation warnings from the Federal Reserve. In today`s trading, the Dow Jones Industrial Average lost 46 points to close at 11,002; it had been down 110 points before coming back a bit. The Nasdaq fell more than six points to close below 2,163.

We`ll have more on inflation and the markets right after this news summary.

The prime minister of Canada may have been a target in a foiled terror plot. That`s according to charges made public today. Some of the 17 suspected Islamic militants appeared for bail hearings in Brampton, Ontario. A lawyer for one of them discussed the charges.

GARY BATASAR, Defense Attorney: The allegations, as you`ve reported, are quite serious, including storming and bombing of various buildings. And there`s an allegation, apparently, that my client personally indicated that he wanted to behead the prime minister of Canada.

JIM LEHRER: The court said today the suspects also talked of taking over the Canadian Broadcasting Corporation. The investigation is continuing.

The governor of Arizona today vetoed a bill banning illegal immigrants from the state. They`d have faced criminal penalties, if caught. In her veto message, Governor Janet Napolitano said the bill was "unworkable" and "unconstitutional." The measure also included new penalties for employers who hire illegals.

The European Union delivered a package of incentives to Iran today. It`s designed to get Iran to stop nuclear activities that could lead to building weapons. The Associated Press reported the package included an offer of American nuclear technology for peaceful uses.

In Washington, State Department Spokesman Sean McCormack would not confirm or deny that.

SEAN MCCORMACK, State Department Spokesman: Once we start talking about these various -- the package in public, it becomes a public document, it becomes a matter for public debate, and that`s not where we are right now.

The diplomacy, I would say, is at a sensitive stage. This package has been present to the Iranian government; we want to give them a little bit of space to consider what`s in the package.

JIM LEHRER: Iran`s chief nuclear negotiator said the proposal included some positive steps. He also said it had some ambiguities, but he did not elaborate. Later, President Bush said Iran`s response sounded positive, as well.

Protesters in Somalia demanded Islamic militiamen leave their capital today. The militia seized Mogadishu on Monday, after weeks of battling secular warlords. But today, the city`s largest clan and hundreds of supporters threatened to attack Islamic forces unless they leave. We`ll have more on this story later in the program.

Iraqi Prime Minister al-Maliki vowed again today to rein in rampant violence. He condemned those behind the surge in attacks and said, "Their aim is clear: It is political, to derail and bring down the new government."

So far, Maliki`s security plans have stalled in a deadlock over naming defense and interior ministers.

In today`s violence, 11 Iraqis and one American soldier died in attacks around Baghdad.

Two coalition soldiers in Afghanistan were killed today in a roadside bombing. It happened in an eastern province, as the troops were conducting security operations. The U.S. military made the announcement but did not give out the soldiers` nationalities.

And that`s it for the news summary tonight. Now: what was it Bernanke said and why did he say it; home foreclosures; a Somalia update; and an election preview.

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JIM LEHRER: The words of Federal Reserve Chairman Ben Bernanke and the reaction to them. Jeffrey Brown has our examination.

JEFFREY BROWN: Today, for the first time since March, the Dow Jones Industrial Average dipped below 11,000 points. The last month has been especially rough, from a 52-week high of 11,709 on May 10th, close to an all-time high, to today`s close at 11,002.

The big sell-offs yesterday and today followed comments from Ben Bernanke, now in his fifth month as chairman of the Federal Reserve.

The Fed has been raising interest rates steadily for the last two years, and there had been some hints that those hikes could be over. But yesterday, Bernanke`s tough talk about inflation got everyone`s attention.

BEN BERNANKE, Federal Reserve Chairman: Consumer price inflation has been elevated so far this year, due in large part to increases in energy prices. Core inflation readings -- that is, measures excluding the prices of food and energy -- have also been higher in recent months.

While monthly inflation data are volatile, core inflation measured over the past three to six months has reached a level that, if sustained, would be at or above the upper end of the range that many economists, including myself, would consider consistent with price stability and the promotion of maximum long-run growth.

For example, at annual rates, core inflation, as measured by the Consumer Price Index, excluding food and energy prices, was 3.2 percent over the past three months and 2.8 percent over the past six months. For core inflation based on the price index for personal consumption expenditures, the corresponding three-month and six-month figures are 3.0 percent and 2.3 percent. These are unwelcome developments.

JEFFREY BROWN: In his speech yesterday, Chairman Bernanke also noted signs of a slowing economy, including a cooling housing market and lower consumer spending.

For more on all this, we turn to Philip Jefferson, economics professor at Swarthmore College and a former research economist at the Federal Reserve Board.

Lee Hoskins, former president of the Federal Reserve Bank in Cleveland, now a senior fellow at the Pacific Research Institute.

And Hugh Johnson, chief investment officer at Johnson Illington Advisors.

Professor Johnson, starting with you, why don`t you help us interpret Mr. Bernanke? What was he saying about inflation?

HUGH JOHNSON, Johnson Illington Advisors: Well, he`s pretty much saying it as it is. He`s just citing the facts, saying that we`ve seen some acceleration in price increases by companies to consumers. It started to pick up over the course of the last six months.

He`s obviously very focused on it, very concerned about it, and implies -- doesn`t state -- but implies that the Federal Reserve will respond to the fact that we`re seeing some upward pressure on prices by raising interest rates even further.

It`s probably the first least-ambiguous statement on inflation that we`ve heard from the chairman. So, very clear, he`s worried about higher prices.

JEFFREY BROWN: Professor Jefferson, how do you interpret it? He used the words "unwelcome developments."

PHILIP JEFFERSON, Swarthmore College: Right, I think what Chairman Bernanke is trying to do in this particular situation is let the markets and the public know that he`s aware of inflation; he`s going to remain ever vigilant.

And at the same time, he`s also in the position where he`s trying to establish his inflation-fighting credentials; that is, he wants everyone to know that, even though Greenspan is not there at the helm anymore, he is still remaining ever vigilant.

He also noted that, in his view, the economy was operating a little bit above trend. So he`s looking at a scenario where he hopes that the Fed can coax the economy down to its long-run trend growth rate and, at the same time, moderate the increases in inflation as a result to energy price changes.

So this is a very delicate operation that he`s starting to undertake because he does not want to actually kill off the expansion.

JEFFREY BROWN: Now, Lee Hoskins, why did what he said yesterday move the markets or shake the markets as it did?

LEE HOSKINS, Former President, Federal Reserve Bank of Cleveland: Well, the markets have a great deal of uncertainty in front of them, both about which direction the economy is going to go -- will it really slow to the extent that people think -- as well as will inflation rise or slow?

So the markets are faced with a lot of uncertainty, just as the Fed is, so we have new data coming in. We have a relatively new chairman. There`s some difficulty, I think, that market participants are having in reading the chairman.

But the overall thrust is the chairman is doing what he ought to do, which is to guard against the worst error the Fed could make, which is to allow inflation and inflation expectations to become embedded in the economy. So I think the Fed`s going to err and should err on the side of a restrictive policy.

JEFFREY BROWN: Now, Mr. Hoskins, you`re saying you think he was right to raise a flag about inflation?

LEE HOSKINS: Oh, yes, I think it should have been raised sooner and I think it should be faced aggressively with policy action, including a discussion of a 50-basis point or half-percent increase at the next meeting.

JEFFREY BROWN: Mr. Johnson, what do you think about the timing of raising the flag over inflation?

HUGH JOHNSON: Well, I think he`s quite right in pointing out that we`re starting to see upward pressure on prices. I think it`s important to note also that some of those technical indicators that we look at that tell us, not where inflation has been, but where inflation is going, have also risen a little bit and are a little bit troubling. They`re not alarming; they`re a little bit troubling.

So I think he`s quite right in right now telling us that he`s focused on inflation; he`s quite right in trying to preserve the credibility of the Federal Reserve as an inflation fighter. Ultimately, that`s going to be very good for the financial markets.

Short term, of course, the financial markets are very worried that the Fed will go too far or make a mistake and kill off the expansion. I don`t think the Fed has gone that far yet, but nevertheless the markets are sending a message and that is that they`re worried that the Fed ultimately may go too far. Right now, they haven`t, but the markets are clearly worried.

JEFFREY BROWN: Well, Professor Jefferson, explain this sort of classic conundrum that Mr. Johnson just raised between fighting inflation on the one hand and fighting slow growth on the other, because they would call for different prescriptions, wouldn`t they?

PHILIP JEFFERSON: Well, certainly it`s the case that the mandate of the Fed is to maximize the potential for economic growth and monitor price stability.

But I think it`s very important, Jeffrey, at this point in the business cycle to realize that this expansion is still not very deep, OK? There are particular pockets where employment is still not robust. You have the relatively unskilled still waiting to fully participate in this expansion.

And so I think it`s a little too soon to go unambiguously towards an aggressive posture towards inflation, because there are still some employment gains for particular demographics in the society that we have yet to achieve.

JEFFREY BROWN: Mr. Hoskins, why don`t you jump in there? You were at the Fed. How do you get that balance, when there is the downside that Professor Jefferson was just referring to?

LEE HOSKINS: Well, I don`t think you can always achieve a balance; that`s the point. Over time, the Fed affects one thing, and that`s inflation or the price level. It does not affect the real economy, other than having a nice, stable, non-inflation environment.

So the Fed`s main focus -- if it wants to have good employment numbers down the road -- needs to be on inflation. As I said before, nobody knows where inflation is going to go; they have forecasts, but nobody knows.

PHILIP JEFFERSON: Jeffrey...

LEE HOSKINS: The error that the Fed does not want to make is to allow inflation to get ahead of it.

PHILIP JEFFERSON: Jeffrey, may I jump in here a little bit?

JEFFREY BROWN: Go ahead.

PHILIP JEFFERSON: Because the statement that was just made that the Fed does not have real effects on the economy, I think the weight of the evidence is contrary to that, that, in fact, over a short- to medium-term horizon, Federal Reserve policy does affect real economic activity, including output and employment.

And so, certainly, Chairman Bernanke is well aware of this and he realizes that, while long-term price stability is the ultimate objective of the Federal Reserve, that in the medium run, it is possible for policy to have some impact on real economic activity.

JEFFREY BROWN: Let me come back to something that I think you`ve all raised. Mr. Hoskins, you said that the markets were having some difficulty reading Mr. Bernanke. He`s still quite new at the job. He says something yesterday; we see quite a large impact.

Did he mean to have that impact, do you think?

LEE HOSKINS: Oh, I don`t think he meant necessarily to have that impact, in terms of that magnitude. I do think he meant to have an impact, to make it clear that inflation is a primary concern of the Fed and that, if it does its job right with respect to inflation, the economy will pretty much take care of itself.

JEFFREY BROWN: What do you think, Mr. Johnson?

HUGH JOHNSON: I think he`s absolutely right, but I think the main thing is, before he took over as chairman, we knew -- we thought things would happen, is one is that he`d be, first of all, very focused on inflation, or at least more focused on inflation and, secondly, quote, "transparent" or less ambiguous.

I think he accomplished both of those things in what he said yesterday. He clearly preserved the credibility of the Federal Reserve as an inflation-fighter, told us that he was focused on inflation, at least now; and, secondly, it was absolutely unambiguous.

His statement was, shall we say, very, very transparent. We knew what he was saying. We have a very clear idea what`s on his mind.

JEFFREY BROWN: Is there the fear, Mr. Johnson, that the markets, too, can overreact to things that the chairman says, particularly with a new chairman?

HUGH JOHNSON: Oh, absolutely, markets always overreact. They either go down too far or go up too far. They`re not very efficient in that sense.

I don`t know whether they`ve done that or not at this juncture. I think it`s kind of important, though, to get the message of the markets right now.

And, clearly, the markets are worried that the Federal Reserve has raised interest rates. They`re worried that the Federal Reserve may raise rates further and have an impact on the economy.

But the message isn`t that it`s going to be a significant impact on the economy; it`s only that the economy is not going to be as strong as we previously had thought. And I believe that`s showing up in the numbers right now for the second quarter and probably will show up in numbers for the third quarter.

JEFFREY BROWN: And, Professor Jefferson, how do you read what we`re calling -- I`ll call it the style question here for the new chairman?

PHILIP JEFFERSON: Well, I think it was very important from that perspective to do what he did yesterday, in that there`s only so much of the Greenspan aura that one can hope to adopt for him or herself.

But, in Bernanke`s case, he knows that establishing credibility is very important; he knows that transparency is very important. And so, again, he has to build his inflation credentials with the market so that, later on in his term as chairman, he will have more flexibility to do unorthodox things.

JEFFREY BROWN: And, Mr. Johnson, I know nothing`s ever final looking at the markets and the economy, what are you looking at next? What`s the next key number?

HUGH JOHNSON: Well, the next key number -- we have a whole set of numbers over the next couple of weeks that will tell us what the economy did in May. We know it slowed in the month of May, things like housing starts, industrial production, capacity utilization, income. They`ll tell us that May was a slow month.

In response to the Consumer Price Index and Producer Price Index numbers for the month of May, which are also coming out, we`ll get a pretty good idea what the Fed is going to do at their June 28th meeting. And right now, it looks pretty clear that they`ll probably raise interest rates further or another notch, probably a 0.25 percent.

JEFFREY BROWN: All right, Hugh Johnson, Lee Hoskins, and Philip Jefferson, thank you, all three.

PHILIP JEFFERSON: Thank you for having me.

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JIM LEHRER: Coming up, the warring in Somalia and a mid-term elections preview. But first, we have a report from Denver on the rising number of home foreclosures by NewsHour correspondent Tom Bearden.

MARY WENKE, Public Trustee, Arapahoe County: Good morning, ladies and gentlemen. Welcome to our sale this morning in Arapahoe County...

TOM BEARDEN, NewsHour Correspondent: Eighty-seven properties were on the auction block recently in a weekly sale in Arapahoe County near Denver. All but one were homes in foreclosure because the owners failed to make their mortgage payments.

MARY WENKE: We have to maintain that file on an active status until...

TOM BEARDEN: Mary Wenke has been running these auctions for the last eight years. In her first year as the county`s public trustee, she handled 700 foreclosures.

This year, Wenke`s filing cabinet is already bulging with more than 1,600, and she anticipates a total of 5,000 for the year. She`s even selling houses with mortgages signed earlier this year, where people never even made the first payment.

Do you ever think about the people behind these stories?

MARY WENKE: Of course we do. And, you know, this is not fun work to do, because we know that, for every file that we handle, there`s a family or a person out there that`s being displaced.

TOM BEARDEN: Colleen Shannon is currently facing the loss of the three-bedroom condo she shares with her 11-year-old son, Ryan.

COLLEEN SHANNON, Homeowner: It`s been very stressful. I think my poor son has probably seen a different side of his mother that he didn`t think he`d ever see, you know, the days where you`re crying and the days where you`re slamming things down.

TOM BEARDEN: She was forced to quit her job as a letter carrier because of an on-the-job injury. She says it took a year to start receiving disability checks. Family loans, disability checks, and child support weren`t enough to meet her monthly mortgage; she missed her first payment a year ago, and things began to go downhill fast.

COLLEEN SHANNON: It`s just been a spiral effect, I guess, just snowballed out of control. It`s kind of trying to accumulate the money to pay the mortgage when, you know, you don`t have any income. And when you get that money, it`s like everybody`s wanting it, and it doesn`t even touch your hands before it`s gone.

I had, of course, you know, like in everybody`s life, financial situations that come up. My car needed fixed. I had to have two root canals done. You know, my son had some things that came up. So, you know, just life things that come up, and it didn`t help.

TOM BEARDEN: In April, after months of rising interest rates, foreclosures all over America were up by a third over the same month last year. They were up 22 percent over April 2005 in Texas; up 61 percent in Indiana; up 300 percent in Georgia.

Many observers blame adjustable rate mortgages, ARMs, where monthly payments are coupled to rising Federal Reserve interest rates. Mortgage lender Tom Gross also point to other forms of so-called creative financing.

TOM GROSS, National City Mortgage: One of the things that I`ve seen since I`ve been in this industry is circumstances where people actually put a client into a loan that I can`t believe in my wildest imaginations that they don`t know, when the loan starts, that the client will never be able to survive when the changes start happening to that loan.

TOM BEARDEN: He says some homebuyers bear responsibility, as well.

TOM GROSS: I think, under certain circumstances, people feel that they absolutely have to have a bigger house than what that traditional 30- year mortgage would offer to them.

TOM BEARDEN: In Colorado, Arapahoe County`s April rate was five times the national average. Eighty percent of the cases were in the city of Aurora. In some neighborhoods, you can find several homes foreclosed on the same block. Most are single-family houses originally purchased for under $200,000.

This house was foreclosed on twice in two years. Wenke says that`s not unusual.

Zachary Urban has been trying to help Shannon work out a repayment plan to stay out of foreclosure.

PHONE OPERATOR: Your call is important to us. Please wait while...

TOM BEARDEN: He`s with Brothers Redevelopment, a Denver agency that counsels homeowners. Urban says, once people fall behind, they often become vulnerable to companies who swamp them with promises to help but are often scam artists.

ZACHARY URBAN, Housing Counselor, Brothers Redevelopment: They`re selling hope or, in many cases, they`re renting hope to the consumer for a short period of time. But, in many cases, what`s happening is those foreclosure scam artists are saying things that are misleading, presenting the issue in an unscrupulous manner that says, "Don`t worry about it. We`re going to save your home. All you need to do is sign on the dotted line."

COLLEEN SHANNON: They come in droves. I think the first day I must have gotten six or seven of them in the mail, and I mean, it`s just -- they just bombard you the first week. There`s 30, 40 of them here, right down to the little refrigerator magnet. We got some of those.

You know, just the single postcard stuff to actual letters, and then you get the actual letters that makes it look like it`s official looking like it`s coming from the attorney`s office, because it`s got his name at the top.

TOM BEARDEN: Patricia Hengeveld signed up with an outfit called HomeSavers when she faced losing her home in Denver in 2002. The company offered to pay off her mortgage and rent the house back to her, supposedly with lower payments, and give her an option to buy it back in two years.

PATRICIA HENGEVELD, Homeowner: They were very specific, stating, "Your name will remain on the title of the house. This is your house. We are not taking your house." And I said, "Wonderful." And I said, "Now, you promised that this is what`s going on." And they give you stacks, and stacks, and stacks of paperwork, and they don`t sit there and explain anything to you.

TOM BEARDEN: Hengeveld says, instead of saving her home, they took it from her. But the paperwork was so complex, she never grasped that.

She`s one of 277 homeowners who recently won a class-action lawsuit against HomeSavers` parent company, despite its argument that it had helped many people. The judge found HomeSavers used fraudulent techniques to get people to sign away their homes under the guise of saving them.

Hengeveld`s lawyer, John Head, has handled 400 such cases in the past few years.

JOHN HEAD, Lawyer: They say, "We have another way to do this. This is an alternative to traditional form of finance." So, you know, a drowning man will grab a snake if you throw it to him on the outside chance it`s a rope.

Well, what these people don`t understand is that, when they signed this deal and the debt service -- their monthly payments are about the same as the debt service -- a month or two down the road, they`re going to be back in trouble again, because they`ve got too much house for their family finances.

And as soon as they get back into trouble, then they get evicted. And in very short order, you can have the sheriff out there throwing their stuff out in the yard.

TOM BEARDEN: Several states have enacted laws aimed at protecting homeowners from foreclosure scams. Colorado passed its own version a few weeks ago.

MEETING COORDINATOR: Are all you folks sort of first-time homebuyers?

TOM BEARDEN: Every month, the city of Aurora holds a class for people who want to use the city`s down payment assistance program. Homeownership is an exciting prospect for John and Theresa Hart, who are finally ready to move up from renting.

JOHN HART, Potential Homebuyer: We feel right about right in there where we can put our foot in the door, and keep this house without losing it, and get the rate that we want, number one, and be able to afford it, and without having to worry about losing it.

TOM BEARDEN: Mortgage banker Gross wants to help this bunch of prospective first-time homebuyers avoid winding up on the foreclosure list.

TOM GROSS: I track the foreclosures in the state of Colorado. This is a list of all the foreclosures that have been disclosed on the Friday disclosures from the different counties in the state of Colorado just during 2006. We don`t want to have any of you show up on this list.

TOM BEARDEN: Yet, if statistics hold, at least a couple of people in this room could be in foreclosure a year or two from now. The Harts say they`ve gotten the message.

What kind of loan are you looking at, 30-year conventional loan?

JOHN HART: Yes, 30-year conventional loan.

TOM BEARDEN: Not an ARM?

JOHN HART: No, not an ARM, definitely not an ARM, definitely not an ARM.

MARY WENKE: The current beneficiary, Peak National Bank, bids the sum of $97,000...

TOM BEARDEN: But no one foresees any immediate end to the wave of foreclosures. Mary Wenke`s auction drew only one set of bidders and that was for a rare commercial property. There were no outside bidders for the 86 residential properties.

MARY WENKE: ... bids $116,000 even...

TOM BEARDEN: Wenke says that`s typical because few houses are worth enough to fetch a profit once the new buyer pays off the loan. She says the average mortgage she sees goes into foreclosure only a year to a year and a quarter after it`s signed.

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JIM LEHRER: Now, the civil war in Somalia. Margaret Warner has that story.

MARGARET WARNER: After three months of fighting between Islamic militia and tribal warlords reportedly backed by the U.S., the so-called Islamic courts movement was patrolling the streets of Mogadishu today, celebrating its takeover of Somalia`s capital city.

Left out for the moment is a U.N.-backed transitional government in Baidoa, about 150 miles from Mogadishu. It has been unable to enter the capital because of the violence.

Somalia and its eight million people have been without an effective government since 1991, when clan-based warlords overthrew the ruling dictatorship.

In 1992, the U.S. and U.N. intervened to help end starvation there, but the warlords turned on the international forces the following year, killing 18 American soldiers in the now-famous "Black Hawk Down" incident. The U.S. left shortly after and has not had an official presence there since.

A decade of civil strife has followed, pitting the new Islamic courts movement against a new collection of warlords who claim the U.S. is covertly supporting them. U.S. officials have declined to confirm that but do contend that some suspects in the 1998 East Africa bombings are being sheltered by the Islamists.

Late today, as he left Texas, President Bush was asked about the Islamists` apparent victory in Mogadishu.

GEORGE W. BUSH, President of the United States: Obviously, when there`s instability anywhere in the world, we`re concerned. There is instability in Somalia.

The first concern, of course, would be to make sure that Somalia does not become an al-Qaida safe haven, that it doesn`t become a place from which terrorists can plot and plan, and so we`re watching very carefully the developments there. And we will strategize more when I get back to Washington as to how to best respond to the latest incident there in Somalia.

MARGARET WARNER: Today, the chairman of the Islamic Courts Alliance, Sheikh Sharif Ahmed, issued a letter saying, "We categorically deny and reject any accusation that were are harboring any terrorists or supporters of terrorism," and adding, "We would like to establish a friendly relationship with the international community."

Today, the Islamists and the transitional government both said they would begin talks with one another.

And for more on what`s happened in Somalia and where these events may lead, we`re joined by Herman Cohen, who was assistant secretary of state for African affairs under the first President Bush, when the U.S. sent troops into Somalia. He`s now president of Cohen and Woods International, a consulting firm specializing in African issues.

And Abdi Samatar, a professor of geography at the University of Minnesota. Born in Somalia, he`s now an American citizen and last visited his homeland in February.

And, Professor Samatar, the dispatches out of Mogadishu today -- and there is no film of this -- but that there were these large demonstrations with both for and against the Islamists taking over. How secure is the Islamic Courts Alliance hold on Mogadishu or anywhere else in the country?

ABDI SAMATAR, Professor, University of Minnesota: I think time will tell how secure that is, but what you have is, in my estimation, about 80 or so percent of the population of Mogadishu backing the Islamic courts.

And there were two demonstrations today, one small group led by two warlords and another group that were opposed to those same groups. So time will tell, but I think, for the time being, the city seems quite secure and that people are, in fact, able to get on with their lives in the evenings and in the middle of the night, when that was not possible when the warlords were in command of Mogadishu.

MARGARET WARNER: Help us understand who these players are. Secretary Cohen, who or what is the Islamic courts union or alliance, and where did it come from?

HERMAN COHEN, Former Assistant Secretary of State for African Affairs: Well, when the government disappeared in 1991, there was anarchy, so local clans in Mogadishu essentially said, "We`ve got to do something to protect our security and give us some basis for public health and what have you."

So each clan formed their own Islamist court to provide justice and a little bit of security. And over the years, they`ve become stronger and stronger, because people felt, "This is all we have."

And, lately, they`ve formed a union and started to work against the warlords. And happily they`ve kicked most of the warlords out. That is a wonderful piece of news, that the...

MARGARET WARNER: Why is it a wonderful piece of news?

HERMAN COHEN: Because the warlords have caused tremendous hardship. They have roadblocks, shoot-outs, exactions. People were permanently insecure under the warlords, and it`s very important to keep those warlords from coming back into Mogadishu.

MARGARET WARNER: What would you add to that, Professor? Do you see it that way? And how did the Islamic Alliance get strong enough to take on these warlords, who I gather are fairly heavily armed?

ABDI SAMATAR: I think Herman Cohen is absolutely right. It`s great news, not only for Somalis, but for the international community, that the warlords are out and hopefully will remain outside of the city and the country.

The reason why the Islamic courts and the population have been able to succeed in doing this is because there are three groups who are involved in this business: One is the Islamic court; the other is a huge number of very successful businesspeople who have tremendous amounts of weaponry; and, thirdly, there`s a very widely distributed civil society movement.

It`s these three groups who are holding the fort, so to speak. And the reason I think they have been successful in defeating the warlords is because the people of Mogadishu and Somalia have gotten sick and tired of the violence which has been visited on them, as Secretary Cohen earlier on. And finally they decided they had enough of this and, therefore, decided to go along with the Islamic people.

MARGARET WARNER: Now, could you explain, Professor, why the business community in Somalia is supporting the Islamists? That might seem to, you know, outside observers a contradiction.

ABDI SAMATAR: I would like to call these people Islamic practitioners, rather than Islamists. Islamists has the connotation that they are incredibly politicized and of the kind that you can expect from the Taliban`s.

These folks, in my estimation, are far away from that and quite different. The reason why the businesspeople have decided to join forces with this is because the businesspeople have to protect their businesses and their property, and so they literally have to have their own security systems.

If there was a state and if there is peace in Mogadishu, then they wouldn`t need all of that. And, secondly, they were also the victims of the warlords, in terms of prosecution, looting, and what have you.

The civil society groups have joined the Islamic courts in large measure because they are the ultimate victims of the war in Mogadishu and elsewhere in the country, so you have a coalition of people spearheaded by the Islamic courts who are doing this at the moment.

MARGARET WARNER: So if all of this is the case, Secretary Cohen, then why is the U.S. government apparently -- though they`ve never confirmed that the U.S. has been supporting the warlords financially -- why is the U.S. so concerned about this Islamic group?

HERMAN COHEN: I think the U.S. government panicked. They saw Islamic group; they said, "Taliban is coming."

Also, there are friends in the region, like the Ethiopians, who probably are feeding false intelligence about terrorists being hidden and that sort of thing, because the Ethiopians are deadly afraid of Moslem control and also they have their own Moslem problem among the Oromo ethnic group in Ethiopia.

So they want to keep the Islamists out of power, and they will bring the U.S. into it, if they can.

MARGARET WARNER: Now, though you heard the president still express some concern about whether it will become a safe haven for al-Qaida-style terrorists, how great a danger do you think there is of that?

HERMAN COHEN: I think it`s minor, because the people in the Islamic movement saw what happened to the Taliban and they don`t want the same thing to happen to them; that`s why this letter that came out in your presentation earlier is saying, "Don`t worry. We`re not going to have any of these folks here. Don`t start fighting with us."

And I think that`s right, because the first thing they need to do is consolidate power where they are. They don`t want to get into a fight with the United States.

MARGARET WARNER: But, Professor, the same leader who wrote that conciliatory letter to the international community about not harboring terrorists also was quoted as saying at this rally today, "We won`t stop until we`ve established an Islamic state throughout Somalia." He talked about Sharia law.

Is this group determined to impose a very strict form of Islamic rule, theocracy, if you will, in Somalia?

ABDI SAMATAR: I think Somalis have always been moderate practitioners of Islam and very, very free people. The same gentleman, Sheikh Sharif, also noted today that they are not interested in becoming ministers or government themselves -- that`s the Islamic courts -- and that they will be using the Sharia law until such a time when a constitutional government is formed.

I`m not too concerned that they will be able to impose the kind of draconian rules that the Taliban`s or anybody of that ilk have done to their people.

What`s relatively very refreshing about this group is the fact that they have committed themselves to say that they are not interested in becoming ministers; they are not interested in becoming government, but what they want to do is create the conditions in which the Somali people, and particularly the people of Mogadishu and the Banadir region, could be able to have determination as to which way they want to go.

That`s quite refreshing. We have not seen that in any group of movement who have taken over a city anywhere in the world, whether they are religious or secular.

MARGARET WARNER: So, Secretary Cohen, do you think then that this Islamic courts movement wants to actually, what, support this transitional government that`s been holed up in that town, Baidoa?

HERMAN COHEN: Well, the traditional government has some form of legitimacy. The U.N. has recognized them; the European Union has recognized them. Only the Americans have been a little reticent, and I think even now, from what I hear from the spokesman in the State Department today, that the U.S. is ready to recognize them.

So this represents legitimacy. And if they can negotiate with the Islamic courts, you might get the beginning of a national government, which would be great.

MARGARET WARNER: But, in the meantime, the warlords are still vowing that they`re not going to give up without a fight. They certainly, this large clan in Mogadishu, had this big rally today. Do you foresee more fighting?

HERMAN COHEN: I do foresee more fighting. They`re not going to give up, but this is the job of the United States right now, to put pressure on the Ethiopians, "Look, stop supporting these guys. This is only trouble."

MARGARET WARNER: You mean that money has been funneled through the Ethiopians, you believe, to the warlords?

HERMAN COHEN: And also there`s the other element of Eritrea. Anything that Ethiopia supports, Eritrea goes against, so Eritrea is feeding arms to the Islamic courts. We should tell them, "Stop doing that now. Now is the time for talks instead of fighting."

But the main thing is to keep those warlords out of Mogadishu.

MARGARET WARNER: But some of them are in Mogadishu?

HERMAN COHEN: In the fringes. In the fringes, yes.

MARGARET WARNER: And, Professor, last word from you. Do you think we`re going to see more fighting?

ABDI SAMATAR: I think there will be some skirmishes along the way, but I think this is an opportunity, both for Somalis, but more importantly for the international community to seize this moment and take these groups on their word.

They said they want to protect human rights. They want to invite all the international community to come to Mogadishu and look at every cranny and nook to be able to see if there are any terrorists. They want to cooperate. I think we should call their bluff and call them on their word; that`s an opportunity which we have not seen for almost 15 years, and it`s time to move on that one.

MARGARET WARNER: All right. Thank you, Professor Samatar, Secretary Cohen, thank you both.

HERMAN COHEN: You`re welcome.

ABDI SAMATAR: Thank you, Margaret.

(BREAK)

JIM LEHRER: And finally tonight, our mid-term election preview with Gwen Ifill.

GWEN IFILL: Voters went to the polls in eight states today, casting ballots in primaries for senators, and governors, and members of the House. The backdrop for all this voting: these numbers.

In early 2005, 50 percent of Americans said they approved of President Bush; that figure is now down to 33 percent.

For members of Congress, the decline has been even more steep. In 2005, 43 percent thought lawmakers were doing a good job; that`s now dropped to 23 percent.

What does any of this bode for this fall`s mid-term elections? For analysis, we turn to Andrew Kohut, director of the Pew Center for the People and the Press, and Amy Walter from the Cook Political Report.

Andy Kohut, yours are the latest numbers about the president`s disapproval ratings. What does this slide mean?

ANDREW KOHUT, Pew Center for the People and the Press: It means that people are mad at Washington; they`re mad at the president; they`re mad at the Congress; they`re mad at the Republican Party, because they control both.

And the consequences are three things. We see a very high rate of people telling us they will be thinking about national issues when they go to vote in congressional elections, a record number of people saying that they will be voting against the president, 34 percent. We haven`t had anything that high since that question started being asked in 1982.

We have a very high percentage of people saying that they will be thinking -- that they care which party controls Congress. So there`s nationalization.

There`s a surge of anti-incumbent sentiment. We now have 29 percent of people saying they don`t believe their congressperson deserves re- election. It hasn`t been that high since 1994. And the Republican Party is taking it on the chin as the party that controls Washington.

GWEN IFILL: Amy Walter, you`ve been following these House races, competitive and not-competitive, as they unfold. Is Andy right? Are congressional ratings sliding because of this national anger?

AMY WALTER, Senior Editor, The Cook Political Report: Well, absolutely. And I think the congressional polls are more of a lagging indicator. The leading indicator were some of these numbers that you put up on the screen, the president`s approval rating.

I think another important one is the right direction-wrong track question, where you have 70 percent of voters now saying they think the country is headed off in the wrong direction. So I agree with Andy that what voters are saying, in the big picture way, is we`re not happy with the status quo.

What we`re seeing in the individual House race polling right now is that it`s taking a toll on almost every single Republican candidate, that it is almost like a weight that`s just pushing them down. So if you are a Republican incumbent that is used to getting polling back that shows you in the mid-50s, maybe now you`re only in the mid-40s.

GWEN IFILL: But isn`t this something that often happens in the second term, the mid-term elections or the second term of a president, that this kind of slide begins?

ANDREW KOHUT: It doesn`t always happen. In 1998, even though President Clinton was being impeached, his approval ratings were 56 percent. His party actually gained a few seats as he faced impeachment, because the public was with him. They weren`t angry at the president and, therefore, his party didn`t take it on the chin.

In every election in our history -- modern history -- when the president -- his approval ratings slip, his party loses seats. Now, this may be a different era. Maybe the structure of the electorate may be a little different, but, if we go by history and these low ratings for Bush and the Congress remain, the odds are very good that the Republicans are going to lose some seats.

GWEN IFILL: But Bill Clinton`s first term was that 1994 mid-term election. Are there signs that it`s beginning to look like that? That`s when the Democrats lost control of both the House and the Senate.

AMY WALTER: Well, and when you look at the numbers that Andy pointed out on the national side, it tracks almost exactly with where the country was in 1994, when you saw the big shift from Democratic control to Republican control. Remember, that was 52 seats. In this case, we only need to see a change of 15 seats in the House to see Democrats take control.

GWEN IFILL: Let`s talk about the nationalizing of elections, something you alluded to. One of the races we`re watching today in California is the 50th congressional district of California, Duke Cunningham`s seat.

He famously was retired, involuntarily, because of corruption charges, but everyone is waiting to see if a Democrat can take over this famously Republican seat and, theoretically, that would mean that corruption matters on a national stage; does it?

ANDREW KOHUT: Well, it does. I mean, part of the discontent with Congress is the discontent over the scandals. And we have a very large percentage -- again, I keep saying the largest number we`ve ever seen -- I`m not B.S.`ing you; it really is the largest number -- saying this Congress has achieved less than most Congresses, and the scandals are an important part of that.

People expected from President Bush because he said that he would restore credibility to government in Washington. And for a good part of his first term -- or most of his first term -- they believed that. And they are more of the view that a change to the Democrats will reinvigorate the ethics in Washington.

GWEN IFILL: How will we tell, Amy, if that`s really what`s happening, that people are making these large conclusions, or whether they`re just not voting because they don`t want, I don`t know, a dam built?

AMY WALTER: Well, here`s what I think the big difference between 1994 and today, when we look at all the empirical evidence before us. The one number that doesn`t add up from where we were in 1994 is that Democrats not seen as positively today as Republicans were seen in 1994.

Both sides that are coming in right now -- voters are saying of both parties, "We don`t really particularly like either one." Democrats are only doing better in that they`re less disliked than Republicans, but they`re not better liked.

Now, I think what that suggests is that Democrats still have to make their case. They don`t have to make the case for why people want change; voters are right now saying, "Yes, we`re not happy with the status quo." But I think where they`re sitting right now is they`re saying, "But I don`t know if I feel like Democrats are the party that`s going to take me there."

GWEN IFILL: So what are we watching for tomorrow? Obviously, that 50th district race in California, but any of the other big races?

AMY WALTER: Well, I think that`s the real race that folks are watching, only because it`s the only one where we put a Democrat up against a Republican. These other races are sort of traditional primaries, where now we`re going to finally have a candidate.

GWEN IFILL: For the record, Francine Busby against Brian Bilbray, the Republican.

AMY WALTER: ... Busby against Brian Bilbray. I think what I`m going to be looking for in the special election is the issue of intensity. And Andy sort of alluded to this earlier, but how motivated are Democrats and Republicans to come out and vote?

It`s been clear from the very beginning that what Francine Busby has been able to do is coalesce her Democratic base. She has every single vote that went to John Kerry last time. She`s kept all of those. Bilbray is the one who`s had problems getting Republicans to get on board. Now, he has some of his own troubles. He`s been attacked by the right by some Republicans, but that`s not the whole problem.

GWEN IFILL: Andy, how do you measure that intensity?

ANDREW KOHUT: Well, the Gallup poll measured it. They`ve been asking for a long time, "Will you be an enthusiastic voter come the fall?" And only 38 percent of the Republicans said yes, and 50 percent of the Democrats said yes. And that`s the reversal of the usual pattern.

GWEN IFILL: And you attribute that to...

ANDREW KOHUT: The Republicans feel under a cloud. I mean, Bush`s base is less happy with him; moderate Republicans have fallen away in great numbers. You know, they have a sense that things aren`t going well in Iraq. They`re paying $50 for a tank of gasoline. They`ve heard about the scandals.

And, you know, the same thing happened, by the way, in `94. Democratic turnout, which is almost always lower than Republican turnout, went very much lower. When a party is under pressure, when the climate of opinion runs against them, it`s very hard to get the base out.

GWEN IFILL: Now, without making a partisan reference here, there is an elephant in the room, and that`s the incredible advantage that incumbents have, just built-in advantage. They`ve got the money; they`ve got the fundraising. Even the Republicans who don`t necessarily want to appear campaigning with President Bush, because of his unpopularity, are having to take money from President Bush.

AMY WALTER: Of course.

GWEN IFILL: So does that offset the negatives we see?

AMY WALTER: Well, and this is what we`re going to really test in this election, which is just how strong is the seawall that incumbents have built around themselves? The other issue is redistricting has helped them, too, right, so they`ve created districts that help to protect them, along with all the other incumbent advantages.

This is where Republicans point to and say, "This is why things are going to be different than 1994." There were many open seats, Democratic open seats in 1994. Republicans don`t have as many to defend; they don`t have as many freshmen to defend.

These are tried, true, tough campaigners who`ve been through tough election before. They know what they`re doing. They`re going to be able to withstand this.

Of course, as we pointed out, no Republican who has been in Congress has ever seen numbers that looked like this, with their president in the White House.

ANDREW KOHUT: There`s a lot of anger among independents in their views about their incumbents. This 29 percent that I referenced, "my member does not deserve re-election," that`s driven by frustration among independents. And we haven`t seen...

GWEN IFILL: And that`s true for the president, as well, isn`t it?

ANDREW KOHUT: That is indeed. It`s independents who determine elections. We hear so much about base. It`s independents who shape the election. And this anti-incumbent sentiment is at the level we saw in `94.

GWEN IFILL: So we`ve been talking about the bad news for the Republicans all along here. What about the Democrats? Are they in any position to take advantage of that?

ANDREW KOHUT: Well, the bad news for the Democrats is they don`t have a Newt Gingrich. They don`t have anyone who represents a rallying symbol for their party.

The question is: Do they need it? I mean, in most elections when people are angry, they don`t vote for the alternative. They vote against the incumbents.

Now, that generally works; it might not work. They would certainly be in a safer place if they had someone comparable to Gingrich who could really rally the troops, who could stand for something that was different and distinct. It doesn`t exist on the national stage.

GWEN IFILL: Democrats?

AMY WALTER: I think those are all good points, and I agree that they might not need a national platform. That`s the discussion and the debate we keep hearing in Washington among Democrats. "Don`t we need to have a message? Don`t we need have a national platform to run on?"

If I`m a candidate running for Congress as a Democrat, I don`t necessarily think I`d want to come to Washington to go stand on the steps of the Capitol and say, "Rah-rah, here`s our national plan. Here we are." They`re running against Washington; they`re not looking to come to Washington.

But I do think that, along with the message about change, there needs to be some sense of what they`re going to do. I don`t think they need a manifesto, a 300-page document they`re going to hand out to every voter, but just a sense for what it would mean to have Democrats in charge. It would mean this.

I think what we saw in the Francine Busby-Brian Bilbray race, an ad we saw in that race that we`re going to see literally Xeroxed all over the country by the Democrats, is this simple message, where she starts off the ad by saying, "Had enough?" And just sort of runs through the litany, "Vote for me." And that`s what Democrats are going to have to hope that voters are going to do.

GWEN IFILL: OK, well, we will be watching the results, especially in that California race. Amy Walter, Andrew Kohut, thank you both very much.

AMY WALTER: Thank you.

(BREAK)

JIM LEHRER: And, again, the major developments of this day. Wall Street lost more ground over concerns about inflation and interest rates. The Dow Jones Industrial Average fell another 46 points; the Nasdaq lost six.

Charges filed in Canada said alleged Islamic militants may have plotted to storm parliament and behead the prime minister.

And the European Union offered incentives to Iran if it freezes its nuclear program. Iran said the offer contained "some positive steps."

(BREAK)

JIM LEHRER: And, once again, to our honor roll of American service personnel killed in Iraq and Afghanistan. We add them as their deaths are made official and photographs become available. Here, in silence, are nine more.

We`ll see you online and again here tomorrow evening. I`m Jim Lehrer. Thank you, and good night.