• This is a rush transcript from "The Journal Editorial Report," December 29, 2007.

    PAUL GIGOT, HOST: This week on the "Journal Editorial Report," the biggest stories of 2007 and the one sure to make headlines in 2008. From the turn around in Iraq to Europe's turn toward America, a look at the events that shaped the past year.

    Plus, will the Obama bubble burst?

    And will Fidel Castro finally step aside?

    Our panel has their predictions for the year. It's all coming up on a special edition of the "Journal Editorial Report".


    GIGOT: Welcome to the "Journal Editorial Report." I'm Paul Gigot.

    From the success of the Iraq surge to the subprime morality meltdown it was another remarkable year. And this week we will look down at those sure to make headlines in 2008. We begin with the biggest stories of this year.

    Joining the panel this week, "Wall Street Journal" colonist and deputy editor Dan Henninger, foreign affairs columnist Bret Stephens, and editorial board members Dorothy Rabinowitz and Mary Anastasia O'Grady.

    Dan, what's your biggest story or trend of the year?

    DAN HENNINGER, COLUMNIST & DEPUTY EDITOR: My biggest story was the meltdown in the subprime mortgage market. I call this the greatest example of moral hazard in the history of the world. What is moral hazard? It means when you reduce risk to a low point people behave irresponsibly. The irresponsibility here is unbelievable. We now believe maybe 50 percent of the mortgages were fraudulent in some regions of the country.

    The risk management controls that many investment banks and investors had applied to these securities they marketed, were almost nonexistent. Merrill Lynch, USB, Citigroup, they are taking tremendous hits from this.

    GIGOT: We in journalism assign blame. We do that are a living. How about the Federal Reserve and the people in Washington who encouraged housing? They said we want home ownership to be 70 percent, 75 percent, 80 percent. Now when people over lend, now they go around blaming people for having made these loans. And the Federal Reserve had easy money, way too easy money.

    MARY ANASTASIA O'GRADY, EDITORIAL BOARD MEMBER: Isn't the reluctance of the Federal government to let people take their lumps right now? Just add to the problem? It seems to me we haven't learned anything from this.

    HENNINGER: My God, the Paulson Plan is thinking about freezing teaser rates for five years. What if they are freezing teaser rates for criminals?

    GIGOT: How long will this last, Mary?

    O'GRADY: I think the housing market will be in the doldrums for most of next year. But it is not a big part of the U.S. economy. It doesn't have to damage the whole U.S. economy but it won't come back any time soon.

    GIGOT: Mary, what is your big story or trend of 2007.

    O'GRADY: My big story is the resilience of the U.S. economy.

    GIGOT: The flip side of Henninger.