Watch "The Beltway Boys" Saturday at 6 p.m. and 11:30 p.m. ET and Sunday at 2:00 a.m. and 6:30 a.m. ET.

This is a full transcript from "The Beltway Boys," on January 6, 2007.

MORT KONDRACKE, "ROLL CALL": Coming up on "The Beltway Boys," President Bush and Democratic leaders are making nice for now. But a showdown over Iraq is just days away.

FRED BARNES, "WEEKLY STANDARD": Bush is shaking up his military team on the ground, and will announce a new Iraq strategy next week.

KONDRACKE: But Democrats want to flex their political muscle, and will likely oppose a troop surge.

BARNES: And Rudy Giuliani is forced to do some big-time damage control this week. We'll tell you why.

KONDRACKE: That's all coming up on "The Beltway Boys," right after the headlines.

(NEWSBREAK)

KONDRACKE: I'm Mort Kondracke.

BARNES: And I'm Fred Barnes, and we're "The Beltway Boys." And the "Hot Story" is "Showdown!" Of course I've talking about showdown on Iraq, and President Bush is girded for battle. He'll give a speech on Wednesday evening to outline his - quote - "new way forward" - unquote on Iraq. And we have a pretty good idea of what he's going to say. And we have a pretty good idea how Democrats are going to respond. I mean, we know for instance that Bush is going to go for more troops in Iraq, a surge, which I think may be as many as 30,000 troops. He's going to want more money to boost the Iraq economy, and some money to - to the - the fledging political parties in Iraq. And - and Democrats are obviously poised out there to oppose everything he says. But listen to Bush first. Watch.

(BEGIN VIDEO CLIP)

GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: I'm in the process of making up my final decision as to what to recommend. What - what recommendations to accept. One thing is for certain: I will want to make sure that the mission is clear and specific and can be accomplished.

(END VIDEO CLIP)

BARNES: That was when - after he met with Angela Merkel, the German chancellor on Thursday. Now - I mean, Democrats have - there are certain things they can do and not do. But we know they're going to be for the most part opposing Bush on this. They can't block - in the short run, they can't stop him from sending the - more troops to Iraq. But they can block new spending on - on things that the president seems to want. You know, this money for the economy and for the political parties in Iraq. And, you know, just a day after the - the Democrats were sworn in - they had one day of bipartisanship, then the next day Pelosi and Reed sent this letter to the president. Let me read you part of it, Mort: "Surging forces is a strategy that you have already tried and that has already failed. Like many current and former leaders, we believe that trying again would be a serious mistake. It's time to begin to move our forces out of Iraq and make the Iraqi political leadership aware that our commitment is not open-ended" - unquote. I think we'll also hear some of this Democratic criticism a day before Bush's speech, when - there's a hearing on Iraq before the Senate Foreign Relations Committee, in Democrats' hands, and headed by Joe Biden, who's become I think every day a stronger critic of the American intervention in Iraq. Now - I don't know. If I had to guess, here's what I'd say - I mean, the battle is on, at home and - and in Iraq. And I think the president's going to win the domestic battle. But the one in Iraq? That's up in the air.

KONDRACKE: I know. This is Bush's last shot in - in Iraq. It's his last shot for victory, and his last shot really to avoid a humiliating defeat, both for himself and for - for the United States. It's got to be a big surge. It's got to be a long surge. It's got to be a successful surge. And - and it's got to establish security for once and for all in Baghdad and Anbar province, and pave the way for economic development and - and political development. And this is a long shot, I got to - I got to say. Because nothing before has - has worked. Now Bush looks like he's going to go for broke. He's not only, you know, going to surge, but he's also replacing his team in - in Iraq. The military - General Casey, who's been in charge of the Iraqi forces; General Abizaid, the CENTCOM commander, both leaving. Incoming Admiral William Fallon for CENTCOM, and General David Petraeus, probably the most successful and praised commander ever to - to serve in Iraq is going to be the - the overall commander in Iraq. Also, our ambassador there, Zalmay Khalilzad is leaving, and he's going to take over the U.N. job. And Ryan Crocker, who's the - been the ambassador to - to Pakistan is moving over to be - to be the new Iraq ambassador. So he's trying to do a fresh start here. Now the Democrats, as you say, are not going to support him at all. They're going to do every thing possible to thwart him, short of actually denying money for the troops. And, you know, and - and as you say, they may even deny money for - for other things. The big question is, Are the Republicans going to support him? Right now, the only upfront supporters he has for this policy are - are heroes John McCain and - and Joe Lieberman. Every body else is sort of silent and standing by and waiting to see what happens.

BARNES: Yes. Well, he's not going to get any help, particularly from Nancy Pelosi, who - who, you know, of course rose to become the first woman as a House speaker ever on - on Thursday. And - but she used her speech - you know, this was supposed to be a day of high bipartisanship. And she used her speech to whack Bush repeatedly on Iraq. Watch this.

(BEGIN VIDEO CLIP)

REP. NANCY PELOSI (D-CA), HOUSE SPEAKER: The American people rejected an open-ended obligation to a war without end. Shortly, President Bush will address the nation on the subject of Iraq. It is the responsibility of the president to articulate a new plan for Iraq that makes it clear to the Iraqis that they must defend their own streets and their own security. A plan that makes - promotes stability in the region, and a plan that allows us to responsibly redeploy our troops.

(END VIDEO CLIP)

BARNES: You know, I don't think Democrats correctly understand American - the American people's sentiment on Iraq. Obviously, they're upset, because we appear to be losing in Iraq. I don't think they want to lose though. I don't think they want a - a hasty retreat, which Democrats seem to be - to be advocating. Certainly Nancy Pelosi does, and she's a follower of John Murtha, who wants a - remove the troops immediately. Now, you know, Republicans - or the White House, really, is girding for battle also on domestic issues as well. And it's not insignificant that Harriet Miers, the White House general counsel, is leaving. And we don't know who's going to replace her, but it's - it's going to be some hard and tough lawyer who's going to have to deal with a flood of subpoenas coming into the White House, particularly as Democrats go back and try to find flaws in every thing President Bush has done, particularly in Iraq. But by the way, Mort, I think the White House is - is ready to use the veto, to use executive orders, to get filibusters by Senate Republicans, both to defend themselves, and block policies they don't like. They like some of the things Democrats want: immigration reform and extending No Child Left Behind. I think they'll agree on energy. You know, more money for these alternative fuels. But the fight is on.

KONDRACKE: Yes. You remember in "The Godfather," when - when they want to the mattresses for the - for the - for - for war, you know? They set Tom Hagan aside as the.

BARNES: Yes.

KONDRACKE: As the peacetime consigliore, and he got a wartime consigliore. That's what Harriet Miers' replacement is all about. The - the - look, the message of the last election - and both Republicans and Democrats said say so, was, the public is sick and tired of combat war - warfare between the parties. They want not vetoes; they want not filibusters and stuff like that. They want action. And there can be action on the - the - on the items that you - that you mentioned, immigration and - and so on. The problem is going to be on money. Both sides say that they want to get the deficit under control. They want to eliminate the - the - the budget deficit by the year 2011, I think it is. The - the - what the president wants to do is not raise taxes, and limit domestic spending. What the Democrats want to do is invest in - in domestic programs, health and - and education and children's - children's health, for example. That's going to cost money. They got to get the money from increased revenues somewhere. And either it's going to be higher tax rates, or it's going to be some - some other device for - for (INAUDIBLE). That's where the - the crunch is going to come, over this money business. And I could write you a scenario for a closedown of the federal government again.

BARNES: Yes.

KONDRACKE: Remember, when the - when - when the Republicans took over in 2000 - in 1994, the next year there was a - a budget showdown. And - and the government got shutdown. I mean, you could - you could have that same kind of confrontation in 2007.

BARNES: You could. But we won't have that. It.

KONDRACKE: Well, I hope not.

BARNES: It's not going to happen. Look.

KONDRACKE: The public would be disgusted if it happened.

BARNES: The White House is perfectly happy having this argument with the Democrats. They want more spending and tax increases. The - the Republicans and Bush want spending restraint and no tax increases. They think that - that helps Republicans. I - I think that's up in the air, particularly when you bring in issues like child health care and so on, for spending on that, which most people I think favor. But - but this is the battle we're going to have. The public, in the election in 2006, did not vote for higher taxes. In fact, they didn't even vote, I don't think, to change anything in any particular policy except to find one that wins in Iraq. I mean, we have a center right sentiment in this country, and that really hasn't changed. So I - I think Bush - and Bush has now has adopted a policy, I believe, of - of no new taxes across the board. Social Security reform - if - if Democrats won't accept personal investment accounts, the president's not going to give them a tax increase. So it's off the table, too.

KONDRACKE: Listen, if you want to get - if - if you want to make a down payment - and it's possible that there won't be one - on getting our great debt problem under control, you're going to have to raise some revenues. And if Bush is going to stand in the way of that, I guarantee you, the public is not going to be with him.

BARNES: What would happen with the tax money raised - extra tax money on Social Security that's brought in? It'd be spent right away. You know it. You know it.

KONDRACKE: No. Not right away.

BARNES: Oh, of course! Immediately. Yesterday.

KONDRACKE: That's the philosophical difference between us (ph).

BARNES: Coming up, Mitt Romney inches toward a presidential race. And Rudy Giuliani's master plan for 2008 is leaked to the press, and we'll tell you what's in it. Stick around; our "Ups and Downs" are next. (COMMERCIAL BREAK)

KONDRACKE: Welcome back to "The Beltway Boys." Let's take a look at the "Ups and Downs" for the week.

Down: Rudy Giuliani. A hundred-and-forty-page secret dossier laying our Giuliani's master plan for 2008 was leaked in excruciating detail this week. Included in the tome, aides' worry that personal and political baggage could scuttle his run.

BARNES: You know, somebody in the - in the Rudy campaign left this behind, and somebody from one of the other camps got it, and obviously lifted and leaked it first, I think, to "The New York Daily News." But - I mean, it's pretty damaging.

But, you know, the fact is, I didn't think the press made as much of this as I thought they would. But once Rudy runs, if he does, then the press will regurgitate the whole thing, and there's a - a lot of fodder there for his opponents as well.

But, you know, I think those - and there are many of them - many people who have written off Rudy as - as a viable Republican presidential candidate. One, because he's so socially liberal, and two, because of his business dealings in that - and he got President Bush to nominate his former aide, Bernie Kerik, who has a less than blemished - a less-than- unblemished record - to nominate for the secretary of Homeland Security. And that, obviously, didn't work out. He had to withdraw the nomination.

But all you do - have to do is remember, when Rudy Giuliani spoke to the Republican convention, and the way he had those delegates just in his hand. The - the way they - he reacted to them, and - and he to them - I mean, it was - it was fabulous. Easily the best speech connecting with the Republican audience. Just remember that. We could see it again.

So I don't write him off.

KONDRACKE: Yes. Well, I - I - yes, I don't write him off, either. But - but he does have baggage. In this.

BARNES: Lots.

KONDRACKE: .this memo, obviously, detailed it. Three marriages, you know? The last divorce and remarriage very messy. And he's pro-choice, and he's pro-gun control, and he's pro-gay rights and stuff like that.

I mean, the other missing thing about Rudy Giuliani is, Where is he? You know, here we are - we're in the midst of a - of a major decision over taxes and - and - and Iraq policy. And - and he's not - you know, he's not part of the debate. So he's got to get in there.

Up: Mitt Romney. The outgoing Massachusetts governor announced the formation of a presidential exploratory committee this week, meaning that he's all but certain to make a run for the White House.

Well, he started out with another lurch to the right. You know, he signed Grover Norquist's.

BARNES: Mort - Mort, that's where the voters are.

KONDRACKE: Well, he signed Grover Norquist's "No Tax Pledge," which he - he refused to do in the four years that he was - that he was governor of Massachusetts. This is a similar to what he did on abortion, and on - on gay rights. And it makes you wonder, you know, who is this guy? You know, does he have the same flaw of - that - that John Kerry had. You know, saying one thing, doing - doing another.

Now at the same time, former governor - Wisconsin Governor Tommy Thompson announced that he was going to - that he was going to form an exploratory committee, too. I would like to think that Tommy Thompson would have a hearing. I - I'm worried that he won't have a hearing, shall we say.

BARNES: You mean not - not a chance to win, but just a hearing.

KONDRACKE: No, a chance to win.

You know, Tommy Thompson's an aggressive, thoughtful, imaginative guy.

BARNES: And a great governor.

KONDRACKE: Yes.

BARNES: I mean - I mean, here's the one who - who laid the groundwork for welfare reform.

KONDRACKE: Stem-cell research.

BARNES: Yes. Well, that's a loser.

As we will find out - and as we are finding out more and more about the great breakthroughs not from embryonic stem-cell research, but from adult and other stem-cell research, which you can't suppress forever, as much as some of these embryonic stem-cell fans are trying to do.

But anyway, let's go back to the Republican presidential race - race after that aside. I think it - it won't be Tommy Thompson, and it may not be Mitt Romney either. But the only person who I think can really challenge John McCain for this nomination is somebody who's got to gather up all the conservatives. It's a conservative party. There's a lot of empty turf there that no candidate has claimed.

Romney's trying to.

KONDRACKE: You don't think John McCain is a real conservative, huh?

BARNES: No, I don't. But I think he's a very strong candidate, and conservative on some issues, great on Iraq. But it's - it - it - it's only a strong conservative who can stop him from winning. You know, he's the next guy in line, as you always say.

KONDRACKE: All right.

Coming up, the growing debate over lavish executive salaries.

And Duke University invites two of the charged lacrosse players back to school. But is it too late?

Up - more "Ups and Downs" are coming up.

(COMMERCIAL BREAK)

BARNES: Welcome back to "The Beltway Boys." We're continuing with our "Ups and Downs" for the week.

Up: John Negroponte. The now-former director of national intelligence is getting the job he really wants: deputy secretary of state, where he will play a major role in shaping U.S. policy in Iraq, and everywhere else, for that matter.

KONDRACKE: Yes. Well, he's a - he's a career diplomat. And, you know, he's what - what - what I'd like to call an "iron ambassador." He's not just a cookie cutter or a .

BARNES: (INAUDIBLE).

KONDRACKE: Or - yes. He's - I mean, he's been ambassador to some really tough places. Honduras during the - the Contra wars, Iraq, the United Nations and so on.

And the intelligence - DNI, the director of national intelligence, is not intelligence czar. He can't - he doesn't really run the intelligence program. It's a kind of a thankless job where you don't have budget authority, you don't have personnel authority, and basically you get rolled by the Pentagon. So he's - I think he's - he's where he belongs.

BARNES: Yes. I think the only thing good about it is, you do get to see the president a lot.

KONDRACKE: Yes.

BARNES: And he might not otherwise in place of the CIA director and these other people who are really doing all the intelligence work. So he will fit.

And I think of all the deputy secretary jobs in - in all the Cabinet agency, this is just about the most important one, because he runs the department on a day-to-day basis.

KONDRACKE: Right.

Up: Duke University. It's finally doing the right thing by inviting two of the accused lacrosse players to - back to school for the spring semester. Now, the - the third, David Evans, had graduated, actually. So this is - this is doing right by these two who - who were - who are still under indictment, actually. But the prosecutor, Mike Nifong, has been totally discredited and may - may lose his job.

Now, Duke has one more crucial thing that it needs to do, and this is to do right by what you might call the - the fourth victim, and that's the - the sacked ..

BARNES: Coach?

KONDRACKE: Coach, who - who's name is Mike Pressler, who was forced to basically leave a very lucrative job, take - taking a much-less well- paid job. And Duke needs to reach a financial settlement with him that's fair.

BARNES: You know, I - I'd add one more thing that I think Duke needs to do, or at least that the faculty needs to do, or at least those 88 members of the faculty who paid out that statement - remember that statement? In the harshest possible language, not assuming innocent before proven guilty, but attacking the - the accused lacrosse players, the lacrosse team, pretty much athletics in general, and big-time athletics in colleges around the country.

They need to apologize. Those faculty members need to.

All right. Down: ousted Home Depot CEO Robert Nardelli. Investors upset at falling profits gave Nardelli the boot this week, but the controversial CEO will have a soft landing: a $210 million compensation package.

Look, Nardelli's problem is - is that - well, on his watch, Lowe's got ahead of Home Depot. These are the two big home-improvement stores all over the country. I think they're both pretty good, actually. I like them both.

But Mort, I know you wince and whine about these CEO salaries.

KONDRACKE: And growl.

BARNES: And growl, yes. And a few other things about these high salaries - and they are high - that CEOs get.

But look, this is what the market says is required to get top-flight executives. Nardelli was a big wheel at GE. Almost was named - he - he was a runner-up in - in the replacement of Jack Welch, when - when Welch stepped down at - at GE. But there aren't that many.

Mort, there are lots of people who can do what we do. There are not many who can be top CEOs. And this is what the market - most of that.

KONDRACKE: But look.

BARNES: Wait a minute. Most of that $210 million is what was guaranteed him to get him to come to Home Depot. So, I mean, you may not like the market. It may look ugly. But - but this is the way it has to work.

KONDRACKE: Some CEOs may be worth $210 million, but Nardelli clearly wasn't. And look, the obscenity here is that - see —- wait a minute. The obscenity - the obscenity here is that CEO salaries used to be what 90 times that the average worker made. Now they are 400 times. That's not - and it's not the market that's.

BARNES: So what?

KONDRACKE: It's not the market that decides that.

BARNES: It is the market.

KONDRACKE: Look, these CEOs appoint the board - the people who are on their boards. They - the - the compensation committees are functions of the board. And they're - it's all a - it's all a sweetheart deal.

You know, the - the - what? - the shareholders need to have more say in what the compensation is. And it ought to be more tied to performance, and not just to - to the whims of the - of - of the compensation committee.

BARNES: Look, this is the money that was offered Nardelli, not by some board when he's going to get hit his tenure, but after the gimme, to get him to come.

KONDRACKE: Yes, I know.

BARNES: And what happened when he didn't perform well? He got fired.

KONDRACKE: Yes, I know. But that - that's the case.

(CROSSTALK)

BARNES: Oh, come on.

KONDRACKE: But the - but the - these CEO severance packages are way out of line for anything (INAUDIBLE) performance (INAUDIBLE)

BARNES: Mort, is the envy just eating you up?

KONDRACKE: No, it's not the envy. It's a question of fairness.

BARNES: All right. Don't move a muscle. "The Buzz" is up next.

(COMMERCIAL BREAK)

KONDRACKE: Here's "The Buzz," Fred: the United States faces trouble, not only in Iraq, but also in Afghanistan, where the Taliban has made significant gains, as we all know, near the Pakistan border, but also in Helmand Province, which is southwest of - of Kabul. And it's the - the place where 20 percent of the world's opium comes from. Which means the Taliban can charge taxes on the opium production and buy lots of weapons and cause lots more trouble in Afghanistan.

BARNES: Hmm. Well, let's not give up there. That wouldn't be the answer.

KONDRACKE: I'm not for that.

BARNES: Mort, you know,David Petraeus, who will be in charge in Iraq pretty soon - of the American military - is the author of the new counterinsurgency manual for the U.S. Army.

The theory of counterinsurgency is - and we're going to see it tried in - in Baghdad, is to go in, get an area, hold the area, secure the area, make - make peace, satisfy the citizens, and - and you win.

That's all for "The Beltway Boys" this week. Join us next week, when the boys will be back in town.

And stick around; "FOX News Watch" is straight ahead.

Content and Programming Copyright 2007 FOX News Network, LLC. ALL RIGHTS RESERVED. Transcription Copyright 2007 Voxant, Inc. (www.voxant.com), which takes sole responsibility for the accuracy of the transcription. ALL RIGHTS RESERVED. No license is granted to the user of this material except for the user's personal or internal use and, in such case, only one copy may be printed, nor shall user use any material for commercial purposes or in any fashion that may infringe upon FOX News Network, LLC'S and Voxant, Inc.'s copyrights or other proprietary rights or interests in the material. This is not a legal transcript for purposes of litigation.