This is a partial transcript from "The Beltway Boys", August 11, 2004, that has been edited for clarity.

Watch "The Beltway Boys" Saturday at 6 p.m. ET and Sunday at 1 and 6 a.m. ET

MORT KONDRACKE, CO-HOST: Coming up on the "The Beltway Boys", in just a few hours, results from this year's Iowa straw poll will be announced. We'll handicap the race and what it means for the GOP field.

CHARLES KRAUTHAMMER, GUEST CO-HOST: Hillary Clinton discovers the pitfalls of being a front-runner and we'll tell you how her rivals are putting on the heat.

KONDRACKE: Subprime mortgages spark a crisis on Wall Street and the world market. We'll have the fall out.

KRAUTHAMMER: And we'll tell you about a new federal crackdown on illegal immigrants.

KONDRACKE: "The Beltway Boys" are coming up. But first, the news headlines.

JULIE BANDERAS, FOX NEWS ANCHOR: From America's newsroom, I'm Julie Banderas. Extra precautions are being taken in New York after an unsubstantiated dirty bomb threat appeared on an Israeli website. Authorities picking up on-line chatter about a truck packed with radiological materials. New York City police have been conducting vehicle checks. Homeland Security said there's no credible threat at this time, but they're continuing to monitor the situation.

In Utah, officials say that they have found survivable space where six trapped miners could be at this hour. A video camera has been lowered into an area where the men are believed to be alive. Desperate attempts to communicate with the miners have been unsuccessful. They've been trapped since the mine collapse on Monday.

And police in Newark, New Jersey, issuing a warrant for a fourth suspected wanted in connection to the execution-style shooting of four friends. He is 24-year-old Rodolfo Gadinez (ph), also known as Rodolfo Gomez. Three people already in custody, including a 15 year-old, and an illegal immigrant with a long rap sheet. Funeral services are being held for the three victims. The fourth person, a girl, also shot in the head, she survived and is in critical condition.

And Democrats are pushing for troops to get more time between deployments to Iraq. Proposed legislation would require the regular military units to get as much time at home as they spend in Iraq. Reserve Units would get a home stay three times as long as they spend in the war zone.

And the Associated Press reports that the Bush administration will add Fatah al-Islam, an al Qaeda-inspired group, to its terrorist black. The group will be subject to financial and travel restrictions once it's placed on the list. At least 136 people have died in battles between Lebanese troops and Fatah since May.

I'll be back with more headlines at the bottom of the hour. "The Beltway Boys" continues now. Then I'll see you for "Fox Report" at 7:00 eastern.

KONDRACKE: I'm Mort Kondracke.

And I'm Charles Krauthammer, in for Fred Barnes. And tonight, we're "The Beltway Boys".

KONDRACKE: Welcome, Charles, glad to have you here.

The hot story of the week is straw fever, that's a reference to the Iowa straw poll, which is today, one of the craziest events of the political season. 40,000 people, 300 media. It's basically a Republican fund-raiser, but it does sort of test the turn-out ability of the various candidates. You'll know who won in a couple of hours. And for his sake, it better be Mitt Romney, who has spent most of the time in Iowa, millions of dollars there. And for the first time, actually in Iowa straw poll history, is running ads to promote himself in the straw poll. Here it is, watch.

(BEGIN VIDEO CLIP)

MITT ROMNEY, (R), PRESIDENTIAL CANDIDATE: Thousands of mimes across Iowa for the Romney family, and the next miles take us to Ames, for the Republican straw poll on Saturday the 11th. I hope you'll join us. Send a message to Washington. Washington politicians in both parties have proven they can't control spending and they won't control our borders. I will. I need your help to do it. So come on to Ames. After all, changing America always starts in Iowa.

(END VIDEO CLIP)

KRAUTHAMMER: That's a classic Iowa ploy. Every candidate knows the way to win Iowa is to flatter the Iowans, to make them the center of the universe. Actually people like John Edwards, Jimmy Carter in the past, who lived there for a long time, and Iowans love that attention.

Secondly, what you ought to know is that it has very little meaning because Romney is going to purchase it. And what it is mostly is a way for journalists in August when it's hot and not a lot to do, to amuse themselves.

KONDRACKE: In Iowa, Mitt Romney is way ahead of the rest of the pack. He's got 25 percent of the vote and his closest is Rudolph Giuliani at 14 percent. And Giuliani is not participating in the straw poll.

The next stage of the events there is going to be the Giuliani and Fred Thompson, who has not yet declared, and John McCain, also not participating in this straw poll, will get involved in Iowa in a big way and start flattering the Iowans, as you say.

And what Romney is trying to do, Giuliani being the national front- runner, preemptively what Romney is going to do is attack Giuliani and he has already started. Here, watch.

(BEGIN VIDEO CLIP)

ROMNEY: When Mayor Giuliani was mayor, he said if somebody is an undocumented alien or an illegal alien, they should feel welcome and come to New York.

(END VIDEO CLIP)

KRAUTHAMMER: That's a very interesting tactic on the part of Romney, A, because he decided Giuliani is the guy he has to go after. The others are out of contention as he sees it. It's him against Giuliani. And if he knocks him down, he can be the front.

And secondly, he picks on immigration. Why? It's a neuralgic issue among republicans. It's what killed John McCain's candidacy. It was not over Iraq. It was over immigration. Romney thinks he has an opening and will try to exploit it.

KONDRACKE: And if Fred Thompson begins to emerge, there will be an attack on Thompson, too.

It's another hot story of the week, and that's the shoving ahead of this primary schedule. South Carolina decided to leap into the picture after Florida decided to leap in, too. So now everybody is rushing toward January 1st. They're not going to quite make it to January 1st, but who knows. It looks as though Iowa will be January 6th, which is a Monday, and Tuesday would be New Hampshire. But the way things are going, we may be covering election returns on Thanksgiving eve.

KRAUTHAMMER: The endless campaign becomes more endless. But what's interesting is, if you have New Hampshire and Iowa on consecutive days, you could have a real slingshot effect. If you have a candidate who wins both, say Romney in the Republican race, that could be a real advantage, and that's Romney's strategy. He is putting everything he has on Iowa and New Hampshire. If a front-runner wins it, it could wrap it up. It's an interesting twist on the way the elections are run and how they are won.

KONDRACKE: Absolutely.

Coming up, from Wall Street to Main Street, the subprime mortgage crisis is causing widespread panic.

And is the surge in Iraq working? We'll talk about progress on the ground and a public opinion poll. The "Ups and Downs" are next.

(COMMERCIAL BREAK)

KONDRACKE: Welcome back. Let's check out the "Ups and Downs" for the week.

Down: the stock market. The subprime mortgage crisis is fueling panic on Wall Street and in world markets, and politicians in the District of Columbia are scrambling to respond.

KRAUTHAMMER: It is very scary because it's a classic -- it looks like a run on the banks in the old days that you see in the Jimmy Stewart movies. It may not end up happy here. We know how to prevent a run on a bank. The government gives a lot of money to banks and everything ends up okay.

But this is a mortgage crisis in which the lenders are not banks. There are all kinds of new instruments and derivatives, hedge funds, unregulated activities that the government doesn't know about. And people aren't sure who is holding the worthless paper. You could be in a corporation holding it and don't even know about it. And that's why everybody is afraid.

KONDRACKE: What worries me is the old Herrnstein (ph) -- remember he was Gerald Ford's Council of Economic Advisors chief, who said that when something cannot be sustained forever, it won't, or something to that effect. If something can't go on forever, it won't. And in this case, we're overextended completely. We're overextended to foreigners because we buy more from abroad than we sell. They keep investing their proceeds in the American economy which helps, but that can't go on forever. There's a federal deficit shrinking at the moment, but it will balloon when the baby boom generation retires. That can't go on forever.

And in addition to that, you have household debt piling up. And people were cushioned against that, to some extent, by increases in home equity values. That's coming to an end. So the question is, when does the big bust occur? And how bad is it and how soon? It's very worrisome.

KRAUTHAMMER: And we have a new head of the fed, a rookie, Ben Bernanke. And nobody knows how good he is and if he'll be as nimble and smart as Greenspan. Everybody is watching and waiting.

KONDRACKE: Up: George Bush. Things are finely looking up for him. The latest Gallop show his approval ratings are up 5 points since last month. And a recent "New York Times" poll shows a 7-point increase in support for the war in Iraq.

That's because there are actually stuff happening on the ground and there are people who have been out there, in Iraq, who have come back and given reasonably positive report. And these are people who are objective, some of them are critics of the war, a couple of observers who were critics of the war at the Brookings Institution, who returned and wrote a piece in the "New York Times. And even Anthony Cordesman, a scholar who has been a severe critics of the war from the beginning, came back and argued for strategic patience, meaning no precipitous withdrawal, there's some improvement on the ground. And because of that, we ought to stop at what would be a rout to collapse of American will and an immediate withdrawal.

KONDRACKE: Strategic patience, by the way, was the line of our ambassador there. I hope he gave credit to Ryan Crocker. And in a conference call, even Dick Durbin, the Democratic whip in the Senate said, has this to say, quote, "The surge has resulted in a reduction of violence in many parts of Iraq. More American troops have brought more peace to more parts of Iraq. That's a fact."

He went on to say, and Democrats will say endless, that there's been no progress on the political reconciliation front in Iraq. And that's pretty much true. So Bush's ability to keep the surge going will depend on the thin line of Republicans mainly in the House of Representatives listening to Ambassador Crocker and David Petraeus in September and saying we'll hang in there with the president.

What I suspect will happen after September is that the president will say, look, in 2008, we will withdraw troops. That's our plan. And in fact, that's a necessity. But about March or April, if you can't sustain 160,000 troops any longer in Iraq, unless you extend tours of duty from 15 months to 18 months, and that's going to result in a revolt in the Pentagon, so he's going to have to draw down.

KRAUTHAMMER: Up: Hillary Clinton. She now has a 22-point lead over Barack Obama. Last month, that margin was just 12 points and now John Edwards and Obama are out for blood.

Here they are trying to paint Clinton as a slave to corporate America. And Hillary's response? Watch.

(BEGIN VIDEO CLIP)

JOHN EDWARDS, (D), PRESIDENTIAL CANDIDATE: You'll never see a picture of me on the front of fortune magazine saying, I am the candidate that big corporate America is betting on.

BARACK OBAMA, (D), PRESIDENTIAL CANDIDATE: You have to have a president in the White House who is not subject simply to the whims of corporate lobbyists.

HILLARY CLINTON, (D), PRESIDENTIAL CANDIDATE: For 15 years, I have stood up against the right wing machine and come out stronger. So if you want a winner who knows how to take them on, I'm your girl.

(END VIDEO CLIP)

KONDRACKE: Contrary to what John Edwards said, she did not appear on the cover of "Fortune" magazine saying I'm the candidate of corporate America. It was an article by our friend Nina Easton, describing her successes in wooing big corporate executives and the cover said business loves Hillary. Who knew?

Hillary is the way ahead front-runner nationally. But there will be a contest. It's not completely over. As you pointed out, there will be a slingshot effect from Iowa and New Hampshire. She's only ahead in Iowa by two points over Edwards and ahead of Obama by 7 points in New Hampshire. And in South Carolina only a 4 point lead over Obama. So the press will insist on a race, and there will be a race before this is over.

KRAUTHAMMER: But as you indicated before, there was a big surge on her part. She practically doubled her lead, and 20 points is a serious lead over Obama. He in a stall and had a slight retreat. I think what really happened here is he stumbled on foreign affairs in the debate a few weeks ago. He was asked about meeting with clowns like Hugo Chavez, and he said he would. And that was a mistake. And then he talked about invading Pakistan, not a good idea. As a result, people have a sense of him as naive. That's a word that Hillary had used. I think it will affect him.

As a result, you have all the attacks on her as a corporate stooge. That's not going to wash. She went after the health care industry and got whacked. She can portray herself as a victim of those corporations. She certainly is not going to be seen by Democrats as their champion. It's an attempt by her rivals to do something, but she has run a disciplined and strong campaign, without error.

KONDRACKE: She's going to have to win Iowa, that's all. And be the beneficiary of the slingshot.

Coming up, a new federal crackdown on illegal immigrants.

And Pakistan's political crisis gets a lot more serious. We'll tell you why the U.S. should be worried. More "Ups and Downs" are next.

(COMMERCIAL BREAK)

KONDRACKE: Welcome back to "The Beltway Boys." Continuing with the "Ups and Downs" for the week.

Down: Pervez Musharraf. The Pakistani president yielded to internal and international pressure this week, deciding to reject a state of emergency as he scrambles to keep control of his government and his country. One of the interventions was from Condoleezza Rice who called him as he was on the verge of declaring a state of emergency and warned him off. But there was a lot of internal opposition.

I think the Bush administration has made a fundamentally wise decision, and that is to fight terrorism and instability in Pakistan with democracy. Musharraf has suppressed Democratic opposition there, meaning the Mosques and the Isalmists are the only opposition force that been allowed to develop.

Benazir Bhutto is waiting in the wings and there's a deal to be had where Bhutto will come back and run for prime minister, probably win. And she would agree, under certain terms, to keep Pervez Musharraf on as president of the country, thereby creating stability. The administration likes this deal, and that's a good decision.

KRAUTHAMMER: I agree with you completely. The only thing I would add, if you weren't depressed enough by what's happening on the in the markets, imagine that we are in Pakistan a bullet away from al Qaeda seizing control of a country that not only has a nuclear arsenal, but a delivery system. This is a very critical ally and we should be careful in how we deal with him. Nudging him quietly into elections is the right idea.

Down: illegal immigrants. With immigration reform dead on arrival on Capitol Hill, the feds are being forced to crack down on illegals. Here's a look at some of the changes announced on Friday by the administration.

KONDRACKE: The administration is, in addition to everything, beefing up border security. You want a big fence or maybe a triple fence along the border and all kinds of other barriers. And they're not doing what you want them to do, but they're doing some.

What worries me is this sort of community vigilantism on the part of city councils like in Virginia and Illinois, which are trying to -- there's some city councilmen and county councilmen who are hotdogs on this issue and decided to have their own crackdown. And the problem is that American citizens who are Hispanic or look like they're Hispanic get caught up in it and get discriminated against by people. And it's ugly. And it turns communities against them.

KRAUTHAMMER: This may surprise you because I'm a hard-liner on illegal immigration, but I think it's the job of the feds to patrol the border and police it and build a fence. Do its job. It should not be delegated and you should not deputize. The landscape is on construction engineers. And people who run the companies to act on behalf of the government in policing illegal immigrants. You stop them at the border. And if that is accomplished, we don't have to have the redundant and damaging mandates on people and private industry to tell on people, to fire them, and have them deported.

KONDRACKE: Internal control is part of the...

KRAUTHAMMER: It is a part. Right now, it's everything and it shouldn't be.

KONDRACKE: Well, it's no everything.

Up: Barry Bonds. He made baseball history, hitting the 756th homerun. To beat Hank Aaron's record. But it garnered mixed reviews.

KRAUTHAMMER: This is a phony record by a guy with phony muscles and in a phony era where his competitors also had the same chemical advantage. There's a sign in the stands on the night of the homerun, that said "Babe Ruth did it with hot dogs and beer." And that's how it was done in the old days. People are nostalgic for an era of a purer sport. And we see it in bicycling, in all the other sports, in the Olympics. There's always somebody, a team sent down, but it shouldn't happen in baseball and unfortunately it did. It looks as if that era is over. And the taint on the Bonds record will be an impetus to cleaning up the sport.

KONDRACKE: I hope. Barry Bonds ought to be considered innocent until proven guilty. But he gets this record with an asterisk. This is Hank Aaron's record. This is Babe Ruth's record. This is not any old Tour de France victory. This is really important stuff. So I think it needs to be taken seriously. And if I'd been the president of the United States, I wouldn't have called him and congratulated him.

KRAUTHAMMER: But you sort of have to. In his defense, ten years ago, you saw guys inferior to him, taking this stuff, passing him, getting all this adulation. And he decided I'll go. And he's lost it.

KONDRACKE: Unfortunately, he's won it, that's the point.

KRAUTHAMMER: Oh, no, he'll never be remembered fondly.

KONDRACKE: Okay, Not by us anyway.

Hang on to your hats, "The Buzz" is next.

(COMMERCIAL BREAK)

KONDRACKE: Here's "The Buzz". The military, U.S. military, is taking precautions against the possibility that insurgents in Iraq would launch a massive attack on the Green Zone in Baghdad along the lines of the 1983 Lebanon attack, which killed 270-odd Marines and drove us out of Lebanon. They don't want that to happen before Petraeus and Crocker report.

KRAUTHAMMER: And also on Iraq, "The Buzz" is that there's the beginning of some kind of split between our administration and the administration of the Maliki government. The prime minister of Iraq was in Tehran holding hands with the president of Iran. We had a surge happening, which is a strategy where America is helping the Sunnis, helping them in the war against al Qaeda. And the central government in Baghdad, the government, is not happy with this and said we're arming their potential enemies.

There's a split coming and the government in Baghdad will have to make a decision as to whether it's going to go the way of Iran and have Iran as a protector or stay a friend of America. And right now, all of that is in doubt. And when you see it happening in Baghdad, you've got to wonder how these guys are going to turn.

KONDRACKE: Another excuse for the Democrats to pull us out.

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

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