This is a partial transcript from "The Beltway Boys", August 18, 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

FRED BARNES, FOX CO-HOST: Coming up on "The Beltway Boys", another roller coaster week on Wall Street. Have we hit rock bottom, or is the worst yet to come?

JEFF BIRNBAUM, FOX GUEST CO-HOST: Rudolph Giuliani and Mitt Romney try to out-tough each other on border security.

BARNES: And Barack Obama answers critics who say his foreign policy is off base and takes a swipe at yours truly.

BIRNBAUM: And is Karl Rove 's gets ready to say so long to the White House. Is he departure a tip of the iceberg?

BARNES: "The Beltway Boys" is next. But first, the headlines.

(NEWSBREAK)

BARNES: I'm Fred Barnes.

BIRNBAUM: And I'm Jeff Birnbaum, in for Mort Kondracke. And tonight, we're "The Beltway Boys".

Hot story number one, it's not over yet. Fred, it was a wild week on Wall Street . There were three days in a row of down days and then a fourth day where it looked like it would be disaster and turned itself around. And Friday was a much better day. But it's not over yet, Fred. In my view, I think the markets are in for wild weeks to come. Consumer confidence is down and the housing bubble has let out a lot of air. And I think a credit crunch around the world will make a big difference. We'll have a lot of volatility in the markets. But I don't think that's reason for pessimism.

In my view, markets are meant to correct things like that, and pretty soon the market will right itself and, in general, begin to head upward. But it will be a while, in my view.

BARNES: The market is not going to correct itself without help from the Federal Reserve. And the Federal Reserve under Ben Bernanke — a man I admire. He's the chairman of the Fed. He replaced the legendary Alan Greenspan . But it took him a while to get the Fed ahead to try to get ahead of the curve, which is where the Fed wants to be. Meanwhile, the stock market, as measured by the Dow, was down 10 percent or more. That's the correction level, a serious drop, as you indicated, all week.

And he dealt with the liquidity problem effectively early in the week and late in the week, as well. He delayed until Friday to drop the interest rate, or the Fed did, under his guidance, a half a point. And the discount rate is the rate by which the Fed lends money to banks.

But there's one other thing, and I'm afraid that's not enough. Because there's a credit problem that can only be dealt with by an interest rate cut. Ben Bernanke has been very leery of doing that and doesn't want to reward people who made bad loans and create a moral hazard. But I really think there's no way around it. There's no alternative. And the good news is the Fed indicated that this might be in the offing sometime in the next few months.

BIRNBAUM: Ben Bernanke cut the discount rate, as you said, but still has left untouched the more important Federal funds rate. And in mid- September, he'll hold another meeting, and will decide whether to cut that next more important rate. I'm not sure he's going to do that. The Buzz, the talk on Wall Street, is that Bernanke is very hesitant to try to put too much stimulation in the economy to start up inflation again, in order to deal the problem, the parameters of which he is not certain. He a rookie, he's new and doesn't know quite what to do. He may signal that he'll be doing more important Fed funds rate cuts, the big interest rate cuts down the road. And then do it very slowly, so as not to shake things up too much.

But this is very important not just for the economy, Fred. It's also very important for politics. And unless Ben Bernanke gets it right, the Republicans will have a tough time and those running for president will be blamed, the Republicans running for president, if the economy heads south. I'm afraid that's the burden holding the White House.

BARNES: That's the way politics works. If the markets are in decline or turmoil, it will hurt the party in power. And the Republicans — it really cuts against the best argument the Republicans have for themselves over the years. They're the party that can produce and sustain growing and stable economy, and they've done a good job under George Bush, but there's a lot of turmoil.

Then there's this other question, and that's the question of bail-out. We know there are hundreds of thousands, maybe millions of homeowners, who have the subprime loans. They're not all in default, by any means, only 10 or 12 percent are in default and even those may not lose their homes. But can we allow hundreds of thousands of Americans to potentially lose their homes? These tend to be lower-income Americans, minority Americans and so on. I don't think we can allow that. I mean, homeownership is one of America's great institutions. And there has to be some way to deal with this where they don't lose their homes. So far, I don't know what that way is.

BIRNBAUM: You could bet that the Democrats in charge of Congress will come up with a way if there's a big problem when they return in September.

BARNES: And it will be an expensive one.

BIRNBAUM: Very expensive.

BARNES: And I'm not sure there's a free market way, but if there is, I hope we can find it.

Coming up, no more Mr. Nice Guy. Barack Obama is sharpening his rhetoric on the campaign trail. Hot story number two, straight ahead.

(COMMERCIAL BREAK)

BARNES: Welcome back to "The Beltway Boys." Hot story number two, Obama 2.0. Now Barack Obama supposedly — and I emphasize supposedly — 20 points behind Hillary Clinton in the polls in running for the Democratic presidential nomination, has sharpened his message and is particularly differentiating himself from Hillary. This is smart. I think he's closer than 20 points behind Hillary. But he's trying to isolate her as the Washington conventional wisdom candidate, and he's the outsider, the guy who is not beholding to Washington.

And she has accused him of being naive and inexperienced on foreign policy. And he has dismissed this as the typical Washington criticism. Watch.

(BEGIN VIDEO CLIP)

BARACK OBAMA, (D), PRESIDENTIAL CANDIDATE: The one thing I will say is it creates difficulty for me when you're running against the conventional wisdom of Washington because experience is typically meant to mean how well do you recite the conventional wisdom. But I'll tell you what, I would rather have Lee Hamilton confirm my views than "The Beltway Boys".

(END VIDEO CLIP)

BIRNBAUM: I think we can agree he's clearly wrong about that. But Obama has gotten his legs recently. He's beginning to define himself rather than allowing others to define him. And he is making a clear distinction which is being verified by the polls. He is saying, acknowledging that the other candidates have more experience, especially Hillary Clinton. But he's the chief candidate of change and that he has judgment that the others have not demonstrated, that Washington judgment, in particular, is not very useful. And he may be on to something with this.

I think if you look at a CBS-"New York Times" poll that came out, Hillary Clinton is clearly way ahead on experience. But Obama, on the other hand, has the change advantage, that is, when the Democratic-likely voters are asked, they look more to Obama as the person of new ideas and a fresh face, someone who will bring new policies to Washington and not be beholden to the Washington establishment. The question of the Democratic race is, in my view anyway, is he right? What is the more important issue? Is it experience, or is it change?

BARNES: Change. The answer is simple. That doesn't mean he'll win the nomination. Change is more important, particularly when you're not the front-runner in the race. Look, voters rarely side with the candidate with the most Washington experience. Otherwise, how would Bill Clinton, Jimmy Carter, George W. Bush, Ronald Reagan, all these people from outside Washington get elected president?

And there's another issue that Obama is working, as well. In an interview with the "Washington Post", Obama said, quote, "I believe I can bring the country together in a way she, Hillary Clinton, cannot do. If I didn't believe that, I wouldn't be running," unquote. And what he's touching on is something very simple, that she's polarizing and he's not. I think he's right on that point.

BIRNBAUM: He may be onto something, but Hillary Clinton understands that very well. And she is defining herself, as well. And we know that she has started a new flight of ads in Iowa. And she's being very careful to contrast herself not with the people nipping at her heels like Barack Obama, but to the extent she is contrasting herself with George W. Bush. Watch.

(BEGIN VIDEO CLIP)

ANNOUNCER: Hillary Clinton has spent her life standing up for people others don't see.

SEN. HILLARY CLINTON, (D), PRESIDENTIAL CANDIDATE: So you're a family struggling and you don't have health care, you are invisible to this president. If you're a single mom trying to find affordable child care so you can go to work, well, you're invisible, too. And I never thought I would see that our soldiers, who serve in Iraq and Afghanistan, would be treated as though they were invisible, as well.

(END VIDEO CLIP)

BARNES: You know, that's a fair ad on the first part. The last part is truly unfair. Certainly George W. Bush doesn't treat the Iraqi troops, particularly those who have been wounded and gone to Walter Reed as if they're invisible. That's unfair. He's spent a lot of time out there.

On the other hand, I think that's a very good ad. It warms her up, which she needs. Another place or another aspect which makes her — where she falls short of Obama is on sheer likeability. Likeability matters. Ronald Reagan was likable. And that didn't hurt him running for president. And he's more likable than she is.

BIRNBAUM: That's right. Still, the CBS poll showed that most voters think that she's more likely to be elected, more electable than any of the others. But they may not know anything. But what they do know is that Hillary Clinton has weaknesses. And that ad tries to address them, shows her as much more warm, as much more friendly, as more accessible. The hugging there is very important.

I have to say that, I think she should like hugging more and people should associate that with her. Don't you think? But the one problem is, I have to say this aloud, is her voice. It seems a little shrill to me. And one of the things people often want in a president is somebody they could listen to every day. And maybe they ought to have someone else do a voice-over on Hillary Clinton ads from now on.

BARNES: It doesn't necessarily wipe out here chances. I mean, George W. Bush doesn't have the greatest voice and not everybody can be Ronald Reagan, so soothing.

BIRNBAUM: But watch the ads. If Hillary Clinton begins to make contrast with Barack Obama rather than George Bush, you're exactly right. Obama may be right on her tail.

BARNES: I'm right whether she does the ads or not.

Coming up, Rudolph Giuliani and Mitt Romney clash over who is tougher on immigration. We'll tell you who, if anyone, is winning the fight.

(COMMERCIAL BREAK)

BARNES: Welcome back again to "The Beltway Boys. Let's check out our "Ups and Downs" for the week.

Down: The Republican Party. Two of its top tier candidates for president, Mitt Romney and Rudolph Giuliani, are trying to outdo each other on who could be tougher on illegal immigrants. It's the party that could be the loser, come Election Day.

Jeff, it is not just those two. It's Fred Thompson and Newt Gingrich, who are potential candidates, I think, Fred Thompson for sure, are doing the same thing, pounding on illegal immigrants.

Here's what Newt Gingrich said on his web site after an illegal immigrant was arrested in Newark, New Jersey, after the murder of three college students execution style. Here's what he said, and he called for an emergency session of Congress.

(BEGIN VIDEO CLIP)

NEWT GINGRICH, (R), FORMER SENATOR: The issue is simple. Either the Congress and the president want to defend innocent Americans from violent illegal aliens or they don't. Either the killing of three young Americans is a horrendous event that requires us to act or we will go on with politics as usual while young Americans in our inner cities are massacred by people who should not be here."

BARNES: The massacre is a big word, and I think Republicans — and it's not just the presidential candidates, other Republicans — are hurting themselves by obsessing on this matter of illegal immigration. As you know, Hispanic voters, who are American citizens, after all, legally here, interpret this as they're saying, you know, we don't like your kind, we don't want any more of you. And I agree with Karl Rove when he said over and over again — and he said it recently as he was departing the White House — that unless Republicans can get a big chunk, not necessarily a majority, but a chunk of the Hispanic vote, the fastest rising voting block in America, that they will be a party in decline.

BIRNBAUM: It gets worse than that, Fred. The chairman of the Republican Party, Mel Martinez, attacked Giuliani and Romney for not backing up President Bush's comprehensive immigration plan, which Martinez, not by coincidence, helped author. This is very unusual, the head of a party is not supposed to stick his finger at all in a nominating season as he did here. But Martinez is also a participant and not just the chairman, and that's a problem here.

I agree with you, Fred. I think that immigration is to the Republicans what Iraq withdrawal is to the Democrats. If they keep pulling themselves to the right, they're going to have a lot more trouble, whoever they select, as the nominee to get to the middle where they need to be, come the general election.

BARNES: Is your point that the issues provide perhaps short-term gain but long-term pain?

BIRNBAUM: That would be the point.

BARNES: Good.

BIRNBAUM: Down: John Edwards. While the former senator downsizes his campaign in Nevada, his wife, Elizabeth, seems to be the only Edwards making headlines. It's an extraordinary case. Edwards is doing a little flailing and not talking about as much about what was his heart-felt issue, poverty. He is taking on lobbyists, which is a sure sign of weakness.

And I think a San Francisco Chronicle columnist, Deborah Saunders, wrote a very astute column, and I quote her saying: "Elizabeth Edwards now is more than John Edward's wife. She has become his Spiro Agnew. Remember Agnew, President Richard M. Nixon's first vice president and designated verbal hatchet man, known famously for dismissing critics as 'nattering nabobs of negativism.' "

Elizabeth Edwards has said her husband can't help it that he's neither a black nor a woman. She has accused Obama of being holier than thou on Iraq. I think it's a sad state when a candidate has to put his wife out to be the bomb thrower.

BARNES: There's a name for this. It's called hiding behind a woman's skirt. And I've seen that written by people about it, and it may have been Deborah Saunders, actually about John Edwards.

Now, I'll have to say his wife is a very attractive candidate herself. She's a person — obviously we know she's been diagnosed with cancer, but she comes across very well. She has none of the phoniness which people associate with John Edwards. And after covering pains for 30 years, he comes across as one of the phoniest candidates I've seen. And I've seen a lot of them.

BIRNBAUM: Up: GOP presidential candidate Mike Huckabee. The former Arkansas governor is enjoying his moment in the sun after the surprising second-place finish in the Iowa straw poll. He came in second without even buying a bus ticket to get to the straw poll. And I think he has a chance of being the conservative competitor to whoever is the front-runner. I think he's had his moment but he needs to show us a lot more than he has.

BARNES: I agree with that. I sneered at the significance of the Iowa straw poll. But when he was in Washington for breakfast a couple days later, I went. I wouldn't have gone otherwise if he hadn't finished there. I agree. He's going to be in the spotlight. He's got his moment. It was a great turn-out for this breakfast among reporters. All the tables were filled, and even people standing. And he's really got to show that he's got tremendous substance. And he hadn't done it yet.

Up: Bush advisor Ed Gillespie. The former RNC chief is likely to fill in the political vacuum at the White House after Karl Rove takes his leave at the end of the month.

We both have known Ed Gillespie for a long time. His experience, 13 years on the Hill, Republican National chairman. And then he took the job as Virginia state Republican chairman, knows the press well. Look, Karl Rove is irreplaceable, but I think given the fact the president doesn't have his own initiatives, he's going to be on defense, and Ed can help a lot.

BIRNBAUM: I agree with you, I think Ed will take up most of what Karl Rove did, but can't take up all of it. Rove was a very deep friend of the president, and Ed Gillespie, while trusted by the president, is no Karl Rove. But he won't have as much to do. Karl Rove wanted big bold ideas and the initiatives are out the window. It will mostly be defensive, and Ed Gillespie will be useful there trying to keep Republicans together to help the president with this fight. And as the former chairman of the Republican Party, I think he's well positioned to do that. And he can help with communications, a place that has been weak at the White House.

BARNES: But holding the residents Republicans together, that's the key. All right, don't move a muscle. "The Buzz" is up next.

(COMMERCIAL BREAK)

BARNES: Here's "The Buzz": Tony Snow is leaving as White House press secretary at the end of the year. He's done a wonderful job. I've got an idea for what he does in the aftermath of this. John Warner, the Republican senator from Virginia, may announce his retirement. He's 80 and not running for re-election in 2008. Tony would be a great conservative Republican candidate for that Senate seat. We know Tom Davis, the Congressman, a moderate, will run if Warner steps down, but there's got to be a conservative alternative in that primary and Tony would be a great one.

BIRNBAUM: I think Tony may want to make a little money before he does that. I hear that Tony may be getting out right in time because there will be a vicious veto war between the White House and Congress. The president will veto almost everything sent down in terms of spending and taxes, but I'm not sure his Republicans will stand with him. I think there will be at least a whole bunch of those bills where the Republicans will abandon him and his vetoes will be overridden.

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

Content and Programming Copyright 2004 Fox News Network, L.L.C. ALL RIGHTS RESERVED. Transcription Copyright 2004 eMediaMillWorks, Inc. (f/k/a Federal Document Clearing House, Inc.), 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, L.L.C. and eMediaMillWorks, Inc.'s copyrights or other proprietary rights or interests in the material. This is not a legal transcript for purposes of litigation.