This is a rush transcript from "The Beltway Boys", April 12, 2008, that has been edited for clarity.

MORT KONDRACKE, FOX CO-HOST: Coming up on "The Beltway Boys," from the Iraq war to the economy to Columbia free trade, election year politicking was on full display this week in Washington.

FRED BARNES, FOX CO-HOST: The big story of the week, Iraq. We'll tell how the war in Iraq is hitting a critical military and political phase.

KONDRACKE: Barack Obama is closing the gap in Pennsylvania as Bill Clinton causes more headaches for his wife's campaign.

BARNES: Calls mount for President Bush to boycott the opening ceremony at the Olympic Games.

KONDRACKE: "The Beltway Boys" are next right after the headlines.

(FOX NEWS BREAK)

(BEGIN VIDEO CLIP)

JOE LIEBERMAN, (I), CONNECTICUT: Let's be honest about this. The Iraqi political leadership has achieved a lot more political reconciliation and progress in September than the American political leadership has.

(END VIDEO CLIP)

BARNES: I'm Fred Barnes.

KONDRACKE: And I'm Mort Kondracke. We're "The Beltway Boys."

BARNES: The hot story is war at home. That was well said by Joe Lieberman, your favorite Democratic Senator, of any senator, and John McCain's best friend in the Senate. But in any case, what he said was entirely right, that the warfare at home, the political warfare between President Bush and Democrats in Congress, is as fierce as ever. I think on almost every issue they are close to irreconcilable. In other words, it's going to be a great year.

KONDRACKE: Let me stop you one second. What do you the chances are that Joe Lieberman will be the first person in history to be the vice presidential candidate of both parties?

BARNES: I will say none. People have talked to the senator and he said he understands that it might be something that McCain would want to do, as McCain would, but it just wouldn't work. He understands that. I think he's a little more of a grown up on this than McCain is. Here's some of these main battlegrounds. You interrupted me. Battlegrounds that flared up again this week, number one, the Iraq war which we're getting to in a minute. Just hold on, on that one. The next item, the Columbia Free Trade Agreement, Mort?

KONDRACKE: All the Democrats say the first priority is rebuilding America's reputation after the terrible damage done to it by President Bush. So on trade, which really does count to practically every country that wants to get rich, which is every country in the world, the Democrats are against that. You know, they're — and they are going to make America's reputation much worse. This is a gigantic pander to the AFL-CIO and a gigantic benefit to Hugo Chavez.

BARNES: Now before I respond to you on that, I want to show what Nancy Pelosi said and then, in response — Nancy Pelosi, the House speaker, in response to John Boehner, the Republican leader. Watch.

(BEGIN VIDEO CLIP)

NANCY PELOSI, (D), SPEAKER OF THE HOUSE: I have said to the administration over and over again, it would be very difficult to pass a trade bill until we put forth a positive economic agenda for the American people so they know that their economic security is first and foremost on our minds.

JOHN BOEHNER, (R), OHIO: Anybody that thinks we're going to push this off a couple months, that is nonsense. This vote today is a vote to kill the Columbia Free Trade Agreement, nothing more and nothing less.

(END VIDEO CLIP)

BARNES: He's right about that. Remember when the Democrats for decades were the free trade party. I think that free trade goes along with economic growth and a higher standard of living, a rising standard of living. Protectionism, the Democrats are now the protectionist party, not that there aren't a lot of Republicans who have become protectionists too, but that's what the Democratic Party is. I think that is slow growth and not a rising standard of living. Issue number three, the housing crisis. You know, there, mind you, is the least government interference the better. That's easy for me to say. I don't run for office. I'm not a politician. At best, I think we'll get away with something halfway between what President Bush wants and Congressman Barney Frank who's the main figure in the House of Representatives. The Senate will have to settle for that. Here's what's going to happen. They'll have some bailouts. It will be a slight bail out where the lenders and borrowers and it will take effect sometime after the house crisis has passed.

KONDRACKE: We hope. This could be a long one. We'll see. I don't know whether it is or it isn't.

BARNES: It isn't. Don't worry about it.

KONDRACKE: The Senate bill passed on a bipartisan basis, 35 Republicans voted for it in spite of the fact it has totally unnecessary subsidies in it for the home building industry. Now it comes to the House of Representatives where more subsidies are going to be larded in, even for renters. And so this is going — when it gets to conference, the administration will try to refashion it. President Bush is going to veto it and they have to have a renegotiation and then it will delay it.

BARNES: Mort, maybe I'm just getting jaded. There will be all kinds of unnecessary spending. I'm just unable to work up my outrage over it. Maybe others will. Number four, other economic issues surrounded the weakened economy. You know what Democrats want to do, they want to tack on to the Iraq spending bill, which has to pass, things like extending unemployment insurance. They'll add three or four months which means the people unemployed will just stay unemployed longer. That's the way it always works. And they want to put in more money for Katrina reconstruction in New Orleans and so on. And they'll get some of it. It's as simple as that.

KONDRACKE: Then you have the whole issue of regulation to deal with this — the crisis that we've got now. And the administration is taking the lead on this. They want a tighter regulation of mortgage lenders and these credit rating agency or bond rating agencies which went into bed with the people they were rating. That's got to be double. That's got to be dealt with. The issues going to be — will the Democrats try to tack on more regulation and stifle innovation.

BARNES: Of course, they will. That's what they do. They're Democrats. Of course, they want to do that. Finally, terror surveillance.

KONDRACKE: Well, this has all got to do with the issue of FISA reform. Again, the Wall Street Journal had a dynamite column this week talking about the terrorists in Britain who wanted to blow up, and had it planned to blow up seven planes over the Atlantic in 2006. They're on trial right now. And it's pretty riveting stuff. Is America paying any attention to that? Uh-uh, especially those that want to take immunity from the telecom companies that cooperated with the government after 9/11. I don't know what it takes to convince the Democrats that terrorism is serious, except maybe another terrorist incident.

BARNES: I think Democrats fear that there may be some Americans, someplace in the far reaches of our country — one American whom I have his phone listened into wrongly because some terrorist in Pakistan called the wrong number and got some poor schlep in Oregon and they listen in on it and, you know, the ACLU will go bonkers. That's what they fear. You knew perfectly well that many of these Democrats think this war on terror is a phony on Bush's part to gain political — for political gain and so they don't want to on. I thought they would have caved by know on this, but they haven't.

KONDRACKE: Coming up, Obama could be poised to deliver a knockout punch to Clinton in Pennsylvania. And after a week of hearings and speechifying, where does the Iraq war really stand for the country, for the troops and for the next president? That's next.

(COMMERCIAL BREAK)

KONDRACKE: Welcome back to "The Beltway Boys." Hot story number two, it's back. I'm referring to the issue of the Iraq war with David Petraeus' and Ryan Crocker's visit back to Washington again. Here's President Bush's reaction to what's going on. And then followed by Harry Reid. Watch this.

(BEGIN VIDEO CLIP)

GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: Complex challenges remain in Iraq from the presence of al Qaeda to the destructive influence of Iran, to hard compromises needed for further political progress. With the surge, a strategic major shift has occurred. Fifteen months ago, the American and Iraqi government were on the defensive. Today, we have the initiative.

SEN. HARRY REID, (D), NEVADA: We've waited now, going on to the sixth year, first in political reconciliation. And what have we seen the last few weeks? More unrest, more tension between groups, Sunnis are coming back into power again. That's what we've seen.

(END VIDEO CLIP)

KONDRACKE: The Sunnis are coming back into power? Where does Harry Reid get that kind of idea? He will dream up anything to condemn the Iraq war, no matter what kind of success there is.

BARNES: It's good for laughs, though.

KONDRACKE: As Ambassador Crocker point out, there was real political progress going on at the provincial level and at the national level. In fact, 12 of the 18 famous benchmarks have been achieved. I don't think — as you said last week, the administration doesn't claim enough credit and certainly the Democrats don't give it any credit. But I think on one point — actually two points — I'll get to the second one later — the critics are correct and that is military overstretch. The big story of the week was that the president is going to stop the troop withdrawals in July and continue them, lord knows when, maybe not until the end of the administration. Every military authority that I've talked to says that the military just cannot sustain these repeated over and over again deployments. Even if the terms length will be cut down. The strain on families and the strain on unit and the strain on units and the strain equipment is just — is reaching the breaking point. And, you know, it's not just against some vague contingency that the Pentagon maybe able to dream up, some war that may never happen. Afghanistan is going on now. We don't have the troops to put into Afghanistan. And we are losing the afghan war slowly.

BARNES: I don't think you're right on either of those points. Look, this idea of an overstretched Army is beside the point. Whenever you're fighting a war, you're overstretched, we were in World War II, particularly when you're winning, it's overstretched because you really put the forces in. How much strain there is, as President Bush has frequently said, there's nothing worse than a strained military. That's what loses the war in Iraq. We don't want that to happen. One of the things the joint chiefs — that's what they have to worry about. They have to worry about strains on the military. And both Democrats and President Bush — remember he announced a year ago when they announced the surge, they would have two more Army divisions and more Marines. Until they come online and are activated — that hasn't happened yet — they will be strained and probably strained after that. That's no reason for giving up on the war in Iraq.

KONDRACKE: The second line of argument, which I think has some validity from the critics, is, you know, the Iraqis bearing responsibility for their own redevelopment and other things because they've got money now. Here's Barbara Boxer talking about this. Watch.

(BEGIN VIDEO CLIP)

BARBARA BOXER, (D), CALIFORNIA: We've been paying $182 million a year. That's on an annualized basis, $18 million a month. And I would say to you here at home, we could get health care for — for 123,000 kids. We could send kids to an after-school program with that money. Why don't you ask the Iraqis to pay the entire cost of that program?

(END VIDEO CLIP)

KONDRACKE: What she was specifically talking about, the pay we're giving to the sons of Iraq, the Sunni militia or guards. Anyway, you know, the real issue is reconstruction. The Iraqis are now earning more than $100 a barrel for their oil. They've got money. And they can't spend it officially, especially on reconstruction. And John McCain had a good idea. Why not have them transfer that money to the funds that the American military uses for reconstruction to help at least lift the burden from the American taxpayer.

BARNES: That's not a bad idea. At $100 a barrel, the Iraqis are getting a lot more money and have a surplus that they want to spend on the construction. The sons of Iraq — I think the Iraqis are only paying half their salary and there's a plan to phase in to the point where, what are they, 90,000 of them in there being put in the Army and so on, paid entirely by Iraq and not by the U.S. And on reconstruction, there are — as Ryan Crocker said, we're getting out of the reconstruction business now. We need to make sure the Iraqis stay in it. They have plenty of money to stay in it. But, again, people like Barbara Boxer, her report, Mort. There are many surprises that you pop on me and that's certainly one of them. But she said you can buy money from the things she is talking about. And, of course, like all these liberals, when she says health care, she means health insurance. Coming up, John McCain talks about the economy. And when snipergate was beginning to fade from the headlines, Bill Clinton brings it back to life. More on that, next.

(COMMERCIAL BREAK)

KONDRACKE: Welcome back to "The Beltway Boys." Let's take a look at the "Ups and Downs" for the week. Up, Barack Obama. He could be in a position to deliver a knockout blow to Hillary Clinton in Pennsylvania after being down double digits. Obama's within six points of Clinton in the Keystone State. As Major Garrett of FOX News points out, Hillary Clinton invariably in these rustbelt states under polls and Barack Obama over polls compared to the final result, and unfortunately may have something to do with race. But if Hillary Clinton wins Pennsylvania by, say, 10 points, all she gets is nine delegates. Nine delegates against Obama's lead which is 130 or 140. You know, she's not catching up very fast. Now, she's not going to get out. And I don't think she should get out, you know, until it's absolutely hopeless. But, after May 6, it's assuming that Obama wins North Carolina by a lot and she wins Indiana by a little, basically the delegate situation is going to be exactly where it is now. She's not going to gain and there won't be very many that — it will be mathematically impossible, if it's not already, for her to catch up. So...

BARNES: So you want her out?

KONDRACKE: No. Vantage, Obama, big time.

BARNES: Mort, I wouldn't say you're the worst offender, but a lot of people want to just drive her out of the race. She has a possible chance of winning. And it's faint that she'd win the nomination. She'll probably have to get ahead in the popular vote. She'll probably be 100 behind even if she wins in Pennsylvania and North Carolina, Indiana and Montana, and a few other states. But if she wins the popular vote, she will have an argument, anyway. I don't think she's going to win the nomination if she has a chance. I think the media ought to be patient. Let it run to June 3 when the last primary is and the superdelegates will jump in. I just wonder, why is the former mayor of Pittsburgh a superdelegate? She came out for Hillary. Can you explain that one to me? I have no idea why she was asked. Now, just when Hillary thinks she might make progress, something happened. Again, Bill Clinton raising up the single most embarrassing issue for Hillary in the entire campaign — she was caught with this lie about sniper fire when she went to Bosnia. Then Bill Clinton said she only said it once, it was late at night. She said it repeatedly! That's just crazy. I've been right about one thing this year. I've been wrong about a lot of things, but, one, Bill Clinton is an albatross. And he continues to be.

KONDRACKE: I confess. I hereby confess that you're absolutely right on that point. I was wrong.

BARNES: Good. Up, John McCain. He made great strides this week in putting more meat on the bones of his economic vision. He's blunted criticism from his Democratic rivals that he's ignoring the housing crisis. Watch.

(BEGIN VIDEO CLIP)

SEN. JOHN MCCAIN, (R), PRESIDENTIAL CANDIDATE: There's nothing more important than keeping alive the American dream to own your home. Priority number one is to keep well meaning, deserving homeowners facing foreclosure in their homes.

(END VIDEO CLIP)

BARNES: Look, McCain, everybody knows, I think we agree, that McCain's weakness in this campaign is domestic policy. He needs to jump on it. He jumped on the housing thing. I think he needs to do other things as well. He needs to take his free market health care plan and explain it really well. I'm not sure he can do that. He needs to have some policy for the dollar. I mean, the dollar, the sinking dollar is killing us.

KONDRACKE: Yes. I'll invite you to explain what we can do about the sinking dollar some other time.

BARNES: OK.

KONDRACKE: All right. This speech shows that McCain delivered last week was designed to correct the false impression that he just wanted to have a laissez-faire attitude toward everything that's hurting Americans in this down economy, and he does have solutions which makes sense. And he's going to explain further next week what they are. But, I've got to say about this speech, that what he was talking about in terms of housing, health and even unemployment insurance extension, was not vivid and was not well-explained and did not contrast what his vision is with what the Democratic vision is. There is certainly time to get in all that stuff but that's what he's got to do. There were some very good signs in this. One was no subsidies for ethanol anymore and no more sugar quotas. That's the kind of thing that's good, but he's going to have to explain it.

BARNES: I agree. All right. Let's move on.

KONDRACKE: Down, China. It was another embarrassing week for China as the Olympic torch relay sparked protests wherever it went, including its only U.S. stop in San Francisco. There were increasing calls for President Bush to boycott the games or at least the opening ceremonies. Calls for that so far have been resisted. Watch.

(BEGIN VIDEO CLIP)

BUSH: I'm going to the Olympics for starters. And, you know, I have — I have my plans. They haven't changed. And the reason why is because I can talk to them about religious freedom prior to the Olympics, during the Olympics and after the Olympics.

(END VIDEO CLIP)

BARNES: He's right about that. He is going to the Olympics. He's not just saying it publicly. He's saying it publicly. He's going to go. Be dumb if he didn't go. What provoked the Chinese the most was when he met with the Dalai Lama on Capitol Hill and everything. They didn't like that. You know what the Olympic Committee needs to do? They need to get rid of that torch relay. It's just provocative I mean, who needs it?

KONDRACKE: Everything that's going on now is utterly symbolic. And even if Bush went or did not go or whatever, it's not going to affect the Chinese at all. They'll ignore him. Or they'll even bash further on the Tibetans. The world is not willing to do what — to China — what it did to South Africa. That is utterly economically boycotted. If they were really serious, that's what they'd do. But they're not.

BARNES: Don't go anywhere. "The Buzz" is coming up next.

(COMMERCIAL BREAK)

BARNES: What's "The Buzz," Mort?

KONDRACKE: I don't know why the Clinton finances is not a bigger issue in the campaign. It's not the $110 million they earned. They're entitled to that. It's the use of the Clinton's joint foundation for political purposes, giving charity money away where it will do political good, and also the failure to reveal who contributed $500 million to the Bill Clinton Foundation.

BARNES: Well, they're Democrats. That's how they get away with it, Mort. You know, people keep talking in Washington about how President Bush doesn't have any influence. But you know what he has? He has great power with the veto, foreign policy. He's commander in chief, the biggest power of all.

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

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

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