This is a rush transcript from "The Journal Editorial Report," July 12, 2008.

PAUL GIGOT, FOX NEWS ANCHOR: Welcome to "The Journal Editorial Report." I'm Paul Gigot. Iran test fired a series of long and medium-range missiles, including several capable of reaching Southern Europe, Israel and U.S. troops stationed in the Middle East. Defense Secretary Robert Gates said the tests proved that Iran is a real threat but downplayed the possibility of war. He said U.S. leaders remained committed to using diplomatic and economic pressure rather than military means to persuade Iran to halt its nuclear programs. John Bolton is the former U.S. ambassador to the United Nations. He joins me now from Washington. Ambassador, good to have you back again.

JOHN BOLTON, FORMER U.N. AMBASSADOR: Glad to be here.

GIGOT: What did we learn that's new this week about the Iranian missile threat?

BOLTON: I don't think we necessarily learned anything that's new. I think what Iran is up to here is trying to brush back the possibility of American or Israeli military action against the nuclear program through these tests and through some pretty aggressive rhetoric by commanders of the Revolutionary Guard's corps. But I think what they've actually undertaken is not anything new.

GIGOT: So you think that the timing here is not coincidental and the fact it happened a couple week after an Israeli military exercise in the Mediterranean, that many people perceived something of a test run for any possible attack on Iran.

BOLTON: Right. I think the Israelis are actively considering it. I think this was part of the Iranian response. I think there's another aspect to Iran as well and that's a less visible but no less active charm campaign to try and keep diplomatic activity with the Europeans going. This gives the Iranians the ability to say there's no rush here, no need for military action. We're still trying to resolve this diplomatically. Of course the diplomatic activity buys Iran time which it needs to continue to work on its nuclear program and continue to upgrade its military defenses.

GIGOT: How much of a threat do these missiles pose if any, actually pose to the United States mainland?

BOLTON: I think they do pose a threat. There were reports in this series of tests that they launched from sea platform. They've done this before in other exercises. And it's entirely possible they could put a missile on a Tran steamer, sail it up the East or the West Coast and that would put them in range of the United States.

GIGOT: Well not obviously the nightmare scenario is a nuclear warhead as opposed to a conventional warhead. But what about this possibility of what people are saying might be an EMP weapon or an electromagnetic pulse weapon or warhead that could be put on top of a missile, explode on top of an American city or on the East Coast and take down a lot of the American electrical energy grid?

BOLTON: Well, I think it's a very real possibility. How far along the Iranians are, I don't think we know. But this is an answer to the people who say, look, you're just being overwrought about an Iranian nuclear capability. They know they would never attack the United States because we would destroy them in retaliation. But really ask yourself say under an Obama administration, what would be the American response to the threat of or actual use of an EMP weapon? Not directly on an American city but as you suggest to cause disruption to our business and other communications. It puts it in a very different light, gives the Iranians another capability.

GIGOT: Well you were in the U.S. government. Sometimes this EMP weapon, when people talk about it, seems futuristic but it's really not. There have been reports that the Iranians have worked on this technology.

BOLTON: That's true. And I think it poses another threat, not just to the United States but in Europe as well. That's why I think President Bush's initial national security strategy remains exactly right, not to allow the world's most dangerous weapons to fall into the hands of the word's most dangerous people. The problem with the administration policy now is they seem to have forgotten that original insight.

GIGOT: How likely do you think that it is that Israel will in fact attack Iran maybe sometime later this year or after the election?

BOLTON: Well, I think Israel's very actively considering it. I think they have concluded correctly that the United States under President Bush is not going to use military force against Iran's nuclear program. I think the president has just given up on that possibility. So that puts the pressure on Israel to come to their own decision. And just as they struck that North Korea reactor under construction in Syria last September, they thought that Iran was really close to having a nuclear capability. I don't doubt they have the will and the capability to go after that Iranian effort.

GIGOT: But wouldn't that require at least U.S. acquiescence, giving flyover rights for example over Iraq and we would certainly know in advance that something like that was going to take place. How much in advance I don't know but we would probably have some kind of inkling that it was going on. Wouldn't we have to more or less at least say OK?

BOLTON: Well, I think what the Israelis would like would be for us simply to stand back. It's not actually necessary to fly over Iraqi air space. They might want to fly back over Iraqi air space after the raid was over, which poses a different question. But the Israelis have looked at this very carefully. It's obviously a risky operation. And not something that's terribly attractive from either their point of view or ours. The reason people are looking at it seriously is considering the other option, which is an Iran with nuclear weapons, which is even more unattractive.

GIGOT: And you don't have any doubt that if there were such an attack, Iran would respond with some of these missile firings, probably aimed at major Israeli cities?

BOLTON: Certainly the Israelis would have to take that into account. But ask yourself this question. If the Iranians are prepared to attack Tel Aviv or Jerusalem or the Israeli nuclear facility with conventionally tipped warheads, what would they do if they had a nuclear weapons capability?

GIGOT: Well OK, all right, thank you, ambassador. Good to have you back.

BOLTON: Glad to be here.

GIGOT: Still ahead, fresh signs of trouble in the credit markets as the nation's two biggest medical record lenders struggle to stay afloat. Is a Bear Stearns like run in the company a real possibility? And if it is, why you may end upholding the bag.

(COMMERCIAL BREAK)

GIGOT: Stocks tumble this week on growing concern of the country's two biggest mortgage finance companies may not be able to survive the housing slump. Investors dump shares of government sponsored Fannie Mae and Freddie Mac, signaling a dramatic loss of confidence in the companies that own or guarantee nearly half of all U.S. home loans. Here to tell you why taxpayers may be left holding the bag if these two giants fail, "Wall Street Journal" columnists Kim Strassel and Mary Anastasia O'Grady and senior economics writer Steve Moore. Kim, what are Fannie Mae and Freddie Mac and why should Americans care if they do fail?

KIM STRASSEL, COLUMNIST, THE WALL STREET JOURNAL: There are other government-sponsored enterprises. And what that means in reality is they can go out and they can borrow money at very low rates because they are seen to have the backing of the United States government.

GIGOT: Some call it an implicit guarantee. Not formal with you everybody kind of knows what it is.

STRASSEL: They then take that money, they buy mortgages from mortgage companies like Countrywide. They either hold them to earn interest on them or they pool them together in securities for investors.

Now here's the thing. They have grown at phenomenal rates and they today combined have about $5 trillion, that's with a "T," $5 trillion in liabilities. Now if there was a run on these companies, if they were to explode in some way, there's already a lot of pressure for Treasury to step in for the government and make that an explicit guarantee, which means all of you taxpayers out there are now on the hook for these companies and their liabilities.

GIGOT: Right. And then the national debt, held by the public would essentially double overnight.

STRASSEL: About $9.5 trillion now.

GIGOT: Well in public, that debt held by the public is about $4.5 trillion, so it would tumble. So how much trouble are they in, Mary?

MARY ANASTASIA O'GRADY, COLUMNIST, THE WALL STREET JOURNAL: Well you know, you saw the Treasury market get slammed this week which means that people are worried about the U.S. balance sheet. And the reason is because on these balance sheets, you have the assets of the banks, of Fannie and Freddie which are the mortgages, and you have the liabilities which is the deficit issue. And they have to issue debt in order to finance the mortgages. As the mortgages go down, their assets, their balance sheet tends to look really bad and in fact this week William Poole, a former Fed president, said that they were insolvent. Now, Henry Paulson says that's not true.

GIGOT: Secretary of the Treasury.

O'GRADY: Yes. But you can see that the markets are extremely worried about it because it -- Fannie and Freddie did usually issue debt at close to Treasury rates. And this week, they had to pay a lot more to do that. So that tells you the markets are very worried about this coming unglued.

GIGOT: Steve, what's the best way to get out of this mess knowing that we're already deeply in it right now.

STEVE MOORE, SR. ECONOMICS WRITER, WALL STREET JOURNAL: Well, I am so angry about this, Paul. I've been writing about this for about 20 years, about as much as you have. What people don't really kind of understand is kind of this crony capitalism agency where you and I know people who worked in the Reagan administration, the Bush administration, the Clinton administration. This is where politicians go after they become politicians, after they leave politics and they make millions of dollars.

GIGOT: To make tens of millions.

MOORE: Exactly, it's just outrageous. So what has to happen here I think, is what I've been saying 20 years, it has to be privatized. That probably means they're going to need a bailout in the short-term. We should have probably done this 10 years ago when Fannie and Freddie were healthy. It's going to cost a lot of money to clean this thing up. But let's hope when it's over, finally we turn this into a totally private agency.

GIGOT: And I agree with you about that. But when you're talking about a bailout, you mean basically a capital injection in the short run that will help them ride out and have enough capital cushion to absorb the potential mortgage losses so we don't have to do the nightmare scenario that Kim talked about which is put the trillions on the American balance sheet.

O'GRADY: Right and if that happens at a minimum, the U.S. taxpayers should be a part owner of the company.

GIGOT: Get something for his money.

O'GRADY: Right. But you know Paul, there's something else going on here that I think is really important, which is that you have right here the fallout from the Fed trying to paper over the birthing of home prices, that market.

And what they've done is they've pushed too much money into the economy. You have inflation. They haven't been able to help the home sector but interest rates are going up because people are worried about inflation. And until the Fed starts to get serious about that portion of the equation, I don't think you're going to get a stabilizing in home prices.

GIGOT: And the Congress and the Treasury both, neither of them want to face up to this fact about how Steve talked about how much trouble they're in and put in public money because that really would be controversial because suddenly the public would wake up and say we've been lied to all these years.

STRASSEL: No, that's right. I mean, as Steve said, look, half of former Washington now works for Fannie Mae. The problem is all the opportunities Congress has had to rein in these companies, they've passed. And in fact, recently they've been saying that Fannie Mae and Freddie Mac should be the kind of answer to the problems in the homeowners market. So here seems very little likelihood that Washington is going to do it.

GIGOT: All right, let's hope we can ride it out. All right, still ahead, as the struggling economy takes center stage in the presidential election, the candidates unveil dueling recovery plans. We'll look at what each is proposing when we come back.

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GIGOT: Amid the market turmoil this week, the presidential candidates unveiled dueling plans to kick start the economy. Steve, John McCain was talking about the economy all week this week. Why don't you give us a quick summary what he's proposing to stimulate the economy?

MOORE: Well what's so strange about this race is on the one hand, Barack Obama has a terrible economic plan but he sounds so comfortable talking about the economy. And John McCain has I think a pretty good economic plan but he looks so uncomfortable talking about economics. But I think if you look at the particulars of what John McCain is talking about, tax rate reductions to try to increase growth and investment. He wants to make the investment tax cuts permanent. He wants to do something that we talk a lot about on the editorial page, cut the U.S. corporate tax so we can become more competitive globally. That contrasts very much with what Barack Obama is talking about. Where as McCain has talked about economic growth, Obama's talking about tax the rich and redistribute income. So it's a classic kind of growth versus redistribution race, I think.

GIGOT: All right, Mary. You've been following Barack Obama. What is he proposing? Because he's talking now about a second stimulus in addition to the one that passed in January and hasn't seemed to stimulate very much. Now he's talking about a second stimulus. What would it be involve?

O'GRADY: Well to be fair, he has so many ideas I can't touch on them all here today, but he has a $50 billion plan to jump start the economy, which includes tax rebates, a foreclosure prevention fund and an expansion of unemployment insurance. On trade, he wants fair trade which is really a way of raising the cost of foreign producers and will raise costs for U.S. consumes. He wants to amend NAFTA. He's going to create five million green jobs and that would be done through a $150 billion fund over 10 years.

GIGOT: So this is mostly, it sounds to me like, this is really a plan to inject government spending into the economy in hope to stimulate demand.

O'GRADY: And not only that but increasing the burden on business to do what it does. And he's going to increase the minimum wage, which is a job killer.

STRASSEL: One thing I would just point out that I find really fascinating about Barack Obama's plan is for all of these incredible details, and you can go to his Web site and there's an economic plan, we don't know the answers on who is the most important aspects.

Such as, for instance, he's been talking about payroll tax and who would be taxed more at higher income rates. But it's not clear exactly how it would work. Would there be a doughnut hole? Would some people be exempted for a certain amount.

GIGOT: Anyone above $100,000 or so, in between $100,000 and $250,000. We know that the taxes are going up under the Obama plan for people of $215,000. But we don't know quite how much and on who?

STRASSEL: Another example, capital gains. He has been all over the place, raise it, maybe I'll double it, maybe I won't do it that much. So some of the things the market is looking at to get a sense where this guy's coming from, we don't have an answer to that.

GIGOT: Steve, the thing that concerns me as I look at these plans, both of them in fact, the McCain plan has a lot of good stuff in it, but in almost a longer term, a fiscal tax and spending plan together. What I don't see either of them doing is where's the growth right now amid this current slum?

MOORE: Good question because three out of four Americans, Paul, now think America's in a recession right now. Count me in that camp. I think the economy's in a lot of trouble right now. When Kim was talking about what Obama wants to do, I think one of the problems with the economy right now, investors are forward looking. If you look at Obama's plan, as Kim was talking about on income taxes and payroll taxes, the highest tax rate would go from about 35 percent to 52 percent, Paul. There's almost no country in the world that has tax rates that high. I think it has a real negative affect on markets and growth.

GIGOT: And quickly Mary, the other thing I see, I don't see either candidate talk about what I think is the biggest problem right now which is prices, food prices, oil prices. They're talking about having a concern about it, but neither one of them is going to the core problem which is the Federal Reserve.

O'GRADY: Well you know, the Fed is supposed to be independent and the president is not supposed to touch anybody over there. But obviously that is the central problem. I think it would help McCain if he would at least acknowledge inflation because I think that is the pain that people are feeling and they connect that to the Republican Party right now.

GIGOT: All right, I think you're right, Mary. We have to take one more break. When we come back, our hits and misses of the week.

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GIGOT: Winners and losers, picks and pans, hits and misses. It's our way of calling attention to the best and the worst of the week. Item one, the FISA surveillance bill passes, Kim, at long last.

STRASSEL: Finally, finally. This is a very half-hearted hit to Congress for finally passing this wire tapping law. For the past year, this has been one of the most astonishing examples how this Democratic Congress was willing to put its special interest groups ahead of everything, including national security.

We needed this law to keep track of enemies overseas. We needed the telecom companies to help and so we had to give them liability protection. But the civil libertarians didn't like it and the trial lawyers didn't like it. And so we ended up spending a year going round and round about this. The worst was Barack Obama, by the way, who liked it, didn't like it, liked it again, didn't like it and finally did vote for it in the end. It took the -- having to get so close to this program actually going dark before Republicans would -- and before Democrats would actually pass it.

GIGOT: Better late than never.

STRASSEL: Better late than never.

GIGOT: Next, amid a summer of natural disasters, a promising new discovery. Mary?

O'GRADY: Yes, this is a hit for researchers in the California San Andreas Fault who say that they have detected slight geographical shifts that take place hours before an earthquake. And this could mean an early warning system is possible. This is documented in the journal "Nature" just this past week. And what they found was they dug wells that were about a kilometer deep and they found that there were seismic waves that occurred hours before two significant earthquakes, small but significant earthquakes in California in 2005. So this is very promising for the future, especially in places where earthquakes are prominent.

GIGOT: Gives you time to get out of Manhattan and get into New Jersey. Finally, California fights to be first in the nation again, except it's on taxes, Steve.

MOORE: I just got back three wonderful days in California. Beautiful weather, beautiful beaches and mountains. This is a little slice of heaven.

GIGOT: I thought you were working.

MOORE: You thought. It's also a tax hello, Paul. California now has the second highest taxes in the country next to New York City. Now the politicians in Sacramento want to raise the tax rate to 11 percent. That would make California the highest tax state in the entire United States. If they do this, Paul, the economy continues to falter and they're going to have to change the theme song in the Golden State from California dreamin' to California leavin'.

GIGOT: All right, Steve, thanks.

Time now for your hit or miss of the week.

Alice Felt writes, "A big miss staging to the Democrats in their attempts to stage a green convention in Denver. From biodegradable utensils to biofuels made from beer waste, their efforts will have minimal impact at best, other than to perhaps ease their guilt. How much better, after spending years demonizing big oil, to go totally green, to demonstrate to the world just how to stage a convention without the use of fossil fuels in any way, shape or forum. Such a measure would basically shut down the convention, just as it would surely shut down our economy and way of life."

And remember, if you have your own hit or miss, please send it to us at jer@foxnews.com. We try it read one at the end of every show.

That's it for this week's edition of "The Journal Editorial Report". Thanks to my panel and to all of you for watching. I'm Paul Gigot. We hope to see you right here next week.

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