This is a rush transcript from "The Journal Editorial Report," September 20, 2008. This copy may not be in its final form and may be updated.

PAUL GIGOT, HOST: Coming up next on the "Journal Editorial Report," Wall Street in crisis. Investors panic as the financial giants continue to fall. We will tell you what is happening, why it is happening and what we might see next.

Plus, with Federal Reserve bailouts of failing to stop the meltdown, the Bush administration asked Congress for new power and taxpayer cash. Will it work?

And the presidential candidates play the blame game, chalking it up to Wall Street agreed.

The "Journal Editorial Report," begins right now.

Welcome to the "Journal Editorial Report." I'm Paul Gigot.

Wall Street plunged deeper into crisis this week as anxiety about the stability of the financial system sent stocks on a roller coaster ride.

The week began with Merrill Lynch, the world's largest brokerage, selling itself to Bank of America on Sunday in a last-ditch effort to avoid failure. That was followed by Monday's news, that the investment bank Lehman Brothers had filed for bankruptcy. And on Tuesday, the U.S. government extended an $85 billion lifeline to crippled insurance giant AIG, in the hopes of avoiding a broader financial collapse. Then late Thursday, the Bush administration asked Congress for new money and new power to buy ailing securities from financial companies, as much as $500 billion.

Here to tell us what is happening, why it is happening and what we might see next, Wall Street Journal columnist Mary Anastasia O'Grady; the assistant editorial editor, James Freeman; Washington columnist Kim Strassel; and senior economics writer Steve Moore.

Mary, what we saw this week, a classic old-fashioned financial panic, a kind of giant global selling mania. Why are people so afraid?

MARY ANASTASIA O'GRADY, COLUMNIST: The immediate fear is markets are going to seize up, people will stop trading. But what is underlying that is the different trading partners, the big investment banks, have a lot of debt that is highly leveraged, which means that they put down very little when they purchased the assets. When the price goes down, that goes against them. It becomes bad debt. It becomes...

GIGOT: Also the fear that these banks don't have enough capital to sustain losses if they had to dump all this debt on the market. Then you get a kind of systemic, as they say, risk to the entire financial system.

O'GRADY: Exactly. And because Lehman Brothers went bankrupt, that's a perfect example of an institution that now is affecting other institutions in the system, because I trade with you and you trade with James. And once one party starts to fail, then there is a fear in the system that that will ripple through and affect all the others.

GIGOT: This is rooted, James, in the housing slump, because these securities are all underpinned by home prices, by real estate assets. And we don't know how low those home prices will go. So nobody is quite sure what the value of the securities are. And that helps the seizing up.

JAMES FREEMAN, ASSISTANT EDITORIAL EDITOR: That's right. What you have are these investment firms holding a lot of assets that were deemed safe by government-appointed risk experts — we called them credit rating agencies.

GIGOT: Standard & Poor's, Moody's.

FREEMAN: That's right. They put the big stamp of approval on these things. They've been sitting in all these investment banks' accounts, safe securities. We now find out they have liar loans behind them. There are mortgages that probably are not going to pay in many cases. And they are risky investments.

That's really at the root of this whole thing. That's why it is absurd for the government to point fingers at Wall Street. At the root of this you have a misunderstanding of risk driven by government-approved credit raters.

GIGOT: Steve Moore, you have the AIG bail out, a huge insurance company. It is a good insurance business. Nobody thinks the insurance business is bad. Yet, the government has to step in and basically hold up the taxpayers for $85 billion in loans. Why?

STEVE MOORE, SENIOR ECONIMICS WRITER: First of all, Paul, I feel I need a raise because I lost all my money this week. This has been one of the worst weeks financially for Americans all over the country.

I have a real concern that these federal government bail outs haven't accomplished what they were supposed to. This started a few months ago with Bear Stearns and then we had Fannie and Freddie a couple weeks ago. And then of course there's the giant insurer, AIG. In every case, Paul, the case was made that this had to be done to calm the financial markets. But as far as I can see, the financial markets are not calm. This is a hurricane.

So I think a lot of people asking the question, when does this bail out mania and? It started with banks, and then it was home company's, and now it's insurance companies. We cannot bail out every company that's in distress.

GIGOT: Well, unlike Bear Stearns, where the markets did come down, for AIG, it was the next day. Boom, they have a plunge worldwide. There really was a fear of kind of catastrophic failure. Do you think these nationalizations — serial nationalizations, or at least the uncertainty of who will be next are fueling that?

KIM STRASSEL, WASHINGTON COLUMNIST: I think people know that the federal government does not have enough money to do what they did in the case of AIG. And there was something kind of arbitrary and nontransparent about the way the Fed operated here.

GIGOT: Yes, why not Lehman, but why AIG? What's the standard?

STRASSEL: Somehow, AIG convinced, you know — I think the secret is make sure you have Paulson in a room at like 2:00 o'clock on a Sunday afternoon, because they are obsessed with solving the problem before the markets open in Asia. So he was really, you know, you could say forced into the problem.

GIGOT: Sundays at the treasury with Hank.

FREEMAN: This makes the Bear Stearns deal in March were worse and worse. The government went in, because the premise was the fifth largest investment bank can fail without destroying the American economy. What we learned from the Lehman Brothers failure is one of these banks can fail and life goes on. In the case of AIG, they could have raised $20 billion as soon as two or three weeks ago, but they were hanging around thinking the government would bail them out. This didn't have to happen.

MOORE: Paul, you asked the question about why institutions like AIG are failing. It is almost the exact opposite of what was happening three or for your years ago in the market we had this irrational exuberance, and these stocks went up and up. Now it is this kind of irrational paranoia. If you look at the fundamental assets, a lot of these companies, they are worth a lot, and yet people are marking them down in value so much because they think they will fall to zero.

GIGOT: Steve, it is called the panic after mania.

When we come back, a closer look at the administration's latest response to the market turmoil, what they're proposing and whether it will work, after the break.

(COMMERCIAL BREAK)

(NEWS BREAK)

GIGOT: We're back with a closer look at the Bush administration's latest plans to shore up the nation's troubled financial institutions.

Kim Strassel, late this week, the administration unveiled its biggest plans yet, which is to spend, could be hundreds of millions, in authority — at least it's asking Congress for that much — in order to buy out some of this bad paper and distressed debt, these securities that are in trouble at some of these financial institutions in order to stop this panic.

Number one, is this going to get through Congress, do you think, before they leave town for the election in about 10 days. And what do you think about it?

STRASSEL: They are promising to do it. You've got Nancy Pelosi and Barney Frank saying they will take it up early next week, hope to have it done by the time they leave town. I think they will earnestly strive to do that.

The problem is other stuff they may attach to it which may be too much for even Hank Paulson to take at the moment.

But the idea, as you said, is to finally figure out where all the bodies are buried, get all of this bad debt in one place. And as a result — and off of the balance sheets to reassure the markets we are done with it. It's a laudable goal. How it will actually work out in the end, that's a lot more complicated.

GIGOT: You think Congress is going to do this? Hank Paulson is going to stare down the Democrats and they won't — they haven't wanted to touch this but they will have to do it, otherwise they run the risk of taking the blame if they do nothing.

STRASSEL: Again, yes. Except the problem is what they load onto it. There is a lot of talk they want a second stimulus bill attached to it. They also want to change the laws to make it easier for people to go in front of a bankruptcy judge and change the terms of their mortgages. This is the stuff they've been pushing for for a long time and they will try to make this the price of giving Paulson this authority.

GIGOT: Mary, I see you shaking your head. I know where you are coming from. I have to say, I have come to reluctantly think, at this stage, this is the least bad of the alternatives. And the alternatives have been these serial nationalizations, like AIG, which is sort of ad-hoc decision making — you get saved, you don't. And it's systemic risk and anxiety that tends it to breed. Even without this, you have the Federal Reserve taking on more and more. It was never designed to take it on. Its real job ought to be keeping the dollar stable and monetary policy. Instead it has taking on this resolution trust — seems to me to be what we've got.

O'GRADY: I think it is a scam. I the reason I think it is a scam is because, you know, what you have here, for example, at Goldman Sachs, they have a lot of bad debt.

GIGOT: Big investment banking house.

O'GRADY: Do we know the inventory? Answer: no. Goldman Sachs, give us your inventory. There are billions of dollars in funds waiting to buy distressed debt in the United States. They don't have a market price for it. there is a market for everything. Goldman may not want to sell at whatever the market price is. But we need to know what that inventory is. And the excuse that, well, they're going to tell the RGC but they don't want to tell the — the...

GIGOT: But you don't think there wasn't a melt down this week? Do you? And we are in real peril this week, were we not?

Look, credit markets have seized up. Who is lending? Nobody is lending to anybody.

O'GRADY: James is right that the problem started with Bear Stearns. And they have compounded the problem all the way along. And now they're saying, we're going to solve everything. Just move all of your bad debt over here. Somebody's going to pay.

Hold on to your wallet. It seems really wrong to me and it's not going to help us ward off a problem in 10 years because no one is learning their lesson.

GIGOT: But there's a real — I disagree. Some people are...

(CROSSTALK)

O'GRADY: We'll some people are learning their lesson.

GIGOT: And I'll tell you, the shareholders of Lehman learned their lesson.

O'GRADY: But the bond holders of AIG are not marked down to the point Lehman is, so somebody — there has been privilegeship.

GIGOT: There really is an issue, James, briefly, about the price. You don't want these investment houses to be able to dump whatever they have, the toxic waste on the taxpayers. You have to make them pay a penalty.

FREEMAN: That is right. That is the only hope for the taxpayer. They've really been ill served by Treasury and the Fed, bailing out Bear. These company CEOs have spent the last six months talking to Washington, hoping to get a bail out instead of fixing their companies, and now we come to this. Your only hope is that whoever it is that runs this thing, drives a hard bargain. But the whole point is to provide relief to Wall Street. You're thinking that's probably not going to happen.

O'GRADY: And the idea that...

GIGOT: All right.

Sorry, Mary, we've got to go.

Up next, the candidates play the blame game. What a surprise. We'll take a look at who they're saying is responsible for the market meltdown and what they are proposing to do about it.

(BEGIN VIDEO CLIP)

GOV. SARAH PALIN, (R), VICE PRESIDENTIAL CANDIDATE: I think it is corruption on Wall Street. That is the blame, and that violation of the public trust and that contract that should be inherent.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

SEN. BARACK OBAMA, (D), PRESIDENTIAL CANDIDATE: We know what happened. Too many in Washington and Wall Street weren't minding the store. CEO's got greedy.

SEN. JOHN MCCAIN, (R), PRESIDENTIAL CANDIDATE: We're going to put an end to the reckless conduct, corruption and unbridled greed that have caused a crisis on Wall Street.

(END VIDEO CLIP)

GIGOT: Both presidential candidates got in on the blame game this week, claiming that Wall Street greed is responsible for the ongoing financial turmoil.

Kim Strassel, that is the kind of critique you expect to hear from Democrats, but why are John McCain and Sarah Palin making this argument?

STRASSEL: You know, I think this is aimed at a very particular constituency. Sarah Palin has helped to shore up the conservative base. And John McCain is making a pitch for those blue collar workers that is Hillary Clinton did well with. He's certainly adopting her populous tones — this is all about Wall Street greed and a lack of oversight by Washington and I feel your pain. And these people haven't necessarily gravitated to Barack Obama. This is who he is going after. I think this is what is driving this idea.

GIGOT: Steve Moore, do you agree with that logic, that somehow these Hillary Clinton voters are mad as hell and they want the candidate to say I am mad as hell too and blame greed? Or do they want cooler, calmer leadership in a crisis like this?

MOORE: I think it is a real mistake by McCain. I think he's taken a lot of momentum out of the campaign that carried through from the convention. And you played those two clips from Obama and McCain. Paul, they seemed interchangeable. They were saying almost the same thing. And John McCain can't decide whether he wants to be Ronald Reagan in this race or Theodore Roosevelt, as the kind of reformer who attacks corporate CEO pay and greed and corruption. I think it is a mistake.

But the one zinger that he got in this week that was really a pretty good one is these ads he is running, which is looking at Barack Obama's record and saying Obama was an apologist for Freddie Mac and Fannie Mae for all these years, and now he's pointing fingers.

GIGOT: What about, Mary, the decision by John McCain to attack Christopher Cox, the head of the Securities and Exchange Commission, who is a Bush appointee, for not stopping this and saying I would have fired him. They betrayed the public trust.

O'GRADY: It is the same line of reasoning I think Kim was alluding to when she talked about the fact that they are just trying to put out sound bites that make people feel better about someone else. If someone...

GIGOT: I'm as mad as you are.

O'GRADY: Exactly. And the thing that McCain and Obama have going for them is that nobody understands this problem. So they can just sort of wave a wand and fix the problem with the RTC, and don't worry, everything is going to be fine, and express indignation and attack people in your own party, somebody who was, by the way, a potential running mate for McCain at one point. It is just cheesy politics.

GIGOT: Obama mocked McCain for the Chris Cox line, saying, look, we don't need this kind of panicky stuff, saying you'll fire this guy, fire that guy. We need cool, calm leadership, somebody who's got some answers. I think that's where Obama looked better this week than McCain, who was flopping around for an answer or a scapegoat.

FREEMAN: That's right. McCain started out the week showing he knew almost nothing about the financial markets. The short selling comments were an embarrassment. But as the week got older, by Friday, he had pivoted a little bit and was focused on Fannie Mae and Freddie Mac, government-created institutions, took on huge debt, buying mortgages. We're now behind them. Taxpayers are going to pay up to $200 billion because of this government-created monster in the housing market, which is the root of this entire credit crisis. He is finally turning the blame where it belongs, which is Washington.

GIGOT: But this resolution agency, Kim, might help McCain in the sense that if it gets a vote before the election and calms markets, would help prevent what might have been serial failures. If you would have had one, two, three, four, five other failures between now and the election — big financial failures because of a run on the global financial system, that would have doomed McCain. If this agency calms things down, that could help McCain.

STRASSEL: Yes, especially because this is Barack Obama's argument. He is arguing that what is happening today — and as long as it stays in the news, he will continue to have this argument — is that this is a consequence of the entire Republican economic philosophy. This is what McCain needs to be addressing. He needs to pick up that debate. He needs to talk about financial regulation. He needs to talk about Obama's plans for taxes, and other things are going to do to an economy that is fragile right now.

GIGOT: James?

FREEMAN: I think McCain botched an enormous political opportunity to deploy the hockey mom from Wasilla to say, can't you fail in America anymore. D.C. and New York are cooking up this big bail out at the expense of taxpayers. and it could have been a win for her?

GIGOT: All right, James.

We have to take one more break. When we come back, our "Hits and Misses" of the week.

(COMMERCIAL BREAK)

GIGOT: Winners and losers, picks and pan, "Hits and Misses," it's our way of calling attention tot he best and the worst of the week.

Item one, a big hit for the private sector's response to Hurricane Ike —Mary?

O'GRADY: Yes, the corporate world has had a tough week and they come off looking evil and greedy. But in Galveston, Texas, they have stepped in where the Federal government failed. Even Michael Chertoff this week was saying that...

GIGOT: That would be Homeland Security.

O'GRADY: Homeland Security — which is involved in the relief efforts in Galveston after Hurricane Ike. He was saying that they are not getting their act together.

Meanwhile, the private sector, Valero Energy and Clear Channel Communications and AT&T, were stepping in. They were delivering water and helping people rebuild their homes. AT&T was providing wireless to people who couldn't keep in touch with their families.

Once again the Federal government failed — another the reason I am against the RTC. And the private sector came to the rescue.

GIGOT: All right, Mary.

Next, a hit and miss to the online white knight to alert Sarah Palin that her personal e-mail account had been hacked — James?

FREEMAN: That's right. According to a "Wire" magazine report, there was a good Samaritan out on the Internet who figured out her account had been hacked, arranged to create a new pass word, try and block other people, alerted her office. Unfortunately, this person I think wanted to take credit for the action and post a note that included all of the new information that allowed more people to read the e-mail. Kind of a rough day on the Internet for Sarah Palin.

GIGOT: OK, all right, James.

Finally, a hit to a Florida judge for shutting down the fashion police.

Kim, I don't know where this is going but I needed to hear it.

STRASSEL: Amazingly, cities in America are contemplating or passing laws against baggy pants, meaning against this fashion style where you wear your pants in a low-slung way and expose your underwear. Riviera, Florida, passed a law like this. A Florida judge had to hear a case of a teen who had been thrown in jail for wearing baggy pants. And he ruled it unconstitutional, saying, look, we are not even talking about nudity here. We are talking about how many inches of someone's underwear you can see. And I give him a hit for that.

We don't want the government as fashion police. Pretty soon they'll be talking about how long skirts can be, how low shirts can be. I think most Americans look at this and they say, if they don't like the way someone looks then they can tell them to hitch up their trousers or just look the other way.

GIGOT: I don't know, considering some of the things I see on the street, Kim — I don't know, a day in jail may not be such a bad thing.

STRASSEL: To each his own, Paul.

GIGOT: 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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