This is a rush transcript from "The Journal Editorial Report," February 28, 2009. This copy may not be in its final form and may be updated.

PAUL GIGOT, HOST: Up next on "The Journal Editorial Report," the Obama agenda unveiled. The president said it is a day of reckoning and he is proposing a fiscal and policy revolution.

Plus, a closer look at the administration's plans to stress test the nation's biggest banks.

The war on the border. A big spike in drug violence in Mexico has U.S. officials warning tourists, and worrying about a spill over into the United States.

"The Journal Editorial Report" begins right now.

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

Those who thought the recession and financial meltdown would moderate Barack Obama's policy ambitions were set straight this week. The president laid out the most ambitious and expensive domestic agenda since Lyndon Johnson, moving ahead with campaign promises to overhaul health care and implement a European-style carbon cap and trade program.

Here to tell you how you how he's going to pay for it all, Wall Street Journal columnist and deputy editor, Dan Henninger; Columnist, Mary Anastasia O'Grady' and assistant editorial page editor, James Freeman.

Dan, starting with you, Barack Obama described himself this week is a pragmatist. He's proposing things as they will work. Yet in a column he wrote he described this as a radical presidency because of the budget. Why?

DAN HENNINGER, COLUMNIST & DEPUTY EDITOR: I think it is radical presidency if the meaning of radical is serious abrupt change. That's what we're going to get your.

Since around the 1980s, and the presidency of Ronald Reagan, we have had an economy led by the market, the free-market. If you look at Obama's budget, he says explicitly that some of the most important areas of life — energy policy, health policy, infrastructure and education — have, his word, been "sacrificed" for tax cuts for the wealthiest and most well-connected. He wants to reverse that. He wants the government to decide that health care and energy are the primary things that we have to do, and that money has to be transferred from the marketplace from those people to support things that he chooses and that he guides. That is a radical change.

GIGOT: My impression is that this budget isn't about just repudiating the last two or four years, Mary. This is about repudiating 30 years, going back to 1980 to Reagan and Clinton.

MARY ANASTISIA O'GRADY, COLUMNIST: No, the progressives are in charge. If you think about the decade of the 1930s and what they sought to do, this very similar to that. They look at the tax rates under the period you just mentioned that basically were around 18 percent of GDP, and they say that is just flat out too low. We want to get it well above 20 percent. We want government to care for people from cradle to grave, including their health care, and we're just not paying enough in taxes. They think that fundamentally that rate has to be much higher.

GIGOT: there is also in terms of spending, James, a big spike obviously in 2009 and 10 related to the stimulus, and Barack Obama said he wanted to do that, and that's going to be much bigger than the 20 percent or 21 percent spent the last four or five years as a share of the economy. That's federal spending as a share of the economy. Even after the economy starts to recover, it will be at 22 percent or 23 percent, as far as the eye can see.

JAMES FREEMAN, ASSISTANT EDITORIAL PAGE EDITOR: Massive. Looking at historical parallels, you have to go back to World War II to see this level of spending as a percentage of GDP, to see deficits as large as a percentage of GDP. Think about World War II, we saved western civilization, defeated Hitler and Tojo.

(LAUGHTER)

Now we're weatherizing homes and driving up the budget of the Commerce Department and all other federal agencies. I would think at some point, a big dose of skepticism is going to set in among the American people to say, wow.

GIGOT: One thing that striking to me, Dan, is the degree of ambition politically. The political system has taken a distant event, the stimulus, and gotten that through very early. Usually you can even do, a president - - even a first year of a popular president, only one other big thing. Barack Obama is saying I wanted has this huge budget undertaking and than I'm going after health care and I'm going after this cap and trade energy program, which would turn upside down the way we manage the energy policy in America.

HENNINGER: This is an interesting point. And we will talk about cap and trade in this context. It seems to me that Barack Obama, more than any president we have had in a long time, really sees the country and its institutions as basically a national government. He is the president for all the people and so his programs are sort of for the nation, when in fact, we have a federal system. Congress represents the states. Those interests are going to press themselves into this budget. For instance, in cap and trade, they are going to put carbon fuels much more expensive.

GIGOT: Cap — just so people will understand, you're putting a cap on the use of carbon by putting a price on it, so you will have a property right. And the government then allocates your ability to emit carbon energy.

HENNINGER: And it raises the price. A lot of states, especially in the Midwest, which are very dependent on that carbon. They're going to object. Their members of Congress will whoosh back hard.

GIGOT: Whether you're a Democrat or Republican.

HENNINGER: Absolutely. And agriculture the same thing. There are local and state interests that are going to object to aspects of this plan.

GIGOT: I want to focus on one part of this carbon tax, Mary — tax and trade program. President Obama says this is not a tax, this is just regulation. But if it raises the price on all of the carbon that anybody in America uses, is the tax cuts.

O'GRADY: Of course, it's a tax. And it's going to be a hidden tax, which is the favorite kind of tax. but what I find amazing about his whole plan is that he kind do just skipped over this recession were in, saying we will have a jumpstarting of the job creation.

GIGOT: Well, they think the government spending will be that jump start. That's the premise.

O'GRADY: But you know what? If you could have the government take money from you and give it to him, and that would create jobs, Argentina would be the richest country in the world.

(CROSSTALK)

FREEMAN: To believe it, we have to ignore the history of the last 100 years, right? That is the greatest or the most dubious assumption here, that we're going to get the economy growing at 4 percent a year after he complete gut punch to small-business — Carbon tax, estate tax coming back and taxes on income going up on business making as little as $250,000.

GIGOT: Again, I have to tell you, the economy is going to recover. It may not seem like it now, but the economy is going to recover. And he is betting he's going to get credit for it.

O'GRADY: Paul, look at the markets last week. They're not telling you anything good about this plan. Investors know that you don't create wealth by transferring it from the government to jobs where people are...

GIGOT: So your point is that the economy will recover despite this overtime?

FREEMAN: There will be some recovery, but 4.6 percent growth is very ambitious when you raising taxes on job creators.

GIGOT: All right, thank you, James.

When we come back, the Obama administration orders the nation's biggest banks to undergo stress tests. But will they be tough enough to root out the weakest in the bunch?

(COMMERCIAL BREAK)

(NEWS BREAK)

(BEGIN VIDEO CLIP)

BEN BERNANKE, CHAIRMAN, FEDERAL RESERVE: Nationalization, to my mind, is when the government seizes the bank, zeros out the shareholders and begins to manage and run the bank. We don't plan anything like that.

(END VIDEO CLIP)

GIGOT: That was Federal Reserve Chairman Ben Bernanke, trying to tap down speculation that the Obama administration plans to nationalize some of the nations most troubled banks. The government began to conduct financial stress tests this week to determine how well the biggest U.S. banks would hold up if the recession gripping the country got worse. But just how tough will these tests be.

Mary, to me, this is the big game, the financial system. If we can't get this right, this economy will not recover. So how much progress did the Obama Treasury make this weekend fixing the banking system.

O'GRADY: None.

(LAUGHTER)

GIGOT: Be optimistic. Here we go.

All right, tell us the bad news.

O'GRADY: They made a deal with Citibank, but I think that Citi survives, which is bad news. There is some indication that it will have to become smaller so it is no longer this monster that is going around, that can bring everybody else down. but I think that really what we need here is to send a message to the banks that they should stop lying in Washington, go home and look at their own balance sheets and figure out how to sell assets — I don't care what the prices are — how to sell assets and how to raise capital. And that was not the message we got from the Citi deal.

GIGOT: James, what do you think of this idea of a stress test? I assumed always this is what regulators typically do, which is to see how well their losses compared to what they have in capital.

FREEMAN: I guess the premise here is their compliant to all existing regulations, so existing regulations don't work, so we will create ad hoc regulations and say we have a new standard. And if you don't meet this, you need to go out and raise capital or we will give you more.

I think Washington needs to stop changing the rules. I subscribe to the let-them- fail school of economics. Even if you believe this big institution has to be saved to avoid some kind of panic, the objective here is not let's figure out how to make Citibank succeed long-term. That may not work. The objective is how do we let it fail quietly and in an orderly way, so it doesn't create a panic. I think you would like to see more changes.

HENNINGER: James is right. I mean, this crisis has been up and running since the middle of September. Back then, the government was in a panic, everybody was in a panic. Citi, Merrill, they were too big to fail. What we mean by too big to fail is too big to collapse overnight and crush the credit system.

GIGOT: and send a stress throughout the system, so you get a cascading effect and a real panic where people pull money out of banks and so forth. That is not what we have now.

HENNINGER: We have one of the biggest safety nets that ever existed under these banks. You should be able, like a damaged building, to be able to take them down piece-by-piece. I think what they are afraid of, and what Chairman Bernanke was saying in that clip, was if somehow the government gets control of this process, this will be called nationalization.

(CROSSTALK)

GIGOT: The government has taken over failed banks for 100 years or at least 70 or 80, James.

FREEMAN: That's right. Normally, what they do is they sell the deposits, sell the assets and the taxpayer takes the loss that's left. But what's happening now is these risk — these rescues end up with the government running institutions, AIG, Citi, Fannie Freddie, all big losers after the government has put in tons of cash. So I think what you have to do is find a way out of this and the stress tests are just creating a longer problem. It'll be months until they get the answers on the test and then they have six months to raise capital.

GIGOT: I will tell you one thing that I like about this plan as opposed to the Paulson plan, it does give the banks an ability — the sound banks, those that actually emerge from the stress tests, less stressed. They get to get out of government ownership faster and on easier terms if they have the money to pay it down. I think that's good. You can get the sound, good banks out from under being terrorized by Capitol Hill a little faster.

O'GRADY: Don't forget too that what the Obama administration wants to accomplish through all of this is to try to get banks back up and lending, and the securitization process going the way it was in 2004 and 2005. That's not going to happen.

GIGOT: Securitization is taking packages of loans and selling them on the secondary market. It's a different kind of lending than the normal traditional bank lending.

O'GRADY: It was the kind of lending that was dominating the industry in 2004 and 2005 when things were going great. So what they're trying to bring back is not going to come back right now. The consumer is withdrawing and lots of the policies that they are promoting are making people more nervous about getting back into the markets not less.

HENNINGER: One word we learned in the past was moral hazard. We all know what it means. This is about liquidity, about creating a market where you have buyers and sellers. The government has been returning itself inside out to restore liquidity to the system, and it won't unlock until it happens.

GIGOT: I have sympathy for Tim Geithner, I tell you. I know James does not. But I think he has a very difficult job trying to price these assets, these toxic assets. And I have some hope this public-private entity they set up can begin to do that. I know I am alone in this table in believing that, but I have to have hope.

Still ahead, Mexico's bloody drug war. Escalating violence in the north has American officials worried about the spillover to U.S. border states where kidnappings and home invasions are on the rise.

(COMMERCIAL BREAK)

GIGOT: The State Department issued a travel warning to a popular spring destination last week, alerting American tourists to a spike in violence in Mexico. More than 6000 people were killed there last year and more than a dozen of died in the first eight weeks of this year as drug cartels fight for territory and trafficking routes amid a government cracked down. The worst violence is in the northern Mexican state of Chihuahua across from Texas and New Mexico. Some 1600 people died at Juarez, Chihuahua's largest city died in violence that included numerous beheadings and the killing of more than 60 police officers.

We're back with Dan Henninger and Mary O'Grady. And "Wall Street Journal" foreign affairs columnist, Bret Stephens, joins the panel.

Mary, a lot of people are comparing Mexico to the situation with Pakistan in terms of instability. What you think of that analogy?

O'GRADY: I think that goes a little bit too far. In fact, I was in Mexico City a couple weeks ago and spent time with the attorney general there. He was pointing out to me that Columbia, where the U.S. considers itself to have this huge success against the drug cartels, in 2008 had 33 murders per 100,000 inhabitants. In 2008, for Mexico, it was 10.

Now that's a number that actually is lower than it was 10 years ago in Mexico. and I think all evidences is that rather than being a failed state, what you have is a state that exerting its right to govern and to restore the democratic rights of its citizens by confronting the cartels, which have been running roughshod over the population. The violence is much worse obviously by the border. 60 percent of the death toll so far this year has been by the border.

GIGOT: It's still scary when you think about the fact that middle class Mexicans, a lot of them, feel that they need to commute out of Monterey in the northern state, Bret, and actually live in the United States a good portion of the time.

BRET STEPHENS, FOREIGN AFFAIRS COLUMNIST: It is scary. And we should specify, it's really happening in the north of the country. If you take your spring break in Cancun, I think you will be all right.

GIGOT: You have been known to take a vacation in Mexico and you're safe?

STEPHENS: One or two.

(LAUGHTER)

But, you know, I think the important point here, you know, with the Pakistan comparison, an important difference, and Mary highlighted this, in Pakistan, you have a government that is collapsing or making concessions to extremist. In Mexico, in Felipe Calderon, you have a president who is confronting them very forcefully. And one of the reasons you see this huge uptick in violence in the past two or three years, as that he has declared war on the drug gangs.

What's important there too to consider is that it isn't simply journalists and businessmen who are being targeted. The principal victims of the drug crimes in Mexico are themselves, members of the various drug cartels. A leader gets knocked off. They vie for control. The Sinaloa cartel against the Gulf cartel and so on. And that's a sign the government is in fact winning this war.

GIGOT: But Calderon felt he had to bring in the military because the police force was often so corrupt and overmatched.

O'GRADY: Right.

GIGOT: That's a little scary because you have the danger. On one hand, you bring in more force. That's good. On the other hand, you run the risk, don't you, over time, that maybe the military itself will be corrupt?

O'GRADY: Of course. And the military is your last line of defense so you don't want to expose it like that. But the other issue is the idea that the Mexican government is winning this war is laughable. There is $10 billion in cash that goes from the United States drug consumers into the pockets of the cartels every year. How's the Mexican government supposed to confront that. It undermines institutions because there is bribery and corruption. And it also gives them a lot of weapons. They have an amazing array of weaponry to use against the Mexican...

GIGOT: Bret, on that point, three former Latin American presidents wrote in our pages this week that the drug war is a failure and we should stop it.

STEPHENS: Well, good luck to them in getting American drug laws changed. That simply is not going to happen.

To Mary's point, Mexico is not some two-bit state. It's $1 trillion economy. The comparison you made is not credible. $10 billion is a drop in the bucket to what Mexico can bring to bear in this war to increase...

O'GRADY: Why — that's ridiculous. Why should the Mexican government be fighting an army with a $10 million budget when the problem is U.S. demand. And you know what? If Filipe Calderon succeeds, raises the cost of trafficking through Mexico, what we're going to get is it going back through the Caribbean and into the United States. So our long-term goal of ending the ability for consumers to get drugs in this country is not going to be met, but we will have a lot of dead Mexican law enforcement.

STEPHENS: We're now getting to this argument about drug legalizations.

GIGOT: Whether or not America's drug laws are helping to corrupt and undermine the Mexican state. Do you agree with that?

STEPHENS: The basic problem with Mary's argument is this. The suggestion that is that somehow the presence of drugs is undermining governance in Mexico or governance elsewhere...

O'GRADY: Not the...

(CROSSTALK)

STEPHENS: Hold on a second — elsewhere in Latin America. The problem in Latin America, and I grew up in Mexico, is the government was weak to begin with.

(CROSSTALK)

STEPHENS: Corruption didn't begin until 10 years ago.

GIGOT: We will take this another time.

(LAUGHTER)

Both of you, this is good stuff.

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 pans, "Hits and Misses," it's our way of calling attention to the best and the worst of the week.

Dan, first to you.

HENNINGER: Joe Biden has a Sarah Palin moment this week on early morning television. He is the guy in charge of seeing how the budget is enforced. He was asked about the government's web site so people could go to it. And the vice president said you know, I'm embarrassed. He turned to an aid and said, what's the number for that web site?

(LAUGHTER)

So the bloggers jumped all over it and said the vice president thinks the web is a giant telephone.

(LAUGHTER)

I want to support the vice president. Mr. Vice President, if you haven't joined the web yet, stay away. This will just suck all your time away. It will destroy your mind. And I think you should stick with that old rotary telephone. Keep it personal.

(LAUGHTER)

GIGOT: All right, Mary?

O'GRADY: This is a hit for American Express, the card company that says don't leave home without it. They are changing their mind and offering some cardholders a $300 prepaid debit card if they were close their accounts and pay off their remaining balances by April. It's a hit, in my opinion, because I think it shows innovation on the part of lenders to clean up their balance sheets and maybe get rid of some of their more dubious borrowers.

GIGOT: All right, James.

FREEMAN: I want to give a hit to stimulus plans going on in the private market, and to two people leading those plans who are in that infamous top 2 percent of American income earners, Steve Ballmer, a CEO at Microsoft, said the company will continue to spend $9 billion a year on R&D, and Tiger Woods, a return to the PGA tour, which helps sponsors in the golf economy at least. So I'm predict these kind of efforts will do more than Washington's trillion dollar schemes to boost the economy.

GIGOT: All right, let's hope so. All right, James, thanks.

Remember, if you have your own "Hit or Miss," please send it to us at jer@FOXnews.com.

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 a Paul Gigot. We hope to see you all right here next week.

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