This is a rush transcript from "The Journal Editorial Report," August 29, 2009. This copy may not be in its final form and may be updated.

PAUL GIGOT, HOST: Up next, Eric Holder's assault on the CIA. Will the administration live to regret it? And what's actually in that supposedly explosive report on interrogations? We'll take a closer look.

Plus, Britain's Lockerbie outrage. Was the freeing of a convicted terrorist part of a deal for oil? And how high up did the decision go?

And the $9 trillion budget deficit, why even that forecast may be overly optimistic.

"The Journal Editorial Report" begins right now.

And welcome to "The Journal Editorial Report." I'm Paul Gigot.

GIGOT: Attorney General Eric Holder named a special prosecutor this week to investigate allegations of CIA abuse against high-level terror detainees. The appointment of federal prosecutor, John Durham, came the same day as the release of a 2004 internal CIA report detailing that agency's interrogation program. So just what is it not once-classified report? Could Holder be starting a political war that President Obama will live to regret?

Joining the panel this week, Wall Street Journal columnist and deputy editor, Dan Henninger; Columnist Mary Anastasia O'Grady; Washington Columnist Kim Strassel. And Brian Carney, who joins us from London as the editorial page editor of the Wall Street Journal, Europe.

Kim, you have read these documents. What's the lesson you take away from it.

KIM STRASSEL, WASHINGTON COLUMNIST: The press jumped all over this, I think with some prodding from the administration, suggesting this is yet more proof of abuse at the hands of an unleashed CIA. When you read these things, what actually jumps out at you is that this program was actually carefully developed, carefully controlled, widely briefed to Congress and it yielded invaluable results.

GIGOT: Bret?

BRET STEPHENS, FOREIGN AFFAIRS COLUMNSIT: That's the key point. There is this obsessive focus with a handful of instances where investigators potentially went over the line. Although, it's important to note that when career Justice Department prosecutors looked at these cases four years ago, they ruled that they did not merit...

GIGOT: That's interesting. This is an internal report that is being released now, but was begun in 2004.

STEPHENS: And was shared with Congress.

GIGOT: And was shared with Congress and turned over to Justice and career prosecutors did not prosecute except in one case of abuse where a detainee was killed by being hit on the head, apparently with a flashlight. That interrogator was prosecuted for assault and convicted.

STEPHENS: I think it's a key point to note the people who looked into this were career prosecutors. This wasn't the Bush administration or its appointees going against the bureaucracy of the Justice Department.

MARY ANASTASIA O'GRADY, COLUMNIST: Paul, the other thing about this that jumps out, besides the fact that the report says the Counterterrorism Center did a commendable job in staying within the rule of law and interrogating these detainees, is that the interrogators reported that they were quite concerned that they were going to be, at a later date, prosecuted in some way. They suspected the U.S. government would not stand behind him even though they were following the rules. That's precisely what's about to happen to them.

GIGOT: Yeah, they said one quotes was very telling. It said, ten years from now, we will regret this, but it must be done.

Another thing that's interesting here, Brian, is the results that were relayed about how they very useful information that ended up exposing, including plots to attack the U.S. Consulate in Karachi, hijack aircraft and fly them into Heathrow, using track spikes to derail U.S. trains, and several others. Had any of those happened, of course, it would've meant the death of innocent Americans

BRIAN CARNEY, EUROPE WALL STREET JOURNAL COLUMNIST: Right. and one of the lines we hear over and over again is torture doesn't work. Torture is ineffective. Now nothing detailed in this report obviously, except for the one case that was prosecuted, really looks like what most people would think of as torture. I think people get treated worse every day in the police stations in major cities around America.

But the fact is these enhanced interrogation techniques do seem to have saved American lives, exposed plots that could have been extremely deadly, and that probably would have led to a lot of worse things being done to even the detainees that we have and try to stop the next one.

GIGOT: This is a critical point. A lot of critics of what happened say there is no evidence that enhanced interrogations made a difference. The detainees would've given us this information anyway. Is there something in the report shows in fact the enhanced interrogation techniques made any difference?

STRASSEL: Yeah, Paul...

CARNEY: The report is very clear that people like Khalid Sheikh Mohammed were extremely resistant to questioning and gave up unreliable or very little information before the enhanced interrogation techniques were introduced. I think there's no question that they made a difference in the material that was produced here.

GIGOT: Kim, why would — given all this, why would Eric Holder, the attorney general, do this now. In the past he said, look, we don't want to go after low-level CIA interrogators. And the president himself has said often, I would look forward and not back. And other people in the White House who think that we really don't want to take this political fight. So what changed?

STRASSEL: I don't know what changed. There seems to be two modes of thought here, either Eric Holder seems to be of the ideological bent that this is something that needs to go back, despite the fact, as we mentioned, that former — other career prosecutors said there was nothing here. Either he is of the belief there is actually something, from a purist view, or it could be this is a political move by the White House to try to appease their left wing. They have been unhappy by the fact that the administration retained some of Bush era counterterrorism policies. They are unhappy with the way health care is going right now, the fact that the public option may not make it into a final bill. So this might've been sent out to them as a way to pacify the troops.

It's interesting because it doesn't work. They haven't been happy. They actually got a lot of criticism from their left that they had not gone further. Meanwhile, what they've done is make Republicans even less likely to want to work with them on some of the stuff in Washington.

GIGOT: But is it possible, in naming a prosecutor like this, the administrative would like to — you appease the left by naming a prosecutor. But then he comes back and says, look, there's nothing to prosecute and it goes away.

STEPHENS: Yeah, we have a 30 year or almost 40 year history of special prosecutors who always turn out to be — always turn out to surprise the administrations, if that's, in fact, the strategy here. It seems to me the Obama administration's strategy is pure Yogi Berra. You get to the fork in the road, you take it. They're trying to appease their left flank while the president is saying, I want us to look forward, not back.

GIGOT: And there's been a lot of reports about how upset Leon Panetta is, the CIA director. He did not want to do this. Time and time again, when he had a face-off with Eric Holder, Eric Holder has won.

O'GRADY: Yeah, again, I think Leon Panetta understands that we need some of these interrogation techniques if we're going to take on this enemy. I don't think he wants to be associated with a decision by the president that could have a very long-term cost in terms of the way we fight the war.

There's another thing going on here, which is that the Democrats have always thought we should fight the war as a — sort of a law-enforcement problem.

GIGOT: Right.

O'GRADY: And that's kind of the path they're going down. Now we're going to litigate all of these problems rather than fight the war on terror.

GIGOT: How far we've come from a post 9/11 world.

When we come back, the U.K.'s Lockerbie outrage. It was one of the deadliest terrorist attacks against Americans until September 11. And one of the men responsible is now free. Did the British government cut a deal with Libya in return for lucrative oil contracts? And just how high up to the decision go? Our panel investigates after the break.

(COMMERCIAL BREAK)

GIGOT: Outrage is growing in the U.K. and the U.S. over the hero's welcome given to convicted Lockerbie bomber, Abdel Bassett Ali Megrahi, upon his return home to Libya. He was released from a Scottish prison after serving eight years of a 27-year sentence for the downing of Pan Am flight 103 in December of 1988. 270 people, including 189 Americans, died. Doubts are mounting about Britain's government's claim that it had no hand in the Scottish justice minister's decision to release the Megrahi, who was apparently dying of prostate cancer.

Well, Brian, you are in London. This is becoming a full-blown political uproar over there. How credible is the claim that Megrahi was released for humanitarian reasons?

CARNEY: I don't think we know exactly why Kenny McCaskill released him yet. This is what we do know. We know that Gordon Brown talked to Moammar Ghadafi about the release six weeks ago.

GIGOT: And he's the prime minister of Britain.

CARNEY: He's the prime minister of Britain. We know his most important deputy, Peter Mandelson, discussed it with Moammar Ghadafi's son a couple weeks ago when they were vacationing together in Corfu. And we know that Gordon Brown, the prime minister, knew, before Kenny McCaskill publicly announced it, that Megrahi was going to be released, because Gordon Brown wrote a letter to Moammar Ghadafi pleading with him to keep Megrahi's return to Libya low key, which was a request that the Libyans gave the back of the hand to, which goes to show what happens when you try to deal with people like in the Ghadafi regime.

GIGOT: We also know that Libyans made Megrahi a priority in their private internal discussion. They mentioned it with Mandelson, and with others, and they want him released. Correct?

CARNEY: Correct. Ghadafi's son, in fact, said, the day after his release, that in every negotiation over every contract or anything that came up between the Libyans and the British government, that Megrahi was on the table. That's what Ghadafi son apparently told Megrahi on the plane on the way to Libya, the plane that was waiting for him before his release was even announced because the Libyans were so certain they were going to get him back.

GIGOT: OK, and we know there have been oil contracts that London received.

STEPHENS: One recent $900-million contract. Gordon Brown has talked up Libya's potential for British companies. The British spymaster who helped bring in Moammar Ghadafi from the cold in 2003 when Ghadafi decided to abandon his nuclear weapons programs, that man, that former intelligence man, is now a senior executive at B.P. So Gordon Brown's claim that the decision belonged to this Scottish justice minister alone, and that that decision was based purely on so-called compassionate grounds because he ostensibly is dying of prostate cancer, is very hard to sustain. This is already a government with almost no credibility with the public.

GIGOT: A big uproar over this. Robert Mueller, FBI director in the U.S., sent a very rough letter denouncing essentially the decision. And, of course, the families of the victims are also outraged here in the states.

O'GRADY: Right. But I'm kind of wondering, where was the U.S. in all of this? The State Department's job is diplomacy. We're supposed to have a relationship with the U.K. The U.S. is supposed to have some influence in the world. I'm worried that the Obama administration has spent all of its resources trying to force Tegucigalpa to take Manuel Zelaya back and forgot about this for the world.

GIGOT: A former president of Honduras.

O'GRADY: A former president of Honduras who — that's their big issue. Meanwhile, you have something like this developing and we're not even there?

GIGOT: Well, Fouad Ajami, who is a writer, often writes for us, he thinks Ghadafi wanted to make this statement welcoming back Megrahi with such fanfare, despite being warned by John McCain and the British, because the 40th anniversary of the Libyan revolution is coming up September 1st, and he wanted a big domestic show of what he could achieve on the world stage.

STEPHENS: Yeah, and, in fact, the British were prepared to send Prince Andrew one of the royals to celebrate. What are they going to celebrate? The domestic butchery in Libya are the terrorism overseas? Ghadafi's a master of rubbing the West's nose in it.

GIGOT: Yeah, but we did this deal with Libya in 2003. He gave — Ghadafi give up his nuclear program, Brian.

CARNEY: Right.

GIGOT: And that was a big — a big strategic victory. He did that in the wake of the Iraq invasion, probably because, in part, because of the Iraq invasion. And he wanted something in return. I think the Brown government would say, look, this is not that big of a deal. Megrahi was going to die in prison anyway, and we need to engage the Libyans.

CARNEY: But Megrahi should've died in prison. Ghadafi didn't do the deal over his nuclear weapons because he had suddenly become a trustworthy and terrific guy, right? He did it because he was afraid, after Iraq, about what would happen to him if he didn't. And what we saw in the way that they treated Gordon Brown's request to at least be discreet about this, right — Brown did not say — hasn't said anything about the substance of the decision, even to this day. All he said was he was repulsed by the reception that Megrahi received in Libya.

And what we saw was that, you know, Libya hasn't changed its spots, right? It did the nuclear deal because it feared the consequences of not doing it. But here, they clearly saw no downside in getting this guy back and then rubbing the British government's face in it.

GIGOT: And a big embarrassment for Gordon Brown.

All right, still ahead, the nine to end our deficit. Does it matter? Our panel weighs in after the break.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

PRESIDENT BARACK OBAMA: At the end of the day, the best way to bring our deficit down in the long run is not with a budget that continues the very same policies that led us to a narrow prosperity and massive debt. It's with a budget that leads to broad economic growth by moving from an era of borrow and spend to one where we save and invest.

(END VIDEO CLIP)

GIGOT: Remember that? Well, reality struck this week when the Obama White House and Congressional Budget Office both announced the deficit over the next decade will balloon to more than $9 trillion, $2 trillion more than predicted earlier this year. Even those revised projections are probably optimistic.

Mary, a trillion dollars here trillion dollars there, for most people, it becomes a distraction. But what do these deficits mean economically?

O'GRADY: When you have a deficit, you have to issue debt in order to get the money. And what the Congressional Budget Office has said is that the amount of debt that the government is going to have to issue is unsustainable. You have to find somebody who will buy your debt and give you that money and you have to service the debt and you eventually have to repay it. So this isn't money for nothing. It has to come from somewhere and it's not sustainable.

GIGOT: Obama's argument would be, look, we needed to run these deficits. I inherited about $1 trillion of it. Besides, we have a big recession. We need these deficits because they help to stimulate the economy, to the soundtrack of "This is Only Temporary."

O'GRADY: Generally, that's what you would hope. You have a deficit, but to start growing. And if you grow fast enough, then you can pay down what you owe.

But the problem is that the projections for growth don't look real good. And part of the reason is because, once the debt gets to a certain level, politicians start stepping in and saying, aha, we have a problem where we don't have enough money. We need to raise taxes. Once you start raising taxes, you kill the growth. And if you do that, you're not going to get out of the problem. That's why some countries end up either going into default or they end up having to print money at the central bank in order to pay for it.

STEPHENS: These monster deficit projections are based on estimates of congressional spending, which are just wildly unrealistic. The suggestion by Peter Orszag and his group...

GIGOT: Who is the White House budget director.

STEPHENS: Budget director — is that Congress is going to spend — basically increase spending at the rate...

GIGOT: And this is not the Congress that you have come to know and love, that it will control spending like that, Bret? Is that it? Is that what you're saying?

(LAUGHTER)

STEPHENS: I think you...

GIGOT: How dare you accuse those Congress people of that.

(LAUGHTER)

STEPHENS: Yeah, you've answered your question there, Paul. And the other thing is, what I find interesting...

GIGOT: Chris Matthews, what I'm trying to intimidate Chris Matthews and answer my own question.

(LAUGHTER)

STEPHENS: It's the same Obama supporters who said the reason — especially conservative Obama supports, who went on for years saying the reason we oppose Bush is he has grown these monster budget deficits, he has let spending get out of control, are no where to be heard from now that Obama is creating $9 trillion of debt over the next ten years.

GIGOT: All right, Kim, what...

CARNEY: Bush was...

GIGOT: Go head, Brian.

CARNEY: Sorry. Bush was criticized for doubling the national debt. And these latest projections say that Obama will more than double the national debt again. And he will do it and have the time. As you say, the reality is like to be worse than that. This is not temporary. $9 trillion of new debt is forever, because we have to pay it off or we have to continue borrowing it forever and pay the interest on it with tax dollars forever. Another $9 trillion in debt is huge.

(LAUGHTER)

GIGOT: Kim, any evidence at all this is beginning to sink in on Capitol Hill and also down their spending? Just one figure. Spending this year as a share of the economy will be 26 percent. The average over the last 40 years is 21 percent. That's a very big change.

STRASSEL: I think it is sinking in. It's sinking in at the town halls you see across America on health care. This is something the Obama administration and Congress didn't think about. They spend crazily at the beginning of the year and, as a result, they put these deficit numbers in the middle of the health care debate, with everyone saying can we really afford to do this right now. You're beginning to here even some Democratic Senators and Congressmen saying this is going to be too costly. Maybe we need to put this off.

But in terms of evidence of actually seeing most of Congress slowdown, no, you don't see that anywhere.

GIGOT: What I hear Kim saying is, silver lining department, it may end up — the deficits may end up defeating at least in a very expensive health care program.

O'GRADY: That's true. And we should celebrate that. But I think we have to come back to the idea of growth. When is this economy going to start growing again? That is so important for the job growth and also to deal with the problem that the Federal Reserve has created. The Federal Reserve is putting out a lot of money. If we don't start to grow, they don't have any bullets left in the chamber for the economy.

GIGOT: Buy T-bills. Somebody has too.

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

(COMMERCIAL BREAK)

GIGOT: Time now for "Hits and Misses" of the week.

Bret, first to you.

STEPHENS: The big obituary of the week is obviously Ted Kennedy. But I would like to call attention to an educational innovator who passed away recently, Stanley Kaplan. You're familiar with his last name because you probably prepped for his courses or his books. He founded a multimillion dollar company, really sort of literally out of his garage, and became a great philanthropist in his old age. But he's evidence of what the private sector can do to improve standards and improve education for the good of students across America.

GIGOT: Mary?

O'GRADY: I'm giving a hit to Jose Hernandez, the first Mexican- American to be a mission specialist on the space shuttle. He was born in French Camp, California of — he was a migrant worker as a child. His family was migrant workers. He did not learn English until he was 12 years old. I would note that he did not get put into a bilingual English program when he was 12 years old. He went into a regular American school, learned English, and he is now the pride of Mexico.

GIGOT: All right, Kim?

STRASSEL: This is a miss for New York Representative Charlie Rangel, who amended his 2007 financial disclosure forms this week. It turns out Mr. Rangel just found — oops — that he had missed about $600,000 worth of assets from mutual funds to IRAs to pieces of property. All I have to say is, if this is how the head of the Ways and Means Committee handles his bookkeeping, maybe it's no surprise we have $9 trillion deficit.

(LAUGHTER)

GIGOT: All right, Kim, thanks.

Finally, tonight, remembering Ted Kennedy. Much has been said this week about the Senator's achievements in 47 years in that body, but perhaps the larger lesson of his career is that true believers matter most in politics.

Kennedy believed in the power of the state to spread wealth and mold human behavior. I don't share those principles, but there's no denying that his passion for his believes and the canny way he promoted them. Yes, he was a partisan — he sometimes slipped into demagoguery, as he did in 1987 against Supreme Court nominee Robert Bork. But he did succeed in protecting and expanding the power of the federal government, even when it fell into disfavor. He knew how to compromise but nearly always on his terms.

There's a lesson in this for politicians who find themselves in opposition, not least, Republicans at the current moment. The politicians who change the world are those who believe in something and are willing to fight for it.

Our condolences to the Kennedy family.

That's it for us. Thanks to my panel and all of you for watching.

I'm Paul Gigot. We hope to see you right here next week.

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