This is a rush transcript from "The Journal Editorial Report," September 19, 2009. This copy may not be in its final form and may be updated.

PAUL GIGOT, FOX HOST: Coming up next, the administration gives the back of its hand to two more American allies, shelving plans for a missile-defense shield in Poland and the Czech Republic.

And lessons from the Lehman collapse. One year later, what have we learned? And are we better prepared to stop the next financial meltdown?

Plus, President Obama risks a trade war with China to help his union friends. Are there more favors to come?

The "Journal Editorial Report" starts right now.

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

Well, it may be risky to be an American adversary, but more dangerous these days to be a friend. The latest allies to get slapped by the Obama administration, Poland and the Czech Republic. The administration announced this week that it is shelving plans to install a missile-defense system in Eastern Europe, citing a change in the perceived threat posed by a nuclear Iran. Plans for the missile shield had angered Russia, a country President Obama promised to reset relations with.

Joining the panel this we go, Wall Street columnist and deputy editor, Dan Henninger; columnist, Mary Anastasia O'Grady; and deputy editor and foreign affairs columnist, Bret Stephens.

So, Bret, the president pitched this as saying, look, we needed to change the policy because the intelligence changed. That is the threat from Iran became more urgent regarding short and medium-range missiles, not the long-range missiles that the defense system that the Bush administration put in place. So why shouldn't the policy change if the intelligence does?

BRET STEPHENS, DEPUTY EDITOR & FOREIGN AFFAIRS COLUMNIST: Well, because there's some disingenuousness to that claim.

GIGOT: You're not buying it?

STEPHENS: No, I'm not buying it for the following reason, Democrats, people close to Obama were putting it about, even before he took office, that he intended to make precisely this kind of deal, which was to shelf these anti-ballistic missile systems in Poland and the Czech Republic, which had angered the Russians, in exchange for Russians cooperation on sanctioning the Iranians at the United Nations. So if this intel — this intel would have to be over a year old for that to make any kind of sense whatsoever. This is something they've wanted to do, and they're fitting the intel simply for their political purposes.

GIGOT: Boy, that's a pretty serious charge, Dan. Basically, he's saying that they're skewing the intel interpretation to fit the policy with the new policy?

DAN HENNINGER, COLUMNIST & DEPUTY EDITOR: Well, it's been a longstanding position of the Democratic Party, even since Reagan, you know, denounced what Ted Kennedy described as "star wars," to get rid of missile defense. They don't really believe in it. And I think what they've done here smacks, as much of the Obama foreign policy does, of being basically not Bush. In order words, they simply reverse something that George Bush did.

I think one of the biggest problems is it's very difficult to discern the strategic rational behind Obama's foreign policy. When you do something like this, all the other players in the world, Poland, the Czech Republic the Eastern Europes (ph), are trying to figure out why you are doing this. and there is no really underlying intellectual rational.

GIGOT: Wait a minute. Here is the rational as I understand it. They're whispering this. Never mind the missile-defense thing for a second. They're saying, look, Iran is a more urgent threat. We need to stop their nuclear weapons program. We can only do that if we're going to impose sanctions and everybody agrees so we have to get the Russians on board. If we need to pay them off with this, if we get Russian supports on sanctions and we stop Iran, that's a much bigger strategic victory.

HENNINGER: Why then would the Russian foreign minister, the day after it was announced say that sanctions against Iran, would be a mistake?

GIGOT: Well, because you can't sell — because the Russians maybe do this on the Q.T., a private deal, not a public deal. That's the thing.

MARY ANASTASIA O'GRADY, COLUMNIST: Well, the thing is, I think this is a calculation about a way to lower the tensions with those regimes around the world that the Bush administration, quote, "was able to get along with." We're going to show that we can get along with these guys and we're going to bring the world together against really what we consider to be the really bad actors. The problem with that is that, you know, it's sort of— first of all, it's alienating the Eastern Europeans.

GIGOT: Our friends. That's for sure. They're very upset.

O'GRADY: And that the administration is doing the same kinds of things in Latin America, alienating our friends and trying to reach out to those regimes that quote, unquote, "the Bush administration couldn't get along with," and send ago very dangerous signal, I think, to the world.

STEPHENS: The other point that's important, I think that the Obama administration fundamentally misunderstands Russian interests, vis-a-vis Iran. They think at some level the Iranians — the Russians, excuse me will go along with this. What Russia wants is to keep the Iranian crisis on a low boil as long as they can. Why? For one reason, it drives oil prices up, which is in their interest. It keeps America and it also keeps America engrained in a crisis. And most importantly, it allows the Russians to dole out diplomatic favors at the U.N. in exchange for material concessions. Now, it's the missiles in the Czech Republic. The next time, it's going to be the nature of the government in Georgia or the Ukraine.

GIGOT: OK, Bret, you're making a judgment about Putin's interests and you may be right.

But what if the administration is right and they have some reassurances from Medvedev and Putin, Dan, that, in fact, they are going to cooperate in Iran and we get their cooperation to come down hard on Iran. Is this a — is this calculation, this trade, the missile-defense sites, which won't be online for several years anyway, worth Russian support against the Iranian threat.

HENNINGER: I suppose one could argue it is. I think it's a weak deal. You're relying on the good faith of the Russians to hold up their end of a bargain and, in return, relying on the intelligence about Iranian missile capability, which also I would suspect is weak. Keep in mind that in May, they did test a long-range 1500-mile missile, right.

GIGOT: It's in the reach of Warsaw, is it not?

HENNINGER: Exactly, yeah.

STEPHENS: Within one, they loaded more — in Warsaw and the solid- fueled rocket. This intelligence they claim to have seems to me somewhat - - somewhat questionable given what we know of what Iran is capable of doing. We also know that the Iranians are cooperating very closely with the North Koreans. And we're seeing North Korea steadily making advances in terms of producing long-range missile capabilities. This particular missile Dan was referring to seems to be based up on a Chinese model. So it's wrong to think that this is not a problem.

GIGOT: These defenses in Europe were also able to defend the east coast of the United States. So that will no longer be the case.

All right, thank you.

When we come back, lessons from Lehman. One year after the financial giant's collapse, are we any better prepared to stop the next big meltdown?

(COMMERCIAL BREAK)

GIGOT: It's been one year since Lehman Brothers collapsed into bankruptcy and sent the U.S. economy into a tailspin. Marking the anniversary, President Obama traveled to Wall Street this week to press his case for an overhaul of the financial regulatory system.

(BEGIN VIDEO CLIP)

PRESIDENT BARACK OBAMA: One year ago, we saw in stark relief how markets can spin out of control, how a lack of common- sense rules can lead to excess and abuse, how close we can come to the brink. One year later, it is incumbent upon us to put in place those reforms that will prevent this kind of crisis from ever happening again.

(END VIDEO CLIP)

GIGOT: We're back with Dan Henninger and Mary O'Grady and also joining the panel, assistant editorial page editor, James Freeman.

All right, Mary, how much progress has — how much sturdier is the financial system now than a year ago and can we have what happened last year happen again anytime soon?

O'GRADY: I think it would be very hard to argue that the system is sturdier.

GIGOT: Really?

O'GRADY: I mean, there really hasn't been any changes done. I think you probably wouldn't have any kind of a crisis anytime soon because we're still in the process of re-flating, if you will. But the problem is that if you do have a crisis, on the fiscal side, the government doesn't have any money to step in. On the monetary side, the Fed can't lower interest rates any further.

GIGOT: It's flooding the zone.

O'GRADY: You still have a lot of the financial institutions doing proprietary trading. You still have...

GIGOT: That's trading on their own account, even if they take insured deposits.

O'GRADY: Yeah, taking risks.

GIGOT: They invest their own money rather than just making loans.

O'GRADY: Exactly, and you still have the Federal Housing Administration making very aggressive loans, so, really...

GIGOT: Subprime lending only on the taxpayer's dime.

O'GRADY: Exactly.

GIGOT: Let me play devil's advocate here for a second. It seems to me the financial system is sturdier in this respect, the panic has subsided. Banks raised their capital standards. Some of them have had that old Adam-Smith discipline imposed, saying we're not going to make some of these really bad loans. and most of the banks are making money, because the interest rates are so low, they can borrow very, very cheaply, almost for nothing, and then lend out at 5, 6 percent. So more than a year ago, the system is in better shape.

O'GRADY: Well, I think what you're saying is conditions are better for the system to be stable.

GIGOT: Right. Right.

O'GRADY: But the point I'm making is that any kind of guardrails or defenses that you have for distortions in the market to get out of line have not — those sorts of things haven't changed.

GIGOT: You're talking about the larger structural changes that need to be made.

O'GRADY: Yeah, there are no protections.

GIGOT: It the same old thing, only just conditions are better, so we don't have panic.

O'GRADY: Because right now, we're not being — right now, we're being careful because we just went through a period where we got burned. But my point is that it could happen again because we still have a system that basically privatizes rewards and socializes risk.

GIGOT: All right.

And that brings the question to one of are favorite subjects, James, "too big to fail." Mary is saying that incentives haven't changed and it may be worse because what happened is we bailed out some of the failures, Citigroup particular as one of the most egregious, and we didn't punish them very much at all.

JAMES FREEMAN, ASSISTANT EDITORIAL PAGE EDITOR: That's right, the media played Mr. Obama's visit to Wall Street this week as a message that there are no more bailouts. In fact, he's saying exactly the opposite. His plan that is currently stalled on Capitol Hill would extend bailouts, not just to banks, but, for the first time explicitly, the companies that aren't banks, allowing the FDIC, which has its hands full with banks to rescue and/or bailout...

GIGOT: But he's talking about a resolution agency. OK? He's saying a resolution agency. That isn't quite the same as a bailout. I would argue that Wachovia wasn't rescued. it was put out of business, OK? Citigroup was rescued, all right? And maybe even Goldman Sachs was rescued. G.E. Capital, G.E. Capital probably was rescued by some of these federal entities. So is that really fair to say that everybody would get a bailout?

FREEMAN: It's a bailout because it's not bankruptcy. And I think the hope is that bankruptcy comes back into fashion. People realize that the freedom to fail is very important. As mutual fund money fund investors, today is our first day of freedom in a year. The first day we're allowed to fail and it feels terrific.

GIGOT: You're thrilled with that, are you, your money market fund could go, can lose money?

(LAUGHTER)

FREEMAN: And let's hope that that trend continues. CIT was the lender this summer that people made the same fact-free arguments, it's interconnected, it's all over the economy, it has its hands in everything. And the government wisely decided not to rescue it.

GIGOT: Yeah, oh, the light has gone on. But the lesson of that is don't be too small. Get bigger, get really big, because if you're poor CIT and you're small, we won't save you. You're gone, fellow. But if you're big enough.

FREEMAN: There's been little, no evidence for the bailouts of the big guys. What the government has said is we're really smart and the world would come to an end and we can't give you the details because — we can tell you, but it would kill your portfolio.

(LAUGHTER)

So just trust us that these really large institutions need to be bailed out.

GIGOT: We'll tell you what a systemic risk is.

FREEMAN: Yeah.

GIGOT: Dan, quickly, pay restrictions. The government is going to impose sweeping pay restrictions on bank executives. Is this going to make any difference to the incentives?

HENNINGER: I think they'll make them worse. It's the one point, I think, we haven't made is that while the government has thrown a big regulatory blanket over the system, they've not created real upside growth incentives at all. This happened simultaneously with the recession. Where is strong economic growth? Where is the risk taking going to come from?

GIGOT: But you still want — you want to give incentives for people to make the money is what you're saying?

HENNINGER: Absolutely, they haven't done that. The state has simply smothered the system and scape-goated the participants.

GIGOT: OK, when we come back, President Obama's big labor payback. He's risking a trade war with China could help his union friends. Are there other favors in the offing?

(COMMERCIAL BREAK)

GIGOT: The United States moved closer to a trade war this week as China threatened retaliation for President Obama's decision to slap a 35 percent tariff on tire imports. The United Steel Workers Union had sought the surcharge and it is perhaps just one of many paybacks coming from the administration for big labor's political support.

We're back with Dan Henninger and Mary O'Grady and also joining the panel, Washington columnist, Kim Strassel.

Mary, politically, in Washington, the trade has kind of flipped under the radar. The administration dropped this tire tariff news out on late Friday, but overseas, it's very big news. What's the reaction been?

O'GRADY: Yeah, I think the administration thinks that this is just something little they can do for their friends in the union and that nobody's going to notice. But in fact, China immediately reacted by threatening to retaliate with tariffs on chicken and auto parts from the U.S. But I think a lot of our other trading partners around the world are noticing that, even though the president says he's not a protectionist, what he does speaks more loudly. He has refused to put through some free- trade agreements that were signed by George Bush. Three of them that are important. And he also...

GIGOT: And Columbia, Panama, South Korea, all pending. All pending, all very significant.

O'GRADY: Yeah, and the other thing that I think is very important is that the administration doesn't recognize the importance of trade to the United States. I mean, this is not just about how other countries will retaliate, but the U.S. has to remain open if it's going to remain a competitive producer of exports. It imports, inputs and different components that it uses, and those supply chains are totally connected throughout the globe. If he starts breaking those supply chains, he's going to damage, not only our export business, but our ability to produce in this country.

HENNINGER: Well, to Mary's point, Obama had a press conference this week with Canadian Prime Minister Steven Harper. They were trying it work out their own trade tensions. And in that press conference, Steven Harper said that he hopes the United States and Canada can manage their relations in a way that would be a model for other countries. What Mr. Harper was talking about was leadership. The United States is supposed to be in a leadership role on an issue like trade, and President Obama is running his trade policy as though we were just another Podunk (ph) country. The result of this is, according to Global Trade Alert, an association of trade analysts, the number of discriminatory trade policies around the world are outnumbering liberalizing trade policies by six to one. Discriminatory policies are rising in the world and the United States should be pushing back against that.

GIGOT: Kim, politically did the president feel, look, I did — big labor helped me so much in the election, I really — this was the first big decision. They're really watching it. Health care, labor supports the public option. That probably is not going to pass the Congress. Therefore, he had to do this on trade no matter what the risks that Mary and Dan makes so clear? Might be?

KIM STRASSEL, WASHINGTON COLUMNIST: He didn't — I mean, he didn't have to do anything. What you're seeing is, yes, they did help him get elected and what we've seen since this president came to office is a series of paybacks. And this really is the latest. You've had executive orders giving unions special access to federal work. You had special considerations for them in the health care legislation to make sure that their plans don't get taxed. You've had discussions — look at the auto bailouts in which the unions were placed ahead of the creditors in those cases. So this has been a series. We've also have buy-America provisions in the stimulus bill. And so this is just the latest. There's going to be a long string of more. And the concern, as Mary and Dan pointed out, is that what labor is most focused on is trade. And so it's these questions of these deals. You've now had U.S. Steel come up and ask for more punitive levies on Chinese steel pipe imports. So we're going to have a lot more of this coming up.

GIGOT: What about the argument, Mary, look, this idea of unilateral free trade is naive in this world. If you really want to get the other countries to open up, like China, and play fair, you've got to whack them once in a while. And that means you have to impose tariffs. You get their attention. They might rattle the saber a little bit about retaliation but, in the end, you'll get them to open up. So in the sense, a little protectionism equals more free trade. That's the logic after lot of people.

O'GRADY: There's a real problem with that. If you look at the evidence of what happens with trade, countries that are open, regardless of the access that other countries — the market access that other countries give, countries that are open are more competitive. They have higher standards of living. And they're able to produce and export even when they don't have special trade agreements. So the idea that by closing up — and we saw it all through the 20th century. Latin measured America completely closed up, lost all of its competitiveness. It's standard of living dropped and it didn't make it back to where it was in the 1920's, until it started to open again.

GIGOT: And Dan's point about leadership is crucial here. The United States is the world's leading economy. If it doesn't — if it starts to abandon that trade leadership, everybody else could say, it's every country for itself. and then you don't know where we're going to be going.

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

(COMMERCIAL BREAK)

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

Bret, first you.

STEPHENS: Well, some good news. This last week has been like the sound track to Queen's "Another One Bite's the Dust." Terrorists have been killed, top al-Qaeda terrorists have been killed in Somalia, in Pakistan and in Indonesia. Some of these people planned hotel bombings. In one case, someone I know quite well was very nearly killed. We point to the problems we're facing in Afghanistan. We should remember that al-Qaeda's problems are even graver than ours. And for what some who suffered what they perpetrated justice to celebrate.

GIGOT: All right.

Kim?

STRASSEL: Somebody — this may be fish in a barrel, but someone has to give a miss to Serena Williams and Kanye West. Maybe some people were amused to watch a tennis star go all John McEnroe at U.S. Open and yell at the line judge, or to watch the rapper storm the MTV stage and tell this woman she doesn't deserve the win. But there is such as good sportsmanship and losing with grace. And one of the uplifting parts this week was listening to the chorus of boos from the audiences in both of these places who realized they were witnessing two people who thought the rules didn't apply to them anymore. And they do.

GIGOT: All right, thanks, Kim.

James?

FREEMAN: Paul, thanks to reader Zachariah Edwards posting on our opinionjournal.com web site, I'd like to give a hit to the real community organizers. These are people not living on government grants or shakedowns of job-creating businesses, but people who run Boy and Girl Scout troops, neighborhood watch, Kiwanis Club, and do not get paid for it. True volunteers.

GIGOT: All right.

And also this week, ACORN was defunded.

FREEMAN: Yes.

GIGOT: By the — the ACORN community organizer group, by the House of Representatives and on housing funds by the Senate. So we'll see if that can continue. That's very good.

All right, James, thanks.

Remember, if you have your own "Hit or Miss," 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 Paul Gigot. We hope to see you here next week.

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