This is a rush transcript from "The Journal Editorial Report," April 17, 2010. This copy may not be in its final form and may be updated.

PAUL GIGOT, FOX HOST: This week on the "Journal Editorial Report," another showdown looms on Capitol Hill. Democrats look to financial reform legislation for their next big win. Republicans say the plan will lead to more bailouts, but can they block it?

World leaders wrap up a nuclear security summit in Washington without any agreement on the biggest threat of all. When will they get serious about Iran?

And a new governor takes on the teachers union in a battle to save the failed state of New Jersey. Can he win? and what others states can learn from his strategy.

(BEGIN VIDEO CLIP)

SENATE MINORITY LEADER REP. MITCH MCCONNELL, R-KY: If you look at it carefully, it will lead to endless taxpayer bailouts of Wall Street banks.

TIM GEITHNER, TREASURY SECRETARY: We will not — let me say, we will not support a bill that there's risk. The central test of credibility on any too-big-to-fail is to make sure we can say that when large companies manage themself to the point where they can not survive without the government, that we put them out of the existence.

(END VIDEO CLIP)

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

Fresh off health care, there's a new battle being waged on Capitol Hill and Democrats hope it's their next big win, financial reform legislation. You just heard Senate Minority Leader Mitch McConnell argue that the Democrats' plan to overall the financial industry would encourage future bailouts, a claim the administration rejects. Who is right and who has the upper hand in the political fight ahead?

Joining the panel this week, Wall Street Journal columnist and deputy editor, Dan Henninger; columnist, Mary Anastasia O'Grady; and assistant editorial page editor, James Freeman.

James, you have heard conflicting claims. On the question of whether or not this bill makes bailouts more likely, who is right?

JAMES FREEMAN, ASSISTANT EDITORIAL PAGE EDITOR: Well, this stuff gets complicated —

(LAUGHTER)

— so fortunately the American people — there's a nice shorthand test, if Treasury Secretary Tim Geithner is for the bill..

(LAUGHTER)

— that means you're probably going to have a lot of bailout authorities.

GIGOT: Why do you say that?

FREEMAN: You go back, really his whole career is orchestrating government bailouts. But more specifically starting in '08, with Bear Stearns and going forward, he's Mr. Bailout. He likes these emergency authorities to put foam on the runways, as it's called. So —

GIGOT: He wants that flexibility in his back pocket because you never know when you need it. You're saying that flexibility —

FREEMAN: He seems to think he needs it a lot.

GIGOT: But that discretion, you're saying, is actually in the bill. Because he says it's not. Dodd says it's not in the bill.

FREEMAN: Absolutely. It's black and white, emergency lending authorities for the fed. They can lend to lots of people and decide what they want to accept at collateral. It's in black and white. Broad authority to put FDIC guarantees on businesses all over the country that are affiliated with banks. So there's really not debate about this. The he only debate is over one portion of whether it's as bad a bailout as some people think it is.

DAN HENNINGER, COLUMNIST & DEPUTY EDITOR: The one thing we've forgotten here, if we go back to September 2008 and the financial meltdown, why did they do the, quote, unquote, "emergency actions?" If was because we sported the idea that there was systemic risk, the credit system was shutting down, therefore the economy would suffer.

GIGOT: Right.

HENNINGER: That's one kind of emergency. We're talking about big institutions that is seems not to be able to make it and whether you're going to prop them up. That's a little bit different than this. I suppose Geithner would say he's talking about the former. The problem I think is they're too big to let go.

GIGOT: Mary, in the wake of 2008, after all of that has happened, would you argue that — let's say there is no bill. But under the status quo to the markets, do investors believe the big institutions are, in fact, right now, too-big-to-fail?

MARY ANASTASIA O'GRADY, COLUMNIST: I think they do. You still have not solved the problem. If you have a crisis and all of a sudden you have what they call counterparty risk, which is that if you —

GIGOT: The creditors of a big institution.

O'GRADY: It could ripples through the system.

GIGOT: So that exists.

O'GRADY: The test here is there a back stop. And one of the things in the bill is it creates a big fund which is going to be a bailout fund.

GIGOT: The $50 billion —

O'GRADY: Yes.

GIGOT: They say it's — but this is just like deposit insurance where you tax the banks. They pay a fee, a deposit insurance fee, and that will be money so it won't have to go to taxpayers.

O'GRADY: What you want in a new system is something that raises the cost to creditors for not doing their homework and not finding out what it is exactly that the institutions are dealing with. The more you put a back stop in place — and I don't care if it's paid by the taxpayer or it's paid by some other —

GIGOT: It will be used.

O'GRADY: Yes. Then you have a feeling, OK, there's a safety net and I don't have to do my homework. And that's what we should be driving towards, more accountability and responsibility on the part of the investor.

GIGOT: If the status quo says these banks are too-big-to-fail — and I agree with Mary, I think that is the status quo. And I think it's going to help big banks if nothing happens — shouldn't we do something?

FREEMAN: But this is institutionalizing that idea. I think Dan has framed it. This is basically a decision right now over whether Americas is going to say, we have a separate set of rules for very large institutions, these systemically important firms decided by a group of unelected wise men in Washington, D.C. And I think that's a problem we have right now that we need to get rid of. What this does is it formalizes it and codifies it. It's the exact opposite of what Americans want.

O'GRADY: It also puts a lot of responsibility back in the hands of regulators.

GIGOT: Right, the discretion.

O'GRADY: And discretion. It wasn't a lack of regulation that left us with all these failing banks. They were all regulated. So why do we think this time, the regulators are going to do a better job? Regulators don't have —

GIGOT: but can the bill be toughened up enough on the too-big-to-fail issues that it would do some good?

FREEMAN: Yes, if you got rid of the FDIC guarantees and fed bailouts and if you worked on what they call a resolution system, to bring it a lit closer to bankruptcy, understanding people are concerned bankruptcy — some people think it's not appropriate for big banks.

GIGOT: You need some kind of short-term liquidity for a financial institution.

FREEMAN: But you have to have it codified, that there's discipline. You want some more judicial review. FDIC, you don't want them having total discretion — I'll help you creditor pension fund for a union, but I won't help this other creditor, that sort of thing.

GIGOT: Right.

On the politics, Dan, and briefly, Republicans — Democrats think they have the Republicans pinned to Wall Street. You're protecting Wall Street. But there's going to be a vote in the Senate. Can Republicans keep 41 together to block this and go out to the negotiating table?

HENNINGER: I think they can because the politics has become so acrimonious. In the Senate Finance Committee Chris Dodd rammed the bill through on a purely partisan vote, really enraged the Republicans. And Republicans say if he passed a bipartisan bill in the committee, you would get 80 votes in the Senate. It's like the health care vote. The Democrats are trying to push the Republicans into a position of being obstructionist. The question is, are they going to allow that to happen to themselves.

GIGOT: Yes. If they stick together and block this on the cloture vote, they can go back to the drawing — to the negotiating table and get a better bill.

HENNINGER: Yes.

GIGOT: All right.

When we come back, world leaders wrap up a summit on nuclear security without agreement on the biggest threat of all, when will they get serious about Iran?

(COMMERCIAL BREAK)

GIGOT: President Obama wrapped up his 47-nation summit on nuclear security this week with a pledge from world leaders to lock down nuclear materials around the globe within four years. Few details were given for how to achieve that goal. And the biggest state threat to security, Iran, remained unaddressed, leading some to question how successful that two-day summit meeting turned out to be.

Foreign affairs columnist and deputy editor, Bret Stephens; and editorial board member, Matt Kaminski, join us.

Matt, is the world safer because of this gab fest?

MATT KAMINSKI, EDITORIAL BOARD MEMBER: I wish it were true. I think we have been worried about loose nukes since the advent of the nuclear age. And after the fall of the Soviet Union, we took steps to secure a lockdown of loose material. There's enough out there to build about 200,000 nuclear bombs. These are some vague steps. As you mention, there's nothing concrete that can —

GIGOT: but that many bombs, potentially, the material out there, is it a good idea? What is wrong with Ukraine turning over its nuclear materials, others doing the same, making a pledging to get this under control? Isn't this a good thing to focus on?

KAMINISKI: It is. Absolutely. But I think it begs the question of whether having the biggest summit in America since the 1945 conference in San Francisco that created the U.N. focused on something which is a very small piece of the nonproliferation puzzle.

BRET STEPHENS, FOREIGN AFFAIRS COLUMNIST AND DEPUTY EDITOR: The issue isn't the loose nukes. Those are important and it's good they're being addressed. It is the new nukes. It is the plutonium that Pakistan is producing. It's the uranium that the Iranians are spinning. And that's why this whole exercise seems bizarrely beside the point.

GIGOT: But I want to stop you on Pakistan. We're getting along better with Pakistan than we have in some periods in the past. And it's — isn't it a good idea, given the volatility of that government, to have them into this negotiating path so that we can actually control some of that plutonium?

STEPHENS: What we need to do to control the plutonium is make sure Pakistan does not fall into the hands of the Taliban, that their nuclear establishment is serious, that they have the kind of controls they need that. That has something to do with the strategy we are pursuing in Afghanistan. It has to do with the strategy we're pursing against the Taliban in Pakistan. With Iran, it has everything to do with the kind of pressure we are bringing to go bare on Tehran to make sure that they understand that when we say it's unacceptable, it's unacceptable. And that's what this summit was simple not about.

GIGOT: President Hu of China was in town and President Obama met with him and others to talk about Iran. Clearly, in the back rooms, this was something that they discussed. Did they make progress?

STEPHENS: This is, again, the issue. The president has spoken about getting sanctions on Iran within weeks. We've seen reporting, including in the "Wall Street Journal," showing how the sanctions get progressively weaker. The Turks on the Security Council, not permanent voting members, say they're not voting for sanctions. The Chinese are leery. And the Russians will complete a nuclear reactor for Iran supposedly later this summer. That's what we need to be discussing.

HENNINGER: Yes. We should talk —

(LAUGHTER)

GIGOT: Mr. Optimist here.

What about you? Where is the good news?

HENNINGER: Well, the good news was, as Matt was suggesting — the problem is President Obama gives you the impression that he has discovered the nuclear proliferation problem when (INAUDIBLE) since Bush one, they've been working to denuclearize the Russian uranium, for example.

We're now heading towards the fourth U.N. Security Council resolution in six years. It's about sanctions. The idea is we'll bring the Russians and Chinese on board. I think Iran's position is, as long as we have what is protection from China and Russia, we don't have worry. China imports 600 thousands barrels of oil a day from Tehran. They sell them $8 billion in goods every year.

Brett is correct, the Russians and Chinese have been diluting this United Nations effort of sanctions. And I don't think we're going to end up in a closer position to doing the right thing than we did a year ago.

GIGOT: Matt, let me ask you about another issue. It was supposed to come up at the summit but didn't at the end. The Turks and Egyptians were going to bring up Israel's nuclear capability, presumed nuclear capability, because they haven't admitted they have it, though most think they do. Is that a proliferation problem that President Obama has opened up by dint of this focus on the whole proliferation issue and particularly with loose nukes and so on?

KAMINSKI: Well, now it seems like a good idea for the Israel prime minister not to attend and give them the excuse to raise the issue. I mean, look, it's — Israel has had or —

GIGOT: So he said home? Netanyahu stayed home?

KAMINSKI: Absolutely. Israel has had the bomb since the '50s probably. We're not sure.

(CROSSTALK)

KAMINISKI: This is not — this is not really — Turkey and Egypt have not moved ahead with their nuclear program in response, for one simple reason, Israel does not pose a threat to them. Iran does pose a threat to them. If Iran gets a bomb, you'll see the Saudis, Egyptians and Turks move ahead with their nuclear programs.

GIGOT: We don't worry about countries that are democracies with nuclear weapons.

STEPHENS: And that's the key point. We're not talking about proliferation. We're talking about proliferation to rogue regimes. That is what ought to be worrying this administration.

GIGOT: All right, Bret, thanks.

When we come back, Governor Chris Christie takes on New Jersey's teachers union in an effort to close an $11 billion budget gap. Is this a battle he can win? And can other states learn from his strategy?

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

GOVERNOR CHRIS CHRISTIE, R-N.J.: New Jersey is the failed experiment that everyone else in America should be looking at. 150 tax increases in eight years, we have unemployment higher than the national average. We have revenue going down, not up, even though we've raised taxes every year. This doesn't work.

(END VIDEO CLIP)

GIGOT: New Jersey' Republican Governor Chris Christie was elected in November on the promise he would get the almost bankrupt state back on the road to fiscal solvency without raising taxes. Now, he's trying to make good on that promise and taking on the state's most powerful union in the process. Christie's proposed budget, unveiled last month, calls for cuts in nearly every government department to close an $11 billion deficit. It includes an almost $820 million cut in aid to public schools, something the governor says can be avoided if teachers agree to a one-year pay freeze. So far, that's a concession the state's teachers union is refusing to make.

We're back with Dan Henninger and James Freeman and "Wall Street Journal" columnist, Bill McGurn, joins the panel as well.

So, Bill, in the campaign, Chris Christie was underwhelming, I would say. But he's really come out roaring. Is this a moderate Republican mugged by reality?

BILL MCGURN, COLUMNIST: Yes. This is the guy, he boxed himself into a great position. One, he has a state that's so bad, he knows that there's going to be pain, and people know it. Two, he ruled out the tax increases. By ruling out tax increases, he had to go after spending. He deliberately left himself no choice but to take on the spending. Not just spending, but the kind of dysfunctional spending that New Jersey has had that fuels local spending and fuels local property taxes.

GIGOT: But some of the teachers unions say they can — let's go back and raise the income tax, which is already 9 percent.

MCGURN: Right. Right.

GIGOT: So you have a millionaire surtax. Why not?

MCGURN: They're running ads on that. The millionaire surtax in New Jersey, in New Jersey math, it starts at $400,000 of income.

(LAUGHTER)

But he points out, we've tried that. We have the highest taxes and higher unemployment. And it's not a coincidence.

GIGOT: It drives people out of the state.

MCGURN: New Jersey has been the perfect bad example, as he says, and he's trying to change that.

GIGOT: But the conventional wisdom, politically, James, is that you can't take on the public schools. It's a sacrosanct lobby. You can't beat the teachers unions. And yet, he's trying to do that. Is it going to work?

FREEMAN: Let me just say that the teachers in my town, where my can you kids go to school, are awesome and deserve raises every year.

GIGOT: We're talking about the union.

FREEMAN: But in general, the — I think people are beginning to understand that the spending on education has far outpaced the needs in terms of, you look at enrollment up roughly 3 percent in the last decade, spending on education, hiring, approaching 60 percent. So it's really out of balance. We've gone over the fiscal problems. I think you're seeing a bipartisan consensus that this is a mess that needs to be fixed. You've seen the legislature already work with him on changes in the pension rules to bring it back into balance. I think he can build a coalition.

As far as taxes, he's going to go further. If he wins this battle of the budget this year, you're going to see tax rates come down to make it, once again, a competitive state.

GIGOT: He's going try to put a lid on the amount property taxes can go up in any one year. I think New Jersey has eight of the top-ten heavily taxed property taxes on counties in the United States, Dan.

HENNINGER: Yes.

GIGOT: Speaking of two current residents and one former resident.

HENNINGER: Right. Right.

GIGOT: What are the lessons here for other state governments?

HENNINGER: I think the immediate lesson for state government, not just New Jersey, but other states, like California and New York, is that the reason this may work is that the public sector has so graphically separated itself from the private sector. One of the things, for instance, that Governor Christie is proposing is that the teachers unions contribute 1.5 percent of salary for their health care benefits as opposed to zero. Now, in the private sector, everybody contributes. He would like to transfer to a defined contribution plan.

GIGOT: Like everybody in the private sector has?

HENNINGER: Yes. He says, if they did that, you wouldn't need cuts in teachers and education. I think it's a pretty strong argument politically for him and other governors.

FREEMAN: I think the most amazing thing we learned when Governor Christie visited us this week was, in the Newark, New Jersey, school system they spend $22,000 per student.

GIGOT: It's amazing.

FREEMAN: And only a quarter of them are graduating.

GIGOT: Money is not a problem.

FREEMAN: It's not money. That's right.

GIGOT: In Newark.

Do you think that the Democratic legislature bill will give ground on this?

MCGURN: I think it might happen this time. Further, to Dan's point, the teachers unions do not have a sympathetic view at this point. I have a lot of family members and relatives that have taken pay freezes and seen benefits cut and these people argue, we should be immune from all this. It's not an argument that flies when you have this budget gap that's more than a third of your budget. It's not going to sustain itself.

GIGOT: Quickly.

FREEMAN: — 10 percent.

GIGOT: I want to turn to another governor. Florida Governor Charles Crist, this week, who vetoed a reform that would have changed teacher tenure rules and linked them to student performance. What do you think of that move by Crist? It was pass bid a Republican legislator and endorsed by Jeb Bush.

MCGURN: Yes. I would say it's consistent with Governor Crist.

(LAUGHTER)

GIGOT: Lack of principle?

MCGURN: I've not been a huge fan of his. It explains — it's the kind of thing he does. It explains why he is where he is in the polls and why he's not trusted within his own party.

GIGOT: He's running in a Republican primary for the Senate and had a big lead and is now trailing Marco Rubio. Does this mean he's going to run for — as an independent?

MCGURN: That's what some wonder. But I'm not sure his credibility will be enhanced either way, even if he did.

GIGOT: Either way.

OK, thank you, gentlemen.

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

(COMMERCIAL BREAK)

GIGOT: Time now for our "Hits and Misses" of the week — Bill?

MCGURN: Well, a hit to the Democrats in the Washington State legislature who just passed an alcohol tax along with a couple other temporary taxes. This one has sort of a double standard because big brews, like Pabst and stuff, have to pay, but microbrews and wine are exempt.

(LAUGHTER)

The governor is defending the tax saying she drinks the white wine and so forth because it's produced by Washington winemakers. And her husband drinks the microbrews because it's Washington, so it's a matter of jobs. But, of course, there are jobs for distribution and retail for the Pabst and so forth. The bottom line is, if you're a white wine and brew kind of person, you're Ok. And if you're a microbrew, you're OK, but if you're a Pabst Blue Ribbon guy, you're out of the look.

GIGOT: All right.

Mary?

O'GRADY: This is a miss for the city council of New York, which just passed a new benefits package for the horses that pull the carriages in Central Park. The four-legged employees will now get guaranteed five weeks vacation, new health benefits and also mandatory regulated breaks.

(LAUGHTER)

There's no such thing as a free hay trough, and prices for carriage rides are going to be going up $50 for 20 minutes, from $34 for a half hour. Go to Coney Island and ride the Cyclone.

GIGOT: Wow.

Bret?

STEPHENS: This is a miss for Mother Nature in Icelandic. A volcano called Eyjafjallajokull is spewing tons of ash into the area and it has — meaning canceled flights all over Europe. This means a lot of angry travelers. But there's a bright sign. Last time there was a major eruption, in 1783, cooled global temperatures for a number of years, so some people are going to be happy.

GIGOT: All right.

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. I hope to see you right here next week.

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