This is a rush transcript from "The Journal Editorial Report," May 9, 2009. This copy may not be in its final form and may be updated.

PAUL GIGOT, FOX HOST: This week on "The Journal Editorial Report," forget the banks. We're giving the federal government a stress test and tallying up the potential losses for taxpayers.

Plus, Pakistan on the brink. With the Taliban gaining, an up-close look at the battle for control of that nuclear nation.

And Pennsylvania Congressman John Murtha makes an appearance in our pay-to-play scandal of the week.

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

This was the week that financial regulators revealed the results of the stress test on the nation's biggest banks. How did they do? The feds say many of them are facing a capital shortfall and may need billions of dollars in additional funds to see them through the recession. But what about the government itself? Would it pass a stress test? We've looked at the fed's balance sheet and the results aren't pretty.

Here to tally it up, Wall Street Journal columnist and deputy editor, Dan Henninger; columnist, Mary Anastasia O'Grady; and assistant editorial page editor, James Freeman.

Well, James, you've been stressed all week.


GIGOT: And used the assignment to look at this and tally up the numbers. What have you found?

FREEMAN: Well, the — as you said the government doesn't make it ease toy figure out exactly how much they've committed to this bailout. It's a little stressful trying to gather up the numbers, and not too scare the folks at home, but if you looked at all of the programs they've announced, if everyone who was eligible used them, of they basically spent to the max of what the authority is, you're talking about over $15 trillion, which is kind of mind-boggling, bigger than our economy.

GIGOT: Just to put that in perspective the economy is thought to be 14.5 percent of...

FREEMAN: $14.5 trillion. I'm sorry.

GIGOT: And the U.S. economy is about 20 percent or one-fifth of the global economy. You're talking one-fifth of the global economy in commitments, federal guarantees and spending and so on. Let's break that down a bit. How much has been spent? How much is out the door or heading out the door?

FREEMAN: About $3.5 trillion out the door or will be out the door. And if you want to look at the glass is half full, only a trillion to you as the taxpayer, you're definitely not getting back.

GIGOT: That includes?

FREEMAN: That would be the Bush and the Obama stimulus plans.

GIGOT: $800 billion or so for Obama.

FREEMAN: $955 billion together.

GIGOT: $168 billion for the Bush, or stimulus, which was long forgotten, deservedly so. It didn't stimulate anything at all. And then what about the TARP plan, that sort of a bailout plan.

FREEMAN: A lot of that money would be TARP money. About $600 billion out of the 700 of TARP has been spent. And when you look at the TARP funds, some of it, the auto bailout, for example, you're probably not that optimistic that it's coming back.


You know, others will see various corporate bailouts. We can say based on what the fed reports monthly, that the assets they bought bailing out Bear Stearns and AIG are not, not gaining in value. They're losing.

GIGOT: All right, that's one pool. Then another pool roughly $3.5 trillion.

FREEMAN: Right, about $3.5 trillion of guarantees. This is not money out the door, but places where the government has put a back stop. The big one there, about $2.8 trillion. The Treasury is guaranteeing money market funds. You also — viewers, recall, we have guarantees on loans held by Citigroup, also by Bank of America. And then, the other big piece of that, about $300 billion is the FDIC's guaranteed a lot of corporate debt, G.E. for example.

GIGOT: Take Bank of America, nobody expects that those are going to be losses, right? Unless the economy really, really gets bad.

FREEMAN: Well, you know, I think that's right. And let's hope not, but you have to remember that ensuring money market funds was actually an industry that existed before the California power debacle earlier in this decade. There were unexpected losses. It was riskier than people thought, so that business basically went away. So, the Treasury collected a billion dollars in premiums to back stop this $2.8 trillion. Let's just hope that's enough.

GIGOT: And then you've got the other package of $7 trillion, which is a little less dangerous and risky. What are you talking about there?

FREEMAN: Let's hope so. Basically, if the government spent everything that they indicated he they might — so, for example, if the — if the fed spent the full $1.2 trillion buying mortgage-backed securities that they've said they might, if all of the corporations who could possibly issue guaranteed debt with the FDIC do that.

GIGOT: OK. All right, Mary, let's talk about the implications of this. And let's assume that it's sort of a — not a worse case scenario, but a modest case scenario. What does it mean in terms of actual risks to the average American?

MARY ANASTASIA O'GRADY, COLUMNIST: Right. Well, the first question comes to mind, right, is how you pay for it. And one way the Obama administration proposes to pay for it is to get the economy growing again. But they have terribly optimistic assumptions about that. They think that more higher taxes on the rich is going to help them. They think the economy is going to recover. Their assumptions there are extremely optimistic. And they also think that they're going to save a lot on military spending and I don't think that looks like it's going to happen.

GIGOT: There's no question you're going to have to have higher taxes. That's at a minimum and the Obama administration said in 2011 taxes are going up. You spend this amount of money, a trillion dollars in deficit spending. You either going to have to do one of two things, you have to raise taxes or you have to borrow more money.

O'GRADY: Well, they're going to have to do both. They're going to do both. And the borrowing is frightening because you can see, by looking at the bond market, that the cost to borrow, the risks that, for example, China foresees in borrowing from the United States, is going up. So the debt servicing is going to become more expensive.

GIGOT: Dan, key question, what is the limit of the world's willingness to lend money to the United States of America? They've always done it before.


GIGOT: Are we at the end of that limit?

HENNINGER: We're getting close, and we have some very specific evidence of that. Recently, the China's central bank governor proposed in a paper that we replace the dollar, the international reserve currency, with a new international reserve currency. There was a financial panel at the United Nations which has proposed the same things.

GIGOT: They're saying the dollar isn't safe anymore.

HENNINGER: Saying the dollar isn't safe anymore.

GIGOT: That's the implication of that.

HENNINGER: That's the implication. And this is the loss of faith in the financial management of the United States. And we're getting to that point. And by the end of the year or by the end of the middle of next year, we're going to find out whether that's the case.


FREEMAN: Not to depress everyone, but as we're going through the stress test, all we've been talking about are the new commitments lately. The Dallas Fed says that you need seven times gross GDP to take care of all the unfunded liabilities in Medicare and Social Security, so.

GIGOT: You just wanted to add that great stone at the end.


FREEMAN: If you're an investor looking at the stress test there.

GIGOT: Great. Yeah, if you work for the bank of China, OK? All right,


Well, after searching high and low, we finally did find something the federal government has no plans to sink taxpayer money into it. Asked this week if the Obama administration would consider bailing out the newspaper business, White House Press Secretary Robert Gibbs told reporters the government may not have the power to reverse the industry's decline.


WHITE HOUSE PRESS SECRETARY ROBERT GIBBS: I don't know what, you know, honestly, the government can do about it.


GIGOT: Well, that didn't stop Democrat John Kerry from holding a hearing this week asking how the government could help the newspaper business, including the paper that always seems to endorse the Senator, "The Boston Globe."


But Robert Gibbs is right. Our industry doesn't need a bailout.

Still ahead, forget Afghanistan. The bigger crisis in southwest Asia may well be next door. When we come back, the battle for control of nuclear-armed Pakistan.


GIGOT: President Obama hosted the leaders of Pakistan and Afghanistan at the White House this week. The original plan, to discuss the new Afghan defenses, but now the bigger crisis may be next door. Once seen as a crucial player in securing Afghanistan, nuclear-armed Pakistan is also under siege from Islamist radicals with the Taliban coming within 60 miles of the capital of Islamabad in recent weeks.

Wall Street Journal editorial board member, Matt Kaminski, just returned from the region. We're also joined by foreign affairs columnist, Bret Stephens.

Matt, you were there with Admiral Mullen, the chairman of Joint Chiefs and other American officials. How big a threat are the Islamists to Pakistan's stability?

MATT KAMINSKI, EDITORIAL BOARD MEMBER: I think it's hard to exaggerate the threat to both Pakistan and to the region and to ourselves what's happening in Pakistan right now.

GIGOT: Wow. Hard to exaggerate.

KAMINSKI: This problem's been festering for many years and Pakistanis have been supporting and — the militants who have been in the country's west, who are Islamists.

GIGOT: Winking, winking at this...

KAMINSKI: Winking both — they used them to undermine Afghanistan. They've used them in Afghanistan. But now, the guys who were, in many ways, their own creation, have turned against them. And that's what you've seen in the last two weeks.

It's actually much worse even when I was there two weeks ago. Having the militants come so close to the capital, you know, raising the question can Pakistan actually fall? I don't think so yet, but that's the danger down the road.

BRET STEPHENS, FOREIGN AFFAIRS COLUMNIST: But the real threat and the real question isn't whether it's going to fall to the Taliban. The question is whether the military, which has always been seen as the so- called steel spine of the country, is going to fight the Taliban or whether it's possible that elements of the military may even join the Taliban. There's a lot of resistance within Pakistan or within the military to fighting other Muslims, other Pakistanis. They see themselves as a force ready to fight the Indians, which are not the...

GIGOT: Which is on the east of the country, the most populous part of the country and not the mountains of the questions, west, which faces Afghanistan and which is where the Taliban and the al-Qaeda have their refuges. What's your answer to that question? Do you think that the military is willing to do that or not?

STEPHENS: Well, I think the military is beginning to understand the scope of the threat, and you've seen that in the last week or so, with the military finally abandoning the ill-conceived truce that they made with Taliban-connected elements in the Swat valley, taking the fight to — taking the fight into the region against the Taliban. But we've seen this movie before. The army fights. It makes some distance. It loses a few battles. And then it strikes another truce. And with each truce the Taliban gains.

GIGOT: The argument during the Bush years was often we heard, certainly in this country, if only we got a civilian government, a democratically elected government to Pakistan instead of a general, General Musharraf, who the people said the Bush administration was too close to. If only we had a democratically elected government, this would be a much better ally the Taliban, maybe not.

KAMINSKI: I think we have to wait and see. I think it's right for the administration to support a civilian government. It's now a democracy.

GIGOT: Sure.

KAMINSKI: These people do have popular support. The military does not want, at the moment, to get back into politics. It has bigger problems to its east and it thinks, to its — I mean — to — sorry.

GIGOT: To the east, in India.

KAMINSKI: It has bigger problems to its west towards Afghanistan. I think there has been a change in Pakistan in the last week or two. The tone in the media has become much more worried. People are seeing what these Taliban do. They come into these villages, they impose Sharia law. I mean, Pakistan...

GIGOT: Chop off heads. They kill — They've killed policemen.

KAMINSKI: Chop off heads. Absolutely. They're willing to go after the Pakistani Taliban. But here it gets more complicated. There are also Afghan Taliban who are also — who have found sanctuary in those tribal regions and in the south around a city called Quetta. We'll see how this counter-offensive goes and who knows if it succeeds. But the bigger question down the road for the administration is, are the Pakistanis willing to go after the people who are fighting our soldiers in Afghanistan?

GIGOT: All right, what message did President Obama deliver, do you think, to President Zardari of Pakistan this week?

STEPHENS: I think it was get tough or else. And I think that was, in effect, the right message. And I think, in many ways, there are aspects here to praise the Obama administration, not the least of which there's been a sharp up-tick in the number of drone attacks against leading al- Qaeda and Taliban members.

GIGOT: On that point, David Kilcullen, a former advisor to General David Petraeus, testified this week that he thought the drone attacks should stop because they're counterproductive in that they undermine public support for Pakistan.

STEPHENS: They undermine public support in Pakistan.

GIGOT: Yeah, for the Pakistan government.

STEPHENS: Up to a point, and I mean, there's...

GIGOT: Should we drop the drone attacks?

STEPHENS: No, of course, we shouldn't because it's been the single most effective means we have of protecting the homeland, that is the United States preventing al Qaeda from gaining strength, from consolidating their leadership, from being able to plan attacks around the world. It would be madness to stop the drone attacks.

The issue is, how do you persuade the Pakistanis that these drone attacks are helping them, are part of the pincer movement against the Taliban and al-Qaeda, and it's a pincer movement they need to join.

GIGOT: We have to worry this does not become Iran, 1979. That's, of course, the greatest fear.

Still ahead, earmark king, John Murtha, keeps it all in the family in our pay-to-play scandal of the week.


GIGOT: The Washington Post reported a firm owned by the nephew of Pennsylvania Congressman John Murtha received millions of dollars in no-bid contracts last year from the Pentagon. Robert Murtha, of Mur-Tech Incorporated, dens using his uncle's influence to land the contracts. But it wouldn't be the first time that the veteran Democratic lawmaker, who chairs the House Appropriations Defense Subcommittee, has been tied to potentially shady deal.

The "Wall Street Journal's" John Fund and Colin Levy are here to fill us in on the rest.

John, Murtha is political powerhouse, very close to Speaker Pelosi, very important and influential on defense spending issues. Why is he under scrutiny now?

JOHN FUND, COLUMNIST: Well, last November, there was a FBI raid of a lobbying firm called PMA. PMA was founded by a former Murtha staffer, Paul Magliocchetti, and in that — in his activities, Magliocchetti funneled millions and millions of dollars of campaign contributions to various members of Congress. And the contributions seemed to be timed about the time the earmarks are sent off. So he would send the contributions off, and in March, when earmark requests are made, and sure enough, earmarks would come flowing back to him. Our of Murtha's subcommittee, a hundred million dollars in earmarks, pork-barrel projects went to PMA clients.

GIGOT: Now, PMA is now out of business, right?

FUND: And under investigation.

GIGOT: As well as this relationship between this firm and various members of Congress, including Congressman Murtha. But there's been no indictment or anything like that so far, just we know it's under investigation, right?

FUND: Yes, but not in Congress. Congressman Jeff Flake, from Arizona, keeps trying to raise this issue, keeps putting up a privileged resolution, demanding an ethics investigation. He gets voted down all the time. There will be another vote scheduled for — another request by Flake next week.

GIGOT: Colin, you've been following that on Capitol Hill. Is Flake getting any traction on his efforts here or the Democrats don't want to go there?

COLIN LEVY, COLUMNIST: He's starting to get a little bit of traction and the reason is that a lot of the young, freshmen Democrats in the House actually got elected on ethics platforms. And they are finding it increasingly difficult to oppose a probe of one of their own now under investigation.

So this is a situation where Nancy Pelosi has been actively trying to protect Mr. Murtha. She even recently called in the former top Democrat on the House Ethics Committee, who's California's Howard Berman, to brief young Democrats as to why they should continue to oppose this. So this is somewhere where pressure is mounting. They're now also hearing from some of the good government groups, like Public Citizen and Democracy 21, who are saying, it's time to get serious and look into this.

GIGOT: And those are groups on the liberal side of the spectrum.

Dan, I want to ask you a question. I want to read a John Murtha quote. Quote, "If I'm corrupt, it's because I take care of my district. My job, as a member of Congress, is to make sure that we take care of what we see as necessary, not the bureaucrats, who are unelected, over there and over there in whatever White House, whether it's Republican or Democrat," unquote. Does he have a point?

HENNINGER: Well, he makes a point. Let's put it that way. We should talk about that a little bit. Murtha argues, in fact, the people down there argue, Johnstown is in southwestern Pennsylvania, a former steel town. Johnstown was dying. The steel mills were dying. And the city fathers made a command decision in the 1980's that they were going to ride John Murtha's seniority coat tails back into business by getting the contracts, which would use the skills that the people in the area had. That succeeded big time. They began to get defense contracts that would build things like Humvees and so forth. And so you've got factories that were formerly dead now hiring and employing 500 people.

GIGOT: All defense contracts.

HENNINGER: They're all defense contracts. And they kept — their argument is, look, if we don't get it, Fairfax, Virginia, or someplace else is going to get it. You've got a $3.5 trillion budget and somebody's going to get that money.

GIGOT: John, just democracy?

FUND: Well, for friends and family.


An enormous number of these people who got the contracts seemed to have connection to Congressman Murtha. I don't think that's how democracy is supposed to work. And some of these projects are just blatantly pork barrel. Johnstown airport, which is named for Congressman Murtha, is...

GIGOT: That's not unusual. There's an interchange named after some Republican Congressmen I know.

FUND: But — Schuster.


But the problem is it's got one of the longest runways in the world. It's got a military unit stationed there. There are all kinds of installations in that district that make no sense.

GIGOT: You know, Colin, lets me ask you this. Listening to Congressman's Murtha's quote, the same I heard from Tom Delay, when he was majority leader, to defend Republican earmarks. He said, look, we don't want those administration bureaucrats to do it. We want to do it. Is there a double standard here in the way the press corps treats Republicans and Democrats in not giving the attention to the earmarks that Democrats are using?

LEVY: Yeah, I think there definitely is sort after double standard. And this has to come back to Democrats and Republicans both promising to go clean. This week, actually, Mike Johannes, came out and said that he won't be asking for any earmarks this year. And those sorts of, you know announcements...

GIGOT: Is he a Republican? He's a Republican.

LEVY: Yes, yes, yes. And you know, that's the sort of thing that will help this get more publicity.

GIGOT: All right, but the issue for criminally, in terms of any investigation, can we prove — can they prove a quid pro quo, an actual trading of favors for the earmarks? That's the key. That's the key issue.

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


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

James, first to you.

FREEMAN: This is a hit to "The Hartford Current" which has been covering Senator Christopher Dodd's ethical travails. And last weekend, they reported that Mr. Dodd's wife, who serves on a number of corporate boards, in part, ostensibly because she runs a consulting business. Actually, has no consulting clients in her business and it actually has no phone number.


GIGOT: So is that a hit or a miss?


FREEMAN: It was in the paper.

GIGOT: That would be a miss to the Dodds.

FREEMAN: Well, I don't know. It seems like a good strategy, but...


GIGOT: Maybe you don't have any clients, but you can still get boards...

FREEMAN: It's very efficient.

GIGOT: It's a time saver.

All right, Mary?

O'GRADY: This is a hit for the National Collegiate Athletic Association, otherwise known as the NCAA. As you know, Paul, athletics, college athletics have been criticized for a long time now for recruiting students to the school, making them play so they can improve their record, but never giving them a division. And the NCAA has something called academic reform. They're checking over schools and finding out whether the players have actually been going to classes and learning something. And for the first time ever, they have banned from post-season play three teams, which means that they're perhaps getting serious about asking schools to actually educate their athletes.

GIGOT: Amazing.


STEPHENS: This is a hit to the people in the government of Mexico. You know, Mexico took a huge economic hit on the account of the swine flu panic, billions of dollars, particularly lost tourism. It's also taken a big hit to hits reputation with immigration restriction, calling for a 40,000-high foot wall on the Rio Grande.

GIGOT: 40,000-high foot wall.


STEPHENS: Not exactly. I'm exaggerating.

GIGOT: But metaphorically speaking.


STEPHENS: Metaphorically speaking. But the fact is that Mexico acted fast. It acted transparently. It acted according to best practices. And the result is this swine flu seems to go going out with a whimper, not a bang. And Mexico deserves our praise and our congratulations.

GIGOT: Did they behave better than the United States?

STEPHENS: Sure, they did. They did so because they're now calming down, toning down the amount of panic that seems only to be rising in this country.

GIGOT: All right, Bret.

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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