The following is a rush transcript of the March 8, 2009, edition of "FOX News Sunday With Chris Wallace." This copy may not be in its final form and may be updated.

CHRIS WALLACE, HOST: People who lose presidential elections deal with it in different ways. Some retire. Others lick their wounds. But our first guest has gone right back into the legislative arena and we're happy to welcome Senator John McCain back to "FOX News Sunday."

As always, Senator, good to have you with us.

SEN. JOHN MCCAIN, R-ARIZ.: Thanks, Chris. It's nice to be back with you. It's interesting times.

WALLACE: It's start with the interesting times and let's start with the $410 billion spending bill before the Senate to fund the government through September.

Here's what Barack Obama said to you about this subject in a presidential debate last September:


PRESIDENT BARACK OBAMA: Absolutely, we need earmark reform. And when I'm president, I will go line by line to make sure that we are not spending money unwisely.


WALLACE: Now the White House says that this is basically an argument over the last Bush budget and therefore it's last year's business.

Is there a practical case to be made that with all the things that President Obama wants to get through Congress he shouldn't get into a fight over this?

MCCAIN: Well, first of all, he -- if -- if he wants to set a standard and wants to set a path, then absolutely he should be in this.

He absolutely should be in it, because we're talking about $480 billion of taxpayers' money loaded down with $8 billion worth of earmark pork barrel projects, and we could go into definitions of that, but the fact is they're unneeded, unwanted, unnecessary.

And it is not last year's business. It's money that's going to be spent as soon as the president signs the bill. And he shouldn't sign it. He should veto it and send it right back.

WALLACE: All sides expect that this bill is eventually, and sometime this week, going to get through Congress. Why hold it up over the weekend? Do you really think you can stop it?

And what do you think of Republican senators like Snowe and Specter who may provide the last one vote to get it over the top?

MCCAIN: Well, I regret their decisions, but I think that we've been able to garner great support throughout the country in the last week as we've engaged in this debate.

I think more and more Americans are against it and several Democrat senators who were on the fence are now against it.

By the way, I Twitter the top 10 pork barrel projects. We have gotten incredible response from it, now from local media people in the area where these earmarks take place. It's really been a lot of fun.

WALLACE: Do you think it's going to get passed this week?

MCCAIN: I think it probably will. I'd like to say otherwise, but what's going to happen is that some Democrats are going to vote against the bill, but they'll vote for cloture, which means that we move forward with the final passage, but I think we fought a good fight.

And we have to -- if we don't stop this kind of spending, which is corrupting -- I mean, there's corruption. We have people, former members of Congress, in federal prison. We have people under indictment right now, one just last week, who were involved in this, one just day before yesterday.

This is a corrupting influence. We are giving money for 13 projects to an outfit called PMA, which was raided and shut down by the FBI. Now, they're the ones that got the earmark for different organizations out of defense spending.

Now, we're going to fund what an outfit got put in to this bill that are raided and shut down by the FBI that everybody knows are going to be on trial.

WALLACE: The stock market has dropped 20 percent since the Obama inauguration. Can this now fairly be called the Obama bear market?

MCCAIN: No, I -- I think I'd leave -- like to leave that up to the experts. But I do believe that a $1.2 trillion stimulus package -- add that to a $750 billion TARP, add that to this $480 billion supplemental, add it to another TARP that's coming down -- massive deficits, and we are committing generational theft. We are laying a debt on future generations of Americans.

And we had proposal of spending $410 billion for a stimulus, yet after two quarters of economic growth, positive economic growth, we would have ordered a path to balanced budget.

What we're doing is phenomenal, not only as far as the debt is concerned, but the transfer of what the free enterprise system does over the government. It's -- it's the biggest since Franklin Delano Roosevelt.

WALLACE: And do you think that is contributing to the decline in the market, the messages that the Obama administration is sending about its agenda?

MCCAIN: I think so, but I -- I'm always a little nervous about allowing short-term market activity to drive our conclusions.

But I don't think there's any doubt, talking to friends of mine on Wall Street and people that I know, that this is not a positive signal. All of this spending, all of this debt, all of the policies that will now, in the long term, cause us to have a negative G.T. -- G.B...


MCCAIN: ... GDP of growth according to the Congressional Budget Office over time...

WALLACE: What do you think of Treasury...

MCCAIN: ... of GDP.

WALLACE: What do you think of Treasury Secretary Geithner? And how serious is it that seven weeks into this administration they still don't have a plan to deal with the banks and the whole lending crisis?

MCCAIN: I think they started off badly with a message that was not specific. I think that they are still not specific enough.

I don't think they made the hard decision, and that is to let these banks fail, to let General Motors go into bankruptcy and re- emerge and reorganize with new contracts with labor and others.

I don't think they've made the tough decisions. Some of these banks have to fail. AIG -- back, I believe, when we started bailing them out, I said, "We've got to let it fail." You can't have zombie banks like the Japanese had. And unfortunately, that seems to be the path.

Now, the latest housing proposal, which is somewhat similar to the one I made during the campaign -- I hope it will have a beneficial effect, and I will work as hard as I can to help that work.

WALLACE: So when you say you'd let these banks -- but would you nationalize them?

MCCAIN: Well, you'd sell off their assets, and you have the -- unfortunately, the shareholders and others will take a beating. But to just keep them alive when -- and keep pouring billions and billions of taxpayers' dollars into them, when they clearly are not -- their situation is not improving -- these are tough choices.

I don't know if it's, quote, nationalizing, but it certainly is not continuing to -- propping them up with tens or 40 or $50 billion of taxpayers' dollars and their overall value continues to decline.

WALLACE: So you think that this administration is making a mistake by seeming to continue to keep the banks on life support, to keep General Motors on life support. You would -- you would let...

MCCAIN: I think the best thing that could probably happen to General Motors, in my view, is they go into Chapter 11, they reorganize, they renegotiate their -- the union management contracts and come out of it a stronger, better, leaner and more competitive automotive industry.

WALLACE: Meanwhile, unemployment -- up to 8.1 percent last month, 12.5 million Americans unemployed. Some people are beginning to say the stimulus package, the $787 billion stimulus package that you just passed, isn't enough and you may need to come back for another big dose of government spending.

MCCAIN: Well, I hope it's not like this. I hope that we can give people tax cuts. I hope we can give small businesses incentives.

There was very little in the stimulus package for small business, the prime generator of jobs in America. I hope that we would not announce that we're going to increase taxes on anybody at this time. That always has a negative effect.

And I would do whatever I can to help with tax cuts, with shovel- ready projects, with a lot of other things. But what we have done is made some fundamental policy changes as regards welfare, as regards our protectionism, our relations with Mexico in this latest bill as far as Mexican trucking is concerned.

So we're not only spending huge amounts of money, and a lot of it not the kind of spending that would have immediate results, but we are also having major policy changes that don't deserve to be on any money bill.

WALLACE: There's been quite an argument this week about Rush Limbaugh's role in the Republican Party. Over the years -- we went back and looked -- he's gone after you a fair bit. At one point in 2002, he said a maverick is somebody who is in it for himself.

And at the CPAC conference last weekend, here's what he had to say about why you show up so often on Sunday talk shows.


RUSH LIMBAUGH: They invited Senator McCain because he happened to be the loudest at criticizing his own president and his own party, and that's what they want.


WALLACE: Back in 2002, you compared Rush Limbaugh to a circus clown, and then you apologized to circus clowns...


... which I thought was a classic McCain line.

MCCAIN: I thought it was a pretty good line, yeah.

WALLACE: Yeah, not a bad line.

What do you make of Republican leaders, including the head of your party, Michael Steele, now apologizing to Rush Limbaugh?

MCCAIN: I think it's all a distraction. Very seriously, Mr. Limbaugh has his audience and his base of support. There's plenty around the country and around our party.

The important thing right now is what you and I have just been talking about -- job losses, health care unaffordability, the biggest economic crisis since the Great Depression.

Let's all work together with the president whenever we can, against him if we think we have to. But let's be the loyal opposition. Let's work together and -- and not get distracted by who's the leader of the party and who's not. And the Democrats have made a lot of hay out of this, and I understand that. Now let's -- let's move forward.

WALLACE: Let's turn to foreign policy. And there is some breaking news. Iran has announced this morning that they have launched a new long- range missile. Your reaction.

MCCAIN: It's not surprising, and it's not surprising that we continue to have information that they have the material to make nuclear weapons. Exactly where they are is not totally clear, but they're obviously on that trip.

This is a great threat to Israel, who they have threatened to, quote, "wipe off the face of the Earth," and this is going to be a -- I think a serious international crisis before it's over.

WALLACE: Really? The whole question of the Iranian -- let me ask you -- the Obama administration -- and apparently this was raised in a private letter from Obama to Russian president Medvedev -- this idea that if the Russians -- not a quid pro quo, but if the Russians get Iran to stop its nuclear program, then there's no need for an American missile defense system in Eastern Europe.

MCCAIN: Well, if I were the president, I would have tried to communicate that in other ways than a letter.

We want to explore every possible option that we can to bring about the cessation of this crisis, but time after time after time the Iranians have been belligerent and even very hostile in their reactions to our efforts to try to get that done.

The Russians -- you would think it's in their interests to have the Iranians not pursue nuclear weapons. So far, they have not been helpful.

I worry about giving the Iranians a signal that we're not going to take serious action according to their violation of a number of treaties if they continue with this development of nuclear weapons and the means to deliver them.

WALLACE: Along those lines, Secretary of State Clinton met with the foreign minister, Lavrov, on Friday and talked about -- and you can see it here -- hitting the reset button on relations between the two countries. Good idea?

MCCAIN: Turns out that it were the wrong Russian words.

WALLACE: Right, overcharge, not reset.


MCCAIN: This is a new administration. They're obviously trying new approaches.

Let's not forget the lessons that we learned from the last administration, and the aggression in Georgia. A lot of their behavior in many respects has obviously been anti-American in many of its aspects -- but most importantly, not a country that's dedicated toward a peaceful resolution of many of these issues.

WALLACE: So you can't just reset the relationship?

MCCAIN: I think we should try all the time to have a better relationship with them, to appeal to what's in their national interest, but it's also been very clear by their behavior and Putin's comments recently that it's going to be a very long and difficult process.

WALLACE: You know, we -- we've been talking through all of this and - - and understandably there are some areas I know that you have supported the president, some that you have not. How do you think he's doing so far?

MCCAIN: I think he's working very hard. I think he continues to have the support of a majority of the American people.

I think he is making a very serious mistake in this budget which would then transfer from the free enterprise system to the federal government many of the fundamentals of our economy, which I think is going to have very dangerous consequences in increasing taxes. No matter who it is, it's wrong at this time.

I do agree with him and work with him on defense procurement, on Iraq and a number -- any issue that I can work with the president, I will work with him.

WALLACE: You ever feel like saying, "I told you so"?

MCCAIN: No. Oh, I'm sure that that would be a pleasant feeling. But the point is we're in such a severe crisis, we've got to work together. We must. We've got to put away childish things.

WALLACE: Finally, on the area of childish things, your daughter Meghan wrote a blog -- excuse me; it's choking me up this week -- in which she said that your presidential campaign has killed her social life.

In fact, she writes one date said to her that she could be his Cindy. What do you have to say for yourself, Senator?

MCCAIN: I have to say I have a beautiful daughter. I have very bright prospects for her future both professionally and socially.

WALLACE: Do you plan a planned marriage?

MCCAIN: No. Look, I'm proud of all of my children, and from time to time they may do or say something that might be slightly not what I would do or say. That's what young people are all about.

WALLACE: Well, I just want to say, as the father of three daughters, I know I speak for many fathers when I say congratulations on slowing down her social life, sir.

MCCAIN: Thank you, Chris.

WALLACE: Senator, thank you. Thanks for coming in today. And always, you're always welcome. Please come back, sir.

MCCAIN: Thanks for having me.

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