This is a rush transcript from "Special Report," December 29, 2010. This copy may not be in its final form and may be updated.


PRESIDENT OBAMA: I guarantee you as soon as the new Congress is sworn in, we are going to have to have a conversation about how do we start balancing our budget or at least getting to a point that’s sustainable when it comes to our deficit and our debt.


BREAM: Debt, deficit, economy, jobs, it remains the hot topic. All right, let's bring in our panel to talk about it, Steve Hayes, senior writer for the Weekly Standard, A.B. Stoddard, associate editor of The Hill, and syndicated columnist Charles Krauthammer. Welcome all.  We got some numbers today to tell us a little about the economy.  A.B., what do you make of them?

A.B. STODDARD, ASSOCIATE EDITOR, THE HILL: The housing news is bad.  That's really, obviously the fundamentals of a recovery is going to be dependent upon those housing numbers and we're not seeing what we need to see.

There had been some good months, but this is not good news.  There was a good Christmas for retail, but some slip in consumer confidence, gas prices high again. Things are just really not motoring along the way that everyone would want. Everyone who put tax cut deal together was joined by economists and promised it would spur growth. We hope obviously for the best, but I think it's discouraging. I think people are looking at long-term joblessness. I think companies continue to hold back on hiring and it's making for a not great picture.

BREAM: A mixed bag today, Charles, a great two-year high for the markets, but again, this bad housing news.

CHARLES KRAUTHAMMER, SYNDICATED COLUMNIST: The reason that housing is an anchor and generally picks up other recessions is for two reasons. A, obviously the number of jobs it destroys because there are unskilled folks that can work in construction, and in the high technology information economy is hard to get jobs elsewhere if you don't have construction. It leads to chronically high unemployment.

But secondly, in the years and years in which we lived with the value of your house rising inexorably every year, there was what was called a wealth effect.  People had a feeling every year they were actually wealthier so they were willing to spend more. If you feel that you're worth more at least on paper, you spend.  So what we're getting is a negative wealth effect. It’s especially hard in housing, it’s also in your 401(k)s but especially in housing because that's where people have most of their money invested generally speaking. So it has a double effect reducing consumer spending and reducing unemployment. That's why this recovery is inevitably going to be very slow and painful.

BREAM: Something that the president talked about that when everybody is back to work in Washington, they'll have to hammer it out. Let's hear from a Republican he’s going to have to deal with on this, Senator Tom Coburn.


SEN. TOM COBURN, R-OKLA.: We want to see a renewal in America's productivity and growth. We are going to have to make sacrifices. Both Republican and Democratic administrations refuse to do that. And we're at a time when we don't have the option anymore. We need to make the decisions ourselves, rather than have those decisions forced upon us by the international financial community.


BREAM: Steve, will there be a bipartisan will to make those tough decisions?

STEVE HAYES, SENIOR WRITER, THE WEEKLY STANDARD: I don't think there will be. We haven't seen one before.

Senator Coburn raises some interesting points. In my view the things he talks about is a starting point. President Obama says we need Congress to come back and then we can start the discussion, as if he hasn't been in office two years.

I know they like to talk about the emergency spending, but the amount that he has, in his administration, together with Congress has increased deficits already is staggering, it’s historic. I think the start of the discussion should be freezing discretionary spending in 2008.

The Republicans propose this and it is viewed as reactionary or crazy.  We can't possibly do that, but that is a modest proposal, actually, tapering on the margins.

I think the politics of this are going to be very interesting because you have particularly in the House a number of people, a couple dozen people who are brought in as part of a tea party movement or tea party Republicans who have said, we're going to stop spending. This is why I am going to Washington to stop spending, to slow the growth of government.

What they've seen in the Republican leadership will go a long way to tell us if they'll become their own faction and really focus on hard questions or whether they'll be with the leadership. And I think it's a test of the Republican leadership on the House side.

BREAM: Along with the questions about federal spending and federal deficit, we see this issue Molly Henneberg reported bubbling up from the state and cities, unfunded pension liabilities. It’s something that came up in the lame duck. A.B., where do we go with this? There are fears it will be a federal problem if these states default.

STODDARD: Right, there is evidence that investors are abandoning the troubled states and our grease fire could happen in Illinois, California and other places.

This is something, this is a question to President Obama and the Republicans who are coming in to control the House and effectively as I like to say op most days in the Senate, whether or not they are going to try to attack this reflexive bailout mentality before we're in a crisis.

Everyone says none of these tough decisions will be by both parties.  There will be no constructive dialogue until there is a looming deadline just like we say in the lame duck with the tax cuts expiring.

That is really depressing, because after 2008, there is a reflexive bailout mentality. Who is the person that’s going to start the debate heading it off?  We have the looming pension crisis in the states. How is the Congress going to try to head this off say before you come to us you're your houses op fire, wait a minute. We're going to come up with a plan and whether or not to allow the states to file for bankruptcy.

And there are a lot of conversations beginning. I really hope we have a strong push not to be proactive or reactive about the crisis.

BREAM: Charles, we have seen California representative Devon Nunes try to tackle this, pushing for transparency with the public employee pensions. They aren't regulated by the same laws as private pension funds.

KRAUTHAMMER: And they're totally out of control. It's a reason FDR never allowed the government workers to unionize. He understood that any negotiation between a government worker and a boss is not like private sector negotiation; where the boss' livelihood is at stake if he negotiates badly.

So that you've got in the state that you mention Illinois and other liberal states, these huge promises to government workers, completely unpayable, undeliverable on. What will happen is they will go to the feds.  I think what Republicans ought to do right now, looking into the near future, is to say we are not going to do a bailout for state over this.  It's not fair. If you are from Texas and other places which have been frugal, you shouldn't bear the burden of states that wasted all this money.  And the minute you bail out a state you assume the debt of every state in the union, and you have just exploded what is already uncontrollable federal debt. I think it's a place for Republicans to stand up and advance and say yes, we have to do the banks. We are not going to do the states.

BREAM: All right, panel, stand by. Thank you very much on that topic.

Up next, the panel‘s going to weigh in on the president's Guantanamo Bay problem and the troubling links to those terrorists across the pond.


BREAM: This is a Fox News alert. A federal judge has lifted stay on certification of Alaska's Senate race clearing the way for incumbent Lisa Murkowski to be declared the winner. The decision means that Alaska state officials likely will make the November election results official on Thursday. If that happens, Murkowski will be sworn in when the new term of Congress convenes next week.  We want to get back to our panel discussion on Guantanamo Bay, starting with this bit of information from White House Press Secretary Robert Gibbs.


ROBERT GIBBS, WHITE HOUSE PRESS SECRETARY: Are Republicans willing to will to General David Petraeus, are they willing to listen to others in the national security arena that have told us and will tell them and told the public that Al Qaeda recruits young people to do harm, to try to blow up airplanes and blow up themselves and kill others? They use it as recruiting tool.


BREAM: We are talking about closing down Guantanamo Bay. Let's bring back our panel, Steve, A.B. and Charles. Steve, I thought it was interesting, a magazine you write for, The Weekly Standard, did a study on whether or not Guantanamo Bay is used as a recruiting tool. I think 34 messages they looked at from the top Al Qaeda leaders it mentioned three times. Is it a recruiting tool or not?

HAYES: It may be at the very lowest levels but it's certainly not from the Al Qaeda central from Osama bin Laden and Ayman al Zawahiri and the top Al Qaeda leaders as we have known them for the past decade.

The White House has been saying this for years. But Tom Joslin, a colleague of mine, did the study and looked at the 34 messages and interviews put out and by the top Al Qaeda leadership and found it mentioned a total of seven times. If you think this is the way Al Qaeda is recruiting its young, they would have mentioned it more than seven times total.  By comparison, to give you some numbers, the Afghanistan war was mentioned 333 times, Iraq war, 157, Pakistan, 331, Israel 98. These are the things that Al Qaeda is focused on. It's a devastating indictment of the president's claim. The president said at his press conference before Christmas. It's a devastating indictment of his claim. It just isn't true.

BREAM: In January it will be a year past deadline to have it closed.  Where do you think he goes on that?

STODDARD: I think he knows he’s not going to close it. The new language actually strengthens the laws and it will strengthen the current law. That means it's the end of this policy for him. He signs it, he knows it.

Those Republicans that Robert Gibbs talked about in his comment on the weekend are not, they're Democrats who are joined with Republicans who may agree with the president's contention that Guantanamo Bay is a powerful recruiting tool for jihadists. But those same Democrats went home and said not here, no way. They voted with the Republicans to block the transfer of prisoners into the states.

It's a bipartisan opposition. He's not going to overcome it in any time soon. It is a moot point. He continues to make it and something he says about something he couldn't do. But some people might think it's true including General Petraeus and others but it is a moot point because his party won't go along and allow a transfer.

BREAM: We have the issue of recidivism as well. It looks like the latest estimate from the DNI, the numbers changed. They are having to admit now there are more people leaving Guantanamo Bay and return to battlefield.

KRAUTHAMMER: That’s why there is not a single logical argument remaining. That the only answer here is to conclude that the Democrats use Gitmo as weapon against the Bush administration to discredit it and say it was acting against American values.

And they come into power and realize it's the only answer. A, the recidivism problem you talked about, you can't release these people. Other countries are not going to take them. Secondly, Steve indicated that the president said it's the number one recruiting tool, which is absurd. On the list of references, Gitmo got 7, Chechnya got 15. Is Chechnya twice as strong as a recruiting tool? It’s absurd.  But lastly, is the logic of this Al Qaeda will always find a new recruiting tool. When the declaration of war was issued by Al Qaeda in 1998, the war against the crusaders and the Jews, the number one reason occupation of the holy places in Saudi Arabia by the Americans, meaning the 50,000 American troops stationed who were stationed there after the first Iraq war to protect Saudi Arabia against Saddam.  Saddam was deposed in the second Iraq war and our troops are withdrawn, and Al-Qaeda comes up with different excuse. They will come up with a different excuse every day. Obama says he's against our ideals but he is in charge of Gitmo and says the prisoners are well treated. No implication of torture. There is no implication that there is nothing that the Obama international would do other than what the Bush administration did because Obama wants indefinite detention in Gitmo or elsewhere, it doesn't matter.  If it's against our ideals it would be against our ideals in Gitmo or Illinois. So there is nothing left of this. It's time that Obama admitted all he had to do is say it's mistake, it's not achievable, and stop nonsense.

BREAM: Steve, how damning is the link we heard reported by Catherine Herridge that Anwar al-Awlaki, a U.S. born Yemeni cleric, radical, connected to a number of plots, that apparently two in leadership working with him in the Iranian peninsula are former detainees at Gitmo?

HAYES: It is a very big deal. If you talk to the military folks who work on the issues in particular they will tell you that one reason that recidivism record is so meaningful, it's not 150 confirmed or suspected recidivist, people who have been released and transferred from Guantanamo who are back fighting jihad. These people assume leadership positions.  You've seen in the Al Qaeda in Arabian Peninsula, which has become effective Al Qaeda franchise.

This is why more than anything the president says we're done with this. We can't continue to pretend to send these people back or transfer them.  And you'll remember a year ago Tom Brenna, his top counterterrorism adviser, almost boasted in what I thought was a very unseemly political attack on the Bush administration, said none of those recidivist are from the Obama administration. Now you have five in a rather short timeframe.  There are going to more soon.  Those remaining in Gitmo now are the worst of the worst. If you release them, you have to know that there is a good likelihood they will return to the fight.

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