This is a rush transcript from "The Journal Editorial Report," May 8, 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," Times Square terror. An American citizen radicalized in Pakistan. It's a story all too familiar to our friends across the Atlantic. What we can learn from the United Kingdom.

And what Faisal Shahzad's arrest says about our own anti-terrorism operations here.

Plus, chaos in Greece helps send stocks into a tailspin. Will that country's debt crisis threaten our own economic recovery?

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

First up this week, the Times Square bomber and lessons from the United Kingdom. As authorities continue their investigation into the attempted terror attack in New York City, a clearer profile has emerged of the suspect, Faisal Shahzad. A Pakistani born American citizen, Shahzad has spent a decade in the United States obtaining two university degrees and working in Connecticut as a financial analyst. Until last year, he lived in a quiet suburb with his wife and two children. It's a story all too familiar in the United Kingdom where, in 2005, London's transportation system was attacked by four British nationals, three of Pakistani descent.

Earlier, I spoke with Melanie Phillips, a columnist for London's Daily Mail and author of the new book, "The World Turned Upside Down: The Global Battle over Truth, God and Power." I asked her what the U.S. could learn from England's experience with homegrown terror.


MELANIE PHILLIPS, AUTHOR & COLUMNIST, LONDON DAILY MAIL: Well, I think the main lesson the United States can learn from the United Kingdom is to learn from its mistakes. The main mistake the United Kingdom has made and continues to make is to refuse to accept that what we're all facing in the West is a religious war and Islamic jihad. Britain insists on regarding it as just violent terrorism from particular grievances around the world. It will not accept it is motivated by religions fanaticism. And as a result —

GIGOT: It has that religious root. What are the implications of that? What is that mean that Britain is not doing, that it should be doing and, by implication, we should be doing?

PHILLIPS: Well, as a result, Britain is making a terrible a mistake of thinking, amazing as this may seem, that religious fanaticism is a kind of antidote to Islamic terror.

GIGOT: An antidote?

PHILLIPS: An antidote. Yes.

GIGOT: Really.

PHILLIPS: Yes. It thinks it can use, for example, the extremists of the Muslim Brotherhood to kind of channel the, quote, "idealism" of young British Muslim men, classically, or the people who might be drawn towards Al Qaeda-style terrorism, and divert them into what the British official mind thinks is relatively harmless religious fanaticism. And that is because it cannot conceive that the religious fanaticism actually feeds in at the extremes to violence and terror.

GIGOT: This with would seem logically, to me, anyway, to actually feed this fanaticism.

PHILLIPS: Of course. Of course.

GIGOT: And make more people, who might be on the margins and might be actually happy with British society, more susceptible to that kind of alien nation of jihad. Is that not right?

PHILLIPS: It is absolutely crazy, but this is what is happening. So the British authorities, and not just the political authorities, but academic authorities turned a blind eye, for example, to the radicalization on campus by groups such as Hizb ut-Tahrir, which purport not to be involved in violence in Britain. But nevertheless, radicalize young Muslims on campus to the jihad, to the idea the West should be overturned, that Britain should become an Islamic theocracy.

GIGOT: Isn't it difficult for a secular society to fight back against something like that? it means you have to be very, very conscious of religions, and religious ideologies, when we are taught live and let live, anything goes, relative — you know, we are all equal. Particularly in America, we don't have a state religion. What do you do, as a state, to try to fight back against that?

PHILLIPS: Well, it is not, in my view, very difficult. It shouldn't be very difficult. It is difficult, because in the West, in Britain and America, we tell ourselves that religion is a protected space. Because we are brought up to believe that you have to be tolerant to religious minorities. That is absolutely correct. You must be tolerant. That is the essence of a free democratic, liberal society.

GIGOT: Sure.

PHILLIPS: But you must accept also that if religion steps over the bounds into politics, into ideology, into the attempt to conquer your own country and your culture, you must resist it. What we should be doing in Britain, and we're not, we should be holding the line for British Western Democratic liberal values. We should be saying that actually our values, we think, are superior.

GIGOT: Let's take the case of Nidal Hasan, accused of the killings at Ft. Hood. He was the military cleric who was thought to have Islamic radical tendencies. People noticed them, spoke about them. Nothing was done about it.


GIGOT: How would you treat his case, given what you just said?

PHILLIPS: It's very, very similar to what is happening in Britain. It's this terrible and lethal reluctance of the official world to go anywhere near religious fanatics.

GIGOT: Political correctness.

PHILLIPS: Political correctness.

GIGOT: But do you have to drum somebody like that out of the military? Do you have to be conscious of this religious identity and say, look you can't teach in a mosque? You can't be a teacher in a school? Is that what you're talking about?

PHILLIPS: I think a line must be drawn between, as it were, spiritual religious identity, which a liberal society must accommodate, minority spiritual religious identity, and the kind of religious identity which poses a direct threat to our state, our society. Now if an individual, in the military or anywhere else, is expressing attitudes, beliefs, which lead us to think that possibly this is a threat, then it must be stopped. Extremism must be stopped.

GIGOT: With that then, say immigrants who have come over from Pakistan and keep traveling back and forth, at some point, do you expel them or do you — do you ask these people about their religious beliefs before you let them be citizens?


GIGOT: That would be inimical to the United States First Amendment.

PHILLIPS: I think one should. I think that with so much of the Islamic world, having fallen prey to this very militarized, radicalized, threatening set of beliefs, I think one should do that. It is very important to bear in mind that a very large number of Muslims in Britain and everywhere else are not radical.

GIGOT: Right.

PHILLIPS: They wish to live just like you and me, raise their children, have a good job, benefit from the human rights of the West. It's very important that we don't forget that. We must not demonize all Muslims. But at the same time, we mustn't be stupid about it as we are being, and say, because we don't -want to demonize all Muslims, we are not going to ask anybody about their radical beliefs. We have got to learn to differentiate between the religious beliefs that are right and proper that a liberal society should tolerate and accept and welcome, and the religious, in quote, "beliefs" that are actually militaristic and threatening and subversive, we should not be tolerating.

GIGOT: Alright. Thank you, Melanie Phillips. Thanks for being here.

PHILLIPS: Not at all. Thank you.


GIGOT: When we come back, from Peshawar to Times Square, the changing nature of the terror threat and how well the U.S. is responding.



REP. NANCY PELOSI, (D-CALIF.), SPEAKER OF THE HOUSE: The harder we work, the luckier we get. I think that's probably the point.


GIGOT: House Speaker Nancy Pelosi responding this week to critics who say the Obama administration is relying too much on luck to keep the country safe from a terror attack. So was the arrest of Faisal Shahzad a result of hard work, luck or a little bit of both?

Joining the panel this week, Wall Street Journal columnist and deputy editor, Dan Henninger; and editorial board members, Dorothy Rabinowitz and Matthew Kaminski.

Dorothy, what have we learned so far? What are the important lessons you take away from the case of Faisal Shahzad?

DOROTHY RABINOWITZ, EDITORIAL BOARD MEMBER: From my point of view, the important lesson is that we now have a list that we can look at the next time we have one of these events. We will learn to discount the following thoughts: This is a loner.


Everything was far, far too clumsy to have been anything professional. He was probably something else. And by the way, this could not have had any connection with anybody claiming responsibility in Pakistan.

GIGOT: So you are saying the default judgment should be, it isn't.

RABINOWITZ: The default is, disbelieve all that.


That's the sign that the opposite is true.


GIGOT: Alright, Dan, what do you think?

DAN HENNINGER, COLUMNIST & DEPUTY EDITOR: I think the area I would like to focus on, Paul, is the interrogation of this — of Shahzad, that the administration, Attorney General Holder is saying the Miranda warning worked because they had this public safety exception —

GIGOT: At the start of it.

HENNINGER: At the start of it.

GIGOT: So they issued the public safety exception they said.

HENNINGER: Talked to him all night.

GIGOT: Talked to him and later Mirandized him.

HENNINGER: Mirandized him. You know, this is a little more complicated than they are making it out to be. The Miranda warning is a complex instrument. It is not like "Law and Order" where you just go, your rights, and the guy goes, OK, and that's it. In this case, he was a talker. He talked all night. They Mirandized him and then he was willing to reaffirm what he said. If you have someone who is not a talker and pulls back after the Miranda warning, you are not able to use in court anything he said before you gave him that warning.

GIGOT: So he could be fortunate in this case that he is talking and cooperating. But that doesn't mean every suspect in all future cases —

HENNINGER: This guy was a perfect 10 —

GIGOT: Right.

HENNINGER: — for their case. But in other cases, it will be more difficult. I don't think that issue has been settled.

GIGOT: What about the general performance by the U.S. security apparatus, NYPD, FBI. Ray Kelly, the New York police commissioner, said captured in 53 hours, pretty good work for government.


MATTHEW KAMINSKI, EDITORIAL BOARD MEMBER: Plus, without a doubt, what happened after the car was found, took 53 hours later, when they got the guy off the flight going to Dubai, did an excellent job. I think now the question becomes, how do we track these guys? How do we stop them from getting that car to Times Square in the first place?

GIGOT: That's what we missed.

KAMINSKI: Absolutely and —

GIGOT: If it went off, we would be having a very different conversation today.

KAMINSKI: Absolutely. The question is, if males, between the ages of 20 and 35, coming to airports, having spent the last six months in Pakistan —


— how do we figure out that in most cases they are probably innocent, or in some cases, how do we surveil them from that moment on?

GIGOT: Well, we did — we do sometimes surveil them. That's what we did with breaking the Zazi case and the subway bomber last year. This is a case where we didn't catch him.

Is there anything more we need do, Dorothy, to make sure that next time we do, it's a Zazi case and not Shahzad?

RABINOWITZ: I think we should go forward with the instincts of self preservation and never mind the rest of it.


I think we have to consider the pronouncements from our government. There was a surprising amount of marshal-going-to-war from the Obama administration.


GIGOT: You must like that

RABINOWITZ: It is different, let's put it that way.

Here's the thing. You still have that instinct. You have the mayor of New York issuing his pompous pronouncement reflective of what we heard before, which is, and I forbid any excesses and any attacks on Muslims, as though there were mobs of Americans running through the streets ready to hang Muslims over this. They didn't do it after 9/11. It is the other countries that are hanging people for phony — the point is that this preachering, this lecturing to the most civilized of societies is a huge insult to Americans. And there's no behavior that justifies it. But it tells you that constraints under which we are operating a political correctness, which is there, which is choking every effort of self preservation.

GIGOT: Is Shahzad, Dan, the future of a terror threat? By that I mean no longer — because of the pressure we are putting on Al Qaeda, we don't get these organized cells as much, OK? We don't get them planning operations like 9/11. Instead, we get the cases of one guy, like Hasan or Shahzad. Sometimes they are amateurs. Sometimes they are able do damage. But the threat is dispersed. It's not as organized. Therefore, it's harder to track. On the other hand, it may do less damage in the end, but it's also harder to track.

HENNINGER: Well, the Brits always used to say, the most dangerous person in the world was a Pakistani with a British passport. And we may have to add an American passport.

This raises issues that Melanie Phillips was talking about. It is very difficult to know how someone like Shahzad is going to go from someone who is thinking about radical ideas and jumping to the point where he's willing to go into Times Square and blow up — that's the part I don't understand.

GIGOT: The spontaneous combustion, which —

HENNINGER: The spontaneous combustion, and say, oh, yes, and I'm quite willing to go kill 40 people in Times Square. That's not normal.

GIGOT: Matt, let me ask you about the links to the Taliban. It seems somehow he had connections in going to Pakistan with the Taliban. People are saying this is a response to our drone attacks. Do you buy that? And should we stop the drone attacks?

KAMINSKI: No, that's been the most effective weapon we have in the war we are waging. We are at war. We are at war in that region of Pakistan. But in this case, it's the past of the terrorist threat, because, once again, we basically have a failed state in western Pakistan.

GIGOT: Right.

KAMINSKI: Goes beyond the reach of Pakistan, beyond our reach, except by drones, and once in a while, we send the Special Forces in. We have been quite restrained. This guy said he was trained in North Waziristan. Most of the attacks on American soldiers in Afghanistan come from North Waziristan. Everyone thinks Usama bin Laden is in North Waziristan.

GIGOT: Right.

KAMINSKI: We should be doing more to go in and pressure the Pakistanis to do more. It is unacceptable 10 years after 9/11 —

GIGOT: Including potentially Special Forces teams that go in with Pakistanis.

KAMINSKI: Even with American.

GIGOT: OK. Alright, thank you.

Still ahead, Greece's debt crisis plunges the country into chaos. But can we keep the panic from spreading? How do avoid another global economic meltdown, when we come back.


GIGOT: A rollercoaster ride on Wall Street last this week fueled, in part, by fears that Greece's debt crisis could threaten the global economic recovery. Will the Greek contagion spread or will cooler heads prevail?

We're back with Dan Henninger and Matt Kaminski. Columnist, Mary Anastasia O'Grady, and senior economics writer, Steve Moore, also join the panel.

Steve, the big question is, will this contagion in Greece undercut the global expansion and spread to the United States. Stocks are saying maybe. What do you think?

STEVE MOORE, SENIOR ECONOMICS WRITER: I certainly think it has the potential too. We are already seeing that with what has happened with the plunge in the stock market.

Let's stop calling this a debt crisis and start calling it an overspending crisis. That's what caused the enormous explosion in debt in Greece. And by the way, we are seeing that in other countries, like Spain, Italy and Ireland and Portugal. I think this does have the potential of spilling into those countries, Paul. Then, if that happens, we are not talking about a $100 billion bailout from the EU and the IMF. It could become a trillion dollar bailout. I simply hope that American tax dollars aren't being put to a bailout. I think a lot of Americans agree with that.

GIGOT: Wait a minute.

Steve says the contagion could spread, therefore don't do anything about it.


I mean, what is it that —

MOORE: Cut spending! Cut spending!

GIGOT: Cut spending, but is that going to help the problem now? How worried should we be, Mary, about this contagion?

MARY ANASTASIA O'GRADY, COLUMNIST: No, I don't think it is a big problem now. First of all, Greece is a very percent of the —

GIGOT: Two percent of the European Union.

O'GRADY: Yes. And also we don't have a big trade relationship with Greece either. I'm not that worried about that.

The problem here is really, to the extent that the European banks own Greek debt, and that's why the European Union is deciding to jump in and bailout the Greeks. Not because they care about Greece, but because they don't want creditors, who are their own banks, to take the hit. And that's —

GIGOT: Especially German banks in particular.

O'GRADY: Yes. I think that's a big mistake. These banks were buying this debt. It had a risk premium associated with it. Greece should have to restructure its debt. And the creditors should have to take a haircut. And I think that would also provide a good bit of momentum for Greece to start to do the right things to recover. Because they are not going to recover you under austere measures, which include tax increases. I don't think that's the way out.

GIGOT: The issue seems to be that if we want the weak governments to be bailed out by strong governments, Germany and France, but is there an endless stream of bailout money available here for Germany and France and ultimately could — U.S. taxpayers too because, through the IMF. The U.S. will be contributing to this rescue.

KAMINSKI: There certainly is not. And Germany is not doing that great itself. I think the other contagion fear here is the economic contagion. This economy in the U.S. is now starting to recover. What happens if you have a real — I mean, the EU is only growing one percent this year —

GIGOT: That's the estimate for this year.

KAMINSKI: That's the estimate this year.

GIGOT: That's not very good.

KAMINSKI: No, but —

GIGOT: Well, Matt, the U.S. is probably going to grow at three, four percent this year. That's pretty good. Can that be undermined if Europe takes a double dip?

KAMINSKI: I think so. I mean, that is our main commercial relationship in the world right now. If the Europeans — you have in the U.K. right now, you have a looming financial crisis there too. They are about 10 percent of public debt. Germany is not growing well. France is doing OK. If this does spread and the Europe goes back into recession, I think this will have an impact here.

GIGOT: I've got nothing but bad news, folks. We'll (INAUDIBLE).


I want to be an optimist.

But what does this tell us, Dan, about the limits — Greece tells about the result of spending as a way to revive your economy? Because the Keynesian argument is, if you spend more now, you spent less later. It turns out, sometimes they don't even spend less later. You are in a bigger debt problem.

HENNINGER: I think that is precisely the question. The thing to ask these people is the spending? Sure. Where does the spending come from? Spending is money. The spending comes ultimately from taxpayers or from the bond market. What has happened in Europe is that the sovereign debt vigilantes, the debt posse, has shown up to say, give us the money, because we are not going to give you any more money unless it is very expensive. That game is over. That was the point of creating the Euro, was to discipline a lot of countries in Europe that were incapable of disciplining their fiscal policies.

And I think what is going on here is the world economy is just full of uncertainty at the moment. Is European Union actually going to work? Is the United States going to impose a series of tax increases on its economy just as it is coming out of its deep recession? I think that's what is being reflected in the stock market volatility now.

GIGOT: Alright, thank you all.

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


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

Steve, first to you.

MOORE: Paul, the Tea Party movement claimed its first casualty of the year when David Obey, the powerful chairman of the Appropriations Committee and a fellow Wisconsinite, he basically retired, saying that he's done with Congress. This is the guy who was probably most responsible for this $1.5 trillion deficit we have. He was the architect of the $850 billion stimulus bill, a floor manager for the Obama health care bill, which he called his greatest accomplishment. This is great news for taxpayers. Hopefully, his retiring means a return to return fiscal common sense in Washington.

GIGOT: Alright.


KAMINSKI: Paul, Britain's David Cameron gets the prize for political missed opportunity of the year probably.


He led the Conservative Party into these elections in Britain Thursday with a 20 point lead, with the electorate yearning for real change and fed up with 13 years of Labour government. But Mr. Cameron thought it would be a good time to introduce a Tory-light kind of campaign with nothing to do with what Margaret Thatcher used to be about. It was a muddled message and the result is a muddled election result with a hung parliament.

GIGOT: Alright.


O'GRADY: This is a miss for Interior Secretary Ken Salazar, who, this past week, in commenting about the big oil spill in the Gulf of Mexico said, it is my job to keep my boot on the neck of BP. Now not only is that kind of a frightening comment from government, but it also shows how incredibly out to lunch the Obama administration is about — about incentives. Does he think BP. doesn't have incentives when it has a billion dollar cleanup in front of it and also a huge public relations disaster. It needs his boot on its neck to incentivize it?

GIGOT: Alright, Mary.

Thanks it for this week's edition of the "Journal Editorial Report." Thanks to my panel and especially to all of you for watching.

I'm Paul Gigot. We hope to see you all right here next week.

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