This is a rush transcript from "The Journal Editorial Report," February 14, 2009. This copy may not be in its final form and may be updated.

PAUL GIGOT, HOST: Up next on "The Journal Editorial Report," the biggest spending increase since World War II. What's buried in the so- called stimulus?

How will the ballooning budget deficit affect President Obama's agenda down the road?

Plus Wall Street bankers in the hot seat as Congress grills recipients on perks and pay. But should government set CEO salaries?

And Geithner's opening act. The markets tank as the secretary univalves his financial rescue plan.

"The Journal Editorial Report" starts right now.

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

It's one of the biggest spending increases in history, so-called economic stimulus, with a $790 billion price tag. The bill marks the largest single-year increase in domestic federal spending since World War II and will send the budget deficit to heights not seen in 60 years. How will we pay for that and what will the ballooning budget deficit do to President Obama's agenda down the road.

Joining the panel this week, Wall Street Journal columnist and deputy editor, Dan Henninger; senior editorial writer, Collin Levy; Washington columnist, Kim Strassel; and senior economics writer, Steve Moore.

Kim, let me go to you first. Everybody's talking about the spending but there's real policy changes that are going to be — a big change for government this bill. What are the most important?

KIM STRASSEL, WASHINGTON COLUMNIST: Well, this bill, people haven't even really read it all yet. But what's been tucked in here are policy changes. Some of then, for instance, to do with healthcare, designed to bring people on to the federal health care system. Some has to do with the way health care technology works. There's some provisions that, for instance, water down the work requirements out in welfare, state welfare programs. There's things that have to do with changes, for instance, in education. There's a lot that has to do with policy, not spending.

GIGOT: How about the spending, Steve? This increase, where does it stand in terms of magnitudes. I mean, I remember the Reagan years when spending as a share of the economy got up to 23, 24 percent. But this bill will take that spending level much higher than that, won't it?

STEVE MOORE, SENIOR ECONOMICS WRITER: Yeah. Welcome to Sweden. We're moving to Sweden levels of spending here with spending the share of GDP going up to as high as 33 percent of GDP this year.

You asked the question what's buried in this bill. One of the things that infuriated a lot of republicans I've talked to and some of the blue dog Democrats, too, is a lot of them, even before the vote, they barely had time to read the bill. They were supposed to be given 48 hours. They had less than 24 hours. That's just I infuriating because there's so much — this is 700 pages. Most of the members who voted on this have never even seen what's in the bill.

GIGOT: But, Dan, this is a huge policy. Leaving vote aside and the difficulty some of the Democrats had getting some of the votes for it, nonetheless it's a big policy victory for a lot of liberal Democrats.

DAN HENNINGER, COLUMNIST & DEPUTY EDITOR: It is a big policy victory. I don't think they quite knew how to get the number up to $800 billion of spending so they put a lot of policy into it.

GIGOT: Cleaned out the cupboard.

HENNINGER:They cleaned out the cupboards.

GIGOT: 30 years of ideas, stuffed them in there and said great.

HENNINGER:A lot of the president's formal agency, going into the president, has been included into the bill. Plug-in hybrids, there are billions for plug-in hybrids, renewables, efficient cars, energy. There's $15 billion in there for renewable energy. And the health care data plan that Kim was talking about earlier, there's quite a few billions in there for that. So they have accomplished much of what they wanted to do.

GIGOT: Let me ask you particularly about this welfare element. It hasn't gotten a lot of attention but over the long term could be significant.

COLLIN LEVY, SENIOR EDITORIAL WRITER: It's a classic case what's happening in this bill. You had a real reestablishment of the federal entitlement for welfare here.

GIGOT: Which was eliminated under Bill Clinton in 1996. A democratic president signed the bill.

LEVY: One of his huge legislative victories, something he often talks about. This is something that's being undone. What that welfare reform did was change welfare to the state into the form of block grants instead of paying a percentage of new welfare cases. And what this bill does is it undoes that change. So with each new welfare recipient added to the roles in a given state, the federal government will pay a high percentage, about 80 percent, of that additional welfare recipient. So it actually adds an incentive to put more people on the welfare rolls.

GIGOT: Steve, let me look at the budget deficit. I want to put up a chart. The budget deficit as a share of economy reached 6 percent under Ronald Reagan. This year, even without the stimulus, was going to be like 8.3 percent according to the Congressional Budget Office. But with this some people argue it could get up to 13 percent. How are we going to finance that two or three trillion dollars?

MOORE: We're really swimming in uncharted territory. We've never seen anything like this before in the United States. We will borrow more money in 2009, thanks to the budget deficit left by Bush, plus this trillion bill, we will borrow money this year than all of the debt that accumulated the first 200 years of the country adjusted for inflation. They're massive numbers.

What we've said in our editorial, which I think is right on the point, the tragedy isn't that we're spending a trial dollars, the tragedy is we're getting so little for the trillion dollars. There are no tax rate reductions, nothing for long-term economic growth in the package.

GIGOT: What does this do, Dan, for the rest of the Obama agenda? For example, he wants health care reform which is expensive. He wants a cap and trade regime for energy. Is there going to be enough money to accomplish that?

HENNINGER:I think it's probably going to be very hard for him. I'll tell you why. I think the public appetite for this sort of monumental spending and legislating is limited. It's not that it's small, but if you add in the stimulus, $800 billion TARP, which is now being called TARP 2 Trillion, and if you add in — I think sometimes think Bernie Madoff, which was psychologically induced blow, a $50 billion scam, to the point where the American people are probably going to say, I want a time out, I want to settle down. I think — Republicans will point this out — he will have difficulty pushing something like cap and trade through the Congress.

GIGOT: Politically, whether it works out, it's going to depend on now, whether or not this helps the economy. I almost forgot to ask, does this help the economy. I'm not sure it does at all.

HENNINGER:We won't know until next year.

GIGOT: But that's what the Democrats are banking on. If the economy does turn around by 2010, Democrats get the credit whether the stimulus had any impact on it or not.

OK. When we come back, Wall Street bankers in the hot seat as Congress grills CEO's on perks and pay. But should government set corporate salaries?




REP. BARNEY FRANK, (D), MASSACHUSETTS: Again, why do you need bonuses? Can't we just give you a good salary or give yourselves a good salary, you're in charge of that, and do the job. This notion that you need some special incentive to do the right thing troubles people?


GIGOT: Democrat Barney Frank led the charge Wednesday as members of Congress grilled the CEO's of eight of the nation's top banks how they used $160 billion in taxpayer money. The financial industry has come under fire in recent weeks for paying out billions in bonuses last year, even as companies reported record losses and accepted government bailout funds.

Jonathan Macy is a professor of corporate law at Yale University and author of the new book, "Corporate Governments, Promises Kept, Promises Broken."

Jonathan Macy, welcome, good to have you here.


GIGOT: You wrote that "I've been a big free market guy but with the free market you get what you deserve and the foxes have been guarding the hen house," unquote. What do you mean by that?

MACY: What I mean is Barney Frank was talking to the wrong guys yesterday. He shouldn't be talking to the CEO's and people getting the pay. He needs to be talking to the members of these companies' boards of directors and their compensation committee. Those are the people deciding and approving these bonus packages. They're the ones who are really captured by these managers and they're the ones who are asleep at the switch.

GIGOT: What did they do wrong? What did they miss? What should they have been doing?

MACY: The job of the board of directors, among other things, is to evaluate the riskiness of the company. They didn't do that. And, of course, to evaluate how well the CEO's are doing and how much compensation they deserve. They weren't doing that either.

The reason for that I think is fairly simple, which is there's a tremendous amount of pressure for the boards of directors to go along and get along. It's inconvenient and kind of a hassle if you're a member of the board of directors of a big company and you make the decision your CEO is — you have to take a lot of time and get rid of them and find a successor, which these companies tend not to have for very silly reasons. The best idea is say, well, my CEO is above average and as such, we've got to pay him above average.

So I think this is much more about bad boards in many ways than it is about CEO's. CEO's are really the system. The boards are the problem.

GIGOT: As I was watching what was happening on Wall Street in the last decade, a lot of it was following the leader. For example, Lehman Brothers was doing very well in the middle of the decade and piling up earnings, taking some risks and mortgages. A lot of the other companies said, hey, why can't we get into that game, too.

Isn't it a lot to ask for a board of directors to go in and say to a CEO who says we've got to make as much as Lehman is and we've got to take these risks to go in and say don't take those risks, stop!

MACY: You're absolutely right, Paul. But that's why, in theory at least, we don't choose members of the boards of directors of U.S. public companies at random out of the phone book. These are people of integrity, of courage, of moral fiber, the kind of few people around who have the fortitude not to follow the leader. It is very hard, you're absolutely right. But presumably, that's exactly the sort of person one is looking for when one selects a board of directors.

GIGOT: Now, Merrill Lynch, just to take one example, now part of Bank of America, but I gather it is lost now in the last couple of years more than the profits that it made during the earlier part of the decade. Yet, the bonuses and the CEO compensation was based upon those profits. Do you believe that there should be a claw-back provision, something that allows the government or the board or the shareholders to go back and retake those bonuses after the fact?

MACY: Well, again, this is the — this is the fault of the way the bonus and compensation packages were crafted. You pay out the money now and you wait four or five years to see if the dust settles and see if they made any money. It's nuts.

There's one thing about the Merrill bonuses, it really has never been mentioned, I think it's an enormous issue going forward that we need to focus on. And that is you have two kinds of bonus problems. One is the one we were talking about where these top guys get — capture their board of directors to get big bucks. But then there's everybody else. You have thousands of people who aren't getting the 40 million bonuses but the two, three million dollar bonuses. These are the AIG guys going on the hunting trips in Scotland.

GIGOT: But how do you stop that?

MACY: These are the Merrill guys, the Morgan Stanley guys.

GIGOT: Do you step that?

MACY: The reason they're getting so much money is because they're selling investment products that are very difficult to sell. These people are actually making money for their companies in an economy so they deserve the bonuses, but it's a bad thing for society because they're shoving more toxic junk down the throats of individual investors and unsophisticated institutional investors.

GIGOT: But do you favor a claw-back provision that would allow shareholders to get that money back after the fact?

MACY: Yes. To the extent that money is paid out on the premise and performance, and the performance wasn't there, it was fraudulently obtained and it ought to get clawed back.

GIGOT: Thank you, John. Appreciate you being here.

Still ahead, Tim Geithner's opening act. Why the markets reacted the way they did to the rollout of his new bank rescue plan.


GIGOT: Judging by the market's reaction, Treasure Secretary Tim Geithner's rollout of a rescue plan was less than a success. The Dow closed down 5 percent Tuesday as investors criticized the plan, which could inject some $2 trillion into the shaky financial system. Criticized it for its lack of details.

We're back with Dan, Kim and Collin Levy. Also, joining the panel, Editor James Freeman.

James, what's the most important thing we learned this week about the Obama-Geithner approach to the financial bailout?

JAMES FREEMAN, EDITOR: I think we learned that several years into this crisis Mr. Geithner, who has been in the cockpit all along, still doesn't know what to do, but is convinced that lots of taxpayers know the answer.

GIGOT: But he didn't put a price tag on it. He specifically said we're only going to use $350 billion still left over from TARP One. But there's an implication there was a bailout in the works.

FREEMAN: A big implication. I think this was frustrating for Senators this week saying, come on, we know you're asking for more money, how much? And he wouldn't answer. He's committing up to a billion in various program, one buying troubled assets and investments in banks. Some, he says, is going to be private capital. What's the plan?

GIGOT: Let me give Tim Geithner credit for one thing — and James is going to dislike this. A lot of the bankers were saying give guarantee. Guarantee these bad assets on the books and it would be great for them. Don't dilute shareholders as much, not as tough as the management, you don't have to work off those assets or record them as losses. He resisted that and at least didn't put the taxpayers on the hook for that.

HENNINGER:Yeah. But somebody has to be on the hook for those bad assets. The bad assets, toxic assets, damaged, they are at the center of this problem. And I think that's why the markets reacted the way they did.

Look at the Treasury's announcement. They announced the capital assistance program which they say will produce "a more consistent and forward-looking assessment of the risk on bank balance sheets. The public- private investment is going to spend a trillion dollars to catalyze the reform of legacy assets." There's no detail on how they're going to do that. We've editorialized about this time after time, that you're going to have to go into those assets one after another and disassemble it. It's going to be a hard job. but they haven't given any detail how they're going to do that.


GIGOT: Kim Strassel?

STRASSEL: This gets into the question of the stress test that Geithner talks about this week, this idea they're going to go in and take a really hard look at these top banks and what their balance sheets look like.

The real question that people are still asking is, when you get done with that process, are you going to allow some of these banks to fail? Because there has been a lot of reluctance in the top echelons of government to let that happen so far. That's got to be the questions coming out of this stress test.

GIGOT: So for example, Citibank, why hasn't Citigroup — the government guaranteed $300 billion worth of potential losses at that bank. Is that one of the banks there's debate whether or not it should be allowed to fail and shareholders wiped out? Kim?

STRASSEL: Yeah, absolutely. This is a bank that is now a three-time loser. There's a lot of questions about whether or not, even if you go and give access to a lot of these programs, that they can come out of the other end and be successful. These are the hard choices they apply to all these banks. They're topping about the top 20. Others might be voluntary. Who's it going to apply to? What's going to be the end gain?

GIGOT: I think one of the problems, Collin, is the specter of nationalization. If you do take a bank like Citigroup and government's going to be the biggest shareholder, that didn't work well with AIG, because that's been shredding value after that. There's a real fear that government is going to end up owning a lot of these banks.

LEVY: Absolutely. You have to remember that this is a confidence game now. That's the biggest thing that's happened this week in terms of the market's reaction to Geithner. What you had was a failure by Geithner to sweep this back into the hands of the professionals. There's been so much politics involved now. It's much better off to be in the hands of the Federal Reserve and the Treasury. And not that politicians are running the show. Part of e problem.

GIGOT: Is dangerous you mean, with Capitol Hill dictating certain terms and further putting a damper on private management.

LEVY: Yes.

GIGOT: James?

FREEMAN: I think Mr. Geithner is continuing his pattern over the last year, spreading fear and uncertainty. The politicians were asking this week why aren't consumers getting more loans. Those markets for asset- backed securities have been frozen this year, almost no new issues because Geithner has spread so much uncertainty, no one's going to do a deal until he says they're going to stop changing the rules.

GIGOT: Kim, let me ask you this. The Obama administration didn't go up to Capitol Hill as part of this and ask for a specific amount of new money. Why not if they're going to have to do that in six months or a year? Wouldn't it be harder at that time to ask for another trillion if that's what you've got to get?

STRASSEL: You bet. But who wants to talk about another trillion when you're passing an $800 billion stimulus bill that day. So this is a problem. They got a perception problem that they are just throwing money out the door.

Another thing, since we're talking about politics, the other question unanswered out there that a lot of investors have is not just what are you going to do in the near term in capital injections or guarantees or an option for this bad debt, but the question is how are you going to pay for all this in the end? What is my tax situation going to be? That's something the Obama administration has also not talked about.

GIGOT: Here's the answer to that question, Kim. Your taxes are going up. So are mine. So is just about everybody's.


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


GIGOT: Winners and losers, picks and pans, "Hits and Misses," it's our way of calling attention to the best and the worst of the week.

Collin, first to you.

LEVY: I'm giving a miss to the Saudi religious belief who are spending Valentine's Day collecting anything that's red or says I love you. That's because Saudi Arabia is a Muslim country and Valentine's Day is considered a Christian holiday. You're not allowed to celebrate it there. For all those American women out there who are upset that they got a pink teddy bear this year, they should take this as an occasion to count their blessings.


GIGOT: You could be living in Saudi, OK.


FREEMAN: Well, I'm going to give a hit, a big hit to some Washington lawyers, believe it or not. There's been so much bad news out of Washington. Here's good news. Special masters this week in a federal court have ruled that vaccines do not cause autism. The science has been clear for a while, but it's good to see the courts acknowledge this. Parents should vaccinate their kids and this is a great day for sound science.

GIGOT: James, thanks so much.


MOORE: You know, Paul, poor Barack Obama, he can't keep anybody in his cabinet. Senator Judd Gregg has dropped out of the commerce secretary position. He's the second one that's dropped out. I don't know, Paul, if you've gotten a call to fill this position.


My attitude is we don't need a Department of Corporate Welfare. Barack Obama, just get rid of the agency. Don't name a third commerce secretary.

GIGOT: I'm not on the short list, the medium list or the long list with anything having to do with the Obama administration.

MOORE: Nobody else will take the job, Paul!

GIGOT: Why do you think Judd Gregg decided to do this?

MOORE: He had big disagreements about the big budgets. And also that census issue. I think he was very afraid that Barack Obama was going to politicize the census.

GIGOT: OK, Steve, thanks.

Remember, if you have your own "Hit or Miss," please send it to us at jer@foxnews.com.

That's 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 right here next week.

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