This is a rush transcript from "The Journal Editorial Report," November 29, 2008. This copy may not be in its final form and may be updated.

PAUL GIGOT, FOX HOST: Coming up next on "The Journal Editorial Report, Obama's A-team. We'll look at the player he's putting in charge of economic policy and their plans to turn things around.

Plus, Citigroup's taxpayer parachute. You may be on the hook for more than $300 billion in bad investments. So is anyone going to hold Robert Rubin and the rest of Citi's directors responsible?

And the Obamas' school choice. They've opted out of D.C.'s troubled public schools for their children. Why can't other families?

"The Journal Editorial Report" begins right now.

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

President-elect Barack Obama officially unveiled his economic team this week saying that he has chosen the best minds in America to lead the country through the economic crisis.

Here with a look at who these men and women are and what they tell us about the policy direction of the new administration, "Wall Street Journal" columnist and deputy editor Dan Henninger; columnist Mary Anastasia O'Grady; editorial board member Jason Riley, and assistant editorial page editor James Freeman.

OK, Dan, the big choice is Timothy Geithner, New York Federal Reserve president, as treasury secretary, and Larry Summers, a Harvard economist, former treasury secretary, to run the National Economic Council in the White House. There are others. Taken as a whole, who are these people and what do they believe?

DAN HENNINGER, COLUMINST & DEPUTY EDITOR: Well, Paul, I'm going to give the group one thumbs up.

GIGOT: Just one?

HENNINGER: Just one. Yes, just chair. I'll get the others get to the down thumb. But I think the good news is that the Obama administration is not going to destroy the real economy. Now that sounds like an overstatement, but, compared to the House Democratic caucus, which I think is more or less oblivious to the real economy, these people understand that there is an economy out there.

And you know what was interesting? After Obama was elected, the one thing we kept talking about is, you know what, we are not — the Dow is not at 11,000 anymore, it is down around 8,000. We are heading into a recession. The last think you want to do is raise taxes in a recession.

And as soon as he appointed the team, we — they started to leak that those tax increases are probably off the table. So I think you are getting a degree of confidence out of this deal.

GIGOT: In order to redistribute income, in other words, you have to make some. And I think at least, you know, Summers and these people understand that that the economy has to grow.

JASON RILEY, EDITORIAL BOARD MEMBER: I am also somewhat optimistic about the team. And including the incoming head of the Council of Economic Advisors, Christina Romer.

GIGOT: Berkeley economist.

RILEY: Berkeley economist. She's also an economic historian. She's also written that tax increases contract economies. Geithner and Summers...

GIGOT: You are kidding! A Democrat saying that?


RILEY: Exactly. Geithner and Summers are free traders. They both believe in the strong dollar. and for those conservatives who are worried that these — this group is not moderate enough, what I would advise them to do is to take a look at some of the left wing magazines and blogs, which are outraged over these picks, because they say Obama is not appointing any true progressives.

GIGOT: OK, let's hear the downside now.


MARY ANASTASIA O'GRADY, COLUMNIST: Well, the great thing about the team is supposed to be their experience. But it is a little bit like saying that you're going to put the arsonist in charge of the fire department because he knows a lot about fire. Tim Geithner was very much involved in bailouts since the Mexican peso crisis in 1995. So, yes...

GIGOT: When he was at the Treasury Department.

O'GRADY: Yes. So, yes, he has a lot of experience. What does he have experience in doing? In rescuing bad financial decisions and adding to what we call moral hazard, which is the tendency for people who are managing money to devote fewer and fewer resources to managing risk. And you can go from Mexico to Asia, to long-term capital, and you will arrive here at this mega crisis.

GIGOT: Well...

JAMES FREEMAN, ASSISTANT EDITORIAL PAGE EDITOR: I think the left wing magazines should look again at Tim Geithner and they might see something they like among his record here.


FREEMAN: Because it is a history of bailouts, of intervention. Bear Stearns, AIG, if you thought these were wonderful things, you can expect more and more of your tax dollars going into institutions that he thinks are too big to fail. And now he is creating another one at the New York Fed. It's called a central counter party for credit default swaps. This is going to be another big monster.

GIGOT: These are derivatives, the things they're trying to insure.

FREEMAN: That's right. The politicians like to blame them because they don't want to blame the bad housing policies for what happened. And what you are going to get is a big mammoth institution heavily regulated and all of us on the hook when it goes bad.

GIGOT: One thing about Larry Summers, for example, is he did try, when he was at the Treasury, to rein in Fannie Mae and Freddie Mac, which are the — one of the big sources of this whole crisis. he did sign onto a bill, called Graham-Leech-Bliley, which deregulated some of the credit markets, and on the left is sort of seen as the cause of this when it really isn't. So, summers — one of the big questions we face is, how regulated are our financial markets going to be down the road. I think Summers may be a voice that says you can't over regulate or else you're going to get into trouble.

FREEMAN: Yes. And I think that is the puzzle...

GIGOT: Do you agree with that?


FREEMAN: I agree that the — the Summers pick tells you that here's a guy who understands that you can't have government anointing certain institutions that is favored and then expecting that to work in the marketplace.

GIGOT: Isn't that good news, James.

FREEMAN: That's good news. The bad news is Geithner has gone the other way on credit ratings while at the New York Fed and on this central counter party in the bailouts. Lots of bailouts.

O'GRADY: Summers is also not good on tax policy. He does not embrace the idea that marginal tax rates matter. And that means that he thinks you can keep raising the highest rate on the most productive sectors of the economy and not harm it. He wants to find where the limit is.

GIGOT: He would tell you that they matter, but they matter in a much higher rate than we have now. It's just 25 percent.

O'GRADY: We're going to find out where it is.


GIGOT: I agree with you. He would get up to 50 or 60 and say, well, we'll see how far we can go. And that could really do damage.

But Romer is disagreeing with that, Dan.

HENNINGER: Yes. Christina Romer has written that if you raise taxes, say, 1 percent of GDP, you reduce output by up to 3 percent of GDP and you reduce investment quite a lot, because, as she says, investment depends on cash flow. But I'm not sure that Christina Romer would disagree that you can raise taxes at the highest marginal rate.

O'GRADY: And don't forget that she's going to report to Summers. She is not reporting to the president. So he's going to really be the guy in charge.

RILEY: There may be indication that Obama already is listening to Romer. He's already has been hinting that he might put a hold on raising taxes on the highest earners.

HENNINGER: We should talk about that.

GIGOT: I think that is the most important economic fact of the week is that Obama has hinted that he might delay those tax increases beyond 2011. In the short will increase spending $500 billion.


GIGOT: $700 billion, that's even more than you make, James!


O'GRADY: But the level of uncertainty in the tax policy still remains. OK, maybe we won't do it next year. Maybe we're going to delay it. You need something that is permanent and that will go to all income sectors.

GIGOT: Yes, but these guys don't believe that. They believe in spending economic policy.

HENNINGER: And rebate checks.

GIGOT: And rebate checks. And I think we've been there, done that. That doesn't work. So that's not going to help.

HENNINGER: There is one member of the team who does. Peter Orszag, the new head of OMB, has warned against entitlement spending and what it will do the out years. And there could be attention tension inside this team.

GIGOT: All right, thank you, Dan.

When we come back, Citigroup's taxpayer rescue. You may be on the hook for billions of dollars in bad investments. We'll tell you what role this man played in making them.



GIGOT: Well, another week, another bailout, this time it's Citigroup. And Americans, who invested $25 billion in the bank last month, are now on the hook for $20 billion more. Taxpayers also will help insure more than $300 billion of Citi's mortgage-backed securities. That is almost $1,000 for each American in guarantees on some dubious investments.

James, did we have a choice here, the government have a choice about bailing Citigroup out?

FREEMAN: I think it is kind of a shame that bankruptcy and FDIC receivership have gone out of style. This management, this board certainly deserve that. Unfortunately, we have taxpayers rescuing a board that happens to make horrendous decisions...


GIGOT: Before we get there, $2 trillion in assets at Citibank, one of the largest financial institutions in the world. Amid this crisis, this panic, could the federal government really have allowed Citibank to fail?

FREEMAN: I just am not a...

GIGOT: Are you saying yes?

FREEMAN: I'm not the believer in the too big to fail argument, especially given this last...


GIGOT: Even Citigroup isn't too big to fail?


GIGOT: You wanted to let that happen.

FREEMAN: Citibank — Citibank has proven it can't function in the status quo.

GIGOT: So you agree with that?

FREEMAN: So breaking it up, maybe receivership is the best way to do it.

RILEY: But the problem is we don't know if it is too big to fail because of the lack of transparency in this process. This is another deal struck on Sunday night with Hank Paulson and a few other people. The markets need certainty. And these are arbitrary. Lehman fails. Citi gets saved. AIG gets saved. Bear Stearns fails. Who knows?

GIGOT: Do you think that, as a principle, this kind of institution would have had — I mean, you can't let, in a panic, this kind of bank go into bankruptcy, can you?

O'GRADY: You know, Paul, I think the problem goes back to the Bear Stearns event in March. The Fed and the Treasury have been signaling that, yes, all of these institutions are too big to fail. So, the process that Citibank should have been undergoing in the past year to sort of deal with these issues has not taken place, because they are sitting there knowing that, you know, they are too big to fail.

GIGOT: And to your point, James, typically when the federal government, in the past, has gone into a bank, they do go in and they fire the directors. They fire the managers. They zero out the shareholders and the private shareholders. They go in and either carve it up, they sell part of it. But you don't let it go away intact, which is essentially what is happening here.

FREEMAN: Well, I think the whole process you described, letting Citi fail sounded wonderful.


FREEMAN: All the people who made mistakes go, and the bank is — pieces of it are reconstituted and...

HENNINGER: I don't think you want to sit here...

FREEMAN: ... economic use.

HENNINGER: I don't think we want to sit here and pretend systemic risk doesn't exist.

GIGOT: Doesn't exist.

HENNINGER: It does. The problem — I think we have to get to the issue of culpability. We were just saying that they should have been revealing what was going on long before this. Look, in 2000 — to me, the central number here is over $300 billion in troubled assets. In late 2007, Citi was assuring analysts that it didn't have a problem. The SEC said we want to look at your books. And they were still telling these people, we don't have a problem.

GIGOT: Dan, 30 days ago they were saying they were well capitalized and not a problem.


GIGOT: And I was on this phone with some of them complaining about some of the things we wrote in our editorials.

HENNINGER: Yes, that's right.

RILEY: I think there is also a political problem here. In the same week Washington tells the automakers to take a hike, they bailed out another Wall Street firm. I mean, Citi's management is — you know, Citi's been run at least as badly as G.M. And they don't even have the excuse of the United Auto Workers Union to deal with.

FREEMAN: That is exactly right. And this is going to be political leverage for the various bailouts to consumers that are to come here.

GIGOT: Let's talk, particularly, James, about Robert Rubin one of Citibank's directors, former treasury secretary, widely reported this week to have been on the phone to his friends and associates in Washington, saying here's the negotiating the deal. What role has he played in this?

FREEMAN: A big role and very culpable and...


GIGOT: A good role or a bad role?

FREEMAN: A bad role since 1999, collecting big checks along the way. And I mean, the history here is just amazing, the various disasters. Just this latest one is not the only one. You look back, he was on the phone to the Treasury trying to get them to lean on credit ratings agencies on behalf of Enron. I mean, he was basically the...

GIGOT: Basically, Citibank at the time.

FREEMAN: Big client of Citi and basically pedaling the variant of the Jeff Skilling-it-was-just-a-run-on-the-bank that killed us.

GIGOT: He would argue, look, I didn't have anything to do with these mortgage-backed securities. That was those managers. I was just sitting up here on the executive committee.

HENNINGER: But it was his idea, it has been reported, for Citi to get into the internal trading. I mean, that had been built on acquisitions by Sandy Weill. Charles Prince takes over. He can't make any more acquisitions. Rubin was the one who argued they should go into internal trading, of the sort that you did when you were a partnership with Goldman Sachs or a hedge fund. I think that is one of the biggest mistakes here. This was a mega bank — banking institution with no business getting into trading this volume of mortgage-backed securities.

O'GRADY: And it was also a very purposeful step when they put all of those — you know, the...


GIGOT: Vehicles off the balance sheets.

O'GRADY: Off the balance sheets, yes. That really was designed to deceive.

GIGOT: Is this some message, Jason, that Barack Obama wants to send here? I mean, he's got his protegees. Rubin's protegees are now filling his administration, Geithner, Summers. They used to work for him. Peter Orszag used to work with him. So suddenly we're going to bail out Citigroup and we're not going to hold the directors and Robert Rubin responsible. Good message?

RILEY: I don't think so. But that seems to be the way they are going.

GIGOT: All right, Jason, thank you very much.

When we come back, the Obama school choice. They've opted out of the troubled D.C. public schools for their two daughters. Why can't other parents do the same?


GIGOT: After weeks of speculation, Michelle and Barack Obama have announced that 10-year-old Malia and 7-year-old Sasha will go to Sidwell Friends School when they move to Washington in January, the same private academy that Chelsea Clinton attended.

The decision not to send the two girls to D.C.'s public schools is no surprise. It is the lowest performing district in the nation. But it draws new attention to a couple of issues, school choice and the controversial efforts of Washington's new schools chancellor.

Jason, why should Americans care where the Obamas send their kids to school?

RILEY: Well, they should care that the president feels that people with the means that he has should be able to exercise school choice but not people that don't have the means that he has. It is no surprise. As you mentioned in your intro, D.C. Schools are among the worst in the nation and last year ranked last in math and second to last in reading.

GIGOT: 12 percent of 8th graders, 12 percent can't read, 8 percent in Math.

RILEY: It's no surprise that responsible pare3nts with the means would want to subject their children to this school system.

The question is why Obama opposes school choice for the disadvantaged kids. There is a scholarship program in D.C. that he opposes. Bush signed it into law in 2004. It is hugely popular. Something like five applicants for every available slot. But Barack Obama opposes giving school choice to the disadvantaged and that is the issue.

GIGOT: The problem in D.C. schools is not money, Mary. $13,000 per pupil spending is one of the highest in the nation. It is not money.

O'GRADY: What I find interesting about the Democrats' broader position against school choice is that they complain a lot about income disparity in this country. And the principal explanation for income disparity is education. If you get stuck in one of these crummy public schools, you will be left behind in your lifetime. There is no way you will be able to catch up.

GIGOT: And particularly in the global economy, returns in education are increasing. So if you go to college, if you graduate from high school, you are that much further off. So these kids are just left behind, and we can't get the Democratic Party to actually think about that in its role in effecting lifetime opportunities.

HENNINGER: Yeah, and we know why. The reason is specific. It's because the teachers union, specifically the National Education Association, opposes most of these reforms. They oppose, for instance, what Michelle Rhee, the chancellor of the D.C. system wants to do, which is to end tenure for failing teachers. They oppose that and the Democratic Party will not stand against them.

I tell you, Paul, I think, in a way, this is Obama's Iraq. The way Democrats thought Iraq was an immoral war, the condition of these schools is this greatest moral issue in the United States right now. It's not the suburbs that are failing. It is the inner-city schools, their constituencies.

GIGOT: What's really interesting about Michelle Rhee too is she is — she's not just saying abolish tenure. She's saying, I will go up to double your salary if you are a good teacher. So she's giving them something in return. She's saying, if you are lousy, we can fire you.

FREEMAN: Yes. And I think there is a great opportunity here for President-elect Obama, even if he will not send his kids to the public schools, to support Michelle Rhee. She's really been a reformer, been firing the dead wood, closing schools that don't perform, bringing in new principals. And that issue of trying to create a merit pay system is huge. And she should be supported.

GIGOT: And Michelle Rhee has said she needs at least the implicit support of Barack Obama. She may need the support if she wants to succeed because unions are resisting what she wants to do and she may have to declare the D.C. schools are an emergency, which would give her extraordinary powers to be able to impose that kind of tenure trade.

RILEY: I don't know if she'll be able to rely on them. The teachers unions endorsed Obama for president for a reason.

HENNINGER: But his feet should be held to the fire. I know that Sidwell Friends thing is understandable. It is a monumental hypocrisy for him to be doing this. And he should be held accountable.

GIGOT: Yes, but the press corps basically doesn't report it. They say, well, the kids have to go to Sidwell Friends because of security reasons. They have to go to Sidwell Friends because...


RILEY: And no one begrudges them the decision. Again, any responsible parent with the means would make the same decision, I'm sure. But the issue is why he wants to cut off that decision for people without means.

GIGOT: So answer the question for me. Here you have a new president coming in. He's an inspiration to an awful lot of Americans. He has this opportunity to address the source, as Mary puts it, of one of the major sources of income equality and lack of opportunity in this country. Why doesn't he seize the day? Wouldn't he have — not support only among African-Americans, but conservatives?

RILEY: Here's what Obama would tell you. Here's what Obama would tell you. He would say, I'm going to fix the public schools system. But the hypocrisy, as Dan pointed out, was that, while I'm fixing them, my own children will be ensconced in this great private school. But I'm thinking of you guys. I'm going to fix those schools for you.

GIGOT: If he wants to fix the — but if he wants to fix the public schools, why not go to bat for Michelle Rhee and what she's trying to do?

RILEY: Again, because he's more interested in advancing the union agenda.

GIGOT: All right, thanks, Jason.

We have to take one more break. And 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 very worst of the week.

Dan, first to you.

HENNINGER: What is the most famous business failure in America right now? The auto industry, begging Congress for a bailout. What is the hottest product in America right now? It's the blackberry storm. A cell phone for which people were standing in the cold in places like Toledo and New York to buy it. It sold out.

There must be a lesson here and that is, if you make a product that people really want, like a cool cell phone, people will stand out in the cold to buy it. And if Congress tells Detroit to create a car, that is the little and you have to plug in every night, no one will stand out in the cold to buy it.


HENNINGER: So let us give thanks this weekend that Congress is not designing cell phones — yet!

GIGOT: All right, Mary?

O'GRADY: There's a lot of bad news in the economy right now. And the fourth quarter I think is going to be especially tough. But, there is some good news, which is the average for a gallon of gasoline in the United States has dropped from $4 a gallon in July to something under $2. About 1.89 a gallon is this national average.

That represents in the aggregate over the year, annual savings of $300 billion to the country. So even though we have lots of bad news, we might be able to start driving cars that we like again.


GIGOT: And it has the impact of a big tax cut.


RILEY: Citigroup, AIG and a number of these other financial institutions that have received government bailouts plan to continue sponsoring sports teams. So even though Citigroup has shed something like 53,000 jobs, it's still going to pay the New York Mets $400 million to name the new stadium Citi Field. AIG is still going to pay a British soccer team $120 million to wear its logo on their uniforms.

I think this is a very bad P.R. move. Appearances matter. And one way to show taxpayers that they are cutting costs would be to end the sponsorships.

GIGOT: Jason, I agree. Thank you very much.

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 all right here next week.

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