This is a rush transcript from "The Journal Editorial Report," October 11, 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," the economic turmoil continues. Is it 1929 all over again or can we learn from past mistakes?

Plus, he says raising taxes on the middle class is the last thing we need in this economy. But just what will Barack Obama's tax plan do?

And John McCain's new strategy? The underdog is on the attack linking Barack Obama to '60's radical Bill Ayers. Is it the right way to go?

"The Journal Editorial Report" begins right now.

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

It was another tumultuous week for the American economy. As stocks continued their downward spiral, Treasury Secretary Henry Paulson signaled that the government may take the unprecedented step of investing directly in U.S. banks as a way of easing the deepening credit crisis. Some say it feels like 1929 all over again. But are we really headed toward another Great Depression?

Here with some historical perspective is Amity Shlaes, a syndicated columnist for Bloomberg and a senior fellow at the Counsel on Foreign Relations. She's author of the book, "The Forgotten Man: A New History of the Great Depression."

Amity Shlaes, welcome.


GIGOT: You studied the history of previous financial panics, as has Ben Bernanke, chairman of the Federal Reserve. Do you think Bernanke is applying correctly the lessons from those previous crises to this one?

SHLAES: Yes, he is. Roosevelt took a bucket and Hoover took at bucket to put out a big fire. Bernanke's bringing out all the hoses. That's what you do have to do in a credit crunch. It's what comes after though, Paul, that's important.

GIGOT: Well, that's the hose. Is what is — I guess that's liquidity, it's opening the banks' borrowing window to — the Federal Reserve bank's borrowing window to commercial banks?

SHLAES: It's all different kinds of hoses. If you look at what — the things Treasury is doing, what the Fed is doing with interest rates, they're playing every hose they have. It's a giant fire and they're doing it. Afterwards, you have a lot of water damage, if you want to continue our metaphor, and then what do you do?

GIGOT: Is that because you cannot afford to let the banking system fail in a free market economy? Because some free marketers might say why is the government playing any role at all. Let some of these banks fail.

SHLAES: We learned in the depression, if you let too many fail, and more failed then than even exists now, you do tighten up. To switch metaphors, it's like a car when the oil runs out, all of a sudden you're pushing on the pedal and going nowhere. It's a good thing to do when you get to a crisis moment like this. But the Great Depression was much longer than just a credit crisis. There were intervention missteps that made it great in magnitude. Bernanke is going to want to be aware of that, too.

GIGOT: What were the biggest mistakes of that era, mistakes that we ought to avoid?

SHLAES: Too much discretion for government. I'm the emergency government, come to me and I'll decide what I do in the morning.

GIGOT: Make it up as we go.

SHLAES: Roosevelt set the price of gold after he had the cigarette and his egg, and he did it arbitrarily. He said let it go up 21 cents and Morgenthau, the future treasury secretary, said why. He said, well, it's seven times three, and it's a lucky number. And Morgenthau said, well, the markets would be frightened if they knew. And they were.

GIGOT: Hasn't there been some of that arbitrariness in the last year? I'm thinking of the government suddenly deciding we're going to take over AIG, the big insurer, wiping out enormous amounts of private wealth. We're not going to save Lehman, we'll let that fail. But we will save Bear Stearns. Those are all arbitrary, have been arbitrary decisions.

SHLAES: Absolutely. That's problematic. That's where the Treasury plan is problematic. It basically says let one big important person make these decisions. He can do it, smartest guy in the room. We know the smartest guy in the room attitude is what got us here.

GIGOT: This is the Hank Paulson plan, the $700 billion of treasury — now with authority, they can apply the money to go into the banking system and help stabilize that system. You're saying that risky because you put so much power in one man. On the other hand, you're saying maybe we need that kind of capital right now to help the banks.

SHLAES: You want to do is short and fast. But if you have over years and years young men at the Treasury and young women picking and choosing which company they like and don't, you'll be in for a long '70s-style malaise at the very least. Because life is about prices, not about deals and who you know. As long as our markets are more about who you know and who's cool and did you spend two years at Goldman Sachs, that's going to give us stagflation or just very slow recovery.

GIGOT: What do you do, set up consistent rules and follow those rules as you deal with each institution that might be in trouble?

SHLAES: What we're missing today — and it's a shame because it's a lame duck situation — in between powers is we're missing the reform. Along with the hoses have to come the new structure. What are we going to build in its stead? You don't hear people talking about that. You hear revenge, more regulation. Regulation is not the same as reform. We once had this Glass-Stiegel law where we separated investment banks from commercial banks. And they didn't get as many protections, those investment banks.

GIGOT: Some have gone belly up.

SHLAES: Now they've gone belly up. Something like that's going to have to happen again. Even if it's not a perfect law you need reform and that's clarity for markets. Markets long for clarity.

GIGOT: What about this decision to increase the deposit insurance from $100,000 to $250,000 per account in banks? Now some people are talking about the government insuring all deposits. Is that a good idea?

SHLAES: Merkel in Germany is doing that.

GIGOT: The chancellor of Germany.

SHLAES: I don't believe so. I think the reform should come first and then more insurance. To insure an insurer without saying how you're going to make the system work is widening what we call morale hazard. In econ- terms, people say this is liquidity versus morale hazard. You're increasing people to repeat errors.

GIGOT: Paul Volcker, Ned Phelps, Vernon Smith, some very prominent economic and financial voices say it's OK in this kind of a crisis for the government to put capital in the banking system for preferred shares or warrants given the crisis we're in as long as they're done on a consistent basis with rules. Do you agree with that?

SHLAES: Yes. But the preferred shares aspect, which has been talked about at Columbia by Charlie Calamaris, is better than just sort of getting all the troubled assets. Because de facto, that plan with the troubled assets means taking over the companies themselves. It's closer to that. And you move political power in America away from New York and to Washington, Paul. We don't want that. We're healthy when we have a financial capital in one place. Preferred shares does more for sustaining the separate center of a financial capital in New York.

GIGOT: All right, Amity Shlaes, thank you very much. Good advice. Good to have you here.

When we come back, he says raising taxes on the middle class is the last thing we need in this economy, but will Barack Obama's tax plan do just that? Our panel takes a closer look.




SEN. BARACK OBAMA, (D), PRESIDENTIAL CANDIDATE: I'll give a middle class tax cut to 95 percent of all workers. If you make less than $250,000 a year, you will not see your taxes increase one single dime. Not your payroll taxes, not your income taxes, not your capital gain taxes because the last thing you need is a tax hike in this economy.


GIGOT: That was Democrat Barack Obama at a rally in Dayton, Ohio, this week, making the promise his tax plan would not hurt the middle class.

Here with a closer look at what he is proposing, "Wall Street Journal" columnist and deputy editor Dan Henninger, columnist Mary Anastasia O'Grady, and assistant editorial page editor, James Freeman.

Mary, Barack Obama says a tax cut for 95 percent of Americans but there's this other figure that he doesn't talk about, which is that about 40 percent of Americans already have no income tax liability at all. How does he give a tax cut to 95 percent of them?

MARY ANASTASIA O'GRADY, COLUMNIST: He's actually giving them money but it's not really a tax cut. Most of what he's offering are in fact tax credits. Whether you work or not, you're going to get money. If you send your children to college, if you use child care, if you buy a clean, hybrid car, these are the tax cuts which are in fact really just credits. They're subsidies.

GIGOT: Right, they're tax subsidies. But credits are supposed to be balanced off of, deducted from your tax liability.

If you have no tax liability, James, how can you get these checks — how can you get this subsidy?

JAMES FREEMAN, ASISITANT EDITORIAL PAGE EDITOR: This is kind of an unreported scandal that's been going on in Washington. Politicians figured out that welfare is a bad word. Taxpayers don't like welfare. They decided to launder it through the tax system and they call them credits. What he's doing is he's expanding this. Bill Beach at the Heritage Foundation ran the numbers on the Obama plan and he said more than 10 million people are now going to be — versus today, are going to be collecting money through this system who paid no income taxes. So it's just a welfare payment run through the taxes.

GIGOT: There could be a lot of money, as much as — really $10,000 perhaps in some cases, if you add them all up, and they all fall right and you do the right things according to the government, that's the amount of free money you get from the government.

DAN HENNINGER, COLUMNIST AND DEPUTY EDITOR: That's right. It's going to cost an enormous amount of money. As we noticed in the debates and in his speeches, Barack Obama says we will find a way to pay for this by going through the federal budget line by line by line to find wasteful spending.

GIGOT: And if you believe that, you probably believe 95 percent of Americans are getting a tax cut.

HENNINGER: Another point about this tax credits is you have to understand, specialists — people who are even listening to this program or are looking at these proposals struggle to understand exactly what he's saying. That's the point. A tax credit system is extremely complicated and specialists in the tax code say this is what contributes to the complexity. He's going to make it more difficult than it already is. You have to file papers for every one of those tax credits to get them.

GIGOT: One mystery to me, Mary, is why hasn't John McCain explained this to people because it's slight of hand what Obama's proposing.

O'GRADY: It's really unfortunate. If fact, if you go on John McCain's web site, he has some pretty interesting ideas, including the idea that entrepreneurs are the ones that create wealth and jobs in this economy. And they are going to be punished under this Barack Obama plan. They are going to see their — successful entrepreneurs, that is those making more than $200,000, if they're individuals, are going to be punished. Their rates are going to go up.

This is I think the most damaging thing about this besides the welfare, is that he is punishing the productive part of the economy during a time when...

HENNINGER: A quick political point. You recall, Paul, we were all visited by McCain's economic advisors several months ago. They told us the tax issue was no longer a winner out there with the public because they internalized this. Here you have Barack Obama running into...

GIGOT: Running on tax cuts.

HENNINGER: ... on tax cuts.

GIGOT: I know. He's running to the right of John McCain in certain respects.

Let's put up a chart. We can show where the taxes are going up, James. Dividends going for 15, 20 percent, capital gains for 15 to 20 percent and the top rates are bumping up.

FREEMAN: The top two rates are bumping up to 36 and 39.

GIGOT: Are those all just rich people who can afford it, and who cares?

FREEMAN: This is the interesting thing. According to some surveys, the median CEO of the small business is making $233,000 a year. That's right in the zone between the 200 for individuals and 250 for families with Obama raising taxes. This is hitting companies that absolutely are not big businesses. If you're in retail, whether it's fast food joints or muffler shops, the dream is to get two or three locations. That's right at the point where these taxes are hitting. It's not just costing them money. It's telling that up-and-coming person, you're going to get hit when you hit this level of success.

GIGOT: Can he raise enough money taxing these well-to-do people to finance their ambitions or, in the end, is he going to have to go down into the middle class?

O'GRADY: Of course, he cannot. As Dan pointed out, he's trying to sell it on being able to cut spending in certain areas and raise taxes on the rich. We know that will create disincentives for small businesses to grow. And he will have to dig down deeper into the pyramid.

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

Still ahead, the McCain campaigns new strategy. They're attacking Barack Obama for his past ties to '60s radical Bill Ayers. But is that the smart way to go? Our panel weighs in after the break.



GOV. SARAH PALIN, (R), VICE PRESIDENTIAL CANDIDATE: The opponent is someone who sees America as imperfect enough to pal around with terrorists who targeted their own country.

SEN. JOHN MCCAIN, (R), PRESIDENTIAL CANDIDATE: Senator Obama said he was just a guy in the neighborhood. We know that's not true. We need to know the full extent of the relationship because of whether Senator Obama is telling the truth to the American people or not.


GIGOT: In case you missed it, the McCain campaign has unveiled a new strategy. They're pounding front runner Barack Obama for his past association with '60s radical Bill Ayers.

Dan, you saw it. McCain is basically saying Barack Obama has not been honest about that relationship. Is that fair? And is it smart politics?

HENNINGER: I think it's fair. It's an interesting subject. We really don't know as much as we probably should about Barack Obama.

But as far as Bill Ayers goes, for John McCain to say we don't know as much as we need to know, guess what Senator, and we're not going to find out in the next three weeks. This is a side issue. To be loading up his entire campaign now, as they almost are, on Bill Ayers just strikes me as desperation. You have tens of millions of people who are going to cast votes in this election. There is no way to get them to understand the Bill Ayers story in the next three weeks. He ought to be talking about Obama's policies.

GIGOT: But isn't the creditability of Obama, James, actually a big issue in this campaign? The voters are being asked to roll the dice to elect somebody who has a very thin resume. Isn't it in that sense — maybe it is good strategy?

FREEMAN: I think certainly we're in the last round of interviews to pick our next president. Reviewing the resume is fair game. I think there's a lot on the resume. John Judas' (ph) piece in "The New Republic" said Obama is a flop as a community organizer. We don't see any record in the U.S. Senate of achievement, and same with the Illinois Senator.

I think a look at the resume to say what has the guy done to get the highest — basically running the largest organization in the world, that's in question.

GIGOT: You think it's a question. But Dan's point is it's probably not good politics because there are these broader issues and this will seem to be a distraction. What do you think about that point?

O'GRADY: I don't think right now the American people really are focused on who Bill Ayers is. They are really focused on the problems in the economy. I think John McCain is going to have a tough time in the next three weeks convincing people that he is going to be able to turn the economy around if he keeps talking the way he is. I think he has to change his — change the conversation.

And I think one of the things he could do is talk more about the U.S. dollar because that's where I think people are hurting. From 2002 until now, the U.S. dollar has plummeted against other currencies and that — and the living standards of Americans are down. That's when they roll the dice. That's why they're willing to roll the dice for Obama.

GIGOT: When you say, Dan, talk about Obama's policy, you mean his tax policy, you mean his health care policy. And the fact that he is the most liberal presidential candidate since George McGovern in 1972.

HENNINGER: Right. The American people simply do not elect extremely liberal presidential candidates. They did not elect McGovern, Dukakis, Mondale, Kerry or Gore. They always elect Democrats who are centrists, like Carter or Clinton. Obama does have a record on unions, trade, spending that McCain could describe. And you cannot compete with Barack Obama's persona. You cannot defeat it.

GIGOT: That is the weakness of the strategy. Because when the people see Obama during the debates, they see somebody who is cool, he dodges the punches, slides, slips. They don't see somebody who looks threatening or radical.

It's difficult to make this a character debate, James, at least in my view, between Obama and McCain.

FREEMAN: That's right. And I also think on the key economic issue, McCain has got to draw the contrast. He actually has a lot of good growth economic tax cuts in his plan, but we haven't heard about it for months. I think getting back to that and not talking about housing where he's managed to get to the left of Barack Obama, but he's talking about competitive tax rates for business. A cell phone tax cut probably would appeal to people.

GIGOT: A cell phone tax cut though, do you think that's going to carry the day with the markets down 7,000?

FREEMAN: It's part of a package including maintaining those low rates. I think everyone would like them in this environment.

GIGOT: OK, James, thanks.

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.

Item one, Ford puts Big Brother in the backseat of your teenager's car. Dan, that sounds ominous.

HENNINGER: Yes, this is both a hit and a miss. Ford Motor Company is going to introduce a car key, a key that parents can program to limit the speed when their kids are driving the car. The limit will be 80 mph. They'll be able to limit the volume on the radio. And there will be constant beepers if you don't have your seat belt on. There will be chimes at 45, 55 and 65 mph. I'm surprised they don't have your mother's voice in there saying, "Mary, I told you not to drive over 50 mph."


GIGOT: Can you block your teenager's music channel choice, too?


HENNINGER: Now listen, personally, I think that all teenagers come with kind of a personal quota of craziness and it's going to come out one way or another. If you suppress it here, it will erupt somewhere else. If Ford has figured out a way to come up with a key that controls teenage behavior, this will be the greatest hit in the history of the world.

GIGOT: All right.

Next, one positive effect from Hurricane Ike. Mary, hit to a hurricane?

O'GRADY: Maybe a half hit to the hurricane. But finally the Cuban government has started leasing land to private farmers. This is something Raul Castro mentioned when he came into power earlier in the year, but he hadn't done it until the hurricane came along and Cuba is suffering from food shortages. So they finally decided, gee, maybe actually giving land to farmers and allowing them to have a little bit of profit in what they grow would be a good way to stimulate production. So this week they leased 865 acres. They have requests for over 150,000 acres.

But it's a start. And in a time when everybody's down on capitalism, it's good to see that the Cubans are sort of embracing it.

GIGOT: Private property, what a discovery.


All right, finally, actor Clint Eastwood makes his choice for vice president clear — James?

FREEMAN: Yes, we have a verdict on the winner of the vice presidential debate. Clint Eastwood was speaking at an event hosted by "New Yorker" magazine. Needless to say, lots of Obama fans in the crowd. Clint said that it was clear one of the candidates was more truthful. Apparently, the crowd thought he was clearly referring to Biden and started cheering. And then he said, "She was great."


Silence descended on the room, according to the "New York Post" report. But I think it's clear, Clint has rendered his verdict and doggone it, she was excellent.


GIGOT: So is Sarah Palin, quickly, James, has she been an asset to the campaign?

FREEMAN: Absolutely. Not just energizing the base, as people expected, but I think still adds an up side in swing states. I think her family speaks to Middle America. And Ohio, Pennsylvania, they're still in play.

GIGOT: All right, thanks, James.

And 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 to all of you for watching.

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

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