This is a rush transcript from "The Journal Editorial Report," October 4, 2008. This copy may not be in its final form and may be updated.

PAUL GIGOT, HOST: Coming up next on "The Journal Editorial Report," the big bailout after a wild week on Wall Street and in Washington. Congress finally passes a $700 billion rescue. Will it work?

And the great debate. She has had a rough few weeks in the press, so how did Sarah Palin do against Joe Biden?

Plus, a look at the presidential race from here as we head into the final month. Polls have turned against John McCain. What does he need to do to make a comeback? "The Journal Editorial Report" begins right now.

Welcome to "The Journal Editorial Report." I'm Paul Gigot. After a tumultuous week on Wall Street and in Washington, the House and Senate finally passed $700 billion financial rescue that many hope will forestall a complete collapse of the U.S. credit system. But the passage came as job loss numbers for September showed their biggest increase in five years, a sign that the economy may be headed toward recession.

Joining the panel this week, Wall Street Journal columnist and deputy editor Dan Henninger, editorial board member Jason Riley, Washington columnist Kim Strassel, and senior economics writer Steve Moore.

Dan, what a week. From Monday to Friday, 32 Democrats and 25 Republicans in the House switched their vote to pass this rescue after the Senate also did it with a much bigger majority. Did they do the right thing?

DANIEL HENNINGER, DEPUTY EDITOR, WALL STREET JOURNAL: Well, Paul, we will discuss this bill in a second. But let's try to understand what was at stake. The United States financial system was in a state of classic panic. They were locking up. And Treasury saw about a week ago Thursday that banks were beginning to stop lending to anyone. It didn't matter whether you were a Fortune 500 company or the local auto dealer.

GIGOT: The kind of classic bank run in the sense of the '30s. We saw people lining up to get their money out. This was with their PCs.

HENNINGER: And this is the lubricant to the American economy, these kinds of loans. Over the past three weeks, the volume of short-term loans dropped $208 billion. That is unprecedented. What they needed to do was to restore confidence to the financial system so that that lending would restart. And that is essentially what they've done with this bill.

GIGOT: Steve, do you think this is going to work?

STEPHEN MOORE, SR. ECONOMICS WRITER, WALL STREET JOURNAL: I sure hope so. There's a lot of money at stake. You've seen the movie "Independence Day" when the alien ships come down and they drop the nuclear bomb on it, if this nuclear bomb doesn't work, what do you do next?

But I think it's going to put liquidity into the system. I think Dan is right. It probably had to be done. I was a very reluctant supporter of this. The money will start flowing, as I understand it, Paul, some time in the next couple of months. So this is going to happen quickly.

It will hopefully provide that lubricant to the economy that Dan was talking about so that banks start functioning again. Because without a banking system, the whole economy freezes up.

JASON RILEY, EDITORIAL BOARD, WALL STREET JOURNAL: Well, I was not a fan of the bailout package. And I think there were good principled reasons to oppose this. You're right, the credit markets were frozen. But one reason they might have been frozen is because Wall Street was holding out for a bailout. And I think one alternative to the bailout might have been to make it clear to Wall Street that the government was not going to come to the rescue.

GIGOT: Yes, but you make it sound like Wall Street is four guys in a room sitting down and saying, oh, we're not going to — let's see if we can get taxpayer money. This was the whole credit system. And this was global.

The European banks are in trouble. You had banks in the West Coast, banks all over the place not lending to one of you (ph). It runs on money market funds. This was a much bigger phenomenon than Wall Street.

And by the way, Wall Street doesn't really even exist anymore as we used to know it, because all the investment banks are either now turning into commercial banks or they're out of business.

RILEY: Some of the big lenders weren't lending. When that happens in a free market economy and there's profit motive there, other lenders will step in ultimately. It might not happen overnight, and it might be an ugly process, but more lenders will come in, other lenders will come in and fill that void.

We don't know if this would have ever happened because we have a bailout now. But I think there were principled reasons for not being in favor of the government going out and buying bad loans, which even the experts on Wall Street don't know how to price.

GIGOT: Well, there is no market in those loans now. And the idea is that you have created — you have some auctions and you create a market that doesn't exist. What, Kim Strassel, do you think changed those 58 votes? Because a lot of people on Monday, a lot more people on Monday agreed with Jason than agreed with him on Friday. What was the change?

KIMBERLY STRASSEL, WASHINGTON COLUMNIST, WALL STREET JOURNAL: Well, they saw what happened this week. I mean, and not just the stock market plunge that came that day, but all the news and news as well that we haven't mentioned.

You know, California, Arnold Schwarzenegger sending a letter to the federal government saying, I may need some money here, a loan, because I'm not being — I'm not able to access the credit markets, and California is going to run out of dollars.

What happened is that these guys looked and said, as dangerous as this vote is for me, I think it might be more dangerous if I sit back and don't do anything and the stock market tanks and the economy comes to a halt right before an election.

So some of these guys stood up and felt that this was the less of two evils, at least from a political sense, and probably some of them actually did change their mind and thought that this was necessary to do something for the economy. They saw the effects of not acting on Monday.


MOORE: Well, you know, if you look at the people who voted against it both the first time and the second time, they tended to be the biggest allies of us on The Wall Street Journal editorial page. People like — you know, people like Jeff Flake of Arizona and people like Jeb Hensarling of Texas who has been strong free market advocates.

And I've talked to Jeb Hensarling after the vote, and he said, this is one of the toughest things. You know, he said, I was voting against my friend Paul Ryan. So this really divided the Republicans much more than it did the Democrats, who were pretty much universally for this.

And I think the Republicans — my big fear is the Republicans are going to pay a very high price for this in November.

GIGOT: Steven, I think the Republicans are paying a high price for it already because of the fiasco on Monday. If you look at the.

STRASSEL: And I think that they would have paid a higher price if everything went bad.

GIGOT: This is really hurting — this fiasco on Monday really hurt the Republican brand for economic management.

RILEY: Well, I think one thing we can agree on is that the bill we got on Friday was worse than the one we got on Monday.

GIGOT: Sure.

RILEY: Thanks in part to it leaving more people on the hook — or more of the public on the hook for more money, the bill we have on Friday.

GIGOT: We should have passed it on Monday.

RILEY: Exactly.


GIGOT: Go ahead, Dan.

HENNINGER: Nor should we delude ourselves into thinking that waving this bill into existence is going to solve the problem. We shall find out. I mean, there are stresses showing up in Europe right now, South Korea is beginning to feel the effects of the credit crunch. This is spreading around the world. So they're going to have a big, big job unwinding these assets.

GIGOT: This is not the silver bullet that's going to solve everything. It is one tool that the Treasury now has. But the whole banking system is going to have to be recapitalized. And it's going to take some public capital. And this is one tool for doing that, and some private capital. All right. Thank you all. We have to go.

When we come back, Sarah Palin's national debate debut after a rough few weeks in the press. How did she do against Joe Biden? Our panel weighs in after the break.



GIGOT: Alaska Governor Sarah Palin made her national debate debut Thursday against Joe Biden using her folksy charm to take on the seasoned senator.


GOV. SARAH PALIN, VICE PRESIDENTIAL CANDIDATE: Say it ain't so, Joe. There you go, again, pointing backwards again, though, you prefaced your whole comment with the Bush administration. Now doggone it, let's look ahead and tell Americans what we have to plan to do for them in the future.


GIGOT: Kim, there was real concern before this debate among a lot of people, particularly Republicans that maybe Sarah Palin had become a liability for John McCain and the Republican ticket because of her performance, and really mediocre performance and to terrible performance with that interview with Katie Couric of CBS. Did this put those fears to rest?

STRASSEL: I think it did. She had a couple of things she needed to do here. She needed to show she could hold her own against Joe Biden. She needed to use that small town charm to connect with average Americans. And she needed to reassure those that in the base that were beginning to wonder.

I think she did all of those things really very well and exceeded expectations. My question, my concern is, did she miss a bigger opportunity which was to stand up there and give her running mate, John McCain, a bit of a helping hand on the big issue like the economy.

I wasn't sure that she was as coherent as she might have been and really used that time to his advantage.

GIGOT: But, Kim, why should she be coherent on the economy if the whole McCain campaign message isn't coherent on the economy?

STRASSEL: Because somebody has to be in the McCain campaign.

GIGOT: I mean, it's asking a little much of her to do that when John McCain won't, right, Steve?

MOORE: This is the big problem I think for both McCain and Palin. Look, I thought Sarah Palin won this debate because she won the likeability factor. And that is so important in these debates, Paul, is, you know, people watched them — people like me, I watched it with my wife. She's not political. And when it was over, she just said, I love that woman.

And I think that's the reaction of so many people who watch this. You know, and it's so true. If you look — go back to the Gore/Bush debate, the professionals said Gore won, but people just didn't like gore. And I think that, you know, Biden comes across as a kind of know-it-all, the guy you hated in high school. So I give Sarah Palin the victory here.

RILEY: Well, the Palin pick was always a Hail Mary pass by John McCain. We knew that. And in Minnesota a month ago she came out, she gave a wonderful speech in her debut, but in the interim, as you mentioned, she hasn't dropped the ball, but she has fumbled it a little bit.

And in the interim, however, the media narrative has been that John McCain went with a lightweight, someone who was out of her depth, uncertain foreign policy issues because of the experience factor.

I don't know if she did enough in this debate to reverse that media narrative, and that's what she needed to do.

GIGOT: Yes, I don't know, Dan, what do you think?

HENNINGER: Well, I think Palin is a weapon. There is no question about it. She has real political skills. Let's not forget that in Alaska to become governor, she had to defeat first Frank Murkowski, who had been a three-term senator and then governor. And then she defeated a very popular former Democratic governor named Tony Knowles.

This woman has something going for her. I agree with Kim, though, the McCain camp has to arm her, they have give her something to run with into Ohio, into Pennsylvania.

GIGOT: Didn't they also make a mistake in keeping her so closed, not letting her do more interviews? Because when you only dribble her out for an interview every 10 days, what it means is that that interview takes on so much more importance. And one mistake or two mistakes and people — suddenly it has a viral effect on the Web and everybody is saying she's not ready for prime time.

She has made two appearances now where everything was on the line, the acceptance speech and this debate, and she did very well.

HENNINGER: And the two times she has appeared live, she has just knocked out the lights. These other areas where she has had problems is when she's going to do an interview seat where they can edit it and dribble it out over three days. That has been very destructive.

STRASSEL: You know, Paul, to make the comparison, as you said, Joe Biden is out there every day. He makes five or 10 mistakes a day. The press barely notices it anymore. You know, but when you have her in two interviews, it's high expectation.

GIGOT: What about Joe Biden's, Jason, seeing that his one job was to just hammer, hammer, hammer McCain and say, Bush two — Bush three, Bush three, Bush three?

RILEY: Yes. I don't — to the extent that anyone was watching Joe Biden in this.


RILEY: . that was one of the problems, all of the focus was on Sarah Palin. Joe is Joe. I mean, he's the Biden we've seen forever in the Senate. And so the focus really was on Palin. And I guess I was a little disappointed in her responses to some of Biden's attacks on McCain.

But, again, the source material here is the McCain campaign. And she was hitting — constantly hitting these populist notes that I found a little grating. The greed and corruption on Wall Street and so forth, when she talked about schools, we need more education spending, we need to pay teachers more and so forth.

GIGOT: You don't think there's greed and destruction on Wall Street, Jason? Are you saying that?

RILEY: There is. But I think that she should have focused on the regulatory issues affecting what happened on Wall Street, particularly Fannie Mae and Freddie Mac. And speaking about that as much more of a source of the problems we have today than greed and corruption on Wall Street.

GIGOT: And if you're worried about business corruption, you had better go with the Democrats because they're a lot better practitioners at the class war game.

All right. Thanks, everybody. When we come back, with the V.P. debate behind us, a look at the presidential race as it stands now. With a month to go, the troubled economy takes its toll on John McCain. What does he need to do to fight back? Our panel has some advice after the break.


GIGOT: As the presidential campaign heads into its final month, the country's continuing economic woes seem to be taking a toll on Republican John McCain. The latest Real Clear Politics national polling average has Barack Obama leading by almost 6 percentage points. And the news isn't much better in some key battleground states.

Jason, three weeks ago this race seemed to be tied. Now, you saw it, 6 points behind and a big gap. What happened?

RILEY: The economy happened, which is what occurs in so many elections that we've seen in the past. And the polls clearly show that Obama has an advantage when it comes to the economy. And that's what has been front and center for the past three weeks.

Also I think what has happened is the Palin bump has subsided somewhat. And it show that you can only hide the lack of enthusiasm for the person at the top of the ticket for so long. Palin gave.

GIGOT: But does this debate performance by Palin though change that dynamic and bring that enthusiasm back for Republicans?

RILEY: It might stop the bleeding a little bit, but I'm not sure it can put McCain back to the offensive where he needs to be.

GIGOT: Steve, one thing that I think happened, John McCain, when he made — he suspended his campaign to go down and work on this rescue bill, and he made himself hostage to Congress, both to Nancy Pelosi and to the fickle people within his own party in the House of Representatives. That's a very dangerous game, and ultimately when they defeated it Monday I think it hurt McCain.

MOORE: Yes, it was a dismal week for Republicans. I'm amazed, Paul, that the Republicans are only down and McCain is only down by 6 points. They should be down by 10 or 12 points. The problem for the McCain campaign right now is that John McCain doesn't have a good story line on the economy.

He has to explain what he's going to do differently, how his tax plan is going to work. And the one thing that Obama keeps getting away with in these debates is talking about the fact that he's going to cut taxes for 95 percent of Americans.

One of the things John McCain should say is, well, how can you do that when 35 percent of Americans don't pay any income tax to begin with?

GIGOT: Yes, it's almost political malpractice, Dan, that they have not had a response to that. Obama made that claim in his acceptance speech, the McCain speech was a week later, he never even answered and he hasn't answered it since.

HENNINGER: Yes, I mean, they've been lying back. And I think that what they also have to do is get on the attack. I mean, one thing Barack Obama proved to Hillary Clinton is that once he gets a lead, it's really hard to catch him.

But the thing that Hillary proved in Texas, Ohio, and Pennsylvania, is that he is vulnerable. He's vulnerable because he is the most liberal candidate who has run for the Democrat nomination since George McGovern. And that is identifiable. And I think if McCain goes out there and describes the tax policy, the unions, the trade policy, he'll at least put in front of voters what they're voting for.

GIGOT: But, Kim, Obama seems to be almost coasting in. He didn't really commit himself very much on the bailout debate. He kind of stood back and said, well, let's just pass something. Had some very generic comments. Let the Democrats on the Hill take all the heat and do the negotiating.

And he just seems to be saying, I'm going to win this election because people are upset with the economy. And as long as we can associate McCain with Bush, I don't really need to take any risks.

STRASSEL: And by the way, he's right. Look, the thing with Barack Obama, he did what he should have done politically in this, whether or not it was right on principle, in that he knows that the Democrats have an advantage with voters on the economy. He sat back and watched John McCain run his head into the wall several times.


STRASSEL: And why would he interfere in that process when it could only help him. So he has been handling this while looking calm. Now the question will be, what happens afterward with any of the — the McCain campaign is clearly hoping this will subside from the headlines and we go back to other issues. But the economy is still going to matter from now until November.

GIGOT: Do you agree with Dan that McCain now has to go on and try to define Obama on issues like taxes and unions and basically say he's too left for the American public?

RILEY: He does. And he has to hope it's not too little too late. I'm surprised that some of these hot button issues have subsided like the Jeremiah Wright issue, the Bill Ayers issue. It's just amazing to me that no one's talking about this anymore.

But, yes, he does have to go out there and explain it. This is a guy that we don't know a lot about and who has an experience issue that he has to deal with.

GIGOT: Steve, the public.


MOORE: One of the was that he could do that, Paul, take the offensive on the economy, is really go after Obama and say, look, how do you create jobs in an economy when jobs are going to be the big issue when you're raising taxes on corporations, raising taxes on small businesses?

I don't care what Joe Biden said the other night, 90 — about 70 percent of these people who are going to pay higher taxes under Obama are small business owners. And he has to make that connection. The corporate bashing and business bashing is something that hurts American workers, doesn't help them.

GIGOT: The other argument that McCain has to make is that if Obama wins, then Democrats are going to run the whole government and there will be no restraint on the Democratic Congress. Is that a potent argument, Steve?

MOORE: It is. And traditionally, if you look at what happened in Bill Clinton's first two years, disaster for the economy. Same thing when Jimmy Carter ran the White House.

GIGOT: All right. Steve, 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 worst of the week. And this week a trio of misses. The first goes to Senate Majority Leader Harry Reid — Dan.

HENNINGER: Yes, Senator Reid, God bless him. Here we have the American financial system in flames, right? And Washington is wrestling with it. Majority Leader Reid goes into a press conference on Wednesday and has something to say to the press which is this, one of the individuals in our caucus today was talking about a major insurance company, a major insurance company, one with a name that everyone recognizes that is on the verge of going bankrupt.

Well, guess what happened the next morning? The entire insurance industry's shares cratered. What happened is that normal middle class people, moms and pops, widows and orphans who held shares in all of these household name insurance companies, lost, well, because of Senator Reid.

So you've got to ask yourself, who's in charge here? This is Washington, they've come to help or they've destroy your assets.

GIGOT: Yes, we're here to help you — all right. The next miss goes to New York Mayor Michael Bloomberg — Jason.

RILEY: Yes. The mayor of New York City wants to revise the city's term limits law so that he can seek a third term as mayor. This is despite the fact that New Yorkers have voted twice in overwhelming margins for two- term limits on their mayors. Like many politicians, Mr. Bloomberg thinks he is indispensable.

But is he not indispensable any more than Rudy Giuliani was indispensable after 9/11 when there was talk of extending his term. The voters have spoken and Mr. Bloomberg should respect their wishes.

GIGOT: And finally a miss to California Governor Arnold Schwarzenegger —Steve.

MOORE: Paul, I bet you thought that bailout mania was over. No, it's just beginning. And this week Arnold Schwarzenegger came to Washington with his tin cup asking the federal government for $7 billion because California can't pay its bills. This is a state with the highest taxes in the country. This is a state with a runaway budget.

My theory, Paul, no bailouts for California. California needs more money, I know where they can get it. They can start drilling for oil offshore.

GIGOT: Especially off Santa Barbara, right?

MOORE: There you go.

GIGOT: Jason, if Michael Bloomberg runs, will he win a third term?

RILEY: Easily.


GIGOT: Well, he is popular. All right. Jason, thanks.

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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