This is a rush transcript from "Special Report," December 29, 2011. This copy may not be in its final form and may be updated.


VICTORIA NULAND, STATE DEPARTMENT SPOKESWOMAN: We've seen quite a bit of irrational behavior from Iran recently. One can only guess that the international sanctions, they are beginning to feel the pinch. And the ratcheting up of pressure particularly on their oil sector is pinching in a way that is causing them to lash out.


CHRIS WALLACE, GUEST HOST: The State Department spokeswoman explaining why she thinks Iran is about to close Strait of Hormuz through which 20 percent of the world's oil passes.

Before the break our question of the day asked you will Iran try to block Strait of Hormuz? And 42 percent say yes, 58 percent of you say no.

And we are back now with the panel. Steve, the Iranians today continued the war of words today. The deputy commander of Iran's Revolutionary Guard said the U.S. is in, quote, "no position to give Iran orders." And he said, quote, "Our response to threats is threats," which is diplomatic for "so is your momma."


So what's going on here?


I think these are just threats. I think we need to treat them seriously. Iran has been behaving irrationally, though I disagree with the State Department spokeswoman suggesting this irrational behavior is something new or maybe as a result of these sanctions. We have seen irrational behavior from Iran going back years, I would argue decades. But I mean certainly the fact they have been attacking our soldiers and American interests in Iraq and Afghanistan is not rational behavior and certainly has been provocative.

But will Iran ultimately move to close Strait of Hormuz? I don't think they probably will. You had an unnamed Iranian official tell the Washington Post yesterday that doing so would be economic suicide for Iran. I think what you are seeing is a regime doesn't know what to do next. The external pressure is having some effect. There's no question the sanctions have been having an effect. But at the same time they are seeking to expand their influence and making headway in places like Iraq and Afghanistan.

KIRSTEN POWERS, COLUMNIST, NEW YORK POST: This is not in their economic interest unless they don't want to sell more oil. It just doesn't seem like something they would do. I think there is a lot of posturing going on right now. I think the administration has indicated, Leon Panetta said they are willing to pretty much do whatever is needed if there is any kind of conflict, which implies that they would be willing to use military force if Iran decided to keep upping the ante. So I just think they are sort of playing a game of chicken.

WALLACE: And the question I guess, Charles, is what is the point. If they are raising this, are they trying to scare the Obama administration out of sanctioning the central bank and trying to get all our European allies to stop buying oil from Iran?

CHARLES KRAUTHAMMER, SYNDICATED COLUMNIST: If there is a logic here, that's exactly what the logic would be. But the means are very reckless, and I think Iran could be making a huge mistake here, because if the bluff is called, if it actually interrupts shipping in the Strait of Hormuz, the United States Navy will respond and reopen the straits and it could destroy the Iranian Navy.

But worse than that is this. There's been a huge debate of course in the U.S. and West, how to respond or whether they should attack the military facilities, nuclear facilities in Iran. And of course the risks are high and the reluctance is great in the United States because it would effectively start a war.

However, if the Iranians block an international strait, that's a breach of the most elementary rules of international law. It is an act of war. And if America reopens the strait and the Iranian Navy attacks America, that's essentially a declaration of war on us. And then the idea, the notion of declaring war is moot. And then it opens the chance that the United States might actually strike more widely than simply the Iranian Navy. And would hit other military facilities and possibly nuclear.

Saddam in 1991 was a year or two away from acquiring nuclear weapons, and he made a mistake of starting a war in Kuwait and as a result he never achieved that. If he waited two years he would have been nuclear. The Iranians are close. If they provoke a war here, they could be de-nuclearized and lose their entire strategic objective of becoming the hegemonic element in the region.

WALLACE: Steve, how confident are you that President Obama will sign and will enforce the law that Congress passed to sanction Iran's central bank and say in effect we don't feel we're dealing with it anyway, but not only won't we deal with them but we won't do any business with any trading partner or any country that does do business with them.

HAYES: Well I think it's likely he will eventually, reluctantly. He was the one who was originally pushing for it and asked the member of the Senate, both Democrats and Republicans, to get together and work out something that they could present to the White House. I think it would be difficult for him now, even though the White House is trying to tamp down those efforts, for him to walk away from them entirely.

WALLACE: Kirsten, we also have reported tonight that the U.S. announced a $29 billion arms deal with Saudi Arabia today, including the sail of 84 F-15s. Is that a completely separate matter, or do you think the U.S. is sending a message to Iran by arming one its counterweights in the region?

POWERS: They say it's a separate matter because this obviously takes time for these things to get done. But it is part of a broader strategy of trying to shore up Saudi Arabia, which is a more moderate regime, as a counterweight to Iran. I think it clearly is.

In terms of the sanctions, I think the issue for the administration is they are concerned about the economy, the global economy. So that would be the only reason Obama would be weighing against doing it. Tim Geithner has warned against this having a really adverse path in oil prices and hence the very fragile economy.

WALLACE: Less than a minute left. Charles, your thoughts on these Saudi arms sale?

KRAUTHAMMER: It's an old issue. When Reagan wanted to sell AWACS and there was a huge argument in the U.S. that it could be used against Israel or if regime changed and becomes radical one, ultimately against us. Nonetheless, the answer today as it was in Reagan's day is you want to. You have to arm the Saudis and the Gulf states who are allies because the threat is Iran. And Iran as the hegemon in the region would be a huge -- hugely dangerous to the United States and all its allies.

I just want to end by saying I am impressed by your Persian scholarship, because "so is your mama" is an ancient Iranian expression.

WALLACE: It comes from the Farsi.


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