This is a rush transcript from "Special Report With Bret Baier," November 26, 2010. This copy may not be in its final form and may be updated.


GEN. WALTER SHARP, U.S. FORCES SOUTH KOREA COMMANDER: What I've seen here physically, that North Korea attacked this island, which is a clear violation of the armistice agreement. We at the United Nations Command will investigate this completely and call on North Korea to stop any future attacks.


SHANNON BREAM, GUEST HOST: That's General Walter Sharp, the top U.S. commander in the region there as things heat up on the Korean peninsula. Let's bring in our panel to talk about it, Fred Barnes, executive editor of The Weekly Standard, Nia-Malika Henderson of The Washington Post, and syndicated columnist Charles Krauthammer. Welcome to you all.

All right, Fred, what do you make of the latest escalation today?

FRED BARNES, EXECUTIVE EDITOR, THE WEEKLY STANDARD: We are back in what we've seen before, this whole cycle. I call it the appeasement cycle. We have seen it over and over again, where there is a provocation by the North Koreans and then there is a response by the U.S. and others. And it's usually we're going to hold talks.

And out of the talks, there is an agreement where great rewards go to the North Koreans, whether it's food, money, arms, whatever. And then they violate it. And then you start again, this whole appeasement cycle. It obviously has not worked to in any way to restrain North Koreans.

The other strategy that hasn't worked is the one to wait for China to act. And China never helps. I think President Obama has finally realized that China is not going to help. I don't think China will do anything short of stopping the North Koreans from actually starting a full- scale war on the Korean peninsula. So the only thing left to do is to get tougher. This time, I don't think it's the U.S., but the South Koreans do want to get tougher because they don't have the same peacenik government that they used to have a couple years ago, and they're not sending aid. And their response here is we'll change the rules of engagement here and get tougher. We're not just going to respond in kind when the North Koreans do this. We can do some other things. They fired their defense minister. And the public in South Korea is outraged in a way they haven't been before. It's kind of pathetic that the U.S. has to look to South Korea to lead the way, but I think we're stuck with that.

BREAM: We know today Nia that Secretary of State Hillary Clinton had a conversation with their prime minister there, the defense minister in South Korea -- excuse me, with China. How do you think that conversation went today, because as Fred mentioned, they are a key player to us getting this under control?

NIA-MALIKA HENDERSON, WASHINGTON POST: I imagine it went like the other conversations in trying to draw China in and really crack down on South Korea -- North Korea. They are the ones that prop up this nation and the only ones that can stop them. They don't have a strategic interest in doing so.

I think the next phase of this we'll see is Sunday when there is more activity out in the Yellow Sea, near China and South Korea and North Korea and we'll see what the North Koreans do. This is obviously a provocation. They see it that way. And it's also somewhat of a provocation to China as well.

BREAM: Well, Charles, how does this work? You have two kids in the back seat, fighting, he poked me first, he poked me first. I mean, who instigates -- it now ratchets up. And the situation -- we have got the exercises coming on Sunday. Those were preplanned. Do we toughen them up or back off? What do we do?

CHARLES KRAUTHAMMER, SYNDICATED COLUMNIST: If one of the kids has a nuclear weapon, you have to be pretty careful how you deal with it. I think what we have done is correct. We sent a carrier group, which is a way to sending a message. Incidentally, it gives us a couple of days because it takes a while to get there. It's always helpful to work out our strategy and coordinate with the South Koreans.

I think what is really revealing here is the Chinese response. It was -- I think there is finally a realization here that our strategic interests do not coincide. We have pretended for a decade-and-a-half that we and the Chinese have a common interest here. We are on the six party talks. The Chinese have not condemned the shelling. This is the first attack on civilians since the armistice 57 years ago. This is a major escalation. The Chinese have not issued a word of condemnation. Their only warning was not to Pyongyang. It was to us over these exercises in the Yellow Sea. They had warned us about the exercises when the South Korean ship was sunk and they said they didn't want us in the Yellow Sea. We knuckled under and held the exercises on the other side of the peninsula in the Sea of Japan.

But this time we're not knuckling under and we're conducting the exercises on the Chinese side in the Yellow Sea, which I think is good. The only influence is not on Pyongyang here. We have zero. It is only on China. I don't think we'll change the Chinese policy unless we threaten them with something a lot worse, namely a nuclear Japan or a nuclear South Korea. But short of that, which we're not going to do right now, all we can do is defy China, hold the exercises, support the South Koreans, and make it clear that any further escalation is going to meet serious response, particularly from the South Korean military.

BREAM: And Fred --

BARNES: The Chinese are perfectly happy to see the North Koreans cause problems for the U.S. They enjoy that. They don't have to worry about a nuclear North Korea because they know the North Koreans aren't going to shoot nuclear weapons at China, for heaven's sakes. The only people threatened by it are Japan, South Korea, and even the U.S.

BREAM: Yes, how much of a factor do you think the civilians in South Korea will be?

HENDERSON: I think, as Fred said, they're obviously -- they looked at President Lee who campaigned on taking a tougher stance in North Korea. So they're very much looking for him to deliver on that. At the same time, they obviously don't want war.

To be honest, there does seem to be even some talk that South Korea will roll things back and go back to this, more giving carrots to North Korea rather than the stick. We'll have to see.

BREAM: How does everyone think that the responses have been from the South Koreans and from the U.S.? We have seen personnel change in South Korea. And some think the U.S. has been toothless in this. Charles?

KRAUTHAMMER: It started out badly when our ambassador, our special negotiator with North Korea Steve Bosworth in China said the day of the shelling we should return to talks.

The good news is that he hasn't been heard or seen since, probably in the witness protection program. And the word out of the White House has not called for a return to talks, which would be the worst possible response. It would be a reward for an act of aggression.

So I think that is positive. The carrier group is positive. And I think holding the exercises in the Yellow Sea in defiance of China is also a positive step.

BREAM: Yes or no, does everybody think the exercises go off as planned?

BARNES: Yes. And I agree with what Charles said, but I'd also emphasize again, the South Korea government is tougher than the last one.

BREAWM: We'll see on Sunday.

HENDERSON: Yes. I think they'll go forward. We'll have to see what happens.

BREAM: Panel, thank you very much.


BREAM: All right, we've already done the winner of the online viewer's choice for the Friday lightning round. That was North Korea. So we'll start this segment with the online viewers' very close second choice, the lame duck. Let's get to it with the panel.

Charles, do they get anything done when Congress comes back on Monday?

KRAUTHAMMER: Well, they're going to have to. The first week was wasted on stuff that everybody knew was not going to be enacted, the Dream Act, which is immigration reform. We've talked about "Don't Ask, Don't Tell." That's not going to be enacted. It's a way for Democrats to make a show of appeasing their own constituencies.

They have to act on a continuing resolution, i.e., keeping the government going otherwise it shuts down in ten days. And they have to do or they should act on tax cuts, on the Bush tax rate because otherwise, January the first taxes will go up for everybody in the middle of a recession.

BREAM: Yes, and Nia, we understand that Senate Majority Leader Harry Reid looks like he will set up two different votes on the tax cut.

HENDERSON: Right. He's going to set up one vote for the middle class tax cuts and one for extending all of them. It's a political ploy to force Republicans' hands to voting for one and not the other.

But I mean I think Charles is exactly right. A lot of these bills that are coming up are really show more than substance, not a lot of chances for things to get done. I think, I mean they'll reach some compromise with the Bush tax cuts, some sort of temporary extension of all of them, because I think it will be a tough vote for either of them to get a vote to raise taxes at this time.

BREAM: And really, Fred, with the numbers changing in January, this is their best shot at "Don't Ask, Don't Tell," and the Dream Act. You know, how --

BARNES: They should have enacted them earlier. They had a whole two years to do all these things. They -- whose fall is it? It's Harry Reid's fault, the majority leader. He left them all for this lame duck session.

And I'd like to see leadership from President Obama right now, particularly on the tax issue. I agree they'll get some kind of extension on all the tax cuts and do a continuing resolution, and that's it.

BREAM: All right. We'll watch and see as it unfolds.

All right, Charles, shopping -- it's black Friday. The economy, it looks like we'll do a little better that year.

KRAUTHAMMER: Well, we have contradictory impulses here. On one hand we want spending to boost consumption and help our economy. On the other hand, the reason of the collapse of our financial system essentially is that we're a country that hasn't been saving for about 30 years. And as a result of our difficulties, now our saving rate is up to about six percent.

I mean, I'm not so sure we really want a return to hyper consumerism, because the only way out in the long run is to rebalance our balance sheets, personal and corporate, and for that you've got to save and not spend every penny you still have.

BREAM: But, Nia, retailers certainly hoping for something different.

HENDERSON: Yes, they are. I think they are estimating there is a 2.3 percent spending increase over last year, something like $474 billion, a ridiculous amount of money considering that 16 million folks are still out of work.

And there is a contradictory impulse. One the one hand folks are looking to save and tighten the budget but on the other hand they want to get out there and get these savings. I think the estimate is 60 million people went out shopping today. And that might mean the ratings today aren't as high as we want, but people are out there spending.

BREAM: You got to get your holiday stuff --

BARNES: I'm for hyper-consumerism, I just don't participate in it. But I'm glad people are out there spending. The economy is getting a little better. I still think we're not going to see jobs created much. I blame Democrats and President Obama for not doing the right things to stir the economy. This will help a little, but only a little.

BREAM: How much do you think the White House is counting on good numbers? The administration as a whole point to them when the season is over to say maybe we're turning around.

BARNES: Remember recovery summer? They were counting on that. Now what they are waiting on, recovery Christmas season? I don't know, but I'm not expecting dramatically better numbers.

BREAM: Will you guys spend more or less this year?


HENDERSON: Probably, more.

KRAUTHAMMER: I have no idea.

BREAM: Think about what you're getting me.

KRAUTHAMMER I don't do any of it.

BREAM: Let's get to number three, and this is about the Tea Party. And we're not just talking about the Tea Party in the U.S., but Tea Party abroad.

But something interesting that Carl Cameron had in his reporting today there are so many factions of the Tea Party and so many different groups that use the title. There are some are now saying let's start to bring in the social issues, things like immigration, abortion, other things. Others say no, we should just stick to the fiscal.

Here is one Tea Party representative's take on bringing in the social issues.


JUDSON PHILLIPS, TEA PARTY NATION FOUNDER: Do we run a little risk we may alienate a few people? Yes, we do. But I think by and large we bring in more people to this movement that we alienate by doing this.


BREAM: Nia, do you think that's true? If you get in the social stuff aside from the lower government spending, cutting taxes, what does it do to the movement?

HENDERSON: They very much steered clear of this in the midterms. I think the test for the Tea Party to grow up, they have to go out and expand this base. And its' hard to see how that happens if they roll in these issues that quite frankly didn't work very well for Republicans in past elections.

BREAM: All right, Fred, plus or minus?

BARNES: I think the issues are the ones that have exactly worked, and they're big enough to take care of themselves, whether it's abortion or gay marriage, whatever it is. So they don't need the Tea Party to bring them in.

The Tea Party is here. They have an incredibly important role in America because they complained about spending, about taxes, about the deficit, debt, the health care plan. If they focus on those, that's the right thing to do. But the issues are out there anyway, all the social issues.

BREAM: All right. Charles, how about the fact that the U.K. has got tea parties? It seems sort of contradictory because the Tea Party was not a plus for them back --


BREAM: -- in its original Tea Party.

KRAUTHAMMER: As I recall, the red coats were on the receiving end of the first Tea Party. And also what is odd about it is that the U.K. actually has a government that has proposed remarkable draconian spending cuts, so it's sort of enacting what the party here was invented to actually encourage.

So it's sort of already succeeded in Britain, unless it's rescinded. I think they are actually going to go ahead with it. So I think it's inspired a lot of people across the globe. But the U.K. is the one place it's not needed.

I would just add on the social issues, it would be fatal error if they expanded away from or distracted from their emphasis on the size of government. It's the size of government, it's debt, it's spending that galvanized the movement and attracted all the independents that resulted in the election results in November. It would be a terrible mistake if they strayed from their original principles.

BREAM: Well that movement still coalescing. We'll see what they do in 2012. Thank you, panel.

Content and Programming Copyright 2010 Fox News Network, LLC. ALL RIGHTS RESERVED. Copyright 2010 CQ-Roll Call, Inc. All materials herein are protected by United States copyright law and may not be reproduced, distributed, transmitted, displayed, published or broadcast without the prior written permission of CQ-Roll Call. You may not alter or remove any trademark, copyright or other notice from copies of the content