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With a flamboyant downgrade of the outlook for economic growth, jobs, and profits, Wednesday’s 280 point Dow plunge to launch the so-called June stock swoon is a warning shot across the bow.

The Dow tanked alongside a batch of dismal economic data. The ISM manufacturing index, ADP employment, Case-Shiller home prices, and consumer confidence are all pointing to 2 percent growth or less, rather than the kind of 5 percent growth we ought to be getting coming out of a deep recession.

The economy now looks like a Government Motors engine that’s stalling out. Or perhaps, with energy and food inflation, and housing deflation at the same time, the economy is acting like a pinball machine on permanent tilt.

Read my full column here.

This recent video from my friend Dan Mitchell explains how a “premium-support” plan would solve Medicare’s fiscal crisis and improve the overall health-care system. This voucher-based system also would protect seniors from bureaucratic rationing.

House Majority Leader Eric Cantor turned the policy temperature down on austerity this week by rolling out a strong economic-growth agenda. Headlined by a 25 percent top tax rate for individuals and business, the Cantor package includes regulatory relief, free trade, and patent protection for entrepreneurs. It’s job creation and the economy, stupid.

Read my full column here.

For years I worked with Mark Haines on Squawk Box, usually Friday mornings as a guest or guest host. We go back a long way. He called me Lawrence of America. The nickname stuck. I  loved it.

Like everyone, I was stunned to hear the unspeakably bad news this morning. Nick Dunn called me. I was in a Washington, D.C., hotel room. A lonely place to get some very bad news. 

Mark’s untimely passing hits me close. We are about the same age, and of course it gets you to thinking. We had a long history. On Squawk and elsewhere we talked and talked, and argued and debated, and agreed and disagreed. I preferred it when we agreed, mostly because he was such a formidable opponent when we were on opposite sides.   

Mark had a very keen intellect.  He had that penetrating, lawyer-like skill of cutting right to the chase in dissecting an argument. But you know what? Down though the years I loved it, and I loved him. 

As a novice learning to become a broadcaster I studied Mark’s formidable skills — his insightful and penetrating questions, his ability to hone in and really nail someone. He taught me a lot, and I am still learning. 

One afternoon a bunch of months ago he came by my desk in the newsroom to chat. I hadn’t seen him in a while. It must have been around Christmas, actually, because we were talking about the Washington debate over extending tax cuts and stopping a humongous and unnecessary spending bill. 

He said, “Kudlow, what do you think here?” I said, “Mark, buddy, kill the spending, keep the tax cuts.” 

Mark broke out laughing and said, “You know what, I agree with you!”  I said, “Oh my gosh.” It was a classic Mark Haines moment. 

During Squawk Box breaks we’d go off the set to talk about sports, politics, that morning’s show. I learned he was a great family man because that’s what he talked about all the time. I think Mark had great values. And I think down through all those years he taught me an awful lot about all kinds of good stuff. 

As I flew home today from Washington, back to New York, I thought about my pal Mark Haines, about all those episodes and conversations and all our ups and downs as two opinionated guys. 

I wanted to write this because emotionally I needed to get it out.  I don’t think it’s really adequate, but it’s what’s rattling around in my head. 

Like I said, Mark Haines was a remarkable man. He passed way too soon. Already I miss him, enormously. To his family, my sincerest condolences and my prayers. To Mark, may you rest in peace.

I had the wonderful opportunity yesterday to sit down with Kansas City Fed President Thomas Hoenig. He’s a straight-shooting, hard-money, free market central banker — an unusual combination. Hoenig is also a man of integrity who dissents from the FOMC so clearly in his disagreement with ultra-easy money. Incidentally, he believes that Too-Big-To-Fail and “Bailout Nation” are moving America away from free market capitalism.

Here’s the transcript of the interview:

KUDLOW: Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, welcome to THE KUDLOW REPORT, sir.

HOENIG: Glad to be with you.

KUDLOW: All right. Thank you, Tom. Let me just begin with this. In the last five months–not the last month or two, but five months, the Consumer

Price Index has increased at 5.8 percent at an annual rate. First, do you think this is transitory?

HOENIG: Well, I think part of it, perhaps. The–some of the energy prices will move up and down and may come down a little bit, but I think the fundamentals are that, with the extended accommodative monetary policy, with zero interest rates and with QE2 in place, that the natural movement will be for prices to systematically rise over time. It will take some time, but it will occur, unless, of course, we remove a combination fairly rapidly at some point.

KUDLOW: Well, you anticipated my follow-up because I wanted to ask if you thought QE2 was to blame. The money supply creating, the negative real interest rates and the depreciation of the dollar all seems to have really have occurred during the QE2 period and this remarkable inflation jump. Is QE2 to blame for this?

HOENIG: I wouldn’t necessarily say it’s just QE2. I think it’s–we’ve been in recovery. We’re ending our second year in recovery. We’ve had a zero interest rate during that period. And we’ve actually eased into a recovery. And the effects are, when you increase monetary combination on a sustained basis, you tend to move prices up a little in the economy.

KUDLOW: Isn’t that unusual? Just that point, you ease–the Fed eased into recovery. Isn’t that unusual?

HOENIG: Well, in some sense it isn’t since that’s exactly what we did in 2003, 2004. And we did it in the ’70s. We had a decade where real interest rates were negative for about 40 percent of the time. And the decade of the

2000s, real interest rates were negative about 40 percent of the time. And I think you have a consequence from that.

KUDLOW: Hm.

HOENIG: And in the ’70s it was inflation, and in the last decade it was asset inflation, if you will, or bubbles. And so those are things that follow an extended period of highly…(unintelligible)…monetary policy, and we need to be aware of that.

KUDLOW: As Mr. Bernanke has said, QE2 is scheduled to end in June on schedule. I wanted to ask you, is QE3 dead before arrival?

#more#HOENIG: Well, obviously I don’t know the answer to that. I would not support it, as everyone knows. I didn’t support QE2. I don’t–I don’t — I can’t speak for other members, so that’s the only answer I can give you there. I wouldn’t support it, but I’m only–I’m a nonvoting member besides so we don’t–I don’t know the answer.

KUDLOW: So I wanted to go to that, you didn’t support it. You’ve been a consistent dissenter from the QE2 and earlier policies of the Fed.

HOENIG: Correct.

KUDLOW: And there used to be a tradition of the Fed of this kind of public, outspoken dissent. But for some reason you’ve been the lonely hawk, and may going many years or not–why is this? Why don’t more board members and reserve bank presidents openly dissent from the Fed’s policies?

HOENIG: Hard question to answer. I think that if you have a different view, you should express it and vote accordingly. I think there is concern that you do want to give a very, shall we say, systematic kind of “this is the committee working together” response to the public. I think it’s more important to show the public that policy is made around different views and that majority does carry the day, but that dissenting views are welcome and are valued.

KUDLOW: It’s not unpatriotic to dissent.

HOENIG: Hardly at all. I think it’s–I think frankly it’s harmful, if you do disagree, not to dissent because then you are being quiet when you shouldn’t, and you can get some pretty bad outcomes that way.

KUDLOW: So a lot of your written dissents and your speeches have said your–have stated your opposition to boom-and-bust monetary policies…

HOENIG: Right.

KUDLOW: …and you’ve noted that you get bad recessions, high unemployment. And I wanted to ask you, regarding the current situation, is this story going to end badly with another deep recession and another high unemployment rate, which could do even more damage to this country?

HOENIG: Well, again, I don’t know the answer to that. I do know that when you have extended periods of highly accommodative policy that go on indefinitely and you take the ability to judge risk out of the market, that you create the conditions, if you will, for bad outcomes…

KUDLOW: Hm.

HOENIG: …for either inflation or for other imbalances that occur in your economy that then have to be corrected later. And we need to be mindful of that. We need to learn from history. We need to learn from the experiences that we’ve had in the past and calibrate our policies accordingly.

KUDLOW: Let’s talk about calibration. You would have the Fed do what right now?

HOENIG: Well, the first thing is I’d let the world know we are changing the direction…

KUDLOW: Yeah.

HOENIG: …because I don’t–I don’t necessarily believe in surprising people either, to a point. Then I would take the language away of highly accommodative for an extended period. Then I would move as rapidly as I–as I judge the economy could towards a 1 percent Fed funds rate, if you will, so that–and then I’d stop, and I’d see how the economy is doing, I’d watch it carefully as we move forward. And then I’d see if I could normalize it further, depending off that–how things go. Because monetary policy, it — my whole view is monetary policy can’t solve everyone’s problems, and the sooner that the economy and those who are involved in it understand that, the more they’ll look to other types of actions like, `How do we support our manufacturing sector? How do we deal with our federal debt?’ and so forth and focus on…

KUDLOW: I want to get to fiscal. I want to get to fiscal in a minute.

HOENIG: Sure. Sure.

KUDLOW: But let me just follow up. What is your economic outlook currently? You had a very soft first quarter, 1.8 percent real GDP.

HOENIG: Right.

KUDLOW: Some sluggish numbers coming out on manufacturing for the first time, of course high gasoline prices seem to have cut back on consumer spending.

HOENIG: Sure.

KUDLOW: How do you see the outlook?

HOENIG: I see that we will continue to have a modest recovery. We’ve had one so far, and I see it going forward because the–it’s pretty striking, if you think about it, that the United States is going through a deleveraging–that is we had such a huge carry of debt that consumers, businesses, government had to–has to take on that the fact that we were able to have that debt in place, go through this terrible crisis and still have growth going forward as we deleverage is a testament to the strength of the US economy. A modest recovery, I wish it were rapid, but the fact that we have these terrible imbalances to get back in, shall we say, equilibrium, that’s pretty striking how resilient this economy of ours is.

KUDLOW: If fiscal policy in Washington had slashed business tax rates or even other tax rates, would that have obviated the need for the Fed to go into QE2?

HOENIG: Again, that’s a counterfactual–it’s a guess. I do think that we do–I do think we have a fiscal crisis that’s long term, and I hope both parties and the administration deal with that. The sooner, the better. Because I do know, as I’ve said before in speeches, that if you don’t, then people tend, as real interest rates rise, with the carrying of the debt and the continued recovery and those real interests rise, people look to the Fed to bring interest rates down. And that’s what you–that’s when you begin to monetize debt, and that is a very damaging long-term effect.

KUDLOW: So OK, just to stay with that for a second. If the unthinkable happens and the debt ceiling is not increased on time and the US somehow defaults on an interest payment on treasuries or some such thing, how’s that affect the Federal Reserve?

HOENIG: Well, I think that, only to the extent that it has other effects on the real economy would that put more pressure on us relative to what are you going to do about this? They tend to always turn to the Fed. And I think that would put us in a difficult situation of choice. Do we try and accommodate a carry out some way through monetary policy, the — counteract those effects?

KUDLOW: Hm.

HOENIG: And I worry about that.

KUDLOW: It’s like all scenarios potentially lead to more pump priming by the Fed.

HOENIG: It tends to, when people are, if–shall we say, if they’re used to that…

KUDLOW: Hm.

HOENIG: …if they’ve become accustomed to that, they then turn to that automatically. And I think that can lead to some pretty difficult outcomes, especially in the long term. Because in the long term, you can then create a new set of new imbalances or you tend to change the inflation, expectations going forward, neither of which is good for the US economy, I believe.

KUDLOW: The former chairman of the Kansas City Fed’s board, it’s Herman Cain…

HOENIG: Mm-hmm.

KUDLOW: …businessman Herman Cain, who’s now running for president in the Republican primary, but I interviewed him a week or two ago. He would like to see the dollar re-linked to gold as per the old Bretton Woods arrangement, which died out in the early 1970s. Other people have made a similar call. Lot of people are worried about the fate of the dollar continuing to decline. Do you have a thought on re-linking the dollar to gold?

HOENIG: I’ve been asked that many times and I’ve said for some time that, you know, a gold standard is a legitimate monetary system. We’ve had it for generations. I don’t think it’s going to solve our problems because really the value of the dollar is a consequensive policy. Whether you’re under the gold standard and you have the Depression or prior to that, or whether you’re…(unintelligible). If you have good policy–fiscal, monetary industrial policy in the sense of a market economy, you will–your dollar will reflect that in equilibrium. If you have bad policy, fiscal, whatever, your dollar will reflect that. It’s a reflection of our national policy.

KUDLOW: But how much of it can be laid at the Fed’s doorstep? I mean, the dollar may be stabilizing right now. There is some speculation about that in the markets. I know you don’t care to speculate. But at the end of the day, it’s the Fed who controls the money supply, and the Fed who controls the interest rate, and to some extent the real interest rate. How much responsibility for the dollar is held by the Fed?

HOENIG: Well, the dollar is, like I said, affected certainly by monetary policy, but it’s also affected by fiscal policy. It’s also affected by what’s going on in Europe or Asia. That’s why I think trying to pin it on one particular thing is unwise. I think you have to look at the broad policy issues. Because let’s say you went to a gold standard and that’s a discipline you have. But if you don’t engage in good fiscal, monetary, other policies, you’re still going to have issues, whether it’s the gold standard or fiat system.

KUDLOW: You’re sort of the quintessential grassroots Fed guy out there in

Kansas City. You’re going to retire this October, be–I guess 20 years to the day.

HOENIG: Right.

KUDLOW: Which is a great thing, great service. But let me ask you, you actually spoke to a tea party group, let’s see, last September…

HOENIG: Right.

KUDLOW: …outside of Kansas City. So far as I know, you’re the only Fed representative to do so.

HOENIG: Right.

KUDLOW: So what did they tell you when you spoke to them? What did they tell you about life in general and the economy? What did they say about the Federal Reserve?

HOENIG: Well, I think the–the group that I met with were middle-class

America.

KUDLOW: Mm-hmm.

HOENIG: They were concerned about the debt. They were concerned about monetary policy and about where interest rates were, what it meant long term, how it affected inflation, the things that you and I are concerned with. Their questions were good. They were sensible. You had, you know, you have one or two people that kind of ask an off the wall questions, but I’ve gotten that in the most sophisticated crowds. I was very impressed with middle America and with Heartland’s representation of mid-America.

KUDLOW: Were they angry or are they still angry at things like banks in New York that are too big to fail, for example, or bailout nation that seems — I don’t know that community banks are getting bailed out. That’s not what the evidence shows.

HOENIG: Right.

KUDLOW: The New York banks get bailed out. What’s your own feeling about too big to fail and the bailouts?

HOENIG: Well, I would first of all say the individuals in the Midwest are no different than the individuals on the East or West Coast about the fact that the largest banks were bailed out and other banks were not. They’re trying to understand why that is and why that’s always so necessary and what the disadvantage to that is to their community banks. That’s a very reasonable reaction to that. So I think that’s the most important message that we have from that.

Now my own view is that this is not capitalism. What we’ve done is not capital–this is not free markets.

KUDLOW: Mm-hmm.

HOENIG: This is an instance where you’ve given certain protections to financial institutions, and with those protections I think you have to recognize that you’ve incented them to engage in increasingly risk activities to return their–increase their return on equity. Why not? Your cost to capital is less, you’ve got protection of the safety net, you can get liquidity. And then when you do, in fact, take on too much risk and complicated transactions and derivatives and trading activities, you turn and say, `Well, I know we took our profits, but now we’re going to walk away and it’s yours,’ that’s hardly capitalism and that has to change. And I think we’re a long ways from changing that.

KUDLOW: Right. So we haven’t really fixed that. And so we’re moving…

HOENIG: Yeah. I don’t think…

KUDLOW: We’re moving away from free market capitalism.

HOENIG: Right. We’re moving further away from free market capitalism, because now our banks, the largest banks, are 20 percent larger than they were before the start of this crisis. We do have a new law, Dodd-Frank, that is supposed to enhance supervision. We’ve seen that before. Enhanced capital standards. Before we had the safety net capital standards were much higher in commercial banks in the Americas. And we have a resolution process that I can–experience suggests that on a Friday evening, and you have until Sunday to solve your problem, that you’re probably going to bail them out before you resolve them.

KUDLOW: Right.

HOENIG: And I think that’s not capitalism.

KUDLOW: All right. Thomas Hoenig of the Kansas City Fed, you’ve given us a lot to chew on. Thank you very much, sir. Appreciate it.

HOENIG: Glad to be with you, Larry. Thank you.

Yesterday I spoke with Sen. Tom Coburn (R., Okla.), the terribly smart, tough, fiscal conservative, about why he walked out of the “Gang of Six” bipartisan budget talks. In short, what he told me was that the “Gang of Six” budget-cutting package was simply too small. It was not up to the needs of a brewing financial crisis. He highlighted Medicare, but he also called for a pro-growth tax reform package, plus a regulatory rollback to promote economic growth.

Here’s the interview:

KUDLOW: All right, so let me ask you the obvious question. Why specifically did you walk out of the Gang of Six bipartisan budget talks in the Senate?

COBURN: Well, specifically, I didn’t think we were making the progress in the areas that we needed to make the progress, and I had a frank conversation with Dick Durbin, and he thought we were at impasse, I agreed that we were in impasse, and his words to me is, `We’ve been at impasse for a couple of weeks.’ And so what I’ve done is take a sabbatical, and I’m going to produce a document that’s going to show you how we can get out of the trouble, and then we’ll let everything else be compared to that. My staff and I have the capability of doing that. And we’ll just see. And I’m not abandoning it completely, but whatever we come up with has to solve the very real problems. And it can’t be light, it’s got to recognize that entitlements are a significant portion of our problem, and if you don’t really address those, you haven’t fixed the problem.

KUDLOW: So let me ask you, you’re using the word sabbatical. What would it take to get you back in? Is it an issue of Medicare? Are there other entitlements? Are there tax issues? What would get you to go back into the talks? Because, potentially, that was a very powerful group.

COBURN: Well, I–first of all, I don’t want to debate that through the media, and I’ll be talking with those guys intermittently from time to time. What has to happen is we have to have a viable solution to our problems, and if I think that’s achievable I’ll be the first one back there. But it’s not fair to them. Each one of these individuals worked in great faith. But look, realistically we cannot solve our problems unless we generate growth in this country, and the only way we’re going to do that is back off on a lot of regulations, create a tax structure that’s going to cause investment to happen, and get dynamic returns that actually increase the revenues coming to the federal government. We can’t do it all by eliminating large sections and duplicate spending and waste. We can do a large portion of it, but there has to be some revenue component to that, and anybody that says that’s not the case, I think they’re just wrong and they’re not thinking about the long-term health of our country.

KUDLOW: What’s the revenue component? I mean, is it tax earmarks or tax expenditures? Would that be accompanied by lower tax rates? Tell me about the revenue part.

#more#COBURN: Absolutely. You know, the idea would be as you start eliminating a lot of the tax credits that cause people to invest not in the best performance for capital, but in the best tax policy and lower rates, effectively, so that we have a lower rate and a more vibrant economy that people will go out and say, `Hey, this rate’s really low, I think I’ll put the risk of that because if I make the million bucks on it, the rate’s only this.’ So changing behavior. But it–with that has to come some regulation reform because one of the things I find all throughout Oklahoma and the places I travel is this government is killing the people’s desire to put a risk in terms of capital into new business propositions because the regulations are so heavy and onerous and don’t make any sense.

KUDLOW: You’re being just a little vague, senator, which is not like you down through the years.

COBURN: Well, I…

KUDLOW: Is it–is it Medicare that you want? It had been reported that you were unhappy with the volume of reduction in Medicare spending. Would that get you back in?

COBURN: Larry, we cannot fix the problems in front of us–let me say it this way. There should not be any confusion on the part of American citizens. Medicare will not be what it is today in five years. It is a physical impossibility for it to be that. We cannot do it. So for us to continue to lie to the American people and say Medicare isn’t going to have to change and Social Security isn’t going to have to change and Medicaid isn’t–that’s untruthful. And it delays the time at which we make the critical decisions. So I don’t want to negotiate with those guys. It’s not fair to them. There’s–entitlement spending is the big problem, and we have to address it to a greater extent than they were willing to do it at this time. And if they’re not willing to do it, I don’t see how we solve the problems.

KUDLOW: I interviewed Nancy Pelosi a few days ago, and she said everything is on the table in these budget talks. Now, she’s a House member, obviously, not a senator, but I wanted to ask you is Paul Ryan’s Medicare reform plan, his so-called voucher plan, is that on the table?

COBURN: Well, it should be. The fact is, is, you know, either a means testing or–you know, our problem in health care isn’t that we don’t have a Medicare program, the problem is health care costs too much, and the reason it costs too much is 1 in $3 that we spend on it doesn’t help anybody. And we think we can bureaucratically address that rather than let market forces address that. And so anything that goes away from market forces is going to end up costing health care more, anything that goes towards it’s going to cost it less. And that’s what Paul–why Paul Ryan’s plan is so good. Paul’s Ryan plan puts it back in your control and makes sure those that need the most help from the federal government in terms of their health care in their older years are going to get it. And those that need the least are going to get less. And also uses market forces to help allocate those resources and diminish overutilization of the health care dollar.

KUDLOW: So it’s been reported that Senator Conrad, who is one of your group, wants to raise the top marginal tax rate significantly. Was that also a deal breaker for you?

COBURN: No, it was never even brought up in our…

KUDLOW: All right, so let you ask me generally, step back for a minute. You’ve got these two talks. You’ve got budget talks and you’ve got the debt ceiling talks. If we don’t get a strong 2012 budget out 10 years, or, alternatively, and/or if we don’t get a debt ceiling deal that has serious budget reductions and budget caps and reforms, I just want to ask you, is this country going into a financial crisis? We’re going to be downgraded again by S&P and the other rating agencies? Is all–are we staring a crisis right here in the summer months?

COBURN: As Erskine Bowles says, this is the most predictable crisis this country’s ever faced. As a matter of fact, I think you could make the case right now in a lawsuit against Moody’s and S&P for why they haven’t already downgraded us, looking at the financial situation. I know that’s going to make Geithner go nuts, but the fact is look at the realistic. You have politics being played ahead of the good best interests of the country. I mean, this shouldn’t be a Democrat/Republican thing. It–our problems are urgent, they’re immediate and they’re severe, and lack of action’s going to make the difficulty in solving them even greater.

KUDLOW: All right. You were very critical–last one–in your Washington Post op-ed piece. You were very critical of the Senate Democratic leadership. Let me just ask you, in your judgment, are they serious about getting a budget deal and a debt ceiling deal?

COBURN: Well, I can’t answer that. What I know is that they’re not serious about having the problem debated on the floor of the US Senate. I mean, when we can’t even get a vote to get rid of 3 to $5 billion worth of ethanol subsidies that the people wanting the subsidies don’t want–in other words, they’ve sent us a letter, `Please quit sending us this $5 billion a year,’ and we can’t even get a vote on that on the Senate floor? Tell me whether they’re serious about solving our problem. That’s the–actually now, if it were to happen today, it’d be about 4 billion we would save this year. That’s 4 billion we wouldn’t be borrowing, and that’s not even on the floor? And that’s a bipartisan bill that we probably have 67, 68 votes for? Tell me, are they more interested in protecting people from having to make tough votes, or are they more interested in what’s in the long-term best interests of the country?

KUDLOW: What’s your answer to that, senator?

COBURN: Well, I think that the lack of action speaks to the answer.

KUDLOW: All right, we’re going to leave it there. Sen.Tom Coburn of Oklahoma, not exactly out of the budget talks, but not in them, either. Thank you, sir. We appreciate it.

As the IMF gets ready to choose a successor to Dominique Strauss-Kahn, who resigned following his arrest on charges that he sexually assaulted and raped a hotel housekeeper, it would be a good thing to step back for a moment and ask: What should the IMF do?

More specifically, can the IMF possibly morph itself into a worldwide force for economic growth instead of Bailout Nation?

Read my full column here.

Earlier today, I had the pleasure of interviewing Nancy Pelosi, the former Speaker and current House Democratic leader. We’ve had several interviews down through the years. And while we’ve disagreed on a number of topics, I do have enormous personal respect for her. She’s a very strong lady with a subtle sense of humor. Always good copy. And while she still wants to tax oil companies, she did have some interesting thoughts regarding pro-growth tax reform and spending and entitlement cuts. Of course, trust but verify. But I thoroughly enjoyed this interview.

Kudlow: Speaker Pelosi, former Speaker Pelosi, House Democratic Leader. Thank you. Welcome back to CNBC.

Rep. Pelosi: Thank you. My pleasure to be here.

Kudlow: Before we get to the debt in the financial issues I want to get your reaction to this Dominique Strauss-Kahn, IMF chief, brought in on these awful sexual charges. Your first thought.

Rep. Pelosi: My first thought is it gives new definition to moral hazard. What a shame at a time when the IMG is center stage for what’s happening in Europe and Greece etcetera and the world, financially, to have this disruption. I know they moved immediately to put someone in his place. But really so unfortunate. I feel very sad for the victim.

Kudlow: Absolutely. On the policy stuff, it seems to me  both Democrats and Republicans down through the years have been very critical of the IMF. United States owns about 18% and, therefore, we are a party to the various bailouts of Greece and so forth. What are you hearing or what are we likely to hear? Is there going to be an oppose IMF reform movement? Are people going to get up on the floor and propose legislation?

#more#Rep. Pelosi: I don’t know if that will happen in relationship to this particular incident. But, for a long time now, we have been saying we should subject any number of our international financial institutions, whether it’s a world bank or the regional development banks or the IMF, to scrutiny as to what their original purpose was, how they are fulfilling it and let’s just take a look because there are important resources put there and we want to make sure we’re getting the best for it and how we choose the leadership and the rest. I think it all should be subjective.

Kudlow: I mean, the guy, I don’t know if he paid it, but the guy stayed in a $3,000 hotel room. I don’t know if the IMF paid it. I don’t know if he paid it. We’re going to find that out. But what I do know is that the IMF is into Greece for $20 billion and as I said about 18% of that is the United States because we own that amount in terms of capital. What about bailout nation in Europe? Is there going to be another wave of opposition to that coming from Washington?

Rep. Pelosi: Again, it is always about the scrutiny we subject it to. Certainly, there will be questions about how the funds are put to use. We’ve been through this. Whether it was in our own hemisphere, whether it was in Asia, as you know, the moral hazard issues that were brought up at that time. But again I think we have to take a step back and say what was the original purpose of the International Monetary Fund?  What is the original purpose of these regional development banks? Are they serving that purpose and many of us who have been involved for a long time, the creation in fact of the European Bank for reconstruction and development and also on the committees that make our contribution to it, look to all these things in terms of what is it that, what is your purpose, are you fulfilling it, there’s a better way to do this. Should there be better coordination and let’s — there are many people who have been very concerned about how these international development banks or the monetary fund do their job.

Kudlow: Okay, the $14.3 trillion debt ceiling expires today. The crunch may not come for a couple of months, but today is the expiration date. First let me ask you, Speaker Boehner last week put down a marker. He said first of all no tax increases, and second of all, the most interesting part for negotiations, any dollar increase in the debt ceiling must be accompanied by a dollar reduction in spending. Your reaction to Boehner?

Rep. Pelosi: Well what I would like to know is did he say then that the Republicans would vote for avoiding the default that would follow if we don’t move forward? Here’s the thing. Here’s the thing we all know we must reduce the deficit. We’ve been in this place before. And we have reduced the deficit and came on to the path of surplus coming out of the Clinton years. We are back into the deficit mode we must reduce the deficit. We must put everything on the table. We’ve got to look at cuts for sure. Waste, fraud, abuse, duplication, you name it.

Kudlow: Is Medicare on the table? Entitlements?

Rep. Pelosi: Yes. I think Medicare is on the table. I think Social Security is probably on its own table because we have to have it be solvent. It has to be strong and we have to deal with it in its own mechanism in my view, but the fact is all the money is fungible and at the end of the day, the deficit must be reduced.

Kudlow: Is there Democratic support in the House and/or Senate for these budget cuts? I’ve not heard it so far.

Rep. Pelosi: There’s a reality check on even about what Speaker Boehner says. First of all, you are never going to reduce the deficit if you’re just looking at this much of the budget. There aren’t enough cuts you can make to reduce the deficit. You also must look for growth. Are these cuts harmful to our growth? Whether it’s cuts in education, R&D, clean energy jobs for the future. You also have to look at the tax code. You have to make it simpler and fairer. The Bowles Simpson commission has suggested we close what they call revenue loopholes.

Kudlow: Deductions.

Rep. Pelosi: Revenue earmarks.

Kudlow: Expenditures, actually.

Rep. Pelosi: Well they call them tax expenditures, earmarks, whatever you call it, how you shut them down so you can lower the corporate rate. How you shutdown a lot of these things so you so you can lower the rates for individuals.

Kudlow: Do you favor the business tax overhaul. You favor that?

Rep. Pelosi: For a long time. I don’t know that we can do it in time — in the 11 weeks that remain to do this — default, voiding default, but I do know this. We must do the simplification and fairness. We have to put it all on the table, see what works. And that’s why we are in New York here this week, meeting with some of my colleagues, two who are at present at the table on negotiations — Peter Clyburn and our lead on the budget, Chris Van Hollen, to talk to some of the leaders in finance here about putting ideology and all the rest of this aside. What will work to reduce the deficit?

Kudlow: Is there any doubt in your mind that we would risk defaulting on U.S. Treasuries?

Rep. Pelosi: Well, the fact is, the Republicans have the majority in the House of Representatives. That’s why I led with the question. It’s interesting what the speaker has said, but did he also say and if that happens, his members will vote for it because we went through this on TARP. The Democrats worked with President Bush on TARP.  It was his solution by and large to a problem that happened in his administration and while he was still president.  We voted to protect the taxpayer. We changed the bill in that way. We had very a hard time getting Republican votes for the TARP.

Kudlow: Let me switch gears to the price of gasoline, maybe on the way to $5 in some states. Over $4 in California — way over $4. President Obama, over the weekend in his speech, opened up a lot of potential for more drilling. In Alaska, off the Atlantic coast of the US. off the gulf. Do you agree on this? Is this something we ought to be doing to relieve gas prices?

Rep. Pelosi: Well, this is what we’ve been for for a long time. He’s articulating it. We have to have increased domestic production of everything. We have many other resources in addition to oil. But there are many people, many places, where drilling is not only allowed, it is permitted. That is permits have been written for it, but the oil companies aren’t drilling there. So we’re saying, use it or lose it. You have permits, drill.

Kudlow: The government put a halt though on all the licenses and permits. As I understand the president is saying he is going to speed it up again.

Rep. Pelosi: No, well, there is some off shore but there have been permits that have been given even there, but what we have to do is maximize what our domestic production is. We have to also invest in renewable energy sources. We have to recognize the role in transition that natural gas will play. I surprised you a couple of years ago when I said nuclear as an alternative.

Kudlow: You’re surprising me now.

Rep. Pelosi: Well it isn’t that you’re used to how other people characterize our position. Thank you for asking what it is.

Kudlow: Yes, of course.

Rep. Pelosi: Because again, we will transition to a place we must reduce our dependence on foreign oil. That’s a national security issue.

Kudlow: Why the insistence, this is the part I don’t get. Okay, you’re going to open up drilling, you are going to open up production. We are all agreed on that it seems to be you’re saying the same thing. And yet we want to tax the oil companies. The government wants to tax oil companies.

Rep. Pelosi: Definitely.

Kudlow: It’s like saying, okay, produce more, but we’re going to raise your taxes so you can’t produce more. Is there an inconsistency there?

Rep. Pelosi: No

Kudlow: Have I fingered a contradiction?

Rep. Pelosi: No you haven’t. In fact, thank you for calling it to everyone’s attention once again. In our proposals to reduce the deficit, one of the provisions is to remove the subsidies, the tax breaks for big oil. Over ten years, that will save about a little more than $30 billion. Almost the exact figure that the oil company, the big five, made in the first three months of this year. They’ll make a trillion dollars. They do not need these tax breaks.

Kudlow: But they’ll pay a 45% effective tax rate on that. And they get a lot of the same.

Rep. Pelosi: But this has nothing to do—

Kudlow: They’re deductions are the same as all the manufacturing companies.

Rep. Pelosi: So why do they need — yeah, they shouldn’t be. They shouldn’t be.

Kudlow: Why not?

Rep. Pelosi: Because manufacturing, you’re making something in America. They are — this was, shall we say, a special case for the oil companies to say we are actually not manufacturing companies, we wanted to be treated like that and that’s one to have things we want to reverse. But you can’t tell me that a company over ten years, the big five, they’re going to make a trillion dollars more than a trillion dollars over ten years. $32 billion.

Kudlow: But they’re paying huge taxes. Some of these guys pay more in taxes than they make in profits. I don’t want to defend the oil companies.

Rep. Pelosi: Nobody’s going to cry over the oil companies having $32 billion. My colleague, you won’t be amused by this, my colleague Ed Marky has an oil derrick drilling down on a Medicare card. We’re saying to seniors, you’re going to pay at least $6,000 more for fewer benefits so that we can to give tax cuts to big oil.

Kudlow: Let me just stay with that for a minute. Medicare, it’s going broke five years ahead of schedule because the economy’s been so lousy. But Medicare is broke now on a cash flow basis. The benefits exceed the revenues. Doesn’t this put the heat on to do something about Medicare? Right now in this deficit deal?

Rep. Pelosi: And one of the first things we should do is reverse is Medicare give away to the prescription industry done in the Bush years. This Congressional Budget Office says the three biggest contributors to the deficit are two unpaid wars, tax cuts for the wealthiest in America and Medicare Part B prescription drug bill. Which gives away the steward to the pharmaceutical industry when we should reverse that and should subject every federal dollar to the harshest scrutiny.

Kudlow: So it is on the table?

Rep. Pelosi: Definitely.

Kudlow: I wish we had more time. House Democratic leader, Nancy Pelosi. Thank you for coming back on CNBC.

Rep. Pelosi: My pleasure.

There’s a lot of turmoil in commodity and stock markets. Last week they both got slammed. On Monday and Tuesday they rallied back. And today they got slammed again.

The heart of this story is commodities, especially gold, silver, and oil. And the dollar.

And the heart of that story is a significant shift coming in monetary policy. Quantitative easing is going to end next month when quantitative neutrality begins. It’s a significant change by the Fed. And on a de facto basis, it represents a relative tightening.

Traders and investors are fighting like cats and dogs over the meaning of the Fed’s policy. They shouldn’t be. The handwriting is on the wall. And Bernanke’s less-accommodative stance — what I call quantitative neutrality — is bullish for the dollar, bearish for commodities, and is leading to a stock market sector rotation of the major groups, away from energy and raw materials and toward more defensive plays like health care, utilities, and consumer staples.

Now, strong profits provide a good backdrop for the change in Fed policy and the rotation shift in the stock market. Profits will cushion whatever stock corrections are out there.

And, let’s face it, with a zero interest-rate target and a negative real fed funds rate, the Fed will still be highly accommodative.

But my point is, going from quantitative easing to quantitative neutrality is a less-accommodative Fed. I think it puts a floor under the dollar and a ceiling over most commodities. And this change from the Fed is the main source of the volatility that we are witnessing.

House Republican Speaker John Boehner will give an important policy speech on the debt ceiling tonight at the Economics Club of New York. This is probably the key paragraph (taken from an advanced look at the speech): “So, let me be as clear as I can be. Without significant spending cuts and reforms to reduce our debt, there will be no debt-limit increase. And the cuts should be greater than the accompanying increase in debt authority the president has given. We should be talking about cuts of trillions, not just billions.”

In plain English, Mr. Boehner is making this suggestion: Let’s say there’s a $2 trillion debt-limit increase proposed by the administration. In that case, there would have to be $2 trillion-plus in spending cuts in order to get Republican support. This is tough stuff.

By the way, the speaker argues that only tax hikes are off the table in the debt-ceiling discussion. He also insists that any debt deal must “reform the budget process.” However, the speaker does not specify budget-process reform.

That’s where there’s gonna be a big debate between an administration that wants deficit targets and many Republicans who want spending caps as a share of GDP. The former could still allow for tax hikes in the form of eliminating deductions, credits, and other so-called tax expenditures. It would seem that Boehner rules this out, but he does not explicitly say so. A spending cap, however, whether as a share of GDP or as a targeted level of some sort, would rule out any tax increases at all.

The White House believes that eliminating tax expenditures is a spending cut through the tax code. But unless this is accompanied by tax-rate reductions, it’s an anti-growth tax hike.

In terms of the overall budget going beyond the debt ceiling, Boehner talks about pro-growth tax reform and overhauling the code. He even quotes President John F. Kennedy in 1962. Speaking before the Economics Club of New York, JFK talked about the need to lower tax rates in order to generate more revenues to balance the budget.

Kennedy believed in the supply-side incentive model, and Boehner does too. But tax reform will not be part of the debt-ceiling discussion. 

Finally, Boehner does state that “allowing America to default would be irresponsible. . . . But it would be more irresponsible to raise the debt ceiling without simultaneously taking dramatic steps to reduce spending and reform the budget process.”

So Speaker Boehner lays down the gauntlet. You want to raise the debt ceiling? Then we need an equal amount of spending cuts to go along with the higher borrowing authority. It looks like a good start. But of course, the Joe Biden talks will go on. We’ll see what happens next.

Are we headed for more political business as usual, where Republicans give up too much and get too little back in the debt-ceiling fight? Today’s papers are loaded with stories on the GOP giving up Paul Ryan’s Medicare-reform package. It’s being called “political reality.”

But let me ask this: Will they also give up any attempt to slow Medicare spending in the next couple of years, at least a down-payment on the budget deficit?

And I don’t see much talk anymore about tax reform as part of the new package. But the economy still needs an incentive jolt, which could be supplied at least by dropping the business tax rate.

Read my full column here.

In the aftermath of the killing of Osama bin Laden, I found myself agreeing with Charles Krauthammer that this was a global game-changer for American greatness. It was a gutsy and courageous decision by President Obama, brilliantly executed by the Navy SEALs and all the intelligence and support behind them.

As Krauthammer put it, after the tough slogs in Iraq and Afghanistan, this amounts to the restoration of unquestioned U.S. military dominance. America has not slipped, nor has our military reach and power.

But now I want to ask a more difficult question. With the killing of Osama, is the Afghan mission complete? Is now not the time to leave?

Read my full column here.

Stagflation officially returned today with a nasty GDP report that showed only 1.8 percent real growth, but 3.8 percent for the consumer spending deflator. It’s a mini version of the 1970s: low growth, higher inflation.

Looked at another way, rising inflation is coexisting with high, near-9 percent unemployment. Keynesians argue this can’t happen. They believe strong growth and too many people working leads to high inflation. But they were blown out of the water way back in the ’70s. And their view is hitting another pothole right now.

Supply-siders know that inflation is a monetary problem. Growth is caused by low tax-rate incentives. And the combination of flat tax rates and sound money could produce strong growth with no inflation. Think 1980s and 1990s.

But that’s not what we have now.

The dollar is falling relentlessly and gold is soaring. These market indicators are correctly predicting higher inflation as the Fed creates more excess money than anybody knows what to do with.

Fed head Ben Bernanke yesterday told us that low Q1 growth and high inflation will be “transitory.” How does he know this? Gold has gone up $40 since he started talking at his Wednesday press conference. It’s now at $1,536 an ounce. And the greenback keeps falling. Transitory? Actually, it looks like the whole QE2 pump-priming hasn’t stimulated economic growth, but has stimulated inflation.

And while the Bush tax cuts were extended last December, the sharp dollar decline and the resulting inflation have neutralized the positive effects of continued lower tax rates.

Once again I note the supply-side model is low tax rates and a stable dollar (backed by gold). But low tax rates and collapsing dollar is no good. Neither is overspending and over-borrowing. Nor is the new round of Obama-based tax-hike threats.

And the Treasury Department hasn’t lifted a finger to support the dollar. So the Bernanke Buck keeps tumbling. The White House won’t come to the table for a budget deal. And the economy is showing signs of stagflation.

Thank heavens for profits. Business productivity and profits in the private sector are the saving grace of this whole story. And let me dream that government will just leave businesses alone, and let them continue to support the economy and the stock market.

Because if stagflation is not transitory, businesses may have to tighten their belts once again.

Fed head Ben Bernanke, at his first-ever news conference on Wednesday, slammed the door shut on any new QE3 pump-priming. The $600 billion QE2 program to purchase bonds will end on target at the end of June, and that will be that. Mr. Bernanke also suggested that the Fed’s “extended period” for the near-zero federal funds target rate could end in a couple of meetings. Perhaps these announcements suggest a bit-less-easy monetary policy. Perhaps.

But Mr. Bernanke had no defense of the sinking dollar, or the inflation it brings, or the drop in middle-class living standards it causes. So it’s little surprise that gold prices surged $24 to $1,526 during the Fed chairman’s press conference. Silver jumped sharply as well. The markets clearly don’t see any King Dollar shift by the Fed.

Read my full column here.

When oil prices blew sky high in 2008, ExxonMobil paid $36.5 billion in income taxes, $34.5 billion in sales taxes, and $45 billion in other taxes, for a total of $116.2 billion in taxes paid and collected in 2008. That’s according to Mark Perry at the Carpe Diem blog.

Exxon will report earnings later this week. And while oil prices aren’t quite as high today as they were three years ago, it’s all a bit like 2008.

Read my full column here.

As I’ve written many times before, profits are the mother’s milk of stocks, and for that matter, business and the entire economy. And what we witnessed Wednesday in a big market rally was the return of earnings to the center stage.

Not just Intel’s numbers. And not just Apple after-the-bell. But industrial companies like Honeywell and United Technologies, and consumer companies as well. Ultimately, the recovery in profits over the past two years has been the backbone of the stock market’s big rise.

Here’s another point on profits: Don’t overlook the important role productivity plays in American business. It’s running a solid 2.5 percent, and is even higher in manufacturing and hard goods.

Look, American companies are very efficient. They are not in decline.

In fact, firms from all over the world are borrowing successful methods from American businesses and producing much more than folks think. And that’s why the global economy is stronger than many people probably think.

Of course, I’d like to give American businesses greater incentives to create more jobs here at home. But we are still — in the U.S. — the best in business in the world. Washington needs to keep it that way with more free-market policies, as opposed to suffocating tax and regulation policies.

Another point on the Wednesday rally is this business of the falling dollar. I hate it. I’m a King Dollar man. Link the greenback to gold.

But let me go out on a limb here: If we get a debt-ceiling increase with enforceable spending limits, and if the ultra-easy Bernanke Fed finally ends its pump-priming QE2 overprinting of new dollars, then we could see a dollar stabilization, or even a dollar rally, before long.

I hope so. I don’t want the dollar to lose its status as the world’s reserve currency.

So, might a stronger-than-expected dollar hurt stocks? In the short run, a brief correction is certainly possible. So, yes. But in the long run, healthy and profitable business is always the key to the stock market.

Profits matter.

Former Republican House Speaker and possible 2012 presidential hopeful Newt Gingrich was extremely outspoken during my CNBC interview with him last night on a host of key issues.

Some highlights:

– Gingrich was very critical of Federal Reserve Chairman Ben Bernanke, saying flatly that he would not reappoint him if he were to become president and that the Fed head has “done a terrible job.”

– He says to expect a decision as to whether he will run for president in the first week of May (May 2 or 3). He also said he’ll skip the exploratory-committee stage.

– On jobs, he said there will not be more employment opportunities until Washington adopts lower tax rates, regulatory reform, a focus on exports, and an “American energy” policy.

Treasury man Tim Geithner was optimistic today about getting a deal on the budget deficit and raising the debt ceiling. In particular, he was confident that in the next few months a compromise would lock in some clear targets for deficit reduction, with a credible enforcement mechanism. He believes the debt-ceiling increase would not be rejected by Congress and that the congressional deal would also put in place deficit targets.

But the problem with the deficit, and for that matter the growing debt, is that we spend too much and grow the economy too little.

Mr. Geithner may run up against a brick wall on deficit targets. The House Republicans want spending limitations, not deficit targets. It’s not a simple semantic issue. A so-called deficit target leaves open the probability of a big tax hike. In fact, as we know, the president’s budget has roughly $1.5 trillion in new taxes. That includes repealing the Bush tax cuts for the top 2 percent of earners and investors, as well as removing many of their tax deductions. As much as half the president’s deficit-reduction plan is absorbed by higher taxes.

This is why the GOP wants a spending-limitation mechanism. As a share of the economy, spending would be gradually ramped down from 25 percent to around 20 percent. Targets would be set each year. And if those targets are missed, budget -cutting penalties would kick in and the excess funds would be sequestered across the board. This is designed primarily for the non-entitlement  portion of the budget.

So you can see the difference in the two approaches. Nobody, myself included, wants to see any default on the servicing of U.S. debt, including interest-expense-payment default. But in the next few months there ought to be plenty of time to work out a compromise with new spending rules.

The differences here are of course philosophical — bigger government versus smaller government. But in economic terms, you could conceivably force a debt-reduction target in the short run that would raise taxes so much that economic growth would be damaged in the longer run. And that would create a bigger deficit.

On the other hand, lower spending as a share of GDP frees up resources to grow the private sector in the market economy. Couple that with pro-growth tax reform to flatten the rates and broaden the base, and you’ll get a more efficient economy with an even lower budget deficit.

Mr. Geithner, in good faith, are you listening?