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Kudlow’s Money Politics

Larry Kudlow’s daily web log of matters political and financial.

Tiny, Targeted, and Temporary



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Who would have really expected a 300-point stock market plunge on the day after President Obama’s so-called jobs speech?

Yes, worries over new fears of a Greek default ripped through the markets on Friday. As did fears of an al-Qaeda bombing plot on the tenth anniversary of 9/11. But you can’t help but think that at least some of the stock plunge is a signal of no economic confidence in Obama’s plan.

And for that matter, who really expected an unbelievably large $450 billion plan? That’s way more than 50 percent of the original $800 stimulus package in 2009 — which did not work. 

Read my full column here

An Interview with Mitt Romney



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Former Massachusetts governor Mitt Romney joined me in Las Vegas yesterday to discuss his new jobs and economic plan. He also shared some thoughts on his new Republican rival, Texas governor Rick Perry.

The video and full transcript follow below.

KUDLOW: North Las Vegas, an international truck dealership, we welcome Gov. Mitt Romney back to the show. Thank you very much.

Governor, zero jobs in August; but actually we haven’t created a net new jobin 10 years in this country. We may be on the front end of another recession. The stock market is plunging. OK. How can you fix that if you were elected president? What’s in your new plan?

ROMNEY: Well, you have to recognize that the world has changed, the economy has changed. We’re still following the old policy, the old strategy. It’s not working anymore. I joked that President Obama is following a pay phone strategy, we’re in a smartphone world. And so what we have to do is recognize that our companies are competing globally. We got to bring our employer tax rates down to be competitive. Bureaucracy regulation and government…

KUDLOW: Corporate. Corporate tax rates?

ROMNEY: Corporate tax rates. Bureaucracy regulation has to be modernized, streamlined. Government has to see itself as an ally of enterprise, not an opponent. We got to open up trade for American goods. The last two and half years, the president sat on his hands with regards to trade. We got to get markets open to American products, push them into those products. We got to clamp down on nations like China that are cheating, stealing our intellectual property. We got to get serious about energy. Look, we’re an energy rich nation. We’re acting like an energy poor nation. Let’s use the energy that we have. The list goes on.

I’ve got 40–excuse me, 59 items that we have to address to get America’s economy structured for the new economy, and that’s going to put Americans back to work.

KUDLOW: All right. A lot of meat on the bones, a lot of topics. Before I can throw–toss is back to Bill Griffith, my colleague, let me just ask you, on the campaign trail you took some flack for saying that corporations are people, but you are sticking to your guns. Can you tell us, we’re the business and financial station, why are corporations people? What are you thinking?

#more#ROMNEY: Well, I hope people understand that when you tax corporations that the concrete and the steel and the plastic don’t pay. People pay. And so when you tax corporations, either the employees are going to pay or the shareholders are going to pay, or the customers are going to pay. And so corporations are people. This old 1960s “We don’t like companies” shtick isn’t working anymore for President Obama. That’s just not the right course. We recognize we want small businesses, middle businesses, even big ones to grow and thrive and hire people. We like business. We’re not anti-business, we’re pro-business in this country.

KUDLOW: All right. Let me go and toss it over to my friend and colleague Bill Griffith up in Englewood Cliffs. Go ahead, Bill.

GRIFFITH:

Larry, thank you.

Governor Romney, we welcome you here. Let me ask you a more market oriented question, if I may. Right now Wall Street is focused sole–to a great degree on what’s going on in Europe as they wrangle with their debt crisis, and they’re doing a lot of soul searching over there on how to restructure the Eurozone to solve that crisis. One extreme is to create what the New York Times labeled the United States of Europe, a central authority. On the other end it would be just to disband the Eurozone altogether. In your view, what would be in the best interest of the US economy and our banking interests here and there for Europe to do? Should there be the central authority or should they disband the Eurozone, or is there something in between?

ROMNEY: Well, I got to be honest with you, it is tough enough to figure out what we have to do for America to continue to lead the world and to put our people back to work and to help the middle class, and so I’m not going to weigh in on what I think Europe has to do. But clearly, their problems are not just temporary, their problems are structural. You have nations that are cobbled together with one monetary policy, despite having very different fiscal policies, and that simply can’t go on on an indefinite basis. And either those nations on the periphery are going to have to adopt fiscal policies that are consistent with those of nations like France or Germany, or myou’re going to see continued stress in the euro. My own view is they have to recognize that, show the world that they do recognize that, that they’ve taken structural change. And on that basis, you’ll get investors to once again have some confidence in the future of the–of the European currency markets.

KUDLOW: All right, let me just pick up. I want to come back to the corporate. You’re going to drop the corporate rate to 25 percent, is that correct?

ROMNEY: That’s correct.

KUDLOW: And what will you do about taxing overseas profits of US companies? A lot of people think repatriation would give the whole economy a shot in the arm.

ROMNEY: Yeah. I’ve been talking about that for a long, long time. As you know, it makes absolutely no sense to say to a company, `If you’ve got money overseas and you keep it there and invest it there, you won’t pay US tax. But if you bring your money home and invest here and create jobs here, we’re going to tax you.’ It doesn’t–that just doesn’t make any sense at all. We got to go to a territorial tax system which says, `Look, you’re going to pay taxes in the territories where you’re competing. We want you to bring money home without having a repatriation tax.’ Let’s get the trillion dollars or so some estimate is parked outside the country back home, creating jobs here. My Democrats friends say, `Well, some companies will just send it out as dividends.’ It’s like, `Yeah.’ And that’ll go to shareholders, and it will go to pension funds and retirees.

KUDLOW: Just terrible things.

ROMNEY: It’s not all bad.

KUDLOW: That would be a terrible thing.

ROMNEY: And they’ll–and they’ll buy stuff. That’s a heck of a lot better than having the government take money from one person and give it to another…

KUDLOW: And it’ll pay for itself.

ROMNEY: Take the–yeah, it’ll pay for itself.

KUDLOW: Yeah. And then some. It’ll pay for itself.

ROMNEY: It’ll do more than pay for itself.

KUDLOW: But I was surprised in your documents that you’re not going for fundamental tax reform for the individual personal tax code. Explain to me. As I understand it, you want to keep the Bush tax cuts in place.

ROMNEY: Yeah. Yeah.

KUDLOW: But you don’t want, for example, Governor Huntsman, your friend and colleague and so forth, he wants to go, what, eight, 14 and 23, and he wants to eliminate most of the deductions. Why did you stay away from fundamental personal tax reform?

ROMNEY: Well, I lay out in our plan that I do want to see down the road a restructuring of our tax system with a broader base and lower rates. But my plan is about getting Americans back to work right away. And the place I’ve targeted is on middle income Americans. The people who have been most hurt by the Obama economy are middle income Americans, and so I say to anybody who’s making under $200,000 a year, we’re going to eliminate all taxation on interest dividends and capital gains for you so that you can save, so that you can invest, so you have more money, so you’re able to care for your kids and their future and your retirement as you think is best. That, for me, is the place we need to move immediately.

KUDLOW: All right, I’m going to sign off here. We’re going to continue with Governor Mitt Romney in a second. I’m going to just toss it back to Bill Griffith on “Closing Bell.” Thank you, Bill.

GRIFFITH: You bet, Larry. Thank you.

And, Governor Romney, thank you for being with us here. And don’t forget, you can see the rest of Larry’s interview with the governor tonight at 7 PM Eastern time right here on CNBC on “The Kudlow Report.”

KUDLOW: All right. Let me continue with you on this issue. Now you’re going to eliminate–I’m sorry–you’re going to abolish capital gains and dividends…

ROMNEY: Yeah.

KUDLOW: …for singles earning $200,000 a year, is that correct?

ROMNEY: Or less, that’s correct.

KUDLOW: All right. Now about the top people? Why are you not including them? And I raise this because you’ve got some people who have who have been ankle biting you on this question. They said years ago, in the middle 1990s, you argued that the flat tax–Steve Forbes’ flat tax was a fat cats tax, and George Will rhetorically in a column asked, `What does Governor Romney think? What constitutes a rich person? What constitutes a fat cat? What’s the dividing line?’ Tell us why you made it 200,000.

ROMNEY: You know, there’s nothing magic about a particular dividing line. You pick a point where you’re getting the great majority of Americans. Look, there are many people who think we should have zero tax on capital gains, interest and dividends for everybody, as–the very, very wealthy. But recognize that means that Bill Gates and Warren Buffett would pay no income tax at all. And some people say, `Well, that’s a good thing for growth of the economy.’

KUDLOW: But you’re referring to the capital gains tax?

ROMNEY: And I–yes, exactly.

KUDLOW: And the dividend tax, those are different.

ROMNEY: No. If we eliminated capital gains, all tax for the–for everybody, even those making millions a year on interest dividends and capital gains, then Bill Gates and Warren Buffett would pay no tax at all because their income is overwhelmingly if not entirely capital gains interest and dividends. And so the very, very wealthiest would pay no tax at all. My guess is that the American people would feel that, you know, right now the people that are hurting in this country are not the very wealthy but the middle income folks. And so the place I want to focus my effort and my break and also encourage more investment savings is for middle income Americans.

KUDLOW: So you agree with Buffett then, there should be higher taxes on the upper income people.

ROMNEY: Well, listen, I believe in keeping…

KUDLOW: But would you also tax wealth?

ROMNEY: I believe, Larry, I believe…

KUDLOW: Would you tax wealth?

ROMNEY: Well, of course not. We have right now a 15 percent tax on capital gains. That’s the rate that I would keep in place for now. And what I would say is we would remove the tax for people in middle incomes. Their tax would go to zero. The tax for higher income folks would stay the same.

KUDLOW: All right. Let me move on. You talked about trade and you sort of have a two-edged sword going here in your package. You want free trade deals but you’re very tough on China, in fact, uncharacteristically tough on China. Piracy, counterfeiting, I get that. How can China be brought into the WTO or play by–at an all-out…(unintelligible).

ROMNEY: Well, the people are going to always threaten that if they don’t get their way, they’re going to do something that’s hurtful. And sometimes people get frightened and say, `Oh, I better give them what they want.’ But, you know, we’ve been doing that for a long time and China continues to steal our intellectual property. They hack into our computer systems. They manipulate their currency such that their products have a substantial disin–excuse me, substantial advantage relative to our products in the world. They buy far more–excuse me, we buy far more of their products than they buy from us. Their government doesn’t buy anywhere near the products from America they should be buying.

KUDLOW: How can we force them?

ROMNEY: And so, look, what you say is, `Hey, look, you signed agreements.’

KUDLOW: All right.

ROMNEY: `You’ve agreed to follow certain practices. If you don’t follow those practices, why, then, we’re going to take the corrective actions which are outlined.’

KUDLOW: What would the correction actions be?

ROMNEY: Well, you take a–when you negotiate, you let them know that you’re willing to take whatever action is necessary, and that would include, for instance, if they’ve stolen intellectual property on a particular series of goods that you’re going to put tariffs on their products if they don’t abide by the rules.

KUDLOW: So you agree with Don Trump. Essentially Donald Trump wants to put tariffs on their imports.

ROMNEY: You know, I’m not going to adopt the policies of someone else that I haven’t read. I can tell you that I agree with my policies that I describe in my book, which is to say that in places where people have taken advantage of us and have killed American jobs or are threatening to do so, that we’re not going to sit back and just say, `Oh, we got to do this because we owe them a lot of money.’ We’re going to say, `You know what? We don’t want a trade war, but we’re not going to endure a trade surrender.’

KUDLOW: All right. So tax cuts for corporations. Tax cuts for the middle class, keeping the Bush tax cuts in place, free trade but tough on China, deregulation. You have a big deregulation point.

ROMNEY: Yeah.

KUDLOW: Let me ask you this, economics on the campaign trail, it’s getting pretty rough and tumble. Yesterday, once again, Governor Perry slammed you. He said Governor Mitt Romney did not create jobs in Massachusetts and he, Governor Perry, created jobs in Texas. What’s your response to Governor Perry?

ROMNEY: You know, I’m not responding to Governor Perry right here. He’s not here. I’ll probably get the chance to do that at some point. But I’ll talk about my record on that.

KUDLOW: But it must get under your skin?

ROMNEY: Why would I be worried about what other people say? I’ve been in politics now for long enough to not worry about what others are saying, but instead to talk about what I believe.

KUDLOW: Did you create jobs in Massachusetts?

ROMNEY: Well, of course I did. Of course I did. The unemployment rate went down as I was governor of Massachusetts. We were losing jobs every month when I came into the state. We turned that around and created jobs every month. And, you know, I’m proud of the fact that when I was governor, the three of the four years I was there, our unemployment rate was below the national average. You know, each state has some differences. I’m pulling out those differences and we’ll talk about the prospects we have for seeing the entire country have as its leader a person who has not just watched other people create jobs but someone who’s actually created jobs. In 25 years in business and at the Olympics, I created jobs.

KUDLOW: All right, that’s where I was going. OK. You give as good as good as you take. You have charged that Governor Perry is a career politician and that you have spent the bulk of your career in the private sector. Do you understand how the economy works better than Governor Perry?

ROMNEY: You know, I haven’t spoken about Governor Perry, but what I have said is that career politicians don’t know what it takes to get this economy going again, and, you know, evidence number one is what’s going on in Washington, DC. You’re seeing the president come out with more of these stimulus plans. Plan one, two, three, four and five didn’t work. He’s going to do another one that’s going to have the same output because they don’t understand what it takes to get businesses to invest in America and to hire people. I do. I’ve done that. I’ve competed around the world. If people want somebody-if they think the most characteristic of a president is someone who understands how the economy works and is expert in turning around enterprises, then I’m the guy. If there are other measures that they want to select upon, well, maybe I’m not the guy. That’s the choice that they’ll have to make.

KUDLOW: Well, just interesting on these choices. People are kind of freaked out by the debt limitation debate, and there’s a lot of economists who are actually saying that that whole debate, which came right up to the edge of a default and still really didn’t make a dent in our spending and our borrowing, damaged the economy. That what we’re seeing now in a potential double dip is in part caused by that. I want to ask you, is it possible for you and other Republicans to make any common ground at all with President Obama, who gives his jobs speech on Thursday night?

ROMNEY: Well, of course. We’ll see what he has to say in his jobs speech. But I’ve found in my interactions with people on the opposite side of the aisle that we can find ways for us to find common ground. There are a lot of Democrats who realize that spending is too much. But, Larry, you have to understand, back in the days of John F. Kennedy, government at all levels–federal, state and local–consumed about 27 percent of the economy. Today it consumes 37 percent of the economy. And Republicans like me are saying, `Look, that’s too much. We’re not going to keep growing the government.’

KUDLOW: Where would you target it?

ROMNEY: I’d get the federal government down to 20 percent. Right now it’s close to 25. Get it down to 20 percent. We’ve got to cap the amount that the federal government is spending. We can’t let government keep growing and growing because you’re seeing in Washington a class of people, permanent politicians, career politicians who have never worked in the private sector, never really built an enterprise, never signed the front of a payroll check, and they think they know what’s right for America. And they don’t. They need to go home and get a job.

KUDLOW: What about President Obama’s infrastructure bank proposal? He also talks about targeted tax credits. But I want to go into infrastructure bank. Is that the answer to an economy that hasn’t really grown in 10 years?

ROMNEY: Well, I’m afraid we do need to see better infrastructure in this country and we need to encourage the investment in airports, in new flight systems, in highways and bridges. Our bridges are in terrible disrepair. And there are a wide array of ideas about how to do that.

KUDLOW: Could you support a government project bank?

ROMNEY: Well, I…

KUDLOW: It sounds like Fannie Mae.

ROMNEY: I will–look, I don’t want the government getting into more and more enterprises like Fannie Mae and Freddie Mac. I’ll look at ways to see if we can’t get our highway system updated and get our bridges rebuilt. That’s something that we can do. And there–and there–what I want to make sure is that we have revenue streams to pay for it, not just more money coming out of the general fund. And guarantees. Look, this idea of the government guarantees, that that doesn’t cost anything, that’s wrong, as we’ve learned. Government guarantees are real cash and can end up hurting the taxpayers.

KUDLOW: All right, Governor Mitt Romney, we’re going to leave it there. Thank you for visiting us. It’s a warm day here in North Las Vegas, but it’s a great pleasure to have you back. All best on the campaign trail.

I’m Larry Kudlow, folks. We’ll be right back with The Kudlow Report in just a moment. 

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A Reagan Moment



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No sooner had President Obama shocked the political world with a gloomy economic forecast — projecting 9.1 percent unemployment for this year and a reelection-killing 9 percent for 2012 — than the dismal August jobs report arrived showing no gain in nonfarm payrolls. That’s right, no gain at all. Private jobs increased a scant 17,000, while hours worked and wages actually declined. Obama’s economic policies have failed.

Are we on the front end of yet another recession? This report alone suggests that we could be, although other data points disagree. But on the eve of President Obama’s so-called jobs speech, there’s a much bigger question here: Has the U.S. entered into long-term economic decline?

As a quintessential optimist who believes in American exceptionalism, I don’t even want to raise this issue. But the data tell me that I must. 

Read my full column here

An Interview with Dick Cheney



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Earlier this week, I had the honor and pleasure of sitting down with former Vice President Dick Cheney on CNBC’s Kudlow Report to discuss his new book, In My Time about his 40-year political and business career.

The full transcript and video follow below:

KUDLOW: I am pleased and honored to welcome back to this program former Vice President Dick Cheney, who has written a terrific new book called In My Time about his 40-year career in politics and, I might add, business. I think people forget you were the CEO of Halliburton for a bunch of years.

CHENEY: Right.

KUDLOW: And you served on a whole bunch of corporate boards.

CHENEY: I did, indeed.

KUDLOW: So you come at it from both sides. Anyway, Mr. Vice President, thank you very, very much.

Let me just begin. Before I get into the book, I want to do some current events with you. I am worried, as are others, that America is in financial and economic decline right now. And I want to get your take on this. Our economy hasn’t really grown in 10 years. Stock market hasn’t really moved in 10 years. The budget is bankrupt, we’ve just been downgraded, the debt continues to rise, the dollar is falling, gold is rising. How worried are you that we are in decline? How do you see the future of the great American economy, which ain’t so great anymore?

CHENEY: Well, I’m worried, too, Larry. I’m–you’re somebody I follow who we’ve worked together over the years, back our days in government. If you’re worried, I’m worried. And I think most Americans are concerned, not just about the problems of the moment, but about the long term. Finally, our debt problems are catching up with us, and we’ve got to find some way to get back on top if we’re going to pass on the country to our kids and grandkids in as good as shape as we found it.

#more#KUDLOW: The Chinese are nipping at our heels and they’re criticizing us at every turn, particularly on the budget and the debt and the decline of the US dollar currency, which frankly, started during the Bush-Cheney years. The dollar’s been falling now for 10 years, gold has been rising, China’s been yelling. Again, what should we be doing about that? How serious a decline is this?

CHENEY: Well, in terms of the financial standpoint, I think it’s very serious. I’m not ordinarily a pessimist. I basically believe deeply in the capabilities of the United States. We’ve done some tremendous things over the years, and I think we’re capable of doing that again. But we have to face up to the fact that we’ve got these very real problems that we’ve created for ourselves, in large part, especially with respect to the debt, and we, in fact, have to put in place policies that’ll stimulate growth, stimulate expansion, job creation, the private sector; and, at the same, time get a handle on entitlement spending in the federal government.

KUDLOW: Now you know the president constantly blames the–your administration for it. He says the Bush-Cheney people drove the economy into the ditch. That’s his stock phrase. And that he’s got to rescue us. And also, democratic talking points about all this, that we didn’t pay for the war, that we didn’t pay, we–the administration, the government, did not pay for the so-called tax cuts for the rich, they didn’t pay for the healthcare drug entitlement. What is your reaction to their blaming the Bush-Cheney administration?

CHENEY: Well, I think after nearly three years in office now, the effort to sort of pass all the problems back to George Bush’s platter, if you will, don’t sit very well. We’re getting to the point where, after you’ve been there for three years, you’ve made a lot of promises, campaigned from coast to coast across the country as President Obama did, sooner or later it becomes your economy. And I think we’re to that point now. He’s going to be measured very much next year against his performance.

KUDLOW: Do you–do you take some–do you take some of the blame for it? I went through some numbers. These are just broad numbers. Spending did increase during the Bush-Cheney years from 18 percent of GDP to 21 percent. The debt did go up $2 1/2 trillion from 32 percent of GDP to 40 percent. Now the debt is running close to 100 percent of GDP now. I get that. But do you take some of the blame? Could Bush-Cheney fiscal policies have been tighter and more disciplined?

CHENEY: Well, perhaps, but we were faced with some unique situations. I mean, when 9/11 happened, all of a sudden we’re hit with a terrorist attack against the homeland, 3,000 dead Americans in an hour and a half one morning. That required us to take some major steps that were expensive with respect to getting on top of that and making certain that we weren’t faced with another attack like that on our watch. So no question it cost money, but it was something that you absolutely have to do. It’s war time. And we’ve been able in the past to meet those kinds of challenges, as we did during World War II, for example, and then ultimately get on with our business. Now, in terms of adding to the debt, Obama has added as much to the debt in two and a half years as we did in eight years. The fact of the matter is, if we talk about unrestrained spending and a lack of discipline with respect to spending, I think the Obama administration’s record is the worst we’ve seen.

KUDLOW: I want to go back into the book. You don’t really spend too much time on the economy and financial stuff. It’s mostly a book about the terror war, and I appreciate that, but you do talk towards the end of the book about the big banking crisis in late 2008.

CHENEY: Right.

KUDLOW: And specifically you say the $700 billion TARP package, you mention this, and you said, `Look, I have long been an advocate of keeping government intervention in the private sector to a minimum. What we were talking about now was the largest such intervention in the history of the republic and I was a strong supporter.’ Now, as you know, the Republican Party en masse, especially in the last couple of years, have been totally against TARP. What do you say? Why were you such a strong supporter? Do you really think it worked?

CHENEY: Well, I–yes, I do think it worked. And I was a strong supporter because I concluded, as I think many of us did at the time, that the federal government is the one with the ultimate responsibility in terms of the nation’s financial system. Federal Reserve’s a part of that, Treasury’s a part of that, but the fact is there isn’t anybody else in the–in our system that can address those issues that were raised by that financial crisis except for Uncle Sam, for the federal government. And TARP was the response to that. And I think TARP has worked in the sense that we did stabilize the situation, that government is collecting in terms of money being paid back, so that virtually all of it has been or will be paid back. Though, from the standpoint of a lot of the criticism that was leveled against it, I don’t think it was valid.

KUDLOW: Did we learn wrong lessons? Is it government bailouts? Is it too big to fail? What came out of this was the Dodd-Frank Bill, which is a massive regulatory bill, almost ineffectively governmentizing the banking systems. Did we wrong–learn the wrong lessons from that emergency?

CHENEY: Well, possibly. I’m certainly not a fan of Dodd-Frank. I hark back to my early experience in government, which was a little thing called the Wage Price Control Program…

KUDLOW: Oh, yes, of course.

CHENEY: …under Richard Nixon. And my job then, I was the director of operations for the Cost of Living Council. I had 3,000 IRS agents who worked under my guidance to enforce those controls. I came away from the experience convinced it was a disaster. It was a classic case of trying to substitute government judgment for what ought to be a private sector enterprise, that millions of Americans would make better decisions for the country on a daily basis as they had addressed all those issues of wages and prices and profits than would a bureaucracy trying to operate in accordance with a set of bureaucratic rules. I think wage price controls were a disaster. I came away from that more conservative in terms of my view of what government’s role ought to be in this society. But this was different. I thought the financial crisis that we faced in ‘08 really, all of a sudden, the financial system seized up, major firms with no significant financial problems can’t get short-term operating cash. I mean, we had a lot of major, major indicators, if you will, that the financial system was coming to a screeching halt. And TARP was the system that was devised on short notice to get us out of that. And I frankly–I think it worked.

KUDLOW: Let me go to the–let me switch to the here and now. We have terrible unemployment problem, 9 percent, 16 percent including marginally unemployed. Something like 20 million people out of work or those who would like to have a better job. It’s a really bad situation. The economies in trouble. We’re growing at 1 percent or less. Now, President Obama next week will unveil another stimulus plan. I don’t know whether it’s stimulus three or four or five. He’s talking about an infrastructure bank, he’s talking about more unemployment benefits, he’s talking about temporary targeted tax credits. I want to get your take on this. And, again, I remind everybody, you yourself were a former businessman for years. You ran Halliburton, you served on a lot of boards, Procter & Gamble, Union Pacific. What should Obama do to trigger businesses that are sitting on $2 trillion in cash to get this economy moving again? What do you think of his so-called jobs plan as we know it from the leaks?

CHENEY: Well, of course, I haven’t seen the plan yet. We’re speculating about it and dealing with the leaks, but I’m not optimistic about what he’ll produce. I think his mind-set is very much along the lines of road-building projects, so-called stimulus, enhanced unemployment benefits. That it doesn’t go to the heart of the problem and that what we need to do is create an environment in which the private sector is prepared to invest, where there’s enough certainty there so that they can move forward in terms of making decisions about ways in which they can expand their businesses and create jobs. We need to do more to reduce the regulatory burden. I see, you know, a big regulatory burden being imposed on the private sector by the administration. That doesn’t appear to be addressed at all by President Obama. I think we need to seriously look at tax policy. I think, you know, left to his own devices, he was arguing for tax increases. I think the private sector is still concerned out there that, first chance he gets, he’s going to be for tax increases.

KUDLOW: Mm-hmm.

CHENEY: And all of those kinds of things will retard the restoration, if you will, of the kind of confidence that’s needed for the private sector, long term, to enter a period of rapid growth and job creation. That’s really the only way out of this. I don’t think government can do it by itself.

KUDLOW: I’ve got a couple more questions. I just want to make sure you and the batteries there are working OK.

CHENEY: Mm-hmm. Well, they are.

KUDLOW: What have you got going in there? You’ve got this lovely–looks like a fishing vest.

CHENEY: It is.

KUDLOW: And what’s–what are the hookups to keep your ticker going?

CHENEY: Well, I’ve got a–this is a control element. Sort of a small computer.

KUDLOW: Uh-huh.

CHENEY: I’ve got two of these batteries.

KUDLOW: Oh, don’t move it, it makes me nervous!

CHENEY: They operate for about 10, 12 hours. Then what it does is it runs a heart pump called the HeartMate II that’s inside my chest, plugged into the heart, that takes blood out of the left ventricle, the pumping chamber…

KUDLOW: Hm.

CHENEY: …and moves it into the aorta. It operates at about 7,000 RPMs. Instead of a heartbeat, it’s sort of like having a Ferrari in your chest.

KUDLOW: Yeah.

CHENEY: I mean, it gives you that kind of noise when you listen to it. But it’s wonderful technology. It was originally built to tide over patients until they could get a transplant. It’s now gotten good enough so that a lot of people are living for several years with this equipment. It’s a little awkward, but you get used to it. I get everything into this vest that’s specially made for that purpose.

KUDLOW: How is your outlook with this?

CHENEY: Well…

KUDLOW: You look great. You sound great.

CHENEY: …so far, so good.

KUDLOW: You’re snapping right back at me just like you always did.

CHENEY: Fourteen months ago, I was in big trouble. I was in end-stage heart failure. My heart was not moving enough blood to service my kidneys and my liver. I was close to–close to the end when we went in and put in the heart pump. Now, it’s not an artificial heart, but what it does is supplement your heart and move a significantly larger volume of blood than was possible…

KUDLOW: Hm.

CHENEY: …before it was installed. And it really is–has done wonders for me.

KUDLOW: All right.

CHENEY: I fish, I hunt, I’m not playing tennis, but I’m doing just about everything else.

KUDLOW: God bless. God bless. All right. Just the last round then, I appreciate this very much and thank you for showing us that. Back to my worries that America’s in decline.

CHENEY: Mm-hmm.

KUDLOW: I’ve taken to calling this a Reagan moment. We need to find a Reagan-like figure to reverse the decline of the United States, at last in the economic and financial sphere. National security, we look much better, as your book chronicles, but on economic and financial. Now, let me ask you a couple of questions, political questions. The role of the tea party. How do you see the role of the tea party?

CHENEY: I think they’ve had a significant impact on sort of putting some spine in the backs of a lot of my friends in the Congress. That, in fact, I’ve realized it was controversial for the–for my colleagues to threaten, for example, the–not to grant the commitment to pay the debt, to raise the debt ceiling. That was, without question, controversial, but I think that threat was effectively used to force the administration to sign on to some significant deficit reduction measures. So I don’t think we would’ve gotten as far as we have without them sort of holding the feet to the fire of members of Congress, but that they were deadly serious about wanting to go after the deficit problem. Now we’ve not yet solved the problem by any means. I’m not totally happy with the package that was approved. I worry very much that defense is going to be on the short end of the stick when it gets down to the point of actually adopting a policy. But we’ve got to start. I think the special committee that’s been established has some good members on it.

KUDLOW: Yeah.

CHENEY: But I think others like Erskine Bowles and Al Simpson have done some good…

KUDLOW: Did a fine job.

CHENEY: A fine job.

KUDLOW: Democrat Bowles, Republican Simpson.

CHENEY: Yeah.

KUDLOW: Simpson’s a great pal of yours from Wyoming.

CHENEY: He is indeed a very close friend.

KUDLOW: But they did a fine job.

CHENEY: And…

KUDLOW: It’s a pity the president didn’t really just enact their proposals.

CHENEY: Totally ignored them. Totally ignored them. And we’ve got to continue to aggressively pursue it, and I think the tea party crowd has had a big impact on moving the political dialogue over to a more responsible…

KUDLOW: All right. On the campaign trail, Governor Rick Perry is the new front-runner. Governor Mitt Romney is a tough competitor. You also have Congresswoman Michele Bachmann. You also have Congressman Ron Paul. Are these people that can step into the Reagan and reverse America’s decline? Do you have confidence in the Republican field or are you looking for other candidates to run?

CHENEY: I haven’t endorsed anybody yet, Larry. I’m not sure that would be necessarily helpful. There’s some quarters where my endorsement probably wouldn’t be welcome. But I–we’re sort of at that moment where, as I look at it, the question is whether or not we can elect the equivalent of Ronald Reagan in 1980 or whether we’re going to get a Jimmy Carter-like figure.

KUDLOW: Mm-hmm.

CHENEY: And I worry that Obama–President Obama represents the Carter wing, if you will, of the political spectrum, and we badly need a Ronald Reagan. Now, do we have that yet in the Republican field? I don’t know. That’s going to depend a lot on what happens in the months ahead in terms of a candidate…

KUDLOW: But you’re not convinced. I’m hearing some–I’m hearing some skepticism and doubt in your–in what you’re saying here.

CHENEY: I have to say, I haven’t…

KUDLOW: You haven’t seen it yet.

CHENEY: I haven’t endorsed anybody yet, and I expect to support the Republican nominee, but they have a lot to show me before I’ll be enthusiastic about any one of those candidates.

KUDLOW: All right. I hear you. Last one, sir. Tenth anniversary of 9/11 approaches. It’s just going to be in a few weeks. Osama bin Laden is dead, the number two and threes of al-Qaeda, they’re dead and gone. We’ve really decimated them. We’ve killed them, we’ve crippled them. It looks like democracy, this was the Cheney vision and the Bush vision. Democracy is spreading–Tehran, Cairo, Tripoli, perhaps Kabul. First of all, on the 10th anniversary of 9/11, are you satisfied that our country is safe? And second of all, are we wining the global war on terror?

CHENEY: I think we’re making progress. I can’t say definitively that we’ve won. I think it’s important that we not let our guard down. I think there’s still folks out there who wish us harm, and I’m still worried that the biggest threat we face is a terrorist organization equipped with a weapon of mass destruction, a nuke or a biological agent of some kind that they’d try to unleash on one of our cities. So I’m not relaxed from that perspective. On the other hand, I think you’re right. I think our intelligence and military capabilities have been significantly improved over the years. We’ve worked hard on that, and I think it’s produced results. The demise of Osama bin Laden is proof positive of that.

KUDLOW: For which you have given the president some credit for pulling the trigger.

CHENEY: I have, indeed. He made the decision to send in Seal Team 6 at that moment on that raid, and that was a good decision. I think the groundwork for it was laid over the 10 years previously and that a lot of the credit goes to our professionals in the military and in the intelligence fields who really produced the information that ultimately led to bin Laden’s demise.

KUDLOW: All right. I’m going to leave it there, Vice President Dick Cheney. First of all, all best, God speed on your health. All best on the success of this book. And thank you for helping the Kudlow Report down through the years. You know we’ve had about a half a dozen interviews.

CHENEY: We have.

KUDLOW: You’ve been wonderful. Thank you, thank you, sir.

CHENEY: Well, great to see you again, Larry. I love the show.

KUDLOW: All right, thank you. We’ll be right back with more from this evening’s Kudlow Report as we thank Vice President Dick Cheney and wish him all God speed.

A Real Recipe for U.S. Job Recovery



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I’ve got a few thoughts on this so-called Obama jobs plan, scheduled for release next week.

For starters, let’s be clear: Government doesn’t create jobs. It’s the private sector that creates jobs. And that’s precisely what President Obama has been missing for nearly three years now.

Ronald Reagan knew this. John F. Kennedy knew this. And Bill Clinton eventually learned this.

The trick here is to create new incentives for workers, investors, and business. But first and foremost, we need to remove the regulatory obstacles. Here are some examples:

– Stop the EPA and its environmental overkill.
– Stop the National Labor Relations Board’s war against business.
– Stop Dodd-Frank’s financial attack.
– And take out Obamacare.

And when that’s done, call off the high-tax dogs. Let C-Corps and small-business S-Corps pay no more than a 25 percent tax rate. Move to territorial taxation. Repatriate foreign earnings, bringing the money home. And make the Bush tax cuts permanent, or else move in the direction of a true flat tax.

And on money, until the dollar is properly re-linked to gold, the Fed should do nothing right now. Since QE2 ended, the greenback has actually stabilized. That’s a hopeful sign for lower inflation.

So the only role for government is to set the stage to make it pay more after regulations, taxes, and inflation to work, invest, and take risks. Revive the animal spirits of America’s private entrepreneurial economy with fewer government obstacles and more take-home pay.

Think of it.

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An Interview with Pimco’s Bill Gross



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Last night I had the pleasure of speaking with Pimco’s Bill Gross, one of America’s most famed investors, on CNBC’s Kudlow Report. Mr. Gross has generated big buzz over his admission that betting against U.S. debt was a mistake.

KUDLOW: And most important, at the top, PIMCO’s Bill Gross, one of America’s most famous and successful investors. He’s generating big buzz today with his superimportant and much talked about interview in The Wall Street Journal and elsewhere. Mr. Gross says he has, quote, “lost sleep,” end quote, over a bad bet on Treasury rates. He acknowledged that selling all his funds, Treasury holdings last February was a, quote, “mistake.” And he went on to say, and I quote, “We try to be very intellectually honest and honest with the public,” end quote.

All right, for my part, I just want to say to my old friend Bill Gross that I have nothing but admiration for his taking ownership and admitting a mistake. We all make them. And by the way, he’s setting a very good example for the rest of us. That’s just my take.

Anyway, it is always a real pleasure, especially tonight, to welcome back to the show a special Kudlow exclusive, Bill Gross. He’s founder and co-chief investment officer of PIMCO.

All right, Bill. You admit to a big Treasury bond miss. Rates this year went way down, not up. Can you tell us, please, why the interviews right now and what message are you sending?

GROSS: Well, I, you know, I think at PIMCO we always try and be open with the press and the public. I mean, isn’t that what voters want from their politicians? Mohamed El-Erian, our CEO, write several op-eds a week. I tweet daily and publish a monthly investment outlook, which came out this morning, by the way. So we try to give an honest answer to an honest question.

#more#And by the way, in terms of the interview with the Journal and with the FT, what I said was that–something that I think all bond and–bond managers would say if they were honest. They would say, `Wish I’d own more Treasuries.’ To say otherwise would be to say something like you’d wished you bet on the Miami Heat instead of the Dallas Mavericks. I mean, it’s obvious who won, right?

KUDLOW: Obviously wrong. All right, well, anyway, you’re very outspoken and I respect you for it.

Listen, you were here–I looked back–June 8th we spoke. So what’s that? Three months ago. At that point, Bill, you repeated the call to get out of bonds. Now the bonds rally more or less from 3 percent to 2 percent, today they’re at 2.20. What went wrong? How do you assess what went wrong with your bond call?

GROSS: Well, first of all, I didn’t say get out of bonds. I said get out of Treasuries and move…

KUDLOW: Treasuries.

GROSS: …and move into Canadian bonds and to Australian bonds and other alternatives. What went wrong in terms of the Treasury call from 3 percent down to close to 2 percent? Well, the economy slowed down dramatically. We had a freeze-up, so to speak, in terms of Washington with the politicians and policy options. It was recognized that fiscal stimulation, you know, certainly wasn’t going to be something undertaken for the next six to 12 months, if at all. It was recognized that the Fed was running out of policy options and so the economy was slowing down and was–seemed to be slowing almost permanently in terms of a 0 to 2 percent growth category.

KUDLOW: Have you basically lost confidence in the economy? You mention, I think, in the FT article, Bill, you call it, quote, “a new normal minus.” Have you lost all confidence in our capacity to grow the economy?

GROSS: Well, no. You know, but the problem I have with the free market capitalism, Larry, which is your philosophy, is not with the concept. In fact, you know, PIMCO is an epitome of its historical thrust. We’re very successful and because of free market capitalism. But the problem I have is with its apparent exhaustion in the face of three equally dynamic economic influences. Let me mention them briefly.

First of all globalization has weakened American and developed economies by syphoning off investment and, more importantly, jobs to emerging nations at 1/10th the wage cost. Take China, for example, Free market capitalism, in other words, is working for China, it’s working for Brazil, but it’s not working for America or Euroland.

Secondly and just briefly, free market capitalism depends on a balanced market between labor and capital. And clearly we’re reaching a point where impoverished Main Street cannot afford to buy the goods that capitalism so magnificently produces. So I think there’s an exhaustion here in terms of free market capitalism that has worked so well for 20 to 30 to 40, 50 years, but now is reaching structural impediments that prevent, you know, strong growth that we’re used to.

KUDLOW: I want to come back to that towards the back end, Bill, but I just want to narrow down for a moment. I want to drill down. According to the reports, you are buying Treasuries. You’re accumulating Treasuries. You have a net positive exposure for the first time. Let me ask you, what if the bond–the Treasury market has discounted a recession that doesn’t happen? Are you chasing the market? Is there a risk that the rate hikes that you foresaw this year might still come to pass if the economy surprises on the upside?

GROSS: Well, that’s possible. We read in the Fed minutes today of the last meeting that the–that the two-year 0 percent or 25 basis point Fed funds level is conditional, and we know that there are hawks, that there are doves, and that should the economy recover to a 2 to 3 to 4 percent rate, that, you know, perhaps inflation looms larger in terms of a threat. So anything is possible. What I would say at the moment, though, is since the economy is really moving closer to the zero level, since inflation probably will come down gradually, you know, the Fed is at 0 percent for the next two years and perhaps even longer than that, and that determines significantly the level of Treasury rates in five-year space, 10-year space and even 30-year space.

KUDLOW: But, you know, it’s interesting. We had Byron Wein on, a distinguished investment guru on his own part. He predicted the S&P would rally to 1400. OK? It’s just over 1200 today, as you know, If that sort of thing happened with better corporate profits, even consumer sentiment, which tanked today but people are still buying washing machines and cars, retail sales are holding up. If you had a big rally in stocks, the risk trade is back on. That’ll come out of Treasury bonds, and those could–that could drive those bond rates back to 3 percent. You’re buying bonds now. Are you worried that there’s a potential for whiplash?

GROSS: Well, I’m suggesting that the probability–that the high probability is for interest rates to stay low for a long time. I mean, Byron Wein basically is a a mean reversion cyclical type of–type of analyst. What we’re suggesting is that there are structural impediments to the US economy to develop market economies that will prevent growth in the 3 to 4 percent category.

Let me ask you, in terms of consumerism, in terms of the US consumer, if unemployment stays at 9 percent plus and if wage gains–if real wage gains are nonexistent, then were is the spending power coming from? It has to come from the consumer as opposed to businesses. Businesses are waiting on the consumer. The consumer is waiting on business. We have what we call a liquidity trap. So what we’re suggesting is not a reversion to the mean, not a cyclical upthrust, but basically a structural impediment that produces growth in the 0 to 2 percent category for a long time. Not just in the US, but in Euroland, as well.

KUDLOW: All right. So let me–have you had any trouble with your fund–I guess the Total Return Fund, because of the bond miss this year, rates went down instead of up? Have people withdrawn from the fund? What are your customers saying right now?

GROSS: We have a $245 billion customer base. You know, that customer base is growing. We just got a billion dollar contribution from a large corporation this week. There’s been no lack of confidence. You know, to suggest that a six to seven month timeframe for the PIMCO Total Return Fund, which has produced results for the last 20, 30 or 35 years, is, you know, a stretch of the imagination. We continue to produce fine results for our clients.

KUDLOW: Oh, that’s what everybody says. That’s–everybody I talked to today on this story said exactly what you said. Your record down through the years has been superb.

Let me ask you this, are you still buying some corporate bonds and are you still buying foreign bonds? You talked to me about that when you last visited.

GROSS: Well, corporate bonds of the highest quality, yes. And that would be A and AA-types of corporates, not high-yield bonds because they don’t do well, you know, if we near the recessionary level of 0 percent. In terms of foreign bonds, let me just cite the comparison: a five-year Treasury in the United States at 1 percent, actually little bit less; in Canada 1.7 percent; in Euroland 2.1 percent; in Mexico 5.4 percent; in Brazil 11 percent. And these are countries, by the way, Larry, which have what we call clean or dirty shirts. Mexico has half the debt of the United States. Brazil has half the debt of the United States and has treasury reserves as opposed to deficits. And so these are countries with higher yields and better balance sheets.

KUDLOW: All right, last one. I’m going to come back to where you were on the breakdown of free market capitalism, which is fair enough. I would acknowledge that America’s economy has been on the decline now for about 10 years. But I ask you, Bill, everybody is so profitable. Businesses are so profitable, so much cash. Banks have more liquidity than they know what to do with. Is it possible there’s a buyer’s strike, that there’s a capital strike, that the spending and taxing and regulatory threats out of Washington are really the problem, not the free market capitalist system?

GROSS: Well, I’d have to say that that doesn’t help. I mean, let’s come together on that point that regulation and too much of it–that taxation in terms of the necessary reforms that probably lie ahead, you know, don’t help either in terms of the current economic environment. What I would say in terms of corporate tax reform is, yes, let’s reform taxes, let’s reform corporate taxes and let’s reform individual taxes. But at the same token, let’s not lower them, because corporate taxes are 10 percent of total federal revenues. They’re at an all-time low, Larry. And to suggest that corporations are the poor baby in this particular story, I think, is an absurdity.

KUDLOW: All right. I’m going to leave that for the next discussion we have. We have much more to discuss on corporate tax reform. But, Bill Gross, thank you for your honesty. Thank you for your forthrightness.

GROSS: Thank you, Larry.

KUDLOW: And thanks for coming on tonight. I appreciate it.

GROSS: Yeah.

Irene’s Broken Windows



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Get ready for a bunch of demand-side economists to tell you that the post-Hurricane Irene rebuilding phase is actually a good thing for future economic growth. But don’t believe it.

Who has it right?

Joshua Shapiro, chief U.S. economist at MFR, Inc., delivered my favorite quote on the subject to the New York Times: “If you’re in the middle of recession, you just wander around blowing up buildings, and that would be your path to prosperity. And clearly that’s not the case. It’s not the case with a natural disaster either.”

Read my full column here.

An Interview with Richard Fisher



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Richard Fisher, Dallas Fed president, explains his dissent on two more years of a zero-interest-rate target. He believes the Fed has created enough liquidity, but tax and regulatory barriers have blocked growth and job creation. He also responds to GOP attacks on the Fed. You’re looking at a future treasury secretary here.

KUDLOW, host: Welcome back to this special edition of THE KUDLOW REPORT. We’re continuing our discussion of today’s stock market route, this time from the perspective of the Federal Reserve. We are honored to have a very special guest joining us this evening. Here now for an exclusive CNBC interview Richard Fisher. He’s president and CEO of the Federal Reserve Bank of Dallas. Richard, welcome. You picked a hell of a day.

FISHER: Well, wait, wait, wait. Not only am I president of the Federal Reserve Bank of Dallas, but I’ve been a friend of Larry Kudlow’s for over 30 years, since we were embryos.

KUDLOW: Yes.

FISHER: So we started out as babies, of course.

KUDLOW: Thank you for that. I appreciate it. All right, Richard, let me just get your general impressions. Today was another plunge in stocks. We’re in the throws of a 16 percent correction. What’s your reaction to this kind of correction? What do you think is behind it?

FISHER: Larry, I’m a central banker. I thought your panel, by the way, earlier was very informative and very helpful. The message on that panel that don’t panic. I’m a central banker. The Federal Reserve does not panic. I think we watch things carefully. You and I both know that markets are manic-depressive mechanisms. There are always some trip wires there, depending on what people are looking for. I’d just like to make two comments.

#more#One is on Philly Fed Index. It’s a wonderful index. You might wish to note to your viewers that its correlation with the PMI, that is the manufacturer’s index, is .08. The two of the Fed indexes that have a good correlation are the Empire State, and then, even more than that, believe it or not, is the Dallas Fed’s manufacturing survey. So I think there’s a bit of an overreaction there.

And then secondly, one of the key points that was made is you have to think about the kind of dividends that are there. As I understand it, if the numbers I looked at correctly today, 60 percent of the S&P 500 is out yielding the Treasury 10-year. So I think your panel’s advice don’t panic is very good. Certainly we at the Central Bank have to look at things in a very calm, steady-handed way, and we’ll continue to do so.

KUDLOW: Richard, I guess a two-edged question. Number one, your assessment of the outlook for recession. You had a bunch of banks today, Morgan Stanley earlier…

FISHER: Mm-hmm.

KUDLOW: …and I’m told, as we’re on the air day, Citi is downgrading its economy, its economic forecast, as is JPMorgan. Do you think–do you personally think we’re going into recession?

FISHER: I’ve said from the very beginning this is will be a slow slog. I think it’ll continue to be a slow slog. You pointed out some numbers earlier, Larry, in terms of the retail sales number, the production numbers. There have been setbacks to that in terms of various surveys. But I still think we have positive momentum. I’m not saying it is sufficient momentum to create the kind of jobs we want to create in America, but I do think we’re going to have a positive third quarter. And my own personal feeling is, at least before the debt ceiling negotiations took place, I was looking for 3 percent or so in the third quarter. Still want to see that. I don’t know much a retardant that comic opera was on people’s willingness to commit capital to build into hire or to consume. But I’m still of the feeling that we’re going to have positive momentum, Larry.

KUDLOW: Well that sort of leads to my next question. It’s a puzzlement question. I’ve never seen so much cash and liquidity around.

FISHER: Boy, you’re right.

KUDLOW: Banks have more money than they know what to do with. Corporations have more money than they know what to do with.

FISHER: Mm-hmm.

KUDLOW: And yet they all seem immobilized, not investing it, not taking risks, not hiring. Why is that?

FISHER: Mm-hmm. Well, my opinions are pretty well known there. It’s not because of monetary policy. We have filled the gas tank. We got lots of fuel in there. Someone needs to step on the peddle and gauge the transmission mechanism, and I really do think the corporations have been discouraged from doing so. Obviously they’re worried about weak demand. But remember, we’re a consumption driven country. Unless you hire people, you can’t have more consumption because you won’t have more employment. And there’s so much confusion on the regulatory side. There’s such an uncertainty, Larry, in terms of what kind of tax regime, what kind of spending and what kind of subsidies are going to be added to, taken away, what the incentives will be that come out of this group of 12, or if they fail, will be laid down. That, to me, is not only depressing production, hiring, CAPEX and all the good things we need to see, it’s also scaring the heck out of the consumer. If you had watched that whole debacle of the debt ceiling negotiations, I would have turned to–as I did–to my wife, `Honey, we just can’t afford to go on this vacation,’ or, `We can’t afford to buy that gizmo or that service.’ I think it is a retardant. We have to get more certainty. Business operates under conditions of uncertainty, as you know. That’s the way capitalism works. But extreme uncertainty freezes decision making, and I’m afraid that’s the position we’re in.

The Central Bank has reliquefied the system. That’s what the Federal Reserve has done. The fiscal authorities, however, have to incent people, or at least help incent people, to have the confidence to go ahead and engage, expand the economy, in addition, of course, to seeing the whites of the eyes of a stronger recovery. But it can’t occur unless businesses are incented to invest and hire more people.

KUDLOW: Well, in terms of Federal Reserve…

FISHER: I have very strong feelings about that.

KUDLOW: Yes, I can tell. And that, you know, I hear you on that. I get that. I hear you completely.

FISHER: Yeah. Good.

KUDLOW: But I want to–let me bring it back to the Federal Reserve. You did dissent from the last meeting.

FISHER: Yes, I did.

KUDLOW: The two year extension of the zero interest rate target. In Midland, Texas, yesterday–apparently, according to all the reports.

FISHER: Mm-hmm.

KUDLOW: You said that that zero interest rate target for two years reduces business incentives to grow and hire. Could you expand on that, because it sounds like you’re suggesting the Federal Reserve’s interest rate policy, the zero target is itself a disincentive, an obstacle, and may be adversely affecting the stock market?

FISHER: Well, this is my personal opinion, but there could be the unintended consequence that in addition to not knowing how you’re going to be taxed or what kind of spending patterns are going to change, how it’s going to affect not only your company, but your consumer base. Now you know that you can wait to borrow because the rates are going to be locked in at very low levels for a two year period. So my suggestion is and one of my arguments was that this might well further retard recovery and commitment. Again, you can’t have recovery unless we have employment go up, unemployment go down. We will not have that unless people decide to expand. And right now there’s almost no incentive to expand, and I was worried–this is my personal opinion–obviously I was in a minority and I respect the majority of my colleagues–that this would be a further retardant.

KUDLOW: Haven’t all these zero interest–it’s been several years now that we’ve had a zero interest rate. Hasn’t it just benefited the speculators, the traders, the hedge funds? Not that they’re bad people, but I just want to say, if you can borrow at zero and invest in anything with a higher yield, you win. At the same time, it’s doing great damage to savers. I mean, isn’t this a lopsided policy?

FISHER: Yep. Well, again, I’ve voiced concern about that. There’s always a cost-benefit analysis takes place. Clearly one of the costs–and we’re all aware of it–is the people that played by the rules, as they got older–like you and me, Larry–began to save more, shorten up on a yield curve, particularly those who don’t have the benefit of sophisticated advice, have really been hammered here because it–they’re getting low, in fact, negative real returns on their investment, and I think it’s hurting the poor, and I think it’s hurting those savers, and I think it’s hurting the middle class that have played by the rules, socked away some money for retirement. And that’s one of the prices we pay to try to reliquify the system.

I’m a little concerned as to how tolerant those people will be over the long term unless they see a pickup over time in the returns on their savings. But…

KUDLOW: Well, I think there’s…

FISHER: It’s very, very hard for retirees, and you and I agree on that front.

KUDLOW: I think there’s a–I think there’s a demoralization going on out there by savers and by businesses.

FISHER: Mm-hmm.

KUDLOW: But let me ask another question. I’m not going political on you, I just want a general sense. Out on the campaign trail, many if not most of the Republican candidates…

FISHER: I know what it is.

KUDLOW: I’m not going to name names, just because they’re–because really many of them are attacking the Fed, sometimes in very harsh terms. I think what people want to know, not so much whether this guy is right or that lady is wrong or whatever. They want to know what kind of impact this has, these attacks on the Federal Reserve.

FISHER: Well, first of all, I come from Texas, Larry, so I come from the history of Wright Patman and Henry B. Gonzalez, and at least one of the individuals you refer to is a Texan–at least two of the individuals you refer to are Texans. I understand their sentiment–that’s sort of the way we’re geared down here–but I worry about it from the standpoint of if they’re pointing fingers at us, I’m worried they’re not focusing on really need–is needed here, which is to change the whole fiscal mix to reboot the way we tax, spend, incentivize and get our economy moving again. That’s what they do as leaders if they’re running for the White House, as president, working with the Congress of the United States.

As far as the impact on our decision making, whether it’s Chairman Bernanke or whether it is the rest of us that sit around that table, we just don’t pay attention to this. I think it’s very, very important you have a central bank.

KUDLOW: No attention whatsoever?

FISHER: It is independent.

KUDLOW: Front page story, no attention whatsoever.

FISHER: That it is…

KUDLOW: I mean, they’re trying to put monetary policy and Fed and…

FISHER: That this…

KUDLOW: …the dollar square in the middle of the campaign, Richard. You’re saying it has no impact at all on the Fed?

FISHER: I think it’s very important that we resist the temptation to react to that criticism any way, shape or form. We know, historically, when legislatures have taken over central bank functions, you end up with Argentina…republic, nationalist China and so on. So if we don’t allow it to permeate our thinking, we just do what we’re suppose to do for a living, then I think we’ll stand in the best stead.

KUDLOW: All right, Richard Fisher, president and CEO of the Federal Reserve Bank of Dallas. We appreciate your views very, very much. It’s great to have you visit with us again. All the best.

The Deflationary M2 Explosion



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Amidst the financial flight-wave to safety, with stocks plunging, gold soaring, and Treasury bond rates collapsing — and all the European banking fears which go with that — there’s an important sub-theme developing: An almost-forgotten monetary indicator, M2, which is mostly cash, demand-deposit checking accounts, savings deposits, and retail money-market funds, has been soaring.

According to the St. Louis Fed, M2 is up 24.2 percent at an annual rate over the past two months. Almost out of the blue, that comes to a near $500 billion increase. In rough terms, the M2 explosion breaks down to $165 billion in demand deposits and $335 billion in savings deposits.

What’s going on here? There’s a flight to government-guaranteed accounts. 

Read my full column here

An Interview with Austan Goolsbee



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Departing Council of Economic Advisors chairman Austan Goolsbee defends Obamanomics. I push back. But he’s for pro-growth tax reform. I’m for it. So where’s the president?

KUDLOW: So now I am personally honored to be joined for an exclusive interview by the former chairman of the President’s Council of Economic Advisers, that being Austan Goolsbee. He is returning to the faculty of the University of Chicago’s Booth School of Business this week. An old friend of the show.

Good evening, Austan. Let me just say congratulations on your government service.

GOOLSBEE: Hey, thank you, Larry, and it’s great to be back and see you again.

KUDLOW: All right, that’s the good news. The bad news, Austan, as you well know, America is not working. Many fear a double-dip recession. There has already been a debt downgrade. What is your man, President Obama, going to do? Can you tell us what he’s going to say in this so-called new economic growth plan?

GOOLSBEE: Well, you know, I’m not going to give away any secrets. It’s his to make. You and I, Larry, for many, many years, have been the growth guys. And while we may disagree on this or that or some other policies, fundamentally we got to get the country growing if we’re going to be generating jobs, and we saw that last year when the economy was growing at a faster clip. We added more than two million jobs, as well as the stock market was doing well and you were starting to see more business investment. As we slowed down this year, we took a hit on all of those fronts. So hopefully it’s going to be in the style of the education, innovation and investment, which I kind of think is–has got to be the fundamentals of any growth strategy.

KUDLOW: Yeah, but Austan, I don’t–look, let’s go back to basics. The $800 billion stimulus package hasn’t worked. The $2 1/2 trillion Fed stimulus package hasn’t worked. Cash for clunkers hasn’t worked. These green energy ideas hasn’t worked.

GOOLSBEE: Well…

KUDLOW: Your president is out there talking about raising taxes on millionaires and billionaires.

#more#GOOLSBEE: Well, let’s–now hold on a second, Larry.

KUDLOW: What kind of message does that send to entrepreneurs and free enterprise business people who, frankly, are immobilized and don’t want to create jobs, Austan? Isn’t it time to turn over a new leaf and start something new?

GOOLSBEE: Have you been saving this all up since I’ve been–last been on, Larry?

KUDLOW: Only for you, my friend. Only for you, because you’re such a good guy.

GOOLSBEE: Well, look–look, what I will say is this, I don’t agree–if you start looking at the impact of various programs. We avoided a depression, which was a scary moment, but all of that stuff was two-and-a-half years ago. If you look at the president cutting the capital gains rate to zero for people starting their own businesses, cutting taxes 17 different times for small business, I’d a thought you’d be for that stuff, Larry.

KUDLOW: Those are not tax cuts. You see, the whole…

GOOLSBEE: How is that not a tax cut?

KUDLOW: One of my problems with your line of thinking is you believe that little teensy-weensy, temporary, targeted tax cuts; and from what I gather from our John Harwood, you’re going to go there again. Another one year payroll tax cut will not do it, Austan. Don’t you understand, businesses think longer term. Is there anybody in the White House that’s ever worked in a business that sees a five-year horizon, permanent reductions in tax rates work? These teensy-weensy tax credits never work, Austan. That’s why we’re at 1 percent growth in the economy.

GOOLSBEE: Look–oh, you and I are both for a low rate and a broad base.

KUDLOW: Yes!

GOOLSBEE: Now when the president has proposed…

KUDLOW: Where is that? Where is that, Austan?

GOOLSBEE: Well…

KUDLOW: Where is his broad base? Yes, let’s start there.

GOOLSBEE: Go ask the members…

KUDLOW: We can agree on that.

GOOLSBEE: …of Congress. When the president proposed a grand bargain with a low rate and a broad base, they said, `What do you mean broaden base? We don’t want to broaden the base. That would be a tax increase.’

KUDLOW: Well, but if you lowered the rates and broaden the base, if you rolled back regulations, if you stopped the National Labor Relations Board from attacking businesses, Austan, you would see companies spending the several trillion dollars of cash that they’re not spending now, my friend.

GOOLSBEE: Well, now, hold on, Larry. You see that same accumulation of cash in other countries that have totally different policies than we have in the US. So I think it’s very unlikely to attribute that to the policy decisions that are taking place in the US, first of all. And second of all, you have seen that the president has actively been trying to streamline regulations. And just going back to the policies that led to the downturn hardly strikes me as the wisest course of action.

KUDLOW: I don’t see…

GOOLSBEE: We ought to do some third thing.

KUDLOW: Well…

GOOLSBEE: And I think you will likely see the president proposing that.

KUDLOW: I mean, I don’t see–you’ve tried all this big government spending and regulate. Why not have flat tax reform? Why not roll back regulations? Why not put yourself in the position of a small business, Austan? They’re worried about Obamacare. They’re worried about…

GOOLSBEE: Look, the president has done that.

KUDLOW: They’re worried about Dodd and Frank. Why not understand that community banks are afraid to make a loan because of overregulation?

GOOLSBEE: Well, Larry, again, I think you’re being highly unfair. The president has cut taxes for small business 17 times. It’s not my job to come down and get in a big battle over things that happened two years–two-and-a-half years ago in the stimulus. If you look from this point forward, what do we need to grow? As I look at what the administration is doing, where they are in those areas where streamlining of regulation can be effective, trying to streamline the regulations. They’re trying to cut taxes for small business. And they’re trying to make the investments. It seems like you were making fun of an infrastructure bank.

KUDLOW: Yes.

GOOLSBEE: That’s one of the only things that the Chamber of Commerce and the labor unions agree on…

KUDLOW: I don’t care if the chamber is for it.

GOOLSBEE: …that the infrastructure will be critically important.

KUDLOW: Austan, you spent a lot of money.

GOOLSBEE: With…

KUDLOW: And the president himself said those jobs were not shovel ready. I don’t think an infrastructure bank or any other form of additional spending is going to help grow the economy and unleash entrepreneurship, with all do respect.

GOOLSBEE: Well, you know…

KUDLOW: And I want to ask you about another one. Is the president going to extend unemployment benefits for another 99 weeks, because many economists, as you well know, believe that this kind of unemployment benefit extension is actually keeping unemployment high?

GOOLSBEE: Well, the evidence that I’ve seen on that suggests that it’s not keeping unemployment high. You have to be looking for a job to get unemployment benefits. If you stop looking for work, you are no longer eligible to receive and benefits. And though it’s come down substantially, we still have more than four-and-a-half people looking for a job for every job that’s out in the economy. So I, you know, I think that’s a little unfair to be trying to pin our economic problems on the fact that we’re trying to give people some time to help them find a job.

KUDLOW: All right, my last one is–look it, you’ve been very patient. I appreciate that. But this is such important stuff, Austan. You’ve a good man. We’ve known each other long time. All this green energy stuff has been an abject value. You’re never going to do more than 1/2 percent or 1 percent of American energy. Why doesn’t that administration come out full throated for American energy production? We’ve got the oil shale. We’ve got the natural gas shale.

GOOLSBEE: We did.

KUDLOW: No, see…

GOOLSBEE: How can you say that?

KUDLOW: They don’t…

GOOLSBEE: They did. Domestic production is the highest it’s…

KUDLOW: They refused to call off the EPA dogs.

GOOLSBEE: …been since the–for many years.

KUDLOW: I understand. But they refuse to call off the EPA dogs that are investigating the infras–the fracking structure and the water levels. And this is one of the great job…

GOOLSBEE: Wait, look, look.

KUDLOW: …creators of all time.

GOOLSBEE: Look, we have to–we have to promote domestic energy consumption. We have to do that in a way that’s safe. We don’t want to have the biggest oil spill again that has ever been had. We don’t want to poison the ground water. But the president, as I’ve viewed it, the administration believes that we can do that in a safe way, and domestic production is ramping up quite dramatically. Now it seems like you’re making fun of some of the alternative energy stuff, but if you look at China, if you look at Europe and if you look at a lot of the faster growing regions of the world, they’re heavily investing in it.

KUDLOW: It’s been a dismal failure in Europe.

GOOLSBEE: (Unintelligible)…alternative energy.

KUDLOW: It’s been a dismal failure in Spain. It’s been a dismal failure in Europe. I say, Austan, if the market…

GOOLSBEE: It seems like in China and Brazil it’s been quite a success.

KUDLOW: If the market wants to produce clean energy, it’ll produce clean energy. Natural gas from shale is clean energy.

GOOLSBEE: Look, I agree with that.

KUDLOW: I just don’t see why we don’t…

GOOLSBEE: I agree with that.

KUDLOW: …call the EPA dogs off. That’s one of these regulatory issues. Call the National Labor Relation dogs off of Boeing, Austan. In other words, some of this stuff, there’s very little presidents can do. I get that.

GOOLSBEE: OK.

KUDLOW: But the signals, the messages, is it pro-confidence or anti-confidence? We have got to get America working again and right now it’s not happening. I’m going to give you the last word, my friend.

GOOLSBEE: OK. All I’ll say is if you look at countries where it is–where they are rapidly growing, they’re investing in their infrastructure. They’re investing in their educations. They are trying to streamline regulations but they’re not neglecting key investments. The president when he’s out looking at fiscal consolidation for the long-term, but making the key investments that are pro-business, I really think that’s the–what we should be doing, and I feel that that could be certainly a bipartisan thing.

KUDLOW: Well, all right. I say make it pay more after tax for all business ventures. But, Austan, we’ve ran out of time. You’re very kind to come on the show. It is a pleasure to see you.

GOOLSBEE: Great to see you, Larry.

KUDLOW: I hope you’ll come back now that you’re going back to college.

GOOLSBEE: You bet.

KUDLOW: And I appreciate it very much. You know I have the highest regard for you. Austan Goolsbee.

GOOLSBEE: It’s great to see you.

Perry’s Red-Hot Bernanke Slam



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Gov. Rick Perry scorched the political pot on Tuesday with a red-hot rhetorical attack on Fed-head Ben Bernanke. When asked about the Fed reopening the monetary spigots, Perry said, “If this guy prints more money between now and the election, I don’t know what y’all would do to him in Iowa, but we — we would treat him pretty ugly down in Texas.”

And that wasn’t all. In a more controversial slam, Perry said, “Printing more money to play politics at this particular time in American history is almost treacherous — or treasonous — in my opinion.” (Italics mine.)

Pretty rough stuff. Very aggressive language. And undoubtedly way too strong. It was poorly received in the financial world.

No, Ben Bernanke is not a traitor. This is a policy dispute; it’s not a matter of patriotism. However, and this is an important however, the rest of Perry’s statement suggests that his analysis of Fed policy is right on target. In other words, wrong words, right analysis.

Read my full column here.

An Interview with Super-Committee Member Sen. Pat Toomey



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Here’s the first super-committee interview with newly appointed member Sen. Pat Toomey (R., Pa.). He’s a supply-sider and Tea Party backer with rather minimal expectations for the super committee, although he does believe IT can pick up another $1 trillion of budget cuts without raising taxes.

KUDLOW: The House and Senate Republicans named their picks for the 12-member super committee charged with tackling the country’s debt crisis. This has all happened in the last 24-48 hours. Joining us now, first on CNBC interview, we have Pennsylvanian Republican Senator Pat Toomey. He will serve on the committee.

Senator Toomey, old friend, welcome back. Let me just ask you, before we get down to nuts and bolts on your assignment, so many people say to me, `You all elected representatives, House and Senate, ought to come back to Washington and start working on spending, on debt, on economic growth. Why are you all taking this vacation? We need help. The market needs help. The national psychology needs help.’

TOOMEY: Well, be careful what you wish for, Larry. You know, when Congress is in session, it’s not always the optimal thing for the markets. But let me say this, the folks on this committee, I think, will begin discussions before September and hopefully be able to really hit the ground running soon.

KUDLOW: Will you begin those discussions in Washington, Senator?

TOOMEY: Well, I suspect we’ll be doing it by conference call and by phone call before we get to Washington, but of course we’ll continue in-person meetings.

KUDLOW: What do you want to come out of this? Let’s talk spending cuts to start.

TOOMEY: Well, Larry, you know, the mandate from the legislation is at least $1.2 trillion. Frankly, I hope we can do more than that. I hope we can accomplish more because the deficit magnitude that we have is much bigger than that. But the other thing that’s equally important to me is that whatever we do is pro-growth. You know, we’ve got to have solidly pro-growth policies. You know, I tend to look at things from the supply side, looking for ways to make it less expensive to do more production. I think that’s what creates a demand and keeps an economy moving. So if we can do–if we can do some meaningful deficit reduction on at least the scale that’s called for in the legislation and do it in a way that encourages economic growth, that would be terrific.

KUDLOW: Is it possible, Senator, to put side by side spending reduction, entitlement reform and tax reform? Is that possible or are the expectations for this super committee too high?

TOOMEY: Well, it’s possible but it’s very tough. That’s a big combination. Our legislation does authorize that level of activity. And frankly, there’s some low-hanging fruit. This tax code is so incredibly inefficient, it’s so costly, it’s such a dead weight burden on the economy, we could simply it, get rid of so much of the junk, lower marginal rates, and I’m convinced that would have a very powerfully pro-growth impact. That would be good for the deficit, the revenue would increase in that fashion. So I hope we can tackle all of those things, but, you know, time will tell.

KUDLOW: Just two quick points. The stock market, which is crashing right now, as you well know. You use to be in the financial world.

TOOMEY: Right.

KUDLOW: So many people are worried that we’re going to have root canal spending cuts but they’re not going to be accompanied by lower tax rates, and therefore we’re going into recession, that Washington may be causing this recession, Senator. Do you have a quick thought on that?

TOOMEY: Well, I think a lot of policies out of Washington have been contributing to the problems we have, especially on the regulatory side. The uncertainty of the size of these deficits and whether that’s going to lead to higher interest rates, inflation, higher taxes, that’s not constructive. So making some progress here, I think, you know, could go a long way to encouraging the kind of certainty and confidence that people need.

KUDLOW: Is it possible that this super committee can surprise us, deliver more deficit reduction, the right way, as you say, shrinking government, promoting growth, and we get our AAA rating back from S&P? Do the members of this committee have any sense of how to get that AAA rating back?

TOOMEY: We haven’t–we haven’t met yet as a committee. You know, we were just–membership was just announcement today, as you know. So it’s a little early to project just how ambitious we can be. But I can tell you it’s my hope that we will strive to do more than the minimum required by this legislation. We need to do more than that to get back that AAA, although I’m skeptical about why S&P reached the decision it did. I just want us to bring spending under control and do it in a pro-growth policy.

KUDLOW: All right. Senator Pat Toomey, a newly appointed members to the deficit reduction super committee. We wish you all the best of luck, Senator. Thanks very much.

TOOMEY: Thanks, Larry.

More Jackson Hole Shock-and-Awe?



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Ben Bernanke’s shocking FOMC announcement on Tuesday — that its zero-interest-rate target would be extended for two more years through the middle of 2013 — drove Dow stocks up over 400 points. But this new policy had no stock market carry-over on Wednesday, when the Dow plunged over 500 points.

But we have not heard the last from Ben Bernanke — not by a long shot.

Read my full column here

Bernanke to the Rescue



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Damn the torpedoes! Up periscope! Full speed ahead! Ben Bernanke and the Fed to the rescue!

In a startling move Tuesday, the FOMC announced that its zero-interest-rate target would be extended for two more years through the middle of 2013, marking the first time the target rate has ever been pegged to a date certain.

After one of the most vicious market plunges in memory over the past two weeks, stocks soared 429 points on the news. And bond rates plunged, with the 10-year Treasury closing at 2.27 percent.

Forget about S&P downgrades. Forget about the recession threat. The stock market loves Ben Bernanke!

Read my full column here.

No Time to Panic



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During a period like this, with stocks plunging almost on a daily basis, it’s clear that fear and shock are ruling the roost. But fear can be overdone. As someone who has been around awhile and has seen many sell-offs, let me offer some advice: Do not panic. Market corrections come and go. They are not the end of the world. Most times they are actually healthy.

The S&P downgrade is a fiscal warning, not an economic event. And the growing fear of U.S. recession may not pan out. There are still plusses out there, believe it or not.

Our financial system is in vastly better shape than it was in September 2008. Vastly better shape.

Read my full column here.

More Obama Spending Won’t Do It



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There he goes again. Out on the campaign trail, President Obama is proposing more federal spending as his answer to sluggish growth and jobs. That won’t do it, Mr. President.

He wants more infrastructure spending, undoubtedly in the form of an infrastructure bank. That’s a terrible idea. It’s borrowed from Latin America, where bloated and corrupt bureaucratic construction agencies have helped bankrupt any number of countries in the past.

He wants to lengthen 99-week unemployment insurance, although numerous studies have shown that continuous unemployment benefits are associated with higher unemployment.

And he wants to extend the temporary payroll tax credit, which is not a permanent reduction in marginal tax rates, has no incentive effect, has not worked so far, and is really a form of federal spending — not real tax relief. 

Read my full column here

No Recession



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Stocks and bond yields are sinking as Wall Street disses the debt deal and instead focuses on a likely double-dip recession.

Everyone is gloomy. But is this pessimism getting a little overbaked?

Granted, the economy is sputtering, with less than 1 percent growth in the first half of the year. But if there is a recession in the cards, it will be the first time one occurs when the yield curve is steeply positive (an ultra-easy Fed) and corporate profits are strong.

And since we do have ultra-easy money and strong profits, I don’t believe we’re heading into a recession. Nor do I believe stocks will continue to swoon.

Read my full column here.

A Downgrade Is Serious Business



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Standard & Poor’s government-credit-ratings guru David Beers played his cards close to the vest on the topic of a U.S. downgrade in our CNBC interview this week. However, this head of S&P’s global sovereign-ratings business — with a staff of 80 covering 126 countries — issued three strong warnings to the debt-ceiling negotiators in Washington.

Beers avoided direct comments on any of the key debt-limit plans. But when I asked him about joint congressional committees that would report back with additional budget savings at the end of the year, he said, “Well, naturally, it’s going to raise questions . . . we would have to look at the balance of incentives and disincentives that might increase or decrease the probability of that type of approach being effective.”

In other words, both the Harry Reid plan and the John Boehner plan could contribute to a downgrade this summer since it’s uncertain whether joint committees will get the necessary votes for large-scale budget cuts and deficit reduction by year-end. There are no guarantees.

Read my full column here.

An Interview with S&P’s Global Head of Sovereign Ratings



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Last night I spoke with David Beers, head of S&P’s sovereign-debt-rating committee, on CNBC’s Kudlow Report. He made it very clear: The U.S. must take steps to lower its debt/GDP trend over the long run. He is looking at all the plans, and he is waiting for a final product. But right now a U.S. downgrade is 50/50. S&P’s next step could come very soon.

The video and transcript follow below.

KUDLOW: On July 14th, Standard & Poor’s placed the US on credit watch negative on the rising risk of a policy stalemate. That clock continues to tick, August 2nd, less than a week from tonight. How real is the US debt downgrade threat? What will come of us? Here now for an exclusive interview is David Beers. He’s the global head of sovereign ratings at S&P, Standard & Poor’s.

David, welcome to the show. I appreciate it very much. If I’m not mistaken, on July 21 you issued a warning there’s a 50 percent chance of downgrade. Where are you tonight? Where are you today?

BEERS: Well, we’re still at 50 percent, at least a 50 percent possibility of a downgrade.

KUDLOW: All right. I want to ask you, what will it take to avoid a downgrade? What are your guidelines telling you? What are you looking for?

BEERS: Well, given the continuing political gridlock, I guess what we’re looking for is some program which we think will make a difference over the medium term in slowing the, if not reversing, the rising trajectory of government debt as, for example, as a percent of GDP.

KUDLOW: And United States is around 70 percent. I believe the Congressional Budget Office has us running up to 90 or 100 percent. You like to use total government debt. So you want to see that instead of going up, you want to see it ramping down. Is that fair?

#more#BEERS: Yeah. Or at least stabilizing, with the prospect of it falling over the medium to longer term.

KUDLOW: All right. I want to ask a couple of questions. I appreciate that you don’t want to speak specifically about the political plans. Really, when you take the three plans that are on the table, more or less, they’re running about $3 trillion in lower deficits. I mean, they’ve got pluses and minuses.

BEERS: Mm-hmm.

KUDLOW: And I don’t want to get into that. Is a $3 trillion reduction over 10 years, would that meet your criteria to avoid a downgrade?

BEERS: Well, to be honest, we can’t answer that question tonight. I think what we’ve said is we’ll look at the deal, whatever the deal is, when it’s agreed by Congress and the administration, and we will measure it on a number of parameters. One is, is it actionable? Is it actually likely to be implemented and, therefore, is it credible? And credibility, among other things, means to us that there has to be some buy-in across the political divide, across both parties, because politics can and will change…

KUDLOW: Yes, sir.

BEERS: …going forward. And if there’s ownership by both sides of the program, then that would give us more confidence.

KUDLOW: But you don’t want to commit to a ballpark number?

BEERS: No. Because it’s not just about the number. It’s about the all-in intent.

KUDLOW: But if it was low–if it as low as $1 1/2 trillion, would that be, you know, downgrade city?

BEERS: It depends on what’s folded into the deal. It depends on what comes along with that number. As you know, there are lots of ideas out there about doing this incrementally. But, ultimately, we’ve got to look at the overall plan to make a judgment as to whether it’s likely to make a difference in terms of the rising tide of US debt.

KUDLOW: All right, the rising tide of US debt. Two of the three plans have a special joint congressional committee which is supposed to find additional spending and debt reduction cuts down the road. Now, does the down the road part trouble you? Is that a plus or a minus in the debt–in the downgrade discussion?

BEERS: Well, naturally it’s going to raise questions. And, again, we would have to look at the balance of incentives and disincentives that might increase or decrease the probability of that type of approach being effective.

KUDLOW: Does it matter to you if the debt ceiling is raised in one or two tranches? In other words, if they raise, let’s say for argument sake, half this year and the rest next year. How does that affect your thinking?

BEERS: Well, we’ll look at it. But we’ve also said on the 14th of July that we would be concerned if we thought that the debt ceiling debate would come back and be open and we’d have to go through all this again and again and again.

KUDLOW: And that would be a negative in your view.

BEERS: That would be a negative in our view.

KUDLOW: Right. That’s what I thought.

All right, let me ask you this, the last scenario. The business about revenue allocation. If we go through August 2nd, we’ve got some big Treasury redemptions and interest expenses coming, 50, 60, $70 billion in August alone. What happens in your view if that’s where the US government goes? Is that a downgrade situation? Or worse, is that a default situation? If we’re parceling revenues, let’s say to pay the interest on the debt, and a little bit to Social Security, a little bit to health care, and then half the budget is not funded. How does that affect your thinking?

BEERS: Well, first of all, we’re rating debt. Right? So it’s theoretically possible that for some period of time the government could take that strategy while the negotiations continue. But it’s worth remembering what that would mean. It would mean a very sudden fiscal shock that the longer it lasted would filter powerfully through the system because the US has got–running a budget deficit right now of roughly 10 percent of GDP. Suddenly, for a period of time, you’d essentially be running a cash surplus to pay off the debt as it matures. So potentially that would be deeply disruptive to the economy.

KUDLOW: Would it be default?

BEERS: No, it would not be default so long as the government is continuing…

KUDLOW: Is covering…

BEERS: …to pay its debt as it matures and its interest payments. But we would suspect that that’s not a tenable situation for very long.

KUDLOW: So it sounds like that would signal a downgrade.

BEERS: Well, we’ll deal with that as and when the time comes.

KUDLOW: When do you reckon you’ll make your next decision? Is it imminent, this week, next week, a month from now, six months from now?

BEERS: Well, it kind of depends on what happens over the coming days. But, you know, we had said that we’ll be very–looking very closely as we approach the 2nd of August to see if there’s a deal or not.

KUDLOW: You heard the two senators. All right? They’re both prominent senators. There’s nothing happening in Washington tonight. Nothing I can report that’s any good. In fact, one plan’s gone back to the drawing board. It’s hard to know what the second plan is. The third plan’s buried in the White House. They admit they don’t even have a plan. We’re getting pretty close it, aren’t we? Downgrade is imminent?

BEERS: I’m not going to say that a downgrade is imminent. We knew that this was going to come close to the wire, and it is, as you say. There’s still every possibility that they’re going to get–come up with a plan. And we’ll–when they do…

KUDLOW: Yeah.

BEERS: …we’ll look at it and we’ll make a judgment then.

KUDLOW: You published a paper where you had several scenarios, and I want to ask you about the middle scenario. What would the downgrade scenario do to the economy and interest rates, based on your work?

BEERS: OK. Well, there’s obviously some uncertainty around this because it hasn’t happened before. We sketched out a scenario, which I think is sort of common ground in the marketplace right now, where it’s possible if the rating went into the AA category for example, the yield on government securities could rise anywhere between, you know, 25 and 50 basis points.

KUDLOW: From AAA to AA.

BEERS: Yeah. That, of course, would filter through to other interest rate sensitive kinds of debt, like mortgages, for example. So it would mean, you know, that holders of mortgages, over time, as this filtered through, would have to pay a higher mortgage rates.

KUDLOW: Fannie, Freddie?

BEERS: Yeah.

KUDLOW: Insurance companies?

BEERS: Yep.

KUDLOW: Overnight bank lending? What–can our economy take–let’s say in the short end.

BEERS: Mm-hmm.

KUDLOW: We have the best rating A-1 plus right now.

BEERS: Mm-hmm.

KUDLOW: If you notch that down to A-1 and rates jumped up 50 basis points, how damaging you reckon that would be to our economy?

BEERS: Well, it would–it would have an impact. It would–it would have an impact. And it would be negative. It would be a depressing effect on economic output, on economic growth.

KUDLOW: Let me ask you one final one in the remaining seconds we have. I know you’re very active in the European ratings and so forth. Greece, have we seen the last of the Greece crisis? You’ve rated them CCC. There is stuff below that. Do you think that will be challenged?

BEERS: Well, the rating has a negative outlook, so we’re pretty certain it’s going to go lower because, of course, an actual debt restructuring is now on the table. But we’ve also expressed the opinion before that we think that any near term restructuring is probably not the end of the story. There may be another bigger restructuring down the road after that.

KUDLOW: How far down the road do you reckon that would be?

BEERS: Well, that’s partly in the hands of Greek politics, but it certainly wouldn’t surprise us if a second restructuring had to be looked at over the next couple of years.

KUDLOW: Couple of years. All right, David Beers from S&P, we really appreciate your coming on here and talking about this…

BEERS: Thanks for having me, Larry.

KUDLOW: …as calmly and honestly as possible.

An Interview with Eric Cantor



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Following is the video and transcript of my Monday night Kudlow Report interview with Rep. Eric Cantor, Republican majority leader of the House:

KUDLOW: Now let us bring in, exclusively, we have House Majority Leader Eric Cantor. He’s a Republican from Virginia. We got him on Capitol Hill.

Mr. Cantor, first up, welcome back, sir. We appreciate your time. And let me just begin by asking you, what’s so bad about the Senator Harry Reid plan? It looks very Republican to me.

CANTOR: Well, look, Larry, number one, we’re about trying to achieve real reform in the entitlement programs. And what Harry Reid’s plan does is really kick the can down the road. What it does is it gives the president the full $2.4 trillion extension in the debt ceiling and does not have the ability for us to force this president to get serious about the entitlement reforms. And that’s what’s wrong. I mean, the choice is very clear this week. And that is, do we want to have a discussion? Do we want to actually make some progress on cutting spending and reforming the entitlement programs, which is the only thing that really folks are waiting for to indicate Washington is serious about getting its fiscal house in order. Do we want…

KUDLOW: But, Mr. Cantor….

CANTOR: Do we want to do that or don’t we? And Harry Reid’s…

KUDLOW: All right.

CANTOR: Harry Reid’s plan does not afford the ability to do that.

KUDLOW: Yes. But, Mr. Cantor, is that really true? I mean, both your plan and Senator Reid’s plan has a joint congressional committee which is suppose to report by the end of this year on the very same topic you just raised, appropriately, entitlement reform. But in a sense, it looked like Mr. Reid’s idea originally came from Republican Senator Mitch McConnell. Now everyone has coalesced around it. That’s why I wonder what’s so bad about it.

CANTOR: Well the issue is, number one, we’ve always said that what the people of this country want to see is a stop to the kind of spending that’s been going on. So Speaker Boehner, he came out months ago and said, `We’re not going to increase the debt ceiling unless we have commensurate or even greater cuts in spending.’ Now Senator Reid’s plan doesn’t do that. What Senator Reid’s plan says is, `We’re going to raise the debt ceiling $2.4 trillion and we’re also going to cut spending.’ But what he does is he counts over a trillion dollars in spending that is assumed to decrease and go away anyway, which is the spending associated with the wars in Iraq and Afghanistan.

#more#KUDLOW: Yes. But isn’t that…

CANTOR: Those…

KUDLOW: Isn’t that in the Paul Ryan baseline also, which is the baseline for cap, cut, and balance?

CANTOR: But it absolutely–absolutely it is, but it’s not anything additional. And what we’re saying is you are increasing the credit limit now to afford additional and new spending. We’re about really trying to do the right thing and to cut spending in this town to reform the entitlement programs. And what our–what our bill does in the House, which we will bring up on Wednesday, is it will give us the ability to say to the president, `You have the opportunity to raise the debt ceiling now to avoid what all of us want to avoid, which is default on August 2nd.’ No one wants to see that happen. But it also sets in place a procession with a pivot point or a leverage point that once again we’ve got to get serious.

KUDLOW: All right. But a lot of people…

CANTOR: Because the president has indicated, Larry, all along, he’s not serious about cutting spending without raising taxes. We’re not for job-killing tax increases.

KUDLOW: Look–OK. OK, I know you’re not. But that’s another similarity. The Reid plan says no new taxes. Your plan says no new taxes. They have adopted the Republican position, have they not? And isn’t that a huge  concession?

CANTOR: No, because Reid plan doesn’t require commensurate cuts in new spending to go along with the increase in the debt ceiling, and the Reid plan doesn’t afford a forcing mechanism to say to the president get serious, let’s not kick the can down the road. We, as Republicans, are serious. We put on the table our plan to reform entitlements. He’s never done that.

KUDLOW: But he…

CANTOR: There’s never going to be any forced discipline, Larry, unless we have another discussion here. And the only thing we hear about–out of the president is he doesn’t want to have to talk about it again until he–until his election. And now that’s not–that’s really not what this is about. It’s not about the politics here. And what we’re saying is preserve the ability to talk about doing some real cuts and reform.

KUDLOW: I will say this, though, Senator Reid’s plan, which would raise the debt ceiling once–it would raise it once, the so-called long-term. You would raise it twice. There’s a lot of sentiment on Wall Street, sir, that wants it once. Let’s get it done. Let’s be done with it. And the spending cuts on paper–I acknowledge your point–but on paper, Mr. Reid’s spending cuts equal the debt ceiling as you want, too. So it looks like that’s another concession to your position.

CANTOR: Listen…

KUDLOW: But Wall Street, I think, it’s fair to say this evening, after watching markets and hearing experts today, Wall Street would greatly prefer one debt ceiling increase. You have two. Is that a problem for your plan?

CANTOR: But what–but what Wall Street, I believe, and the rating agencies are also looking for, is not only the fact we can get it over with. It’s not certainty for certainty’s sake, it is to get it right. And what I’m saying to you, the Reid plan kicks the can down the road. It doesn’t afford the opportunity for us to get it right and to actually begin to cut real spending and reform the entitlements. That’s also what Wall Street and investors are looking at, whether the US government is going to get serious, put its fiscal house in order in order to honor its long-standing tradition of being the number one credit risk in the world.

KUDLOW: All right. Well, I have two other…

CANTOR: And again, the Reid plan doesn’t get us to do that.

KUDLOW: All right, what…

CANTOR: It kicks the can down the road.

KUDLOW: What do you need for a compromise to bring the two sides together? And what’s the process here? I mean, the bottom line is let’s get a debt ceiling increase so we don’t have some kind of Armageddon in the financial markets. I can’t predict it. You can’t predict it. My point is let’s not take a chance.

CANTOR: I agree.

KUDLOW: We don’t need predictions.

CANTOR: I agree.

KUDLOW: And, of course, the issue of an S&P, Moody’s downgrade. Let me just ask you, what would it take to bring you together and a merger with the Reid plan, sir?

CANTOR: Well, I think that, you know, what Harry Reid has indicated, I believe has suggested, is the operation of this joint select committee. It’s something that he and the Senate wants. We in the House like to see our committees work towards this end. But this is in the House plan, the Harry Reid suggestion of a joint select committee.

You know, we would like to see no tax hikes, and we’d like to see some actual movement on reforms and spending and entitlements. That’s in the House plan. So there’s a compromise here.

KUDLOW: So if you can work out–if you can work out this congressional entitlement deficit committee, if you can work out those details, would you have a plan? Would you have a deal?

CANTOR: No. What we want–what we’re trying to say, Larry, is our plan offers the majority leader in the Senate what he wants, which is a joint select committee, but it also gives us the dollar for dollar cuts to the increase in the ceiling, which I think is very promising in terms of the beginnings of reform. And that’s what we’d like to see. And in fact, by making sure this is a two-stage process and ignoring the insistence of the White House to go beyond the election. Again, that’s just political. The president doesn’t want to have to talk about this while he’s campaigning.

KUDLOW: All right.

CANTOR: That’s not…

KUDLOW: Can you get a…

CANTOR: That’s not a sustainable position.

KUDLOW: Can you–can you get–Mr. Majority Leader, it’s hard for me to keep a straight face because I have so much respect for you. You know that.

CANTOR: Well, I don’t understand why that’s funny. I mean, to sit here and say…

KUDLOW: There’s nothing–there’s nothing funny about it. In fact, my next question, my final question to pitch to you is, can you get this done by August 2nd?

CANTOR: I…

KUDLOW: And can you get it done in time to codify it in legislation?

CANTOR: I am–I am–I am certain that we will make sure that this country doesn’t default. Absolutely. None of us want to see that happen. You know, that–it’s never happened and we’re not going to let it happen. But what we’re saying is we’ve got the best opportunity right now to put in place a process through the House bill that will actually lead to real reform and cuts. The Reid plan kicks the can down the road.

KUDLOW: All right. So the issue…

CANTOR: It doesn’t accomplish that.

KUDLOW: Is it fair to summarize, sir, just say the issue is over this joint committee? Is that–is that really the key sticking point?

CANTOR: No. No. Because the joint committee is present in both plans. And that’s what I’m saying to you, we proffered that in our plan, something that the majority leader in the Senate wants is that joint select committee. What’s different is the forcing mechanism, the force discipline that this town needs to actually do the tough things.

KUDLOW: The enforcement.

CANTOR: Which is…

KUDLOW: The enforcement mechanism, that’s the key point?

CANTOR: The enforcement–the enforcement mechanism, Larry, is the second vote. It is the forcing of the discussion to increase the debt ceiling another time, because otherwise this town will walk away from anything that’s tough.

KUDLOW: All right. As it has in the past, I acknowledge that. I acknowledge that. Majority Leader Eric Cantor, thank you very, very much. I appreciate you coming on. I know you’re very busy. Good luck, sir.

CANTOR: Thanks, Larry.

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