The GOP must bolster its argument for spending discipline with a loud case for tax cuts.
Republican Senate leader Mitch McConnell is absolutely right to warn against Obama’s gigantic stimulus-spending package. McConnell says it “will be the largest spending bill in the history of our country at a time when our national debt is already the largest in history.” As a result, he says the bill “will require tough scrutiny and oversight.”
According to McConnell, scrutiny should include this simple test: “Will the yet unwritten, reportedly trillion-dollar spending bill really create jobs and grow the economy — or will it simply create more government spending, more bureaucrats, and deeper deficits?”
The Republican leader is drawing a clear line in the sand. Okay, good. But the GOP has got to do more. It must start talking about tax cuts to grow the economy. And it must get back to the supply-side by talking about lower marginal tax rates on individuals, businesses, and investors.
We don’t need bailout nation. Nor do we need the government picking winners and losers in a massive, Keynesian, new-New Deal spending extravaganza. And it’s not Obama’s middle-class tax cut that’s going to get us out of this economic jam. At best his vision is incomplete. But at worst his aversion to successful earners and investors is a real obstacle to full economic recovery.
Social historian and early supply-side activist Irving Kristol taught us three decades ago that the top earners are the economic activists. They’re the ones with the highest propensity to consume and invest. They’re the ones who buy the yachts, which are built by blue-collar workers. And they’re the ones who run the small businesses and provide the capital for the new entrepreneurial start-ups that are the lifeblood of the economy. It is they who energize free-market capitalism.
If we had an economy without rich people we wouldn’t have much of an economy. That’s why lower tax rates to reward the economic activists — the most prominent capitalists — are so essential.
In fact, the GOP has a great opportunity to challenge Obama’s Keynesian pump-priming by insisting there be a major tax-cut component in any new fiscal package. Republicans shouldn’t merely push for somewhat less government spending. They have to make a bold case that tax rates matter for economic growth and job creation. They must insist that any recovery package includes this key element. Shift the debate. Say clearly that a reenergized economy cannot occur without lower marginal tax rates.
In particular, the GOP position should include lower tax rates on large and small businesses. Right now the top federal tax rate for C-corps is 35 percent. Small businesses, which pay the individual rate, also are taxed at 35 percent. These rates should be 20 percent for both C-corps and S-corps (including LLCs). This would make a huge difference. It would be a boon for our global competitiveness, since companies in the U.S. (as well as Japan) are taxed way above the rates of other advanced countries. It also would attract job-creating investment flows to the U.S. at a time when capital is on strike in our financial markets and economy. And while businesses collect corporate taxes, it’s really consumers who pay the final cost.
Republicans also could promote a middle-class tax cut that would reduce the 28 percent and 25 percent brackets down to 15 percent. And of course, the GOP should work hard to maintain the Bush tax cuts on capital gains, dividends, inheritance, and top individual rates.
Senior Obama advisor David Axelrod recently told the Sunday talk-show hosts that the Bush tax-cut package of 2003 is “something we plainly can’t afford moving forward.” Well, in static terms, the sum-total of the 2003 tax cuts comes to somewhere between $25 billion and $40 billion. Compare that to a trillion-dollar spending plan.
In fact, lower capital-gains tax rates will raise revenues, since this is the single most sensitive tax on the Laffer curve. Indeed, many economists — including Alan Reynolds at the Cato Institute — argue that the growth and simplification effects of reducing the corporate tax rate would be revenue positive.
But the congressional Republicans have to step up to the plate right now. Me-too-ism on spending is a big mistake in both political and economic terms. Instead, the GOP should argue that fiscal policy needs a choice — not an echo (to paraphrase the late conservative stalwart Barry Goldwater).
The whole debate in Washington is heavily skewed toward government spending on infrastructure. It’s all spending and virtually no tax cuts. For a more balanced and effective recovery policy, the GOP has to bolster its argument for spending discipline with a loud case for tax cuts.
It truly is time for a choice, not an echo.
Tuesday, December 30, 2008
Wednesday, December 24, 2008
Tuesday, December 23, 2008
We Need Rich People
Vice-President elect Joe Biden had a strange press conference today where he spoke about the Obama stimulus plan. Larry Summers also spoke. Nothing new was said, but it was all very gloom and doom on the economy. I don’t know what the purpose of it was. Maybe Team Obama is attempting to lower expectations? Anyhow, it sure didn’t lift the holiday spirit of several hundred million Americans who would love to see a little light at the end of the tunnel or even some optimism right now.
Almost thirty years ago, Ronald Reagan came into office during a very deep recession with double-digit inflation and interest rates. But somehow Reagan, as only he could, gave a sense of optimism that things could be fixed and he was the man to do it. That America was a great country despite its troubles and that we would recover. And then of course he laid out his tax-cutting program.
I don’t disagree with Biden that the economy is in recession. But every time he speaks about it, he seems to leave a lasting impression of doom and gloom. I just don’t see how that’s helpful. I suppose Obama supporters think they’re getting even with Dick Cheney who said in early 2001 that the U.S. was on the front end of a recession. Turns out that he was correct. But neither he nor President Bush blathered on endlessly about how bad everything was.
And then in today’s meeting Biden talked about the stimulus package with all that new spending. It’s going to be an avalanche of government spending.
In today’s Wall Street Journal, Nobel Prize winning economist Robert Lucas said all this spending isn’t necessary. Let the Fed take care of the economy, he argued. He wrote, “It entails no new government enterprises, no government equity positions in private enterprises, no price fixing or other controls on the operation of individual businesses, and no government role in the allocation of capital across different activities. These seem to me important virtues.”
Lucas is right. We do not need bailout nation. Nor do we need the government picking winners and losers in some massive new New Deal industrial policy. In fact, the absorption of scarce private resources by the government may very well make economic matters worse, not better.
And then of course Biden went on about how Obama is going to help the middle class, and how it’s the middle class that’s going to get us out of this jam. While I listened carefully, I never heard him say anything about rich people, or successful earners and investors. No mention of businesses. Irving Kristol taught us three decades ago that the top earners are the “economic activists”. They are the ones with the highest propensity to consume and invest. They’re the ones who purchase the yachts, which are subsequently constructed by blue-collar workers. And they’re the ones who run the small businesses and provide the capital for new entrepreneurial startups that are the lifeblood of this economy.
If we had an economy without rich people, we wouldn’t have much of an economy. That is why lower tax rates to reward the economic activists—that is, the most prominent capitalists—would be ever so helpful. Or slashing business tax rates that would create investment inflows to promote high wage earning new jobs. And, it would give consumers a break since they’re the ones that bear the brunt of high corporate taxes.
As it happens, there was a story in Sunday’s Washington Post that indicated Team Obama is considering some kind of business tax breaks. Now that would be a very good thing indeed. But mostly, I want to put a good word in for rich people. Can’t do without them.
Almost thirty years ago, Ronald Reagan came into office during a very deep recession with double-digit inflation and interest rates. But somehow Reagan, as only he could, gave a sense of optimism that things could be fixed and he was the man to do it. That America was a great country despite its troubles and that we would recover. And then of course he laid out his tax-cutting program.
I don’t disagree with Biden that the economy is in recession. But every time he speaks about it, he seems to leave a lasting impression of doom and gloom. I just don’t see how that’s helpful. I suppose Obama supporters think they’re getting even with Dick Cheney who said in early 2001 that the U.S. was on the front end of a recession. Turns out that he was correct. But neither he nor President Bush blathered on endlessly about how bad everything was.
And then in today’s meeting Biden talked about the stimulus package with all that new spending. It’s going to be an avalanche of government spending.
In today’s Wall Street Journal, Nobel Prize winning economist Robert Lucas said all this spending isn’t necessary. Let the Fed take care of the economy, he argued. He wrote, “It entails no new government enterprises, no government equity positions in private enterprises, no price fixing or other controls on the operation of individual businesses, and no government role in the allocation of capital across different activities. These seem to me important virtues.”
Lucas is right. We do not need bailout nation. Nor do we need the government picking winners and losers in some massive new New Deal industrial policy. In fact, the absorption of scarce private resources by the government may very well make economic matters worse, not better.
And then of course Biden went on about how Obama is going to help the middle class, and how it’s the middle class that’s going to get us out of this jam. While I listened carefully, I never heard him say anything about rich people, or successful earners and investors. No mention of businesses. Irving Kristol taught us three decades ago that the top earners are the “economic activists”. They are the ones with the highest propensity to consume and invest. They’re the ones who purchase the yachts, which are subsequently constructed by blue-collar workers. And they’re the ones who run the small businesses and provide the capital for new entrepreneurial startups that are the lifeblood of this economy.
If we had an economy without rich people, we wouldn’t have much of an economy. That is why lower tax rates to reward the economic activists—that is, the most prominent capitalists—would be ever so helpful. Or slashing business tax rates that would create investment inflows to promote high wage earning new jobs. And, it would give consumers a break since they’re the ones that bear the brunt of high corporate taxes.
As it happens, there was a story in Sunday’s Washington Post that indicated Team Obama is considering some kind of business tax breaks. Now that would be a very good thing indeed. But mostly, I want to put a good word in for rich people. Can’t do without them.
On Tonight's Show...
Please join us tonight at 7pm ET on CNBC.On this evening's program:
THE LATEST ON MADOFF
CNBC’s Mike Huckman and Charlie Gasparino report.
A LOOK AT TODAY’S MARKET
CNBC’s Bob Pisani reports from the NYSE.
ECON DEBATE:
GDP, Consumer Sentiment & Housing
*Joe LaVorgna, chief U.S. economist at Deutsche Bank
*Jerry Bowyer, chief economist at Benchmark Financial
BIDEN’S GLOOMY ECONOMIC MEETING
CNBC’s Hampton Pearson reports.
*Heather Boushey, Center for Economic and Policy Research.
*Jimmy Pethokoukis, U.S News & World Report senior writer Money & Business
HOUSING
Looking ahead into ‘09
CNBC’s Diana Olick reports.
THE MARKET
*Joe Battipaglia, market strategist, Stifel Nicolaus
*Quentin Hardy, Forbes Silicon Valley Bureau Chief
*Don Luskin, chief investment officer at Trend Macro
Also…CNBC’s Margaret Brennan reports on small businesses.
Please join us. 7pm ET. CNBC.
Monday, December 22, 2008
On Tonight's Show...
Please join us tonight at 7pm ET on CNBC.On this evening's program:
CNBC’s Bob Pisani will deliver a report from the NYSE.
THE LATEST ON THE MADOFF SCANDAL
CNBC ace Charlie Gasparino reports.
THE STOCK MARKET
Are investors losing faith? Where do you put your money right now?
One-on-one with investor Mario Gabelli, chairman & CEO of GAMCO Investors, Inc.
MARKET PANEL
*Peter Schiff, chief global strategist at Euro Pacific Capital
*Mario Gabelli, chairman & CEO of GAMCO Investors, Inc
*Jack Gage, Forbes magazine associate editor
TARP II: OBAMA STIMULUS DEBATE
A closer look at the state of bailout nation.
*Steve Moore, Wall Street Journal senior economics writer & author of "The End of Prosperity"
*Robert Reich, author, public policy professor & former Clinton labor secretary
EXECUTIVE COMPENSATION, AIG BONUSES & MORE
Messrs. Reich & Moore will debate.
Please join us. 7pm ET. CNBC.
Revisiting TARP
The TARP plan that debuted in October was described as a way to purchase toxic assets from banks and other lenders in order to unclog the credit system, which is so essential to the efficient functioning of the economy. I supported that plan then, and I still do now.
Unfortunately, the plan has changed, and I feel as though the rug has been pulled out from under me. The shift to investing in various banks and other financial companies is troubling. So far, the Treasury has injected $244 billion of taxpayer capital into 150 companies. There have been no auctions for toxic assets. And now TARP may be used to bail out General Motors.
Where will it end? A recent news story talked about car-rental, ethanol, and equipment-leasing companies asking for TARP funds. After GM, maybe car suppliers and dealers will want TARP. It’s not hard to envision a long queue in front of the Treasury Department made up of various U.S. businesses hoping to get bailed out.
Once you stuff money into the banks, you create a political argument for stuffing money everywhere else. And now I worry that we have entered a period of unprecedented government intervention in the economy. It’s industrial policy on a grand scale; it’s picking winners and losers.
Another story talks about all these new czars in the White House — an energy czar, an urban-affairs czar, a health czar. Paul Volcker and Larry Summers already are economic czars. And a car czar may be announced this week. But all these czars remind me of the Soviet Union, not our great democracy here in the United States. A potential $1 trillion stimulus plan that relies almost solely on government spending is part of the new-New Deal economic-policy disease.
I don’t know how all this will get unwound. TARP has become much greater than I ever believed possible—technically, financially, and symbolically.
Color me very worried.
**For more of my thoughts on bailout nation, click here.
Unfortunately, the plan has changed, and I feel as though the rug has been pulled out from under me. The shift to investing in various banks and other financial companies is troubling. So far, the Treasury has injected $244 billion of taxpayer capital into 150 companies. There have been no auctions for toxic assets. And now TARP may be used to bail out General Motors.
Where will it end? A recent news story talked about car-rental, ethanol, and equipment-leasing companies asking for TARP funds. After GM, maybe car suppliers and dealers will want TARP. It’s not hard to envision a long queue in front of the Treasury Department made up of various U.S. businesses hoping to get bailed out.
Once you stuff money into the banks, you create a political argument for stuffing money everywhere else. And now I worry that we have entered a period of unprecedented government intervention in the economy. It’s industrial policy on a grand scale; it’s picking winners and losers.
Another story talks about all these new czars in the White House — an energy czar, an urban-affairs czar, a health czar. Paul Volcker and Larry Summers already are economic czars. And a car czar may be announced this week. But all these czars remind me of the Soviet Union, not our great democracy here in the United States. A potential $1 trillion stimulus plan that relies almost solely on government spending is part of the new-New Deal economic-policy disease.
I don’t know how all this will get unwound. TARP has become much greater than I ever believed possible—technically, financially, and symbolically.
Color me very worried.
**For more of my thoughts on bailout nation, click here.
Saturday, December 20, 2008
Wise Words from Mr. Welch
Here’s an excerpt from my recent CNBC interview with the legendary Jack Welch. The former GE chairman & CEO offered some fabulous advice on how great businesses can capitalize on current economic uncertainty and become even better. Mr. Welch is arguably the greatest business figure of his generation. It is always a great honor to have him on as a guest.Kudlow: You took over as the CEO and chairman of GE in the early 80s, and that was a really bad economic period. Really, really, bad.
Welch: I came in the same time as Ronald Reagan.
Kudlow: That is correct.
Welch: And I was lucky enough to have him there doing things. We didn’t grow in the first couple of years. We reshuffled our portfolio, took a lot of costs out, got in position to capitalize on his policies later on.
Kudlow: All right, so let me ask you, you’ve got two questions implicit in what you just said. Number one, what is your advice to business right now? You talked about reshuffling portfolios. Whether it’s General Electric or other great businesses, what do you do now in the throes of such—this one is probably going to turn out to be as bad as the one in the early 80s, which itself I think was the worst one since the 30s. What’s your advice to business Jack?
Welch: Well, we have a four-pronged approach. One, believe it’s going to be 10 percent more than you think it is. It’s going to be worse than you think it is. So prepare the business for a lower volume case.
Two, communicate like you’ve never communicated before. Get out and talk to everybody, “Here’s what we’re doing and why we’re doing it.” People at moments like this go to their worst instincts. They get scared. They don’t know what’s happening. Their friends are getting laid off. Let them know why you’re doing things, why they should play ball, and what’s in it for them to do it.
Thirdly, make sure you take care of your best players. Don’t cut everybody. Don’t have across-the-board cuts. Take care of the right players. Be sure you’ve got the players going forward. Be sure that you take care of your stars. Be sure they’re on board.
And finally, think offensively. If you’ve done the first three—think offensively. Think of your competitors in the following way: Buy them or bury them. Number one, go after them, their price has never been lower. It’s easy to buy in an up market. Now is the time that it’s the best deal for shareholders. Go out and do it. Secondly, steal their employees. Steal those people that can help you going forward and weaken them. So buy them or bury them. Four prongs.
Friday, December 19, 2008
On Tonight's Show...
Please join us tonight at 7pm ET on CNBC.On this evening's program:
THE BUSH AUTO BAILOUT
-CNBC chief Washington correspondent John Harwood reports all the latest.
-CNBC’s Phil LeBeau live from Detroit at GM Headquarters.
AUTO BAILOUT
Special Guests:
*Sen. Bob Corker (R-TN)
*Sen. Tom Carper (D-DE)
Also...former GE chairman & CEO Jack Welch will be aboard with his take.
MADOFF RUINS A LONG ISLAND TOWN
CNBC’s Darren Rovell offers a special report on the Madoff fallout.
THE MARKETS
CNBC Matt Nesto reports.
Stock Market Panel:
*Dawn Bennett, CEO of Bennett Group Financial Services
*Don Luskin, chief investment officer, trend Macro
*Stefan Abrams, Bryden-Abrams Investment Management Managing Partner
Please join us. 7pm ET. CNBC.
Thursday, December 18, 2008
On Tonight's Show...
Please join us tonight at 7pm ET on CNBC.On this evening's program:
-CNBC's Charlie Gasparino with the latest on the Madoff mess.
-CNBC's Hampton Pearson on Obama's SEC pick.
Regulation Debate
*Steve Moore, Wall Street Journal senior economics writer
*Dan Pedrotty, Director of the AFL-CIO Office of Investment
*CNBC's Charlie Gasparino
Markets
*CNBC's Rebecca Jarvis
*Jack Gage, Forbes magazine associate editor
*John Kilduff, VP of risk management at MF Global Ltd
*Jim LaCamp, RBC Dain Rauscher Sr. VP, Portfolio Manager & Financial Advisor
TARP Profitable?
*CNBC senior economics reporter Steve Liesman
Economy
*Andy Busch, global FX strategist at BMO Capital Markets
*David Malpass, president of Encima Global
*CNBC's Steve Liesman
Auto Shutdown
*CNBC's Phil Lebeau
Auto Bailout
*Senator Bob Corker
Please join us. 7pm ET. CNBC.
A Despicable Decision
It was Federal District Judge Gabriel Gorenstein who released big-time, $50 billion dollar scam-artist/fraud/crook Bernard Madoff. He is the one who did it. This ruling allows Madoff to stay out of jail, even though he couldn't meet the original bail conditions that he provide four co-signers to his $10 million bond.Write Judge Gorenstein. E-mail him. Call his office. (Contact info here.) Let him know what a terrible injustice he has done to every law-abiding citizen in this country, not to speak of the victims of this incredible fraud.
It is an outrage to me that Madoff is sitting back home in his luxurious $7 million Park Avenue pad after what he did to this country. What a joke. It is a complete and utter outrage.
Wednesday, December 17, 2008
On Tonight's Show...
Please join us tonight at 7pm ET on CNBC. On this evening's program:
-CNBC’S Rebecca Jarvis on today's markets and oil dropping despite OPEC announcement.
-CNBC’s Rick Santelli reports live from the CME on the falling dollar.
FED FALLOUT
*Art Laffer, economist, chairman of Laffer Associates
*Michael Pento, Delta Global Advisors, Inc. Senior Market Strategist
*Steve Forbes, President and Chief Executive Officer of Forbes
*Robert Reich, author, public policy professor & former Clinton labor secretary
FED FALLOUT ON MORTGAGES
CNBC’s Diana Olick will report.
HUD HEAD CALLS AID ON MORTGAGES A FAILURE
HUD Secretary Preston will be aboard.
THE MARKET
*Joe Battipaglia, market strategist, Stifel Nicolaus
*Zachary Karabel, president of River Twice Research
*Neil Weinberg, Forbes Senior Editor
MADOFF MESS
CNBC ace Charlie Gasparino reports.
THE GOP: IS IT “HOOVER TIME”?
*Bob Shrum, Democratic strategist
*Jerry Bowyer, chief economist at Benchmark Financial
Please join us. 7pm ET. CNBC.
(Anti) Mustard Seeds
I’m going to get to mustard seeds in a moment, but let me first address two anti-mustard seeds: “Bailout Nation” and a pump-priming Fed. Bailout nation remains an ongoing issue. It really goes to the issue of government planning, industrial policy, and Uncle Sam picking winners and losers. This obviously includes Detroit, which we will probably get a decision on later this week.
Here’s a quote from President Bush that captures all my concerns about Bailout Nation: “I’ve abandoned free market principles to save the free market system.” Oh no. Say it ain’t so Mr. Bush. Either you believe in markets, or you don’t. Unfortunately, right now, the intellectual and policy tide out of Washington is anti-market. Not good.
As far as the Fed’s shock-and-awe, pump priming is concerned, I wrote about it yesterday. But already, the U.S. dollar is plunging. Gold is rising. How much will the Fed prime the pump? There’s no evidence that Bernanke cares one wit about the dollar. Not now, not yesterday, not tomorrow. If the greenback keeps falling, it can’t be good. I thought we learned that in recent years. Let’s not go to palm tress on the trading floor. A zero interest rate and massive pump priming reminds me of Argentina, not the United States.
Look, if we keep depreciating the dollar, the Chinese (our bankers), are going to boycott our bond markets. And then, at some point, longer-term interest rates are going to go up, not down. That includes mortgage rates.
The Fed’s balance sheet, reserve bank credit, is already expanding at 107 percent over the past 52 weeks. The monetary base is rising at a 41 percent pace. M1 and M2 at 8 percent. Money lags are long and variable, but there’s more than enough stimulus in the system. Banks have more than $500 billion in interest bearing excess reserves. It’s enough already.
At least Harvard economist Greg Mankiw is being honest when he says the Fed should drop its price stability rhetoric and just come out and say it wants to raise the inflation rate to at least 2-3 percent.
But if we really want to jolt the economy, there’s a tried and true way to do it. Lower marginal tax rates across-the-board for individuals and businesses. Labor and capital costs will be reduced, risk taking and success will be rewarded, and investment will flow back into the United States. A chronically cheap dollar will simply repel investment, not attract it.
On the other hand, there are some positive mustard seeds that could grow into recovery. For starters, the drop in the CPI is boosting real wages. Of course that is an offshoot of the plunge in retail gasoline prices, which represents a $350 billion dollar tax cut for consumers. This may be why core retail sales rose ½ percent in November, the first positive reading since July. It’s also a big tax cut for corporate profits.
In fact, for businesses, the plunge in commodity prices in general has balanced out prices paid and prices received. The CPI/PPI ratio has turned positive in recent months. This is a very good sign for corporate profits. And it may be a key reason why stocks have been rising and why the November 20th bottom looks like the real bottom.
Another mustard seed is the big decline in the 3-month dollar Libor rate, along with declining short-term credit market spreads in general. There is a thaw in the money market freeze up.
Still another mustard seed is the decline in mortgage rates. This, along with lower home prices, has raised housing affordability to its best level in many years. In fact, as economist and Carpe Diem blogger Mark Perry recently pointed out, housing affordability has reached an all-time historical high.
In other words, the excesses of the recession are gradually healing. The mis-investment of the recession is gradually being absorbed. The Fed is adding liquidity and that is another plus. I just don’t want them to go hog wild and destroy the dollar in the process. If we maintain a steady currency and provide a much needed tax rate reduction for large and small businesses, and if we allow market forces work out the rest, then the economic patient will heal. That’s my message.
Here’s a quote from President Bush that captures all my concerns about Bailout Nation: “I’ve abandoned free market principles to save the free market system.” Oh no. Say it ain’t so Mr. Bush. Either you believe in markets, or you don’t. Unfortunately, right now, the intellectual and policy tide out of Washington is anti-market. Not good.
As far as the Fed’s shock-and-awe, pump priming is concerned, I wrote about it yesterday. But already, the U.S. dollar is plunging. Gold is rising. How much will the Fed prime the pump? There’s no evidence that Bernanke cares one wit about the dollar. Not now, not yesterday, not tomorrow. If the greenback keeps falling, it can’t be good. I thought we learned that in recent years. Let’s not go to palm tress on the trading floor. A zero interest rate and massive pump priming reminds me of Argentina, not the United States.
Look, if we keep depreciating the dollar, the Chinese (our bankers), are going to boycott our bond markets. And then, at some point, longer-term interest rates are going to go up, not down. That includes mortgage rates.
The Fed’s balance sheet, reserve bank credit, is already expanding at 107 percent over the past 52 weeks. The monetary base is rising at a 41 percent pace. M1 and M2 at 8 percent. Money lags are long and variable, but there’s more than enough stimulus in the system. Banks have more than $500 billion in interest bearing excess reserves. It’s enough already.
At least Harvard economist Greg Mankiw is being honest when he says the Fed should drop its price stability rhetoric and just come out and say it wants to raise the inflation rate to at least 2-3 percent.
But if we really want to jolt the economy, there’s a tried and true way to do it. Lower marginal tax rates across-the-board for individuals and businesses. Labor and capital costs will be reduced, risk taking and success will be rewarded, and investment will flow back into the United States. A chronically cheap dollar will simply repel investment, not attract it.
On the other hand, there are some positive mustard seeds that could grow into recovery. For starters, the drop in the CPI is boosting real wages. Of course that is an offshoot of the plunge in retail gasoline prices, which represents a $350 billion dollar tax cut for consumers. This may be why core retail sales rose ½ percent in November, the first positive reading since July. It’s also a big tax cut for corporate profits.
In fact, for businesses, the plunge in commodity prices in general has balanced out prices paid and prices received. The CPI/PPI ratio has turned positive in recent months. This is a very good sign for corporate profits. And it may be a key reason why stocks have been rising and why the November 20th bottom looks like the real bottom.
Another mustard seed is the big decline in the 3-month dollar Libor rate, along with declining short-term credit market spreads in general. There is a thaw in the money market freeze up.
Still another mustard seed is the decline in mortgage rates. This, along with lower home prices, has raised housing affordability to its best level in many years. In fact, as economist and Carpe Diem blogger Mark Perry recently pointed out, housing affordability has reached an all-time historical high.
In other words, the excesses of the recession are gradually healing. The mis-investment of the recession is gradually being absorbed. The Fed is adding liquidity and that is another plus. I just don’t want them to go hog wild and destroy the dollar in the process. If we maintain a steady currency and provide a much needed tax rate reduction for large and small businesses, and if we allow market forces work out the rest, then the economic patient will heal. That’s my message.
Tuesday, December 16, 2008
Bernanke & Co. is Locked and Loaded
In a monetary version of shock-and-awe, the Federal Reserve unleashed a massive easing move with its FOMC policy announcement Tuesday -- one that represents a sea change in central-bank operations.For starters, Bernanke & Co. established a new target range for the federal funds rate of zero-to-one-quarter percent. That's right: zero-to-one-quarter percent. In doing so, the Fed is abandoning its fed funds target and essentially following Treasury bill rates in the open market, which have been trading close to zero for many weeks. The Fed also signaled the near-zero funds rate could last for "some time."
However, the really big news is not the fed funds target. It's this sentence:
"The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level." (Italics mine.)
The Fed goes on to say it will purchase large quantities of agency debt -- meaning Fannie and Freddie -- and more mortgage-backed securities (quite possibly toxic assets). In other words, it wants to drive mortgage rates down. What's more, the Fed may buy long-term Treasury securities, also to drive bond yields lower. And it will purchase the Term Asset Backed Securities Loan Facility in order to finance consumer-related bonds and pump liquidity to consumer lenders.
The message here is that Bernanke & Co. is locked and loaded, ready to shoot every last bullet to help credit markets and the economy. In particular, the Fed is formally adopting a Milton Friedman-type approach that is directed at expanding its balance sheet and stimulating the economy.
The Fed's balance sheet already has more than doubled from roughly $900 billion to $2.2 trillion. For all we know it may soon double again. Money-supply measures are already growing at 7 to 8 percent.
And while some economists worry about higher future inflation from all this money-creation, Tuesday's consumer price report actually showed deflation of 10 percent annually over the past three months. That gives the central bank ammunition to ignore inflation and aim instead for a massive monetary easing.
Will it all work? In the short-run it may. But is a near-zero interest rate, and even more pump-priming, really the best longer-term solution? It's still troubling that Fed policy lacks a true anchor or compass. In the past, targeting the economy alone has resulted in higher inflation. That's why many conservatives wish the central bank would keep a sharp eye on the value of the dollar and commodity prices (including gold).
While energy and other commodity prices have experienced a wicked plunge since the summer, in recent days -- ahead of the Fed's new policy decision -- the dollar has fallen and commodities have rebounded. But the question is this: In the future, will the Fed be able to unwind its huge cash-liquidity injections? The same can be asked about government bailouts for banks and quite possibly Detroit. Yes, this is an emergency. But it's also unprecedented government intervention in the economy. How we restore traditional free-market capitalism remains unsaid and unknown. That is worrisome.
Stocks cheered the Fed's move by rallying nearly 400 points on Tuesday. Savvy investors Ken Heebner and Robert Doll -- two financial and political conservatives -- strongly endorsed the Fed moves on CNBC. This massive easing almost certainly underscores the likelihood that stocks bottomed on November 20. Both the monetary surge and the upturn in equities are pointing to economic recovery next spring or summer.
Meanwhile, on the fiscal policy front, everyone has been focusing on Obama's huge big-government-spending infrastructure play. But Team Obama is also drawing up plans for a massive purchase of mortgages in order to get long-term borrowing rates down to 4.5 percent -- a full percentage-point drop. The specifics are sketchy, but there's no question the Obama Treasury, led by Tim Geithner, will be working hand-in-glove with Geithner's former Fed boss Ben Bernanke to drive down mortgage rates and stop the housing slump.
Perhaps Bernanke himself scored a few points with his historic shock-and-awe easing move. It's as though Bernanke is telling the new president: Hey, I'm on your team.
But I still believe the best economic stimulus would be a move to cut tax rates across-the-board for individuals and businesses. No matter how much money the Fed prints, or how many roads or mortgages Uncle Sam buys, none of it creates new incentives for private enterprise, risk-taking, and investment.
To complement the Fed's easy money, permanent tax cuts would increase the production and investment that would soak up the excess money and create non-inflationary growth. Alas, supply-side tax cuts are nowhere to be found right now.
On Tonight's Show...
Please join us tonight at 7pm ET on CNBC. On this evening's program:
TODAY’S HISTORIC FED POLICY SHIFT, STOCK MARKET REACTION & MORE
-CNBC senior economics reporter Steve Liesman reports.
-CNBC’ s Rick Santelli will be live from the CME.
-CNBC’s Rebecca Jarvis reports on today's big stock market gains.
FED REACTION
CGM Focus Fund manager Ken Heebner will offer his perspective.
FED PANEL
*Wayne Angell, former Federal Reserve Governor
*Brian Wesbury, chief economist at First Trust Advisors
*Peter Schiff, chief global strategist at Euro Pacific Capital
*Bob McTeer, former President of the Federal Reserve Bank of Dallas
Also on board:
*Art Laffer, economist, chairman of Laffer Associates
*Joe LaVorgna, chief U.S. economist at Deutsche Bank
*David Malpass, Deputy Assistant Secretary of Treasury ('86-'89) & President of Encima Global
OBAMA-NOMICS
CNBC chief Washington correspondent John Harwood will report.
STOCK MARKET PANEL
*Dennis Gartman, editor of the Gartman Letter
*Jim LaCamp, RBC Dain Rauscher Sr. VP, Portfolio Manager & Financial Advisor
*Peter Schiff, chief global strategist at Euro Pacific Capital
*Ken Heebner, CGM Focus Fund manager
Please join us. 7pm ET. CNBC.
Monday, December 15, 2008
On Tonight's Show...
Please join us tonight at 7pm ET on CNBC. On this evening's program:
MADOFF
CNBC ace Charlie Gasparino reports on the latest developments with Melissa Lee discussing the impact on charities.
Also… former SEC Chairman Richard Breeden will be on board.
THE MARKETS & ECONOMY
CNBC’s Bertha Coombs will be live from the NYSE with Rick Santelli reporting from the CME on credit spreads, currencies and commodities.
Panel:
*Don Luskin, chief investment officer, Trend Macro
*Quentin Hardy, Forbes Silicon Valley Bureau Chief
*Stefan Abrams, Bryden-Abrams Investment Management Managing Partner
*Vince Reinhart, former Director of the Federal Reserve Board's Division of Monetary Affairs
AUTO BAILOUT UPDATE
CNBC chief Washington correspondent John Harwood reports.
OBAMA'S $1 TRILLION FISCAL PACKAGE
*Jimmy Pethokoukis, U.S News & World Report senior writer Money & Business
*Robert Reich, author, public policy professor & former Clinton labor secretary
Please join us. 7pm ET. CNBC.
Bigger Government Is Not Stimulus
Here’s another video from my friend and senior fellow at the Cato Institute, Dan Mitchell – one that is particularly timely – on Keynesian “stimulus” proposals.
Dan notes in his email to me, “With Reuters reporting that Obama may propose as much as $1 trillion (yes, trillion) of new spending, which would be in addition to the huge expansion of government under Bush, there is a desperate need for more education on this issue."
Amen to that.
As I recently wrote, government cannot spend our way into prosperity. What we need is a revival of the dormant animal spirits. They have been beaten down by a brutal bear market in stocks, the ongoing housing slump, and all the myriad blockages to credit availability. A bunch of new spending won’t do the trick. Lower tax rates will.
In other words, government policy must make it clear that new successes will be handsomely rewarded.
Dan notes in his email to me, “With Reuters reporting that Obama may propose as much as $1 trillion (yes, trillion) of new spending, which would be in addition to the huge expansion of government under Bush, there is a desperate need for more education on this issue."
Amen to that.
As I recently wrote, government cannot spend our way into prosperity. What we need is a revival of the dormant animal spirits. They have been beaten down by a brutal bear market in stocks, the ongoing housing slump, and all the myriad blockages to credit availability. A bunch of new spending won’t do the trick. Lower tax rates will.
In other words, government policy must make it clear that new successes will be handsomely rewarded.
Kudlow In the News
From Mediabistro:
Kudlow Continues Anchoring "The Call"
A TVNewser tipster asks today: "Is Larry Kudlow the new co-host of The Call?" Kudlow has co-hosted the 11amET show, today with Melissa Francis and Trish Regan, since November 24. A CNBC spokesperson tells TVNewser, "Closing out on one administration and heading into a new one, who better than Larry Kudlow to get more airtime?"
Kudlow Continues Anchoring "The Call"
A TVNewser tipster asks today: "Is Larry Kudlow the new co-host of The Call?" Kudlow has co-hosted the 11amET show, today with Melissa Francis and Trish Regan, since November 24. A CNBC spokesperson tells TVNewser, "Closing out on one administration and heading into a new one, who better than Larry Kudlow to get more airtime?"
Big Bullish Mustard Seed
Here's a big, bullish, mustard seed for the stock market and economy. LIBOR decreases despite Madoff scandal, etc. TED spread back to pre-Lehman bankruptcy levels. The market is pricing in a much lower level of credit risk. Liquidity is recovering.
Who’s Losing the U.S. Car Business?
Look no farther than the UAW.
After Chairman Mao’s revolution about 60 years ago, people in the U.S. played the blame game by asking, “Who lost China?” Well, following the breakdown of an arduous seven-hour Senate negotiating session on Thursday night, many are asking, “Who lost the U.S. car business?” Right after the UAW vetoed a compromise, bankruptcy-lite, Detroit-little-three rescue plan put together by Tennessee Republican Bob Corker, UAW president Ron Gettelfinger played the blame game by blasting Corker and the Republican party for “singling out” union workers to shoulder the burden of reviving the U.S. car business.
In truth, the UAW is to blame.
If Sen. Corker’s plan had prevailed, with UAW support, many believe it would have had 90 votes in the Senate. GM could have gone forward with a clean-as-a-whistle balance sheet under a three-part restructuring plan that included a $60 billion bond-refinancing cram-down, a renegotiation of the $30 billion VEBA health-care trust, and a pay-restructuring plan that would put Detroit compensation levels in line with those of foreign transplants Honda, Toyota, Nissan, and BMW.
Average compensation for the Detroit little three is $72.31. Toyota’s average wage is $47.60, Honda’s is $42.05, and Nissan’s is $41.97, for an average of $44.20. So Corker’s idea was to bring that $72 a lot closer to that $44. (Corker notably knocked out Korean carmaker Kia, which has super-low wages.)
Corker’s plan also was constructed in true compromise fashion. Among the negotiators were reps from GM, Chrysler, and Ford, and bondholders like fixed-income giant PIMCO. Critically, UAW representatives also were in the negotiating room, with an open line to Gettelfinger back home.
During the negotiations Corker tried to be as compromising as possible on the tough question of wages, benefits, and overall compensation. He asked the union to be competitive, but he never specified parity or complete equality with the foreign transplants. And Corker provided that the comp-package would be certified next year by the secretary of Labor — an Obama selection. In addition, the Senate governing the package would be made up of 58 Democrats, rather than today’s 50.
All Corker asked was a 2009 date for union pay restructuring. Sen. Corker never specified his date. He asked the UAW to name its date for a new pay package. But it had to be in 2009. In return, union members would get a lot of stock in this deal — up to $10.5 billion of new equity as GM’s heavy debt burden would be converted into common shares.
But the UAW refused to make concessions. Instead, it insisted it would only renegotiate its current contract when it ends in 2011. That was the sticking point that killed the deal.
You have to ask this question: If the Detroit carmakers are in dire straits, going broke in two weeks, right now in late 2008, how can the UAW wait until 2011 to make its concessions? The financial problem is today, not two years from today. The threat of liquidation, with perhaps a few million autoworker, supplier, and car-dealer jobs lost, is today’s threat, not a 2011 threat. So what’s the UAW waiting for?
That’s easy. Gettelfinger is waiting for President Obama and a Senate with 58 Democrats. He also was playing a game of bluff with President George W. Bush. He knew Bush had $15 billion of TARP money ready to go, meaning the TARP was Gettelfinger’s trump card. The tough-minded union leader never believed the White House would let GM sink and possibly force millions of job losses in the middle of a recession.
So while Sen. Corker was negotiating in good faith (even with the support of Democratic big-wig Chris Dodd), Gettelfinger doomed the deal, knowing full well that the Democratic Senate conference would never walk away from the UAW.
What happens now is anybody’s guess. The White House has suggested that TARP may be called into play, although the Treasury is in no rush to make a decision. The Treasury is going to kick the tires to see if a TARP bailout for Detroit really works. However, a TARP auto bailout may require new legislation. And ironically, a Treasury TARP loan may carry the very same conditions proposed by Sen. Corker, including a “car tsar” to supervise the whole operation.
Whatever the outcome, Bob Corker has emerged as a Senate star. As a former businessman who ran his own construction company and built shopping centers, and a former chief operating officer for the state of Tennessee, Corker knows finance and the economy. He even was a long-time union member — beginning as a 19-year-old bricklayer — and a trustee of the carpenter’s union fund in his home state.
So while Mr. Corker may have lost this battle, he will be heard from again.
After Chairman Mao’s revolution about 60 years ago, people in the U.S. played the blame game by asking, “Who lost China?” Well, following the breakdown of an arduous seven-hour Senate negotiating session on Thursday night, many are asking, “Who lost the U.S. car business?” Right after the UAW vetoed a compromise, bankruptcy-lite, Detroit-little-three rescue plan put together by Tennessee Republican Bob Corker, UAW president Ron Gettelfinger played the blame game by blasting Corker and the Republican party for “singling out” union workers to shoulder the burden of reviving the U.S. car business.
In truth, the UAW is to blame.
If Sen. Corker’s plan had prevailed, with UAW support, many believe it would have had 90 votes in the Senate. GM could have gone forward with a clean-as-a-whistle balance sheet under a three-part restructuring plan that included a $60 billion bond-refinancing cram-down, a renegotiation of the $30 billion VEBA health-care trust, and a pay-restructuring plan that would put Detroit compensation levels in line with those of foreign transplants Honda, Toyota, Nissan, and BMW.
Average compensation for the Detroit little three is $72.31. Toyota’s average wage is $47.60, Honda’s is $42.05, and Nissan’s is $41.97, for an average of $44.20. So Corker’s idea was to bring that $72 a lot closer to that $44. (Corker notably knocked out Korean carmaker Kia, which has super-low wages.)
Corker’s plan also was constructed in true compromise fashion. Among the negotiators were reps from GM, Chrysler, and Ford, and bondholders like fixed-income giant PIMCO. Critically, UAW representatives also were in the negotiating room, with an open line to Gettelfinger back home.
During the negotiations Corker tried to be as compromising as possible on the tough question of wages, benefits, and overall compensation. He asked the union to be competitive, but he never specified parity or complete equality with the foreign transplants. And Corker provided that the comp-package would be certified next year by the secretary of Labor — an Obama selection. In addition, the Senate governing the package would be made up of 58 Democrats, rather than today’s 50.
All Corker asked was a 2009 date for union pay restructuring. Sen. Corker never specified his date. He asked the UAW to name its date for a new pay package. But it had to be in 2009. In return, union members would get a lot of stock in this deal — up to $10.5 billion of new equity as GM’s heavy debt burden would be converted into common shares.
But the UAW refused to make concessions. Instead, it insisted it would only renegotiate its current contract when it ends in 2011. That was the sticking point that killed the deal.
You have to ask this question: If the Detroit carmakers are in dire straits, going broke in two weeks, right now in late 2008, how can the UAW wait until 2011 to make its concessions? The financial problem is today, not two years from today. The threat of liquidation, with perhaps a few million autoworker, supplier, and car-dealer jobs lost, is today’s threat, not a 2011 threat. So what’s the UAW waiting for?
That’s easy. Gettelfinger is waiting for President Obama and a Senate with 58 Democrats. He also was playing a game of bluff with President George W. Bush. He knew Bush had $15 billion of TARP money ready to go, meaning the TARP was Gettelfinger’s trump card. The tough-minded union leader never believed the White House would let GM sink and possibly force millions of job losses in the middle of a recession.
So while Sen. Corker was negotiating in good faith (even with the support of Democratic big-wig Chris Dodd), Gettelfinger doomed the deal, knowing full well that the Democratic Senate conference would never walk away from the UAW.
What happens now is anybody’s guess. The White House has suggested that TARP may be called into play, although the Treasury is in no rush to make a decision. The Treasury is going to kick the tires to see if a TARP bailout for Detroit really works. However, a TARP auto bailout may require new legislation. And ironically, a Treasury TARP loan may carry the very same conditions proposed by Sen. Corker, including a “car tsar” to supervise the whole operation.
Whatever the outcome, Bob Corker has emerged as a Senate star. As a former businessman who ran his own construction company and built shopping centers, and a former chief operating officer for the state of Tennessee, Corker knows finance and the economy. He even was a long-time union member — beginning as a 19-year-old bricklayer — and a trustee of the carpenter’s union fund in his home state.
So while Mr. Corker may have lost this battle, he will be heard from again.
Friday, December 12, 2008
The TARP Deal Is Not Done
Media reports and Wall Street investors are now assuming the Treasury will put up $15 billion in TARP money to keep the Detroit carmakers out of bankruptcy. But my sources tell me that the TARP deal is not done — not by a long shot.
At a minimum, it’s going to take the Treasury several days to walk through the financial numbers and gather all the facts before it takes any action. The Treasury wants to see the cash-flow data and get to the truth about GM and Chrysler. (Ford doesn’t need the money.) And nothing will happen until these numbers are properly crunched. And the Treasury may well want to arrange for a built-in monitor — something that might even look like a car tsar — if any TARP money is dispersed.
Senate sources tell me that any TARP-money allocation might include the very same conditions proposed by Tennessee Sen. Bob Corker in legislation that broke down in a marathon session in the Senate list night.
So folks shouldn’t count their TARP eggs before they're hatched. And nothing is expected to be announced today.
At a minimum, it’s going to take the Treasury several days to walk through the financial numbers and gather all the facts before it takes any action. The Treasury wants to see the cash-flow data and get to the truth about GM and Chrysler. (Ford doesn’t need the money.) And nothing will happen until these numbers are properly crunched. And the Treasury may well want to arrange for a built-in monitor — something that might even look like a car tsar — if any TARP money is dispersed.
Senate sources tell me that any TARP-money allocation might include the very same conditions proposed by Tennessee Sen. Bob Corker in legislation that broke down in a marathon session in the Senate list night.
So folks shouldn’t count their TARP eggs before they're hatched. And nothing is expected to be announced today.
CNBC Programming Note
We have received a large number of inquiries from concerned viewers of CNBC’s “Kudlow & Company” asking if Larry is still on the air, or why their television-recording device (e.g. TiVo, etc) is no longer recording the program.
The issue is simple. The name of the show has changed. It is now called “CNBC Reports”.
Your best bet is to tape the show based on the time it appears, rather than title. For example, viewers in the Eastern Time zone should simply program their system to record the show at 7pm. In the alternative, you could also tape the show by its new name, “CNBC Reports”.
We apologize for any inconvenience this may have caused, and we thank the many viewers who have voiced their concerns.
Incidentally, our new and improved show at the 7pm hour is receiving the best ratings in its history. A big thank you to all viewers for your continued loyalty and support!
The issue is simple. The name of the show has changed. It is now called “CNBC Reports”.
Your best bet is to tape the show based on the time it appears, rather than title. For example, viewers in the Eastern Time zone should simply program their system to record the show at 7pm. In the alternative, you could also tape the show by its new name, “CNBC Reports”.
We apologize for any inconvenience this may have caused, and we thank the many viewers who have voiced their concerns.
Incidentally, our new and improved show at the 7pm hour is receiving the best ratings in its history. A big thank you to all viewers for your continued loyalty and support!
Thursday, December 11, 2008
Tonight's Show...
Please join us tonight at 7pm ET on CNBC. On this evening's program:
EYE ON THE AUTO BAILOUT, OBAMA & MORE
CNBC’s Hampton Pearson reports.
*Jim Press, Chrysler president and vice chairman.
*Sen. Kit Bond (R-Mo) live from Washington.
JAMIE DIMON INTERVIEW
CNBC’s Melissa Lee reports.
THE MARKETS
CNBC’s Bob Pisani reports from the NYSE.
*Michael Pento, Delta Global Advisors, senior market strategist
*Jerry Bowyer, chief economist at Benchmark Financial
* Jack Gage, Forbes magazine associate editor
*Morris Reid, political strategist with Westin Rinehart
Also on board… Frank MacInnis, chairman & CEO at EMCOR Group
And CNBC’s Diana Olick with a report on foreclosures.
Please join us. 7pm ET. CNBC.
Wednesday, December 10, 2008
BlueFire Spitfire
William Davis, a representative of a company called BlueFire Ethanol, sent me a rather interesting email this morning. He is up in arms over my characterization in a recent column that his company was looking for TARP money.
Mr. Davis claims his company wasn’t looking for government cash, as suggested in a recent Wall Street Journal story entitled, “Nonbank Firms Like Avis Seek to Broaden U.S. Relief on Credit”. However, in the context of that article, it sure looks like BlueFire was preparing to go hat-in-hand to the Treasury for a bit of TARP.
BlueFire may not have precisely made the request (we don’t know exactly what they told the reporter), but the way that story was written, it sure hints of their interest in securing a wee bit of Uncle Sam’s dough.
So, while I acknowledge that BlueFire may not have been precisely quoted for a TARP request, I do stand by my recent column.
Mr. Davis claims his company wasn’t looking for government cash, as suggested in a recent Wall Street Journal story entitled, “Nonbank Firms Like Avis Seek to Broaden U.S. Relief on Credit”. However, in the context of that article, it sure looks like BlueFire was preparing to go hat-in-hand to the Treasury for a bit of TARP.
BlueFire may not have precisely made the request (we don’t know exactly what they told the reporter), but the way that story was written, it sure hints of their interest in securing a wee bit of Uncle Sam’s dough.
So, while I acknowledge that BlueFire may not have been precisely quoted for a TARP request, I do stand by my recent column.
Tuesday, December 09, 2008
Infrastructure Spending Is No Cure-All
A lot of people on Wall Street are praising Obama’s infrastructure plan for roads, highways, tunnels, schools, green tech, and other build-outs. But they don’t know that in 2008 alone the U.S. spent $114 billion on infrastructure, following $102 billion in 2007. Didn’t do much for growth did it?
Over the past five years infrastructure spending domestically for non-defense comes to nearly $500 billion, with another $500 billion spent on defense-related infrastructure. But an academic study from the University of Chicago argues that government spending does not stimulate jobs and growth, and in fact crowds out private investment. Infrastructure spending also doesn’t create permanent new businesses, jobs, or incomes.
What Wall Street may be missing is that only a permanent change in tax-rate incentives — such as slashing the corporate tax — will reignite investment and job creation. Governments don’t create new technologies or new risk-taking. For that matter they also don’t create the new profits that are so essential to private enterprise. In the short-run, infrastructure building appears to create jobs. But these are not permanent.
The Obama package is unbalanced by relying on this infrastructure business without any real permanent reductions in tax rates or business cash-expensing for investment. That’s why the Obama plan needs to be changed.
Over the past five years infrastructure spending domestically for non-defense comes to nearly $500 billion, with another $500 billion spent on defense-related infrastructure. But an academic study from the University of Chicago argues that government spending does not stimulate jobs and growth, and in fact crowds out private investment. Infrastructure spending also doesn’t create permanent new businesses, jobs, or incomes.
What Wall Street may be missing is that only a permanent change in tax-rate incentives — such as slashing the corporate tax — will reignite investment and job creation. Governments don’t create new technologies or new risk-taking. For that matter they also don’t create the new profits that are so essential to private enterprise. In the short-run, infrastructure building appears to create jobs. But these are not permanent.
The Obama package is unbalanced by relying on this infrastructure business without any real permanent reductions in tax rates or business cash-expensing for investment. That’s why the Obama plan needs to be changed.
No UAW Haircut, no Little-Three Bailout?
Bailout nation is in trouble today as reports circulate that the little-three bailout deal does not have the votes in the Senate to pass. Also, Nancy Pelosi wants a lot of Republican votes in the House, but it doesn’t look like she’s gonna get them. One key point missing from the Democratic proposal is a strict compensation condition, whereby GM wages and benefits must equal Toyota’s. The difference right now is roughly $75 for GM and $48 for Toyota. This is the Sen. Bob Corker proposal, and he himself is opposed to the bill because of the absence of any strict compensation conditions.
Nancy Pelosi calls the deal a barber shop, where everybody will take a haircut. But there is no UAW haircut. And that may turn out to be a real deal-blocker.
Nancy Pelosi calls the deal a barber shop, where everybody will take a haircut. But there is no UAW haircut. And that may turn out to be a real deal-blocker.
Monday, December 08, 2008
Tonight's Show...
Please join us tonight at 7pm ET on CNBC. On this evening's program:
BIG 3 BAILOUT DEAL
CNBC’s Phil Lebeau reports.
BOND REPORT
CNBC’s Rick Santelli reports.
THE MARKETS
*Quentin Hardy, Forbes Silicon Valley Bureau Chief
*Zach Karabell, president of River Twice Research
*CNBC’s Rick Santelli
*CNBC’s Bob Pisani
HOUSING, MORTGAGE MODIFICATIONS, GSE LOAN LIMITS
CNBC’s Diana Olick
CNBC senior economics reporter Steve Liesman
MEDIA MALAISE: NY TIMES CASH FLOW WOES & TRIBUNE BANKRUPTCY
CNBC’s Julia Boorstin reports.
OBAMA'S NEW NEW DEAL
*Steve Moore, Wall Street Journal senior economics writer
*Robert Reich, author, public policy professor & former Clinton labor secretary
Please join us. 7pm ET. CNBC.
Saturday, December 06, 2008
Where to Draw the Bailout Line?
It’s time for supply-side tax cuts.
The bailout-nation saga continued this week as the little-three carmakers from Detroit drove to Washington to plead for a $34 billion federal package to save themselves from bankruptcy and insolvency. Hot on their heels was a devastating report of 533,000 lost jobs in November. Actually, it’s a loss of 732,000 jobs, including downward revisions from the prior two months. Unemployment moved up to 6.7 percent from 6.5 percent, a number that’s going to get worse as the volume of discouraged workers continues to rise.
So here’s the painful choice for both Republicans and Democrats in Congress: Will the political class risk a Detroit-carmaker bankruptcy that might lead to catastrophic liquidation — including, realistically, a couple million car-related jobs — all while the recession deepens and job losses mount (1.2 million in just the past three months)?
It’s a tough choice — especially for Republicans, most of whom want to vote against bailout nation and stop big-government encroachment on our free-market economy. That’s the right theory. But are the economic risks simply too great to employ it?
Various polling surveys say bailout nation, and a federal rescue for autos in particular, is very unpopular. At least 60 percent are polling against a bailout. The TARP bailout of banks is increasingly unpopular.
Meanwhile, the pressure for more bailouts grows daily. The Avis rental-car company wants a bailout from TARP. A company called BlueFire Ethanol wants a bailout. The trade association for equipment-leasing companies wants a bailout. There’s no end to it. And if we keep going down this path we’ll make a mockery of free-market capitalism.
Where to draw the line? That’s the huge political question.
Coming back to Detroit, there may be a pragmatic solution, one that takes some of the apocalypse-now threat of major economic decline out of play. Senator Bob Corker and others have proposed a federal oversight board that would in effect become a bankruptcy court. Strict conditions would be imposed on the carmakers, especially regarding compensation — the single-biggest reason for Detroit’s decades-long decline.
Corker wants Detroit to have the exact same compensation levels as the Japanese transplants in the non-union Southern states. That means moving hourly labor costs down from roughly $70 to $48. It means reopening the UAW contracts that have created the huge pay-gap between Toyota and GM. It means putting an end to excessive pension and healthcare benefits.
According to Professor Mark Perry of the University of Michigan, GM healthcare benefits add $1,500 to the price of every vehicle, while pension costs add another $700 per car. That will have to end. The lucrative jobs bank that pays laid-off workers 95 percent of their compensation also will have to stop. And bondholders will have to be satisfied with a complete renegotiation of GM’s $62 billion in debt, including the union retiree healthcare fund that is under-funded by $30 billion.
There still will be considerable job losses for downsized Detroit carmakers. They’ll have to cut a huge chunk of their dealer networks. Domestic brands will have to be sharply reduced. But essentially, as would be the case under Chapter 11 bankruptcy, the federal government will provide short-term financing while Detroit goes through its radical restructuring. It looks like bankruptcy lite, and it will completely change the direction of the former Big Three.
It’s probably too much to ask, but tough federal action under the aegis of oversight-board enforcement also should relieve the CAFE fuel standards that have plagued U.S. automakers. At the very least, worldwide standards should be substituted for domestic ones. Making expensive small green cars is an unprofitable business.
Ironically, with oil and retail gasoline prices plunging, it’s not unreasonable to expect something of an auto-sales recovery. Gas prices have dropped all the way to $1.75 from over $4. This tax cut will help revive the whole economy, along with auto sales.
But if Washington can put this car-bailout business behind it, perhaps Congress can move on to the ultimate solution: restoring economic growth.
President-elect Obama has been cagey about the details of his massive $700 billion infrastructure spending plan and whether he’ll raise taxes on successful earners. But this new New Deal, including Obama’s middle-class tax credits, will not create permanent economic growth incentives.
What will? A genuine supply-side growth agenda to reduce tax rates across-the-board.
If the Republican party wants to put bailout nation to rest it should campaign for lower corporate, individual, and investment tax rates. It should make clear that the Democrats are the government-spending party while the Republicans are the tax-cutting party.
We will not bailout our way into prosperity. Nor will we spend our way into prosperity. Somebody has to stand up and yell: It’s time to cut tax rates on the supply-side. That will reinvigorate growth and infuse new spirit into a demoralized economy.
Friday, December 05, 2008
Tonight's Show...
Please join us tonight at 7pm ET on CNBC.TODAY’S JOBS NUMBER, MORTGAGE DELINQUENCIES & MORE
CNBC senior economics report Steve Liesman provides perspective.
BIG THREE IN THE HOUSE
CNBC’s Phil LeBeau reports on today’s hearings.
*Rep. Peter King (R-NY)
*Rep. Stephen Lynch (D-MA)
MONEY POLITICS…Jobs…Taxes…Bailouts & Obamanomics
*Keith Boykin, editor of The Daily Voice
*Robert Reich, author, public policy professor & former Clinton labor secretary
*Dan Mitchell, senior fellow at the Cato Institute and co-founder of the Center for Freedom and Prosperity
*Kevin Hassett, director of economic-policy studies at the American Enterprise Institute
THE MARKETS
CNBC’s Mary Thompson reports on today’s top market news.
*Dawn Bennett, CEO of Bennett Group Financial Services
*Jerry Bowyer, chief economist at Benchmark Financial
*Joe Battipaglia, market strategist, Stifel Nicolaus
Please join us. 7pm ET. CNBC.
Thursday, December 04, 2008
Bailout Nation, Cont.
The bailout-nation saga continued today as the Little Three carmakers from Detroit testified all day in front of the Senate Banking Committee. So far, the best thing I heard was from Sen. Robert Corker of Tennessee.
Mr. Corker wants a deal where, first, carmakers must restructure all their debt at some price, perhaps 30 cents on the dollar. But the bond owners must be satisfied so the government doesn’t have to pick up the tab. Second, Mr. Corker wants carmakers to get their worker-compensation levels exactly equal to those of the Japanese transplants in Detroit south. That means about $48 total hourly labor costs. GM’s labor costs were $73 in 2006, an estimated $69 in 2008, and are projected to be $62 in 2010. This, of course, includes pension and health benefits. If these two conditions are satisfied, Mr. Corker then believes some kind of government loan might be granted. We’ll have to wait and see where this thing goes.
But bailout nation continues in a story in this morning’s Wall Street Journal. Car rental company Avis wants TARP money now. BlueFire Ethanol, Inc. wants TARP money. The Equipment Leasing and Financial Association wants TARP money for its member companies. There’s a pattern here. Any economic sector that uses credit is coming ’round to the view that it deserves TARP money. That’s right. A TARP for all seasons. A TARP for all companies. That’s what we’ve created here.
The headline for this WSJ story is “Non-Bank Firms Seek U.S. Credit Relief.” Yup.
Mr. Corker wants a deal where, first, carmakers must restructure all their debt at some price, perhaps 30 cents on the dollar. But the bond owners must be satisfied so the government doesn’t have to pick up the tab. Second, Mr. Corker wants carmakers to get their worker-compensation levels exactly equal to those of the Japanese transplants in Detroit south. That means about $48 total hourly labor costs. GM’s labor costs were $73 in 2006, an estimated $69 in 2008, and are projected to be $62 in 2010. This, of course, includes pension and health benefits. If these two conditions are satisfied, Mr. Corker then believes some kind of government loan might be granted. We’ll have to wait and see where this thing goes.
But bailout nation continues in a story in this morning’s Wall Street Journal. Car rental company Avis wants TARP money now. BlueFire Ethanol, Inc. wants TARP money. The Equipment Leasing and Financial Association wants TARP money for its member companies. There’s a pattern here. Any economic sector that uses credit is coming ’round to the view that it deserves TARP money. That’s right. A TARP for all seasons. A TARP for all companies. That’s what we’ve created here.
The headline for this WSJ story is “Non-Bank Firms Seek U.S. Credit Relief.” Yup.
Dougie Talks Mustard Seeds
My old buddy Dougie Kass shed some interesting light this morning on the mustard seeds I’ve been drawing attention to of late.In particular, Dougie, who made his name and a tidy fortune playing it from the bear camp, now sees some silver investment linings while other investors remain fixated on clouds. According to Doug, “I am increasingly confident that investments made in the next three to six months will look terrific one to two years from now.”
He also thinks a “once-in-a-generation short opportunity might now be occurring in the fixed-income markets” and has begun “gingerly” buying selected equities.
Also worth noting is that Doug just announced the formation of a new long/short fund. That’s a bullish signal considering his firm’s forte has always been playing the short side.
Doug is a good friend. He's a smart guy, a good guy, and his ideas are worth paying close attention to.
Mustard Seed Chart of the Day
As my friend and University of Michigan economics professor Mark Perry points out on his Carpe Diem blog today, housing affordability has reached an all-time record high.
This is a big deal.
The million dollar question now becomes when the media will highlight this mustard seed of recovery.
This is a big deal.
The million dollar question now becomes when the media will highlight this mustard seed of recovery.
Wednesday, December 03, 2008
Tonight's Show...
Please join us tonight at 7pm ET on CNBC.TODAY'S UAW MEETING
CNBC’s Phil Lebeau reports.
AUTO BAILOUT DEBATE
*Steve Moore, Wall Street Journal senior economics writer
*Robert Reich, author, public policy professor & former Clinton labor secretary
*Mark Perry, University of Michigan economics professor, Carpe Diem blogger
OIL
*Dan Yergin, chairman of Cambridge Energy Research
MARKET PERSPECTIVE
CNBC’s Bob Pisani from the NYSE.
*Michael Pento, Delta Global Advisors, senior market strategist
*Jack Gage, Forbes magazine associate editor
*Jim LaCamp, RBC Dain Rauscher Sr. VP, Portfolio Manager & Financial Advisor
MORTGAGE APPLICATION SURGE
CNBC’s Diana Olick will deliver a report.
SEC MEETING ON RATINGS AGENCIES
Former SEC chairman Harvey Pitt will be aboard.
Please join us. 7pm ET. CNBC.
An Alternative to Bailout Nation
At his news conference this morning, where he introduced New Mexico Gov. Bill Richardson as Commerce-secretary designate, President-elect Obama refused to play his hand on the Detroit/GM bailout story. That tells me he’s aware that the country is getting fed up with the thought of bailout nation. And so far the Detroit automakers’ case lacks detail.In particular, everyone is waiting to see if the UAW will reopen its existing contract to knock down its high compensation numbers, which still compare unfavorably with the Japanese carmakers in non-union Detroit south. UAW head Ron Gettelfinger is scheduled to talk today about contract negotiations. We’ll see what he comes up with, if anything.
In the meantime, the former big-three automakers have upped the bailout anti from $25 billion to $34 billion, while GM and Chrysler are perilously close to running out of cash — perhaps even in the next few weeks. Nancy Pelosi yesterday indicated her support of using TARP money for the carmakers. This morning the Bush administration seemed to open the door on this front, if just a little bit.
Remember, there’s already $25 billion coming from the Energy Department, allegedly for fuel-mileage efficiency standards. But that $25 billion is no longer enough. There’s going to have to be a congressional vote to change the mandate on the Energy Department tranche. But if TARP money is used, that will open the door to all manner of additional bailouts. That’s why this is becoming a really important issue — one that goes beyond the automakers. And that’s why Obama and his advisors are treading very cautiously on this.
Is the U.S. really about to become bailout nation? I sure hope not. Using Chapter 11 bankruptcy as a reorganizing tool is a much better idea than federal money. The airlines have used it. Steelmakers have used it. Retailers have used it. I don’t know why we didn’t use it for Lehman and the other banks. It’s a matter of first principles — and I’m talking about market principles. Bailout nation puts us on the wrong road.
Treasury man Paulson is apparently thinking about requesting the second TARP tranche of $350 billion. I wish he wouldn’t. Not only do I still want to tarp the TARP, I’d like to close the door on bailout nation.
And I still believe the ultimate solution for all these problems — be it the carmakers, the banks, mortgages, foreclosures, or all the rest — is a significant pro-growth jolt for the economy. Economic growth will solve our problems. And the best way to move to a growth agenda is to lower tax rates across-the-board, including corporate taxes and individual taxes if at all possible.
Lower tax rates will boost asset values and reward successful producers and investors. That’s what we need. A $700 billion big-spending package merely moves money from the private sector to the government and then to a government-targeted bailout. That’s not growth. That won’t create new factories or new technologies or new risk-taking. Permanently lower tax rates will.
This is the cutting-edge issue. And I sure hope the Republican party in Washington and around the country gets on this message. There is an alternative to bailout nation. It’s called supply-side tax cuts. That will jolt the economy back toward growth.
Tuesday, December 02, 2008
Tonight's Show...
Please join us tonight at 7pm ET on CNBC.BIG 3 AUTO BAILOUT DEBATE
*CNBC’s Phil Lebeau live from Detroit.
*Jared Bernstein, senior economist at Economic Policy Institute
*Jerry Bowyer, chief economist at Benchmark Financial Network
THE STOCK MARKET & ECONOMY
CNBC’s Bob Pisani reporting from the NYSE.
Rebecca Jarvis at NYMEX on oil.
*Doug Kass, president, Seabreeze Partners Management
*Dennis Kneale, CNBC media & technology editor
*David Sowerby, chief market analyst, Loomis Sayles & Co.
OBAMA MEETS THE GOVERNORS
CNBC chief Washington correspondent John Harwood will deliver a report.
STATE OF THE STATES
- Gov. Mark Sanford (R-SC)
- Democratic governor TBA
GETTING BACK ON TRACK: TAX CUTS VS. SPENDING
*Greg Mankiw, Harvard economist, former chairman of Bush's Council of Economic Advisors
BAILOUT NATION?
Economists Jared Bernstein & Jerry Bowyer will square off.
Please join us. 7pm ET. CNBC.
Monday, December 01, 2008
Trouble in China
The real source of today’s stock market plunge is a collapse of China’s purchasing managers index, which fell to 40.9 in November from 45.2 in October, its fourth straight monthly drop. Inside the index, export orders fell significantly. All of this suggests big cuts in China production, employment, and investment, including infrastructure investment.
Over dinner last week, economic Nobelist Robert Mundell, who advises the Bank of China and travels there every other month, told me the Chinese economy is in bad shape. As a bulwark for the global economy, the China card is fast turning unreliable. Not only are stocks falling everywhere else in response to this disappointing China news, but commodity prices like palladium, silver, gasoline, oil, and gold are all plummeting today. I’ve only seen one news story that reported on this China economic decline, but I’m convinced it’s the main factor behind the U.S. stock drop.
Meanwhile, China’s yuan is starting to depreciate, a development that may be a function of their weakening economy, but also may be a policy change by the Bank of China toward devaluation, rather then appreciation.
I’d like to reiterate my support for Mr. Mundell’s idea for a 1-year tax holiday on U.S. corporate profits, then segueing to a 20 percent marginal tax rate on U.S. business from the current 35 percent rate. It is business, not government, that creates economy-growing jobs. Although U.S. profits have slipped (IRS/NIPA profits after tax have dropped 9 percent from their peak in late 2006), they still totaled $1.5 trillion thru the end of the 3rd quarter. After tax, that’s $1.1 trillion.
So, with roughly a $400 billion tax bill at stake, a tax-free holiday would provide a big pool of cash for U.S. business recovery. And a lower marginal tax rate after that would make it pay more after tax to invest in businesses. The Mundell tax cut recovery plan is especially important now that the NBER has just officially declared a recession beginning in January.
Once again, I repeat, government cannot spend our way into prosperity. However, strengthening incentive rewards would boost the animal spirit of investors and businesses to put risk money back to work. This would produce economic recovery.
Over dinner last week, economic Nobelist Robert Mundell, who advises the Bank of China and travels there every other month, told me the Chinese economy is in bad shape. As a bulwark for the global economy, the China card is fast turning unreliable. Not only are stocks falling everywhere else in response to this disappointing China news, but commodity prices like palladium, silver, gasoline, oil, and gold are all plummeting today. I’ve only seen one news story that reported on this China economic decline, but I’m convinced it’s the main factor behind the U.S. stock drop.
Meanwhile, China’s yuan is starting to depreciate, a development that may be a function of their weakening economy, but also may be a policy change by the Bank of China toward devaluation, rather then appreciation.
I’d like to reiterate my support for Mr. Mundell’s idea for a 1-year tax holiday on U.S. corporate profits, then segueing to a 20 percent marginal tax rate on U.S. business from the current 35 percent rate. It is business, not government, that creates economy-growing jobs. Although U.S. profits have slipped (IRS/NIPA profits after tax have dropped 9 percent from their peak in late 2006), they still totaled $1.5 trillion thru the end of the 3rd quarter. After tax, that’s $1.1 trillion.
So, with roughly a $400 billion tax bill at stake, a tax-free holiday would provide a big pool of cash for U.S. business recovery. And a lower marginal tax rate after that would make it pay more after tax to invest in businesses. The Mundell tax cut recovery plan is especially important now that the NBER has just officially declared a recession beginning in January.
Once again, I repeat, government cannot spend our way into prosperity. However, strengthening incentive rewards would boost the animal spirit of investors and businesses to put risk money back to work. This would produce economic recovery.
Tonight's Show...
Please join us tonight at 7pm ET on CNBC.THE MARKETS & ECONOMY
CNBC’s Bob Pisani from the NYSE.
CNBC’s Rick Santelli from the CME.
CNBC’s Steve Liesman on today's economic numbers.
CNBC’s Charlie Gasparino on financials.
THE MARKET PANEL
*Bob Doll, BlackRock CIO
*Zach Karabell, president of River Twice Research
*Gary Shilling, president of A. Gary Shilling & Co.
*Vince Farrell, Soleil Securities Chief Investment Officer
TEAM OBAMA TRANSITION
CNBC chief Washington correspondent John Harwood reports.
RECESSION DEBATE: STIMULUS SPENDING VS. TAX CUTTING…HOW ABOUT A CORPORATE TAX HOLIDAY?
*Steve Moore, Wall Street Journal senior economics writer
*Robert Reich, author, public policy professor & former Clinton labor secretary
PREVIEW OF THE BIG THREE'S PLAN
CNBC's Phil Lebeau reports from Detroit.
Please join us. 7pm ET. CNBC.
Singing Perry's Praise
Here's a nice little article on my friend, University of Michigan economics professor Mark Perry. Mark is a very smart and talented guy. Make sure to check out his Carpe Diem blog if you haven't already.
Tax Havens: Myths vs. Facts
Here's the final installment of the Center for Freedom and Prosperity's three-part series on tax havens. Top tax expert Dan Mitchell addresses some of the most common myths put forth by anti-tax haven demagogues.
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