Thursday, July 31, 2008

Palin on Deck

Tonight on CNBC I’ll be talking with Alaska Governor Sarah Palin. Obviously, Palin’s a leading candidate to be McCain’s veep. InTrade prediction markets have her at 20 percent, third behind Romney and Pawlenty. I’ll be talking to her about drill, drill, drill. Has she made any progress persuading McCain to drill in ANWR? And what’s the latest in her battle for a new Alaska pipeline? We’ll also talk about the Sen. Ted Stevens indictment, as well as Don Young (the other Alaska pork-barreler). I’m also going to ask her what it means to be a conservative these days.

Thursday Night Lineup

On CNBC's Kudlow & Company at 7pm ET tonight:

THE MARKET & ECONOMY...Our stock market and economic all-stars will discuss and debate all the latest news, trends and developments affecting investors including today's GDP report.

On board:

*Joe Battipaglia, market strategist, Stifel Nicolaus
*Vince Farrell, managing director, Scotsman Capital
*Jerry Bowyer, chief economist at Benchmark Financial
*Mark Skousen, financial economist, author, editor of the financial advice newsletter Forecasts & Strategies

INTERVIEW WITH GOV. SARAH PALIN...Joining us from Juneau, Alaska will be Republican Governor Sarah Palin. We'll discuss her status in the McCain campaign veepstakes, drill, drill, drill, and more.

OBAMA VS. MCCAIN...Our Washington pros will offer their perspective on all the latest developments in the presidential campaign including what appears to be a ratcheting up of the rhetoric between the two candidates.

On board:

*Keith Boykin, New York Times bestselling author and former Clinton White House aide
*Deroy Murdoch, conservative syndicated columnist

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

Drill, Drill, Drill: My Interview with Senator Jon Kyl

What follows below is an unofficial transcript of my interview last night with Senate Republican Whip Jon Kyl of Arizona.

Kudlow: All right, drill, drill, drill. Or not? So we welcome back Senate Republican Whip Jon Kyl of Arizona. Hopefully, he's going to give us the inside scoop. Senator, before I get started, I just want to play a quick sound of President Bush on this topic today.

[President Bush: “The need for congressional action is urgent. So I’ve lifted the executive restrictions on offshore exploration. I’ve done my part. And that means the only thing now standing between the American people and these vast oil resources is the United States Congress.”]

Kudlow: All right, since President Bush started to aggressively go for this drill, drill, drill, oil prices have come down a lot from near $150 to about $125 bucks. Senator Kyl it’s great to see you again sir.

Sen. Kyl: Thank you.

Kudlow: Now this thing has gone back and forth. It is a huge issue. It’s a political issue. It’s an economic issue. It’s a stock market issue, as I’m sure you know. Let me just ask you, late in the day, here’s what we got. Senator Harry Reid calls on [Republican Senate Leader Mitch] McConnell to work with him to organize a bipartisan energy summit. Mr. Kyl, can you tell us what that means?

Kyl: [Laughter] Well it’s Harry Reid’s way of trying to pass the blame to somebody else, when in fact, for the last two weeks, he has prevented us from getting amendments that would permit us to drill offshore.

You’re right about the President’s announcement. It immediately began to drive prices down. And if we were able to pass legislation that opened up some of the off coast and deep waters of the Gulf areas to exploration, you’d see those long prices go down even more. The reality is the American people understand we need more drilling. And certainly it would help the economy if we were to do that. But we’ve got to get by this congressional impasse that has prevented Republicans from being able to drill for more.

What Harry Reid also said, if I could Larry, is that while Democrats favor a lot of other things, the one thing they will not vote for is more drilling off our coasts.

Kudlow: How does Mr. Reid unequivocally rule out amendments regarding drill, drill, drill? Some kind of rollback of the moratorium? Or for example, some kind of compromise—we’ve had [Democratic] Senator Mary Landrieu of Louisiana on a couple times, she’s working with a group of five Democrats and five Republicans. She wants to include offshore drilling. She wants to include shale drilling, not ANWR. And she says some kind of CFTC regulation of speculators has to be part of it. Has Reid ruled out that gang of ten compromise?

Kyl: Well for right now. But I think there’s no doubt that if we’re not able to do anything before Congress recesses for August, that when we come back, this so-called gang of ten that is a bipartisan group that’s worked on a proposal, will get a vote on their proposal. And my guess is, having talked to some of their members, it’s something which could get pretty broad support on both sides of the aisle.

Kudlow: But when you say they’ll be a vote, look, this is Wednesday evening sir, you’ve got Thursday and Friday, you all go out Friday, would that vote come in the next 48 hours? Or do we have to wait for Godot to appear?

Kyl: Well the latter unfortunately. I think we’re talking about no votes on energy for the next two days. So this bipartisan bill would have to be proposed first part of September. But Larry, here’s the good news I think. Even though we haven’t been able to get amendments for drilling this week, when it should have happened, I think public opinion is now building behind this to such an extent, and it will continue to crescendo during the month of August, that it will be irresistible in September. And while it may not be quite strong enough now, by September it will be strong enough to have a good result.

Kudlow: Even tougher against drilling, House Speaker Nancy Pelosi. I mean, she just flatly again today said no way she’s gonna vote. Let me ask you. It’s a tactical question. I just want your judgment and your forecast. If the Senate got the kind of votes you’re talking about, a compromise vote, even though it might have to wait until after the recess to get it in September—might a Senate bill influence action on the floor of the House and stop the stonewalling in the House?

Kyl: It would have a significant influence. Whether or not it could break the hold that the far left has with Nancy Pelosi as Speaker would remain to be seen. But there are a bunch of Democrat Blue Dogs, and other Democrats, that I think would really like to drill. And combined with Republicans, I think we can get it done.

Kudlow: All right, Senator John Kyl. All the best sir. Thanks for coming back on. Appreciate it.

Kyl: Thank you Larry.

Wednesday, July 30, 2008

Wednesday Night Lineup

On CNBC's Kudlow & Company at 7pm ET tonight:

THE MARKETS & ECONOMY...Our stock market all-stars will discuss and debate all the latest news, trends and developments affecting investors.

On board:

*Dennis Gartman, economist & editor of the Gartman Letter
*Doug Kass, president, Seabreeze Partners Management
*Don Luskin, chief investment officer, Trend Macro
*Stefan Abrams, Bryden-Abrams Investment Management managing partner

DRILL, DRILL, DRILL...Arizona Senator Jon Kyl (R) will give us an update on all the latest energy and drilling developments coming out of Congress.

The market panel will rejoin us following our interview with Senator Kyl.

TRANSPORTATION & PRIVATE FUNDING...Transportation Secretary Mary Peters will give us an update on the Bush administration's call for new tolls on freeways and more private investment to finance road and mass-transit projects.

OBAMA VS. MCCAIN...Larry Sabato, Director of the Center for Politics, University of Virginia, will offer his insight on all the latest election developments.

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

McCain Talks Straight on Fan-Fred Reform

This is Big Mac at his very best.

There will be no more business as usual for housing lenders Fannie Mae and Freddie Mac if John McCain is elected president. That’s McCain’s clear message in a recent hard-hitting op-ed in the St. Petersburg Times and in various straight-talk media interviews.

Politically powerful Fannie and Freddie may be popping champagne corks in Washington, where a congressional bailout package provides full government backing for their outsized management pay packages, massive political-contribution and lobbying practices, and private portfolio hedge-fund activities. These government-sponsored enterprises (GSEs) got just what they wanted, and they now have the power to pay more dividends to their shareholders without any caps on compensation.

But Big Mac is gonna put an end to this if he’s elected come November.

“Americans should be outraged at the latest sweetheart deal in Washington,” writes McCain. “Congress will put U.S. taxpayers on the hook for potentially hundreds of billions of dollars to bail out Fannie Mae and Freddie Mac. It’s a tribute to what these two institutions — which most Americans have never heard of — have bought with more than $170-million worth of lobbyists in the past decade.”

Fannie and Freddie represent the worst of Washington’s bailout fever. Using government power for private profit is how Wall Street Journal editor Paul Gigot puts it. Privatizing gains while socializing losses is the complaint registered by former House majority leader Dick Armey. Government semi-socialism is how I see it.

The GSEs spread political vigorish in turn for more power and more privilege. Just this year alone their portfolio caps were raised twice while their capital reserve requirements were lowered. And now, with an explicit government guarantee, unlimited credit lines, and the possibility of federal stock purchases, they’ll be GSEs on steroids. All this in the name of helping housing, the most favored political sector in the American economy.

Budget assistance for homebuyers is already staggering. The Housing and Urban Development department spends $52 billion a year. The home mortgage interest deduction is worth about $80 billion yearly. A capital-gains exclusion is estimated at $29 billion. And the local property-tax deduction comes to roughly $14 billion. That’s a total of $175 billion in annual assistance to the housing sector. And that’s before we get to the Fannie-Freddie bailout.

Some people talk about a so-called Marshall Plan to spur American energy independence. But for years we’ve had a Marshall Plan for housing. It’s enough already. There are other economic sectors worthy of investment.

John McCain has taken a strong reform position here, and he’s totally right. This is McCain at his very best. He argues that Fannie and Freddie employees manipulated financial reports to line the pockets of senior executives. He calls the GSEs a danger to financial markets. And he says if one dime of taxpayer money ends up in those institutions “the management and the board should immediately be replaced, multimillion dollar salaries should be cut, and bonuses and other compensation should be eliminated. They should cease all lobbying activities and drop all payments to outside lobbyists.”

He also argues for strong regulation of Fan and Fred “that limits their ability to borrow, shrinks their size until they are no longer a threat to our economy, and privatizes and eliminates their links to the government.”

McCain economic advisor Steve Forbes wants to breakup Fannie and Freddie into 10 or 12 companies, completely severing their ties to the government. With these private companies competing in the mortgage market, Forbes says the entire housing sector will be revived, with taxpayers off the hook for a change.

On the other hand, Treasury Secretary Henry Paulson is putting his reform hopes on new Fannie-Freddie regulator James Lockhart, who runs the Office of Federal Housing Enterprise Oversight. Lockhart is a reformist skeptic of Fannie and Freddie. But his term would only last until year-end. After that, his successor will be subject to Senate confirmation and a public grilling from the two banking committees, all while Fan and Fred pour money into the campaign coffers of the Democrats and Republicans serving on those committees.

Does this sound like true reform? Highly doubtful. In fact, the bailout bill should be completely rewritten to stipulate the kind of privatization program outlined by Sen. McCain.

Former Reagan Treasury official Peter Wallison has warned for years that Fannie and Freddie would blow up financial markets. Well, we just witnessed the blow-up. But now we should also blow up the Fannie-Freddie bailout. It’s not real reform.

Obama won’t do it. He says there must be an essential role for Fan and Fred. And Obama advisor Franklin Raines — the former Fannie Mae CEO who was forced to resign over accounting scandals — argues for the status quo. But McCain is talking real reform. Bravo for the Arizonan. He’s the real candidate of change.

Drill, Drill, Drill: My Interview with Devon Energy CEO Larry Nichols

Stop all restrictions, just say no to cap and trade.

What follows below is an unofficial transcript of my interview last night with Devon Energy chairman & CEO Larry Nicols on the subject of oil shale. Devon Energy is a fabulous company. And I completely agree with Mr. Nichols. We should be lifting restrictions on oil shale and all of our energy sources.

Kudlow: All right. Drill, drill, drill. The incredible Barnett Shale on top of Dallas-Fort Worth is America’s biggest natural gas find. Here to tell us about this really great story is Larry Nichols, chairman and CEO of Devon Energy Corporation. He’s the one. He joins us now. Hello Larry. Thank you very much for coming on.

You know, I could talk about your stock which is up 270 percent over the last five years. Your profits are rising about 50 percent a year. But I want to talk about this incredible Barnett Shale. First of all sir, what’s shale? Describe to our viewers as quick as you can the shale story.

Nichols: Well the shale story—shale is a formation that is not like sand or limestone. It’s a dark, dense rock that historically the industry did not know how to complete. They knew gas was there, but they didn’t know how to get that gas out. In 2002, Devon established a position in the Barnett Shale, in the middle of Dallas-Fort Worth, the central part of Texas. And using technology that literally ten years ago did not exist have made ourselves the largest natural gas producer in Texas. We’re producing over billion cubic feet a day and using technology that did not exist ten years ago.

Kudlow: You know, I was reading—actually the first time I saw this sir, the New York Sun here in New York wrote a big story, a big editorial, about the Barnett Shale. So let me get this right. You’re sitting on top of Dallas-Fort Worth, schools, houses, airports. What’s the environmental impact? Because you know, a lot of greenies don’t want us to go after shale.

Nichols: Well most of it is actually not under Dallas. It’s more under Fort Worth in the western and southern and northern suburbs, and out into the prairie of Fort Worth. It’s an easy place to drill. It’s flat land. There are lots of oil and gas pipelines there. So it’s a very simple place to drill.

Kudlow: Have you decimated the local environment as a consequence of your exploration and drilling?

Nichols: [Laughter]. The local environment is as robust as anyplace in the world.

Kudlow: And you put a lot of money into it from what I gather.

Nichols: Our company alone will spend $1.5 billion dollars drilling wells in that area alone. That creates a tremendous amount of jobs; a tremendous amount of taxes for schools, and hospitals and roads. It really increases the wealth of that part of the world significantly.

Kudlow: The number that was in the editorial was 100,000 new jobs. That’s pretty hefty for Dallas-Fort Worth, central Texas.

Nichols: I have no doubt that’s a true number because there’s thousands of wells being drilled there. We’re up to about 3500 wells ourselves. The gas we’re producing is about 2 percent of the natural gas in the United States. It will heat something like 13,000 homes for an entire year out of that one field.

Kudlow: Now look it, even our friend Boone Pickens, who is sort of smooching with wind power, he says natural gas is essential to solving our energy problem. I want to ask you about that. Do you agree with Boone? You must because you’re doing this work. But can we convert the natural gas to transportation?

Nichols: That’s more challenging. However it’s used, natural gas is our cleanest burning fuel. It’s a fuel that we’re growing in the United States, even with all the restrictions we have on where we can drill. Our industry is still growing this fuel. And it’s going to be an important fuel for our country for a long time to come.

Kudlow: Now what about all the shale up in the Rocky Mountains? Some people are guesstimating that there might be 2 trillion barrels worth of oil up there. I think the low-end estimates are about 800 billion. Congress, in its wisdom, in late 2007, put a moratorium on extracting or drilling for oil and gas in the Rocky Shale. Isn’t that a dumb idea?

Nichols: All these restrictions we have on natural gas, on oil exploration, on coal, on nuclear, on wind, on all of our forms of energy, should not be restricted. We need to encourage all of them. We need to stop exporting jobs outside this country, exporting dollars outside this country to import oil and import gas. Our country has a tremendous amount of resources.

Kudlow: Finally, real quick. If Congress imposes cap-and-trade on your business, what will that do to it?

Nichols: It will have a very significant negative impact. Cap-and-trade is nothing more than a BTU tax. They don’t like to call it a tax. It’ll take dollars away from our industry. And that can only mean that we’ll drill less natural gas wells and prices will go up.

Kudlow: Larry Nichols, Devon Energy. You’re terrific sir. Good luck. Thanks very much.

Tuesday, July 29, 2008

Tuesday Night Lineup

On CNBC's Kudlow & Company at 7pm ET tonight:

THE STOCK MARKET & ECONOMY…Our market all-stars will discuss and debate all the latest news, trends and developments affecting investors including today’s big stock market rally.

On board:

*Jerry Bowyer, chief economist at Benchmark Financial
*Joe Battipaglia, market strategist, Stifel Nicolaus
*Dennis Kneale, CNBC media & technology editor

STEVENS GOES DOWN…We’ll discuss Alaska Sen. Ted Stevens indictment by a Washington federal grand jury on charges of hiding hundreds of thousands of dollars in gifts he received. Joining us to discuss Stevens' indictment, as well as the political fallout, will be John Fund from the Wall Street Journal and David Goodfriend, political commentator and former Clinton aide.

PRIMARY POLITICS…Our political pros will provide their latest Washington to Wall Street perspective on the race between Obama and McCain. Joining us will be Scott Rasmussen, president of Rasmussen Reports and Frank Newport, editor in chief of the Gallup Poll.

DEVON ENERGY CEO…Larry Nichols, chief executive of Devon Energy, will weigh in with his thoughts on moving toward U.S. energy independence including the development of oil shale.

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

Drill, Drill, Drill Strikes Again: Oil Drops $3

Isn’t it funny that news reports this morning showing that Sen. Harry Reid will in fact allow a drill, drill, drill amendment to come to the Senate floor seem to have triggered a $3 drop in oil to less than $122 a barrel. Is this a coincidence? I don’t think so. More like cause-and-effect.

Oil traders aren’t stupid. There are a dozen Democrats in the Senate who will vote for drilling, and that means future energy supplies will rise. Coupled with falling oil demand, especially by motorists, that means lower prices. Even unleaded gas futures are now dropping to less than $3 a gallon. Add in a buck for local and state taxes on average, and pump prices will drop to under $4 a gallon.

So I guess those horrible oil speculators are not so horrible anymore. Since President Bush launched his drilling-moratorium offensive oil prices are down almost $30.

Even in the House, where Nancy Pelosi wants to save the planet, political pressures are building for a series of votes to expand drilling. Republicans are now linking Obama to Pelosi and Reid as the cause of high oil prices and the economic downturn. This is good politics and good economics.

It also reminds me that government matters a lot in fostering economic expectations. Take the gigantic housing bailout bill. Supposedly this was going to help banks recover from sinking sub-prime mortgage paper based on defaults and foreclosures. But as the bailout bill passed the House and the Senate going back to last Thursday, banks and other financial stocks have been clobbered. Know why? Lenders may be forced to take the very worst mortgage paper as part of the “loan modification” program. That means the banks will have to write down a lot more loans and loan principal.

I guess the moral of the story for the growing bailout crowd in Washington is be careful what you wish for. Or, remember the unintended consequences of hyperactive government.

Monday, July 28, 2008

Monday Night Lineup

On CNBC's Kudlow & Company at 7pm ET tonight:

THE MARKETS & ECONOMY...Our stock market all-stars will discuss and debate all the latest news, trends and developments affecting investors including today's 239-point sell-off.

On board:

*Vince Farrell, managing director, Scotsman Capital
*Jim Lacamp, portfolio manager, RBC Dain Rauscher
*Gary Shilling, president of A. Gary Shilling & Co.

OBAMA'S ECONOMIC PLAN...Laura Tyson, former chairwoman of President Clinton's Council of Economic Advisers will be aboard to discuss.

MCCAIN'S ECONOMIC PLAN...Former eBay chief and McCain campaign co-chair Meg Whitman will join us in a one-on-one discussion.

PRIMARY POLITICS DEBATE...On to debate the Obama and McCain economic plans will be Jared Bernstein, senior economist at the Economic Policy Institute and the Wall Street Journal's Steve Moore.

DRILL, DRILL, DRILL...Sen. Mary Landrieu (D-LA) will join us from Washington with her take on the latest developments in the oil and energy debate.

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

Is Obama Freedom and Democracy Deficient?

Why is it that in all his statements in his recent foreign-policy trip to the Mideast and Europe, Sen. Obama never mentions the importance of spreading freedom and democracy around the world, and most especially in the very troublemaking nations that are so tied to terrorism that he has been discussing?

Perhaps I’m wrong about this. But I tried to read most of his speeches and I watched his television interviews, and I can’t find or don’t recall any references to freedom and democracy. What’s up with this?

And let me add, although Obama does mention terrorism, I do not recall him using the phrase “global war on terrorism,” or “war on terrorism,” or “protecting the U.S. from terrorist attacks.” I’m no expert on foreign policy, so I ask my colleagues at NRO to tell me what I’ve missed here. I’ll be happy to recant. But I continue to believe that the biggest reason to stop Iran, stabilize Iraq and Afghanistan, nail Osama and his evildoing friends in Pakistan, and generate some sort of protection for Israel against Hamas, Hezbollah, and the weak Palestinian government is a) to get the bad guys on their home turf before they get us and b) to spread freedom and democracy since democratic countries tend not to attack each other or us.

Friday, July 25, 2008

Friday Night Lineup

On CNBC's Kudlow & Company at 7pm ET tonight:

THE STOCK MARKET & ECONOMY...Our stock market all-stars will discuss and debate all the latest news, trends and developments affecting investors including today's better than expected durable goods and new home sales reports.

On board:

*Joe Battipaglia, market strategist, Stifel Nicolaus
*Michael Pento, Delta Global Advisors, senior market strategist
*Vince Farrell, managing director, Scotsman Capital
*Dennis Kneale, CNBC media & technology editor

UNRAVELING REAGAN?...On to debate whether the Reagan government deregulation revolution is coming to an end will be Jared Bernstein, senior economist at the Economic Policy Institute and Jerry Bowyer, chief economist at Benchmark Financial.

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

If Things Are So Bad . . .

If the economy is in recession, why are business durable-goods orders and shipments booming? Non-defense capital goods (capex) excluding aircraft rose 1.4 percent in June, or 19 percent at an annual rate over the last three months. Capex shipments rose 0.7 percent in June, or 8 percent annualized over the last three months. Business looks pretty healthy to me. And non-financial profits in the second quarter are rising 12 percent. Even including depressed bank earnings, positive surprises for profits are well outstripping negative surprises.

And if we are in a housing depression, why have existing home sales in the hard-hit West (think California, Arizona, and Nevada) increased four straight months (plus 12 percent)? And why are they up 17 percent from the low in October? More important, nationwide median existing home prices have increased four straight months, from $196,000 to $215,000. That’s a 10 percent gain.

And if the humongous Freddie, Fannie, and FHA ($300 billion) housing-bailout bills are so important, why did bank, thrift, and other financial stocks register their worst losses in eight years yesterday?

Maybe the answers to these questions are a bit different from what the mainstream media are telling us. To wit, Phil Gramm was right: We are in a mental recession, not an actual recession. And the low-tax, free-trade, free-market, capitalist economy is a whole lot more resilient and durable than the pessimistas and declinists would have us believe.

Big-government bailouts — the likes of which we haven’t seen since the 1930s — might just make matters worse, rather than better, since they interfere with the workings of free markets. In relation to the bailouts of Fannie and Freddie, we are talking about privatizing gains while socializing losses. Or as Paul Gigot of the Wall Street Journal put it, we’re using government power to generate private profits. This is always a bad idea.

Thursday, July 24, 2008

Thursday Night Lineup

On CNBC's Kudlow & Company at 7pm ET tonight:

INSIDE TODAY'S HOUSING NUMBERS, STOCK MARKET & ECONOMY...Our stock market all-stars will discuss and debate all the latest news and developments affecting investors including whether today's housing numbers might actually be hiding some good news.

On board:

*Noah Blackstein, portfolio manager at Dynamic Mutual Funds
*Jack Gage, Forbes magazine associate editor
*Jason Trennert, chief investment strategist and managing partner at Strategas Research Partners
*Stefan Abrams, Bryden-Abrams Investment Management managing partner

SENATE OFFSHORE ACCOUNT PROBE...Sen. Chuck Grassley (R., Iowa) ranking member of the Senate Finance Committee, will discuss tax evasion in offshore accounts.

PRIMARY POLITICS...Our political panel will offer its perspective on all the latest presidential election developments including Obama's speech in Berlin earlier today.

On board:

*Scott Rasmussen, pollster & president of Rasmussen Reports
*Jay Campbell, pollster, Hart Research
*Kellyanne Conway, pollster & president of the polling company

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

McCain on Fan and Fred Is McCain at His Very Best

Senator John McCain hit a grand-slam homerun today with an op-ed piece (“Take taxpayers off hook for rot at Fannie, Freddie”) that debunks the federal worship of Fannie Mae and Freddie Mac, and takes off the table the possibility that these GSEs will get a strong dose of steroids if he is elected president. This is a dramatic statement that completely differentiates his view from the go-along, get-along policy of Sen. Obama.

“Americans should be outraged at the latest sweetheart deal in Washington,” writes McCain. “Congress will put U.S. taxpayers on the hook for potentially hundreds of billions of dollars to bail out Fannie Mae and Freddie Mac. It’s a tribute to what these two institutions — which most Americans have never heard of — have bought with more than $170-million worth of lobbyists in the past decade.”

This is right on the money. This is the straight-talk McCain as true Washington reformer. The senator goes right to the heart of what Wall Street Journal editor Paul Gigot describes as a bad mix of government power backing private profit.

McCain goes on to argue that Fannie employees manipulated financial reports to line the pockets of senior executives. Freddie did likewise. Big Mac calls them a danger to financial markets. He says if one dime of taxpayer money ends up in those institutions “the management and the board should immediately be replaced, multimillion dollar salaries should be cut, and bonuses and other compensation should be eliminated. They should cease all lobbying activities and drop all payments to outside lobbyists.”

Sen. McCain argues that government backing is no longer needed for their original mission. He writes, “There are lots of banks, savings and loans, and other financial institutions that can do this job.”

Later on in the piece he argues for strong regulation of Fan and Fred “that limits their ability to borrow, shrinks their size until they are no longer a threat to our economy, and privatizes and eliminates their links to the government.”

This is as clear a statement as I’ve seen any politician make regarding the absolute folly of the GSE bailout that unfortunately will probably be passed by the Congress before the week is out. This is McCain at his very best. This is shot-across-the-bow stuff. I hope the voting public gets the message.

The Media Are Missing the Housing Bottom

Media reports painted a pessimistic picture of today’s release on existing home sales, which fell 15 percent from a year ago and recorded higher inventories. But inside the report was an awful lot of very good new news, which appear to be pointing to a bottom in the housing problem; in fact, maybe the tiniest beginnings of a recovery.

For example, the median existing home price has increased four consecutive months and is up 10 percent since February. Yes, it’s down 6 percent over the past year. But the monthly numbers show a gradual rebound. Actually, this median home price is $215,000 in June, compared to $196,000 last winter.

And there’s more. One of the hardest hit regions is the West, including California, Arizona, and Nevada. The other two bad states are Florida and Michigan. However, existing home sales in the western region are up four straight months, and are 17 percent above the low in October. At the same time, prices in the West have increased three straight months.

Meanwhile, overall national existing home sales are basically stabilizing at just under five million. And in the first and second quarters of 2008, these sales dropped slightly by 3 percent in each case, which is a whole lot better than the roughly 30 percent sales drops of the prior three quarters.

It’s a pity the mainstream media keeps searching for more and more pessimism. The reality is a possible upturn in the housing trend, and at the very least we are getting a bottom. Stocks sold off 165 points largely on media reports of terrible home sales and prices. But I am hoping the market comes to its senses and realizes the data are a whole lot better.

And on top of all that, just as housing may be on the mend, Congress is about to ratify a huge FHA-based bailout that could total $42 billion. Congressional solons are putting up $300 billion to refinance and insure distressed loans through the Federal Housing Administration. But this dubious government agency, with a whole history of bad portfolio management, may wind up taking in the very worst loans on the books.

Of course, taxpayers are on the hook. More government semi-socialism.

Drill, Drill, Drill: My Interview with Senator Mitch McConnell

Senator Mitch McConnell, in another virtuoso performance, said in no uncertain terms in a CNBC interview last night that the GOP is committed to drill, drill, drill. Interestingly, he said he is willing to do business with the Democratic leadership, and despite news reports to the contrary talks between him and Harry Reid are in fact going on. But if the Dems stonewall, then McConnell will take it to the people in a concerted national effort to make the point on drill, drill, drill and position the GOP for a comeback in the congressional elections this fall. Once again, the distinguished Republican Senate leader showed an awesome command of an issue as well as a clear strategic view on how to proceed. I hate to say he is underrated, but he is truly one of the top Republicans in the country. What follows is a transcript of the interview:

Kudlow: Our lead story tonight is the hammer and tongs, drill, drill, drill battle in Congress that could decide the fate of the November election, the economy, and stocks. Here to tell us about this historic battle is Republican Senate Leader Mitch McConnell of Kentucky. Mr. Leader, welcome back. Thank you sir for your time.

McConnell: Glad to be with you Larry.

Kudlow: Senator McConnell, there’s a lot of talk about a drilling deal that could be out there – energy speculation, trading speculation may be part of it. There was a 94-0 vote on a procedure. Where is this debate? Because this could really be a huge issue for stocks and the economy, and I reckon for the November election as well.

McConnell: Well there’s good news and bad news. The good news is we’re turning to the subject. The bad news is our Democratic friends think this is only a speculation problem. You know, the most famous rich Democrat in America, Warren Buffett, says it’s not a speculation problem; it’s a supply and demand problem. Boone Pickens has been down here promoting his plan which involves doing everything. He thinks we ought to do all of these things.

What our goal is as Senate Republicans is to get the Democrats to open this thing up. Let’s have real amendments on real issues. And at the top of the list, obviously, would be following the desire of over 70 percent of the American people to get the option to go into the Outer Continental Shelf. Right now 85 percent of the Outer Continental Shelf is off limits. [Democrats] have shut down all of the oil shale. We have three times the reserves of Saudi Arabia in oil shale, right here in America. A moratorium has been imposed by this Congress last year on that. We need to have votes on those amendments and see if we can do a better job of opening up our own resources and become significantly less dependent on Middle East oil.

Kudlow: Senator McConnell, let me pick you up on the moratorium idea. First of all, what would be in this? Would it be a total reversal of the moratorium that expires September 30th? Are we talking offshore drilling? Are we talking Alaska, ANWR. Are we talking shale?

McConnell: Well I think we ought to do, at the very least on offshore, is give states an option. A state like Virginia for example, which wants to go into the Outer Continental Shelf, is currently not permitted to do that. At a very minimum, we ought to allow states an option. Many of our members obviously think 50 miles and out, and that’s what we’re talking about, nobody by the way would see any of these oil rigs, because they’d be further out away from the shore. Why not give states the option at the minimum to do that?

And why in the world would we want to shut down oil shale when we have three times the oil reserves of Saudi Arabia right here on shore, on land, in the western United States? There are other things we ought to do as well. I’d like to see a vote on opening up a small portion of the Alaskan wilderness. I’d like to see an amendment on coal to liquid. We’d all like to promote nuclear power, particularly those who are concerned about climate change. There are a lot of things we need to do. And we need to do them now. The American people are demanding that we do it now.

Kudlow: There are reports that you were having negotiations with Senator Reid and the Democratic leadership in recent days over amendments to what I guess is some kind of anti-speculators bill. I’m not sure if that’s even right. But the report said that these negotiations broke down sir. Can you shed any light on that?

McConnell: No they continue. The first thing we want to make clear to the Democrats is that we want to get on this subject, and stay on this subject. We think they want to just pass some kind of bill on speculation that almost no one thinks would make a difference, and then move on to something else. We want to stay on this issue. We want to offer amendments that will make a difference. We hope that will encourage the American people that we’re finally going to get a handle on our own energy production and try to make a difference in the future, rather than handing our future over to Middle Eastern governments, many of whom are not friendly with us.

Kudlow: Senator, there’s a gang of ten out there, I’m sure you know about it. We interviewed Senator Mary Landrieu of Louisiana who’s one of the ten. They’re looking for a compromise deal to open lots of drilling opportunities offshore and onshore. Not Alaska, but I think the shale was included with some conservation measures. Sir are you working with the gang of ten? Might that be some support for your position?

McConnell: Well I certainly hope so. I’ve certainly encouraged this group. I think any Democrats we can find who are willing to come on board for additional drilling both on and offshore, I think that’s a good thing. And by the way, I want to emphasize that every member of my conference also is in favor of most of the measures you can think of to use less. For example, we’re enthusiastically in favor of incentivizing battery-driven cars. Many of my members are interested in natural gas, natural gas automobiles, which are driven all around the world, except here. We have a few here, but not nearly enough. We’re for both finding more and using less. Our Democratic friends, most of them, and I think Senator Landrieu may be an exception to that, are only interested in using less. They’re not interested in finding more. And that’s not enough to help solve this problem.

Kudlow: As you can imagine, the whole world is watching this debate. Since President Bush removed the executive moratorium, we’ve seen a precipitous drop in energy. Oil prices are off, I don’t know, more than $20 dollars, about 15 percent, just on the hope of greater energy supplies. So the whole world is watching this debate in the Senate and the House. Do you have any sense of a timetable for votes that would give us guidelines?

McConnell: Well we’re on the subject now. And our view, Republicans in the Senate’s view, is that we ought to stay on this subject until we do something worth doing. Something important that will send a signal, not only to the rest of the world, but to the American consumer that we intend to get a handle on this problem and make progress.

Kudlow: You know Senator, you and I have talked about your need to create a firewall against, perhaps, contingencies in the election coming up. 60 votes is the magic number. In your judgment, is this drill, drill, drill argument a key political issue? Could this in fact boost GOP hopes for November?

McConnell: Well it could. My first choice frankly is to get something done that’s important for the country. But if our friends on the other side are unwilling to increase domestic production, then we’re happy to take that to the people as a political issue this fall. First choice is to have an accomplishment; second choice is we take it to the American people. We think they’re on our side. We think they want us to expand American production, and to begin to solve this problem now.

Kudlow: When might the first votes occur? Are we talking tomorrow? Are we talking Friday? Are we talking actually before you go out for Labor Day?

McConnell: Yeah. Friday and then you know, if we stay on the subject, which is my goal, we’ll be still dealing with this next week.

Kudlow: All right, Senator Mitch McConnell. Thank you very much for the update sir. We appreciate it.

McConnell: Thank you Larry.

Wednesday, July 23, 2008

Wednesday Night Lineup

On CNBC's Kudlow & Company at 7pm ET tonight:

DRILL BILL DEBATE...Joining us to discuss the battle in Congress and the road ahead to U.S. energy independence will be Sen. Mitch McConnell (R-KY) and Sen. Byron Dorgan (D-ND).

THE STOCK MARKET, ECONOMY, OIL'S SELL-OFF & MORE...Our stock market all-stars will discuss and debate all the latest news and developments affecting investors.

On board:

*Joe Battipaglia, market strategist, Stifel Nicolaus
*Jeffrey Kleintop, chief market strategist, LPL Financial Services
*Dave Maney, co-Founder & chairman of Headwaters MB

HOUSING BILL BAILOUT...On to discuss will be Jared Bernstein, senior economist at the Economic Policy Institute and former Republican House Leader Dick Armey.

WASHINGTON TO WALL STREET...Democratic strategist Bob Shrum will square off with Republican strategist Ben Ginsberg on a host of political issues including John Edwards' Beverly Hills Hilton flap, Romney's rise, and other news in the veep sweepstakes.

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

Wall Street Likes the Bailout plus Drill, Drill, Drill

Can bad Washington policies sometimes work to the benefit of financial markets? In the short run the answer is certainly yes. Nothing illustrates this point better than the gigantic Fannie-Freddie housing bailout bill that will soon pass Congress and be signed into law by President Bush.

This is a perfect example of Washington’s new too-big-to-fail corporatism, or even semi-socialism. Fannie and Freddie are getting their dream wish lists of expanded loans, expanded debt, a full-fledged explicit government guarantee, and virtually nothing in the way of real reform, all in return for Uncle Sam’s imprimatur.

The only remote possibility for future GSE reform of political lobbying, huge compensations, and a downsized internal portfolio, or even future privatization moves, rests solely on the new regulatory powers embedded in the bill. But the chances of a strongman regulator actually succeeding in changing these government housing banks are slim to none in my view. Democrats running the House and Senate banking committees will never permit it. The GSE political pressures are too strong. And no reforms were codified in the actual bill.

As for the $300 billion FHA housing bailout — with its ACORN-like community slush funds and tax credits and subsidies for existing and new homeowners — well, it’s just a big bailout. Oh my gosh. Between Fan and Fred and the FHA, U.S. taxpayers are gonna be on the hook for potentially gargantuan sums.

And yet, bank stocks are roaring ahead on Wall Street for the simple reason that in the short run the Fan-Fred guarantee from Uncle Sam stops the potential run against the financial stocks and the banking system. It’s very similar to the Bear Stearns story, when the Fed stepped in to open the discount window to prevent a run against the investment banks.

In fact, not only are financial stocks rising, but the near-term credit-preserving impact of the Fan-Fred backstop is strengthening the dollar and punishing the gold price. So Wall Street is cheering big government’s big expansion, at least in the short term.

More constructively, the growing possibility of a drill, drill, drill oil bill, even with some mild anti-speculator attachment, is contributing to a bear market in oil prices. Ever since President Bush unleashed last week, oil has been falling. It’s now down to $126, a little more than a $20 drop. This oil sell-off improves the outlook for lower inflation and better economic growth, which in turn is strengthening the dollar, pushing down gold, and driving up share prices.

The drilling issue in Congress is a huge election-year debate. It could well be the Republican’s last hope for November. The Democrats don’t want to drill, even while the public does. This could be a Democratic waterloo and could actually help elect Republicans, narrowing anticipated GOP losses in the election. But the Republicans have to launch an all-out fight nationalizing this issue, taking it to the public with a large media ad-buy, lots of speeches, and daily presser sound bites from Washington. Mitch McConnell is the right leader in the Senate — he’s one of the best tacticians ever. The votes are there for a drill, drill, drill compromise, with probably a dozen Democrats coming along.

As Michael Franc writes today on NRO, the House version of drill, drill, drill is a tougher uphill climb against Nancy Pelosi, who may be putting her speakership on the line against the drillers. Using a discharge petition is a tough road to hoe, though not impossible. But my thought is that a Senate victory might just blow Pelosi out of the water and open the floodgates to Democratic defections in the House.

If a drilling bill ever passes Congress, oil prices will keep on plunging — perhaps all the way to $75 a barrel, which is the profitable break-even point for lifting the extra barrel of oil. That would drive the Dow to somewhere between 15,000 and 16,000, and it would have a huge tax-cut effect on the economy. And, of course, it could completely change the November election outlook in a highly favorable way for the GOP.

The conventional wisdom says Republicans are gonna get clobbered again this fall. But drill, drill, drill would overturn that wisdom. More drilling today would have the potency of the Reagan tax cuts 28 years ago in the 1980 landslide race. But the GOP has got to make the case. And deregulating oil, which is great policy, would offset much of the bad policy pain coming out of the Fannie-Freddie housing bailout.

Obama's Social Security Tax Plan

Cato tax expert Dan Mitchell just emailed me his new video analyzing Obama's class-warfare Social Security tax scheme. It's definitely worth a look.

As Larry Lindsey recently wrote in the Wall Street Journal, "It is shocking to think that we have a presidential candidate who would make the private sector $5 poorer in order to make the government $1 richer."

Tuesday, July 22, 2008

Tuesday Night Lineup

On CNBC's Kudlow & Company at 7pm ET tonight:

THE MARKETS, ECONOMY, OIL & MORE...Our stock market all-stars will discuss and debate all the latest news and developments affecting investors including oil's continued slide, financials, and more.

On board:

*Don Luskin, chief investment officer, Trend Macro
*Quentin Hardy, Forbes Silicon Valley Bureau Chief
*Vince Farrell, managing director, Scotsman Capital
*Mark Skousen, financial economist, author, editor of the financial advice newsletter Forecasts & Strategies

FANNIE MAE & FREDDIE MAC…Senator Bob Casey (D-PA) will be aboard to discuss all the latest developments in the GSE saga.

DRILL, DRILL, DRILL…Joining us from Washington to debate America’s energy solution will be Senator John Barrasso (R-WY) and Senator Amy Klobuchar (D-MN).

MONEY POLITICS…The Wall Street Journal’s Steve Moore will square off against political commentator Lawrence O'Donnell on a number of Washington to Wall Street subjects including whether the rich in America shoulder an unfair share of the tax burden.

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

Paulson: We’re Gonna Be Alright

Treasury man Henry Paulson reassured investors and bank depositors in a speech this morning in New York that the U.S. banking system is okay. Mr. Paulson noted the failure of IndyMac bank, the third largest in history. But he said it represents only two-tenths of 1 percent of total banking industry assets and that depositors are insured up to $100,000 per account. The FDIC took over the bank two Fridays ago and reopened it the next Monday with business as usual and no one losing a penny of insured deposits.

Mr. Paulson went on to say that of the 8,500 insured banks and thrifts in the U.S., 99 percent are well capitalized. While one thrift and four commercial banks have failed this year, this doesn’t even remotely compare with the 1980s savings-and-loan crisis, where there was an average of 255 failures per year. What’s more, Paulson noted that U.S. financial companies have raised more than $150 billion of new capital.

So I think the Treasury man was basically trying to say that we’re gonna be alright, media pessimism notwithstanding.

Forbes Spins Positive on Gramm

Last night on CNBC I asked Steve Forbes about the McCain-Gramm breakup. Steve of course is a McCain economic advisor, and he had a positive spin on Phil Gramm’s continuing role in the campaign. Here’s what he said:

Kudlow: Steve Forbes, we just have a little bit of time. A lot of conservatives are very dispirited that Phil Gramm has left the McCain campaign, Steve. Has he in fact left? I know he resigned. Will Senator McCain, who has yet to speak about this, do you think Sen. McCain will ask him to come back?

Steve Forbes: Oh I think in terms of advice, Phil Gramm will be critical, which is good, because on things like trade he’s absolutely right. I think John McCain has a long friendship with Phil Gramm. So this was something, Phil Gramm said something that you’re not supposed to these days. And he paid a price for it. But in terms of the relationship, I think it’s as strong as ever. And in a McCain administration, I think Phil Gramm’s advice will be taken to heart.

Kudlow: Why won’t Sen. McCain say what you just said publicly? In other words, McCain can say, “I don’t want your resignation, you misspoke, let’s leave it be, we’re a large tent, a big family, we need you on this campaign.” Steve, do you think McCain will come out and say that?

Forbes: I think he will say good things about Phil Gramm. And Phil Gramm paid the price for it. Gramm’s been in presidential politics, as I have, and when these things happen somebody walks the plank. But I think in terms of the relationship, and the philosophy, that’s not going to change.

Kudlow: All right. Appreciate it, Steve Forbes. Very, very much.

Monday, July 21, 2008

Monday Night Lineup

On CNBC's Kudlow & Company at 7pm ET tonight:

THE STOCK MARKET & ECONOMY…Our stock market and economic all-stars will discuss and debate all the latest news, trends, and developments affecting investors.

On board:

*Gary Shilling, president of A. Gary Shilling & Co.
*Steve Forbes, editor-in-chief of Forbes magazine
*Art Laffer, economist & chairman of Laffer Associates
*Dr. Bob Froehlich, chief investment strategist, DWS Scudder
*Jared Bernstein, senior economist, Economic Policy Institute

AN EYE ON FANNIE & FREDDIE…Former Treasury official Peter Wallison of the American Enterprise Institute will join the market panel with his insight and ideas on all the latest news and developments.

COUNTRYWIDE & VIP LOANS...Attorney, columnist and former Republican state legislator Kevin Rennie will joins Messrs. Forbes and Bernstein with a look into Countrywide lending practices with an emphasis on the loan received by Senator Dodd (D-CT).

THE GREY LADY SNUBS MCCAIN…On to discuss and debate the New York Times's refusal to run John McCain's recent op-ed criticizing Obama's Iraq policy will be Kevin Madden, former press secretary and senior adviser to former Massachusetts Gov. Mitt Romney and progressive economist Jared Bernstein.

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

The Essential Phil Gramm

When the Phil Gramm flap broke out about 10 days ago, with his Washington Times interview miscues about a nation of whiners and a mental recession, other McCain economic advisors were quick to lambaste the former Texas senator. Douglas Holtz-Eakin told the PBS Nightly Business Report that Gramm is no longer giving advice to McCain or his aides. He said, “I haven’t spoken to Sen. Gramm since the comments took place, and I’m not expecting to.” On Meet the Press, Carly Fiorina emphasized that Sen. McCain had rejected Gramm’s remarks, and then said, “I don’t think Sen. Gramm will any longer be speaking for John McCain.”

While McCain clearly disowned Gramm’s remarks, Holtz-Eakin and Fiorina were wrong, at least at that point, to throw Gramm out of the campaign. In fact, McCain spoke to Gramm after dissing him, and asked him to stay in the campaign and continue to be a surrogate speaker. This was not widely reported, but several sources confirm the conversation. However, it was no secret that Holtz-Eakin in particular has been a Gramm adversary inside the campaign.

So when Robert Novak’s Saturday column was initially published Friday evening, correctly reporting that McCain and Gramm had patched up their relationship, McCain insiders apparently went ballistic, even though their boss wanted to keep Gramm inside the tent. Once Gramm got wind of this internal war dance last Friday night, he resigned as campaign co-chairman, relegating himself to rank-and-file supporter status.

What exactly happened Friday night is still a mystery. At least one senior campaign official believes Gramm resigned without any prodding. Sources close to Gramm, however, report that it was the campaign staff revolt that forced Gramm’s hand.

Interestingly, Sen. McCain himself has yet to publicly comment on Gramm’s resignation. When asked about it this morning on NBC’s Today Show, McCain dodged the question. Many conservatives are hoping McCain will overrule his staff by saying no to Gramm’s resignation. In other words, not accepting it. Those conservatives believe the hard-nosed free-market Gramm is essential to the formulation of McCain economic policy.

As inartful as Gramm’s initial comments were, these things happen during campaigns. And Sen. McCain could have made light of the comments while still rejecting them. He also could have pivoted and attacked Obama’s constant whining, economic pessimism, and American declinism. What’s more, McCain’s basic economic message of low taxes, ending pork-barrel spending, and drill, drill, drill to generate more energy supplies at lower prices is a strong contrast to Obama’s high-tax-and-spend plan. Essentially, McCain has an economic-recovery program. Obama does not.

But the effects of Gramm’s absence may already have surfaced. Appearing in Michigan at a GM town hall meeting last Friday, McCain lapsed into talking auto-bailouts and huge government subsidies for GM’s new battery car, the Volt. McCain’s message was basically that he’ll do anything to keep the car business afloat. This sort of pandering by McCain was missing during the Michigan primary last winter. And when asked by a worker how GM could cope with cap-and-trade greenhouse-gas emissions standards, McCain said that we’ve got to adjust these standards so they don’t kill off the industry. So McCain is back on his cap-and-trade system which completely dilutes his drill, drill, drill message. It’s this kind of confusion that the tough-minded Phil Gramm could solve with a clear policy message. An attempt to be all things to all people and all constituencies is a sure-fire path to an empty message that garners the support of no one.

A last thought: If Sen. Gramm is in fact out of the campaign, might Sen. McCain give new titles and influence to supply-side stalwarts Jack Kemp and Steve Forbes? So far their contributions have been sporadic. Perhaps elevating their roles would fill the gap left by a departing Sen. Gramm.

Friday, July 18, 2008

Friday Night Lineup

On CNBC's Kudlow & Company at 7pm ET tonight:

THE STOCK MARKET, ECONOMY, MONEY POLITICS & MORE...Our stock market and economic all-stars will discuss and debate all the important issues and developments affecting investors.

On board:

*Jerry Bowyer, chief economist, Benchmark Financial Network
*Vince Farrell, managing director, Scotsman Capital
*Gary Shilling, president of A. Gary Shilling & Co.
*Fritz Meyer, senior investment officer with A I M Advisors

Also on board...Energy and commodities expert Kevin Kerr, president of & editor of MarketWatch's Global Resources, will offer up his take on all the latest oil news.

DRILL, DRILL, DRILL...On to discuss opening up offshore drilling, ANWR, oil, alternative energy sources and more will be Acting Deputy Secretary of Energy Jeffrey Kupfer.

***William Rogers, attorney and member of SOS California, an environmental group that supports offshore drilling, will also be aboard to offer his perspective.

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

Thursday, July 17, 2008

Is Failure No Longer an Option?

Why does it seem to me that all Washington ever seems to talk about these days is bailouts? Bailout Freddie Mac. Bailout Fannie Mae. Bailout Wall Street. Bailout homeowners. Is it possible in America today that no one is allowed to fail?

You know, Phil Gramm was right. We are a nation of whiners. No one wants to believe that failure is an option anymore. Whatever happened to personal responsibility? Or learning from your mistakes? Or going through transformative difficulties that just might change your life and your behavior? But it seems like failure is off the board nowadays and that it’s government’s job to rescue everybody.

Whatever happened to the philosophy of Friedrich Hayek, the great free-market economist and Nobel Prize winner, who said the great thing about capitalism is the freedom to succeed beyond your wildest dreams, but that there is also the freedom to fail? I believe Hayek once argued that if he had to choose between success and failure, failure is more important in terms of preserving the free-market system.

Of course, the great thing about America is that you can fail many times, pick yourself up, keep on trying, and then succeed beyond your wildest dreams. But this whole process is being subverted by the political attitude that no one must ever be allowed to fail. I don’t like it. It’s socialism, isn’t it? Perhaps it’s big-government socialism. Or maybe it’s corporate socialism. Or maybe (with Fan and Fred) it’s Republican socialism.

No, I guess it’s really bipartisan socialism.

And you know what? There may be other bailouts. Look at General Motors, a complete basket case. They’re now trying to come up with a new hybrid-type car, but so far no one is buying. Given their bankruptcy, my friend Holman Jenkins of the Wall Street Journal worries that government subsidies in the name of global warming will lead to a government bailout of GM.

And what about the bankrupt airlines? Is government gonna bail them out too?

So I guess I was relieved to come across a passage from President Bush’s press conference last Tuesday. A reporter asked him about bailing out banks and mortgage markets, and wondered about other entities in the economy that might be crucial, like General Motors. And President Bush said, “If your question is, ‘Should the government bailout private enterprise?’ the answer is no, it shouldn’t.” POTUS went on to say, in terms of private enterprise, that no, he doesn’t think the government ought to be involved with bailing out companies.


Thursday Night Lineup

On CNBC's Kudlow & Company at 7pm ET tonight:

THE MARKETS…Our stock market and economic all-stars will discuss and debate all the latest news and developments affecting investors and offer their take on the road ahead.

On board:

*Don Luskin, chief investment officer, trend Macro
*Jack Gage, Forbes magazine associate editor
*Michael Pento, Delta Global Advisors, senior market strategist
*Michael Darda, chief economist, MKM Partners

SHUT DOWN UBS?…Joining us to discuss whether regulators should consider revoking the US banking license of Swiss banking giant UBS because of its alleged role in helping wealthy Americans evade billions of dollars in taxes will be Sen. Carl Levin (D-MI).

Our market guests will weigh in with their perspective following our interview with Senator Levin.

DRILL, DRILL, DRILL…Joining us to discuss America’s drilling policy will be Senator Richard Shelby (R-AL) and Senator Ron Wyden (D-OR).

PRIMARY MONEY POLITICS…On to debate all the latest Washington to Wall Street issues facing investors including how the Obama/McCain match-up is shaping up will be “Jimmy P” Pethokoukis, money and politics blogger for U.S. News & World Report and political columnist Harold Meyerson.

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

My Interview with Congressman Ron Paul

What follows below is an unofficial transcript of my interview on Kudlow & Company last night with former Republican presidential candidate Congresman Ron Paul of Texas. We talked about inflation, bailouts, the Fed's role, Fannie & Freddie and much more. Last night's K&C market panel also joined in the discussion.

Kudlow: All right. We welcome back to the show Ron Paul, Republican Congressman from Texas, former presidential candidate who had some tough words for Ben Bernanke. Take a listen to this please.

[Video of Congressman Paul’s comments during Bernanke testimony: “Inflation is a tax. And if the Federal Reserve, and you as chairman, have this authority to increase the money supply arbitrarily, you’re probably the biggest taxer in the country.]

Kudlow: Oh, Mr. Paul, I heard that this morning, I got so excited sir. I just had to have you on. I’m so glad you’re around today. I say almost nightly that inflation is the cruelest tax of all. And the consumer price index, I’m sure you know this, but I didn’t hear Bernanke reference it today, 1.1 increase in June, 7.9 percent at an annual rate over the past three months, and 5 percent over the last 12 months. Did Bernanke understand what you were getting at sir?

Rep. Paul: Well I was hoping he did. You know, I did bring up the CPI very briefly. But I thought he did concede half of the message that I gave because he did say that inflation was a tax. He did acknowledge that, but he didn’t acknowledge that he had anything to do with it. And you know, I did make the concession to him that he himself didn’t create every bit of inflation that we have today, because it does add up. It’s been over a period of time and we’ve been inflating for a long time. Every time we’ve had a crisis we have sort of arrested that crisis by more inflation, exactly what we’re doing now. But ultimately, people pay for it in higher prices. So if we look at the higher energy prices, and you and I would agree we need free markets and capitalism and more drilling and all this, but if there’s an inflated price there due to the depreciation of money that won’t solve that part of the problem.

Kudlow: Well that’s the deal. Let me go with you on this. The Federal Reserve is accumulating more and more authority now in our financial system. They may well be the so-called “financial stabilizer” of last resort. They now have new regulatory power over Wall Street investment banks. And of course, they’re supposed to balance unemployment and inflation. Mr. Paul, with all these new missions, it seems to me what’s gonna get sacrificed? Inflation and the dollar, isn’t that the way this is going to wind up?

Paul: Absolutely, but also our freedoms. And just that litany of what you listed there is central economic planning. We don’t believe in central economic planning. At least I don’t. But that’s central economic planning through the monetary system. And now the regulatory system, not only does the Fed have the power over the supply of money and the interest rates, but now they want the regulatory function over more than just the banks, all the financial industries. I tell you, I think it’s a bad sign for free market capitalism.

Kudlow: I’ve been talking sir, a little bit, just in recent days and weeks, this funny story, I’m calling it the new socialism. Nobody can fail in America. If something fails, then government’s gonna come in and bail them out. Now the latest of course is Fannie and Freddie. There’s a huge housing bailout bill out there. Who knows? Maybe we may [bail out] the airlines, the automobile companies, I don’t know. You know, Phil Gramm may have had a point. We are a nation of whiners. Nobody wants to lose. Capitalism, you’re supposed to have the great opportunity and freedom to succeed, but you also have the freedom to fail. What’s happened to the freedom to fail?

Paul: Well you know a lot of consumers and people who are losing their jobs, they have a right to be angry and complaining and I sympathize with them. And you talk about socialism, and we do have a form of socialism creeping in, but it sort of is of the fascist type, because we have business and big government, you know, working together. It’s not the old-fashioned type of socialism where government owns everything. But they do control a lot of the financial markets for the benefit of certain industries, whether it’s the banks or other industries. And they do want bailout. And they are socializing their failures and that certainly shouldn’t be what we’re working for.

Kudlow: Mr. Paul, can you stay with us and work with our panel for a moment or two?

Paul: I think so.

Kudlow: All right we’d love to have you. Jerry Bowyer what did you just hear? What’s the way out? And let me ask you too Jerry, I mean once again today, Bernanke, you get this big inflation number in the CPI. Yesterday it was the Producer Price Index. So far as I can tell Bernanke has thrown the dollar overboard. He’s thrown the dollar under the bus. He’s saying we have to worry about financial stability, a weak economy, high inflation. If you try to be everything to all people you get nothing done. I’ve kind of lost hope on the dollar Jerry. You heard Ron Paul. What’s your take?

Jerry Bowyer [chief economist Benchmark Financial]: Well don’t lose hope on the dollar because Bernanke will learn I think from experience. I think Ron Paul is right on the policy side, where he says that the Fed has been far too loose and we are devaluing our coinage. I don’t think he’s right in saying that there shouldn’t be a Fed, that there shouldn’t be a national bank, that it’s unconstitutional. I think that’s an overstatement. I want a Fed that does its job well. I want a lender of last resort, with a good strong money policy, a good strong dollar policy. So at least on that policy, I agree with Congressman Paul.

Kudlow: Mr. Paul, can we have a Fed that does its job well?

Paul: I don’t think so. I think it’s the system that by nature will fail. Because of, you know, the character of the human beings, whether they’re in the Congress or in the Federal Reserve. The temptation is – you know, even Milton Friedman said that you could have a type of Federal Reserve, or a computer, increase the money at 3 percent. But if you understand human nature, 3.5 percent might be better than 3 percent. And the Congress loves this because they can spend money, they don’t have to tax directly, and they can always resort to the Fed. So whether it’s the Fed deliberately doing this or the pressure from the political side and the Congress, no, I don’t think so. It’s the monetary system. You have to have the consumer in charge and only a gold coin standard can do that. Because if you mistrust the system, you can always say, “Hey, are they printing too much money? Let me see if they have the gold in the bank.” And that’s the only real test of money.

Kudlow: Gold, gold…

Bowyer: We didn’t have a gold standard in the 1980s and we had great money.

Kudlow: Yeah gold is definitely my favorite four-letter word. I mean it is, look, we basically had the equivalent of $300 dollar gold for almost twenty years. I mean it worked beautifully. It all broke down at the beginning of the new century. I mean that’s the interesting thing. It just completely broke down. Joe Battipaglia, you’ve heard Congressman Paul. You’ve heard Jerry Bowyer and others. Joe, if you buy into it, I don’t know if you do or not, what do you do as an investor, if you’re faced with this problem, the breakdown in Federal Reserve and monetary discipline. Inflation is the cruelest tax of all. As an investor Joe, what do you do about it?

Joe Battipaglia [Stifel Nicolas market strategist]: Well unfortunately you become a trader, not an investor. Because policy decisions will be made that will work in contrast to the economy’s proper functioning, and you will have bouts of inflation, and you will have bubbles. So, the long-term strategy of buying and holding and growing equity gets tossed over to trading environment. And you swing from commodity classes to traditional assets like equities and bonds. And that’s a very dangerous place to be because you create more risk in the marketplace, you retard investment I think, and you also retard the ability to accumulate wealth over time. Because what’s happening is monetarism is being put at the beck and call of Keynesianism. So now you’ve got government policy run amok and the central banker coming in behind to make sure there’s no failure, puff up the economy, create more credit, keep the bubbles going. It’s a very bad mixture.

Kudlow: Well it’s over-tinkering and fine-tuning. You’re exactly right. David Kotok, what’s your take on all this?

David Kotok [co-founder & CIO of Cumberland Advisors]: Well I have to weigh in on defense of the Fed. The Fed cannot do its job until and unless it restores financial markets with functionality. We have dysfunctional financial markets. That means the Fed…

Kudlow: What does that mean? What does that mean? In plain language, what did you just say?

Kotok: Some markets are not clearing at all, like adjustable rate preferreds, or student loans. Other markets are not clearing at pricing which is not normal. That was true of the federal agencies. So you have to have a fix, and that’s part of this process. And if you look at history far back enough you will find in the Gold Rush days 150 years ago, there was rampant inflation in California during gold discoveries. Gold is not the magic cure.

Kudlow: Jerry Bowyer, did Dave Kotok just blame markets? Did I hear that right Jerry?

Bowyer: Well I think what he did is he saw that there’s a problem in the markets and basically thought that the Fed could solve that with the printing press. There are problems in credit markets, but they’re regulatory problems. A lot of these loans were foisted on the banks by political pressure, [the] Community Reinvestment Act and other things. And so the banks did what the regulators told them to do, and now they’re having trouble selling those mortgages because a lot of them shouldn’t have been issued in the first place. You can’t solve that with the printing press. If you could solve it with the printing press, it would already be solved because the Fed funds rate is at 2 percent and we are pouring money into this economy. The solution is not more money.

Kudlow: Well in Argentina, it would be the center of the world economy. Jim Lacamp do you want to weigh in on this? You’ve heard Mr. Paul…

Jim Lacamp [portfolio manager, RBC Dain Rauscher]: Yeah.

Kudlow: You heard the Kotok opposition to it. You heard Jerry Bowyer and Joe B. I want to know, should we be advising investors to run a sort of inflationist investment policy? In other words, today, commodities, basic materials and energy got hit, but maybe you buy those on the dips because that’s the new long run play. And as Joe Battipaglia said, inflation is inherently unstable. So you can’t buy and hold, you’ve got to trade the market. What’s your take Mr. Lacamp?

Lacamp: Yeah it’s a fiat monetary currency system. And when you have something like that it builds up a bigger and bigger mountain of debt and creates asset bubbles just like Joe said. And so the buy-and-hold really hasn’t worked over the last ten years. The ten years numbers on the S&P right now are about 2.7 percent per year. That’s sub-par throughout history. And the reason is because we keep creating these bubbles. And Fannie May and Freddie Mac are poster children for why we should not have government involvement in our financial system to a big degree. And the reason is that these are semi-socialistic, not even semi-socialistic, they’re socialistic entities that were allowed to create bad business models because of this implied government backing. Well now we have to give this unlimited line of credit with taxpayer money to a bad business. That’s not good policy. It rewards bad behavior. And I think that we need to get government out as much as we can.

Kudlow: Alright Mr Paul, just two quickies on the way out sir. We appreciate your time. You gonna vote for bailing out Fannie and Freddie?

Paul: No. No way. I can’t do that. Because that would contradict everything I’ve been saying. No. We should have the cleansing of the system. All the malinvestment, all the problems came from the artificially low interest rates. Yes, the markets are dysfunctional. But the problem should be laid at the doorstep of the Federal Reserve. Like I said, not just Bernanke, but the system itself. All of the Greenspan years. It caused all of the malinvestment. There were a lot of sound economists over the last ten years warning about this housing bubble. I even had a bill in eight years ago to remove the line of credit to the Fed saying it was a moral hazard because even though it was only $2.5 billion dollars, I said when push comes to shove, it’s gonna be a lot more. Now it looks like it’s $300 billion dollars.

Kudlow: Yeah, we’re gonna go from $2.25 to $300. Last one, real quick sir. Political question. I’m going to switch gears. Have you thrown your support to Bob Barr, the Libertarian candidate?

Paul: No. No I have not. I have not endorsed any one particular candidate. The only question I’ve answered has been would I vote for John McCain, and I wouldn’t be able to.

Kudlow: But you haven’t ruled out voting for Barr, is that correct?

Paul: No I have not. I’ll probably do some type of announcement like that sometime in September.

Kudlow: All right. We appreciate your time very much.

Paul: Thank you.

Kudlow: Congressman Ron Paul, thank you for joining us.

Definition of “Schumer”

My friend Jim McTague over at Barron’s sent me an amusing e-mail earlier.

Apparently Jim has coined a new word he’d like to see added to the lexicon. The word? Schumer. It’s a verb with the definition, “to cause a decline in confidence at a financial institution by a public statement.” As in, “XYZ Bank today was schumered by the Washington Post.”

Jim notes that his last attempt to coin a word — indigencia — failed to catch on. That’s too bad. It’s actually a pretty handy word. Indigencia is a noun that refers to “the class that both promotes and benefits from welfare subsidies.”

Very clever, Jim.

Wednesday, July 16, 2008

Wednesday Night Lineup

On CNBC's Kudlow & Company at 7pm ET tonight:

THE MARKETS...Our stock market and economic all-stars will weigh in with their perspective on all the latest news, trends and developments affecting investors.

On board:

*Joe Battipaglia, Stifel Nicolas market strategist
*Jim Lacamp, portfolio manager, RBC Dain Rauscher
*David Kotok, co-founder & CIO of Cumberland Advisors
*Jerry Bowyer, chief economist, Benchmark Financial Network
*Bert Ely, president for banking consultant Ely & Co.

INTERVIEW WITH REP. RON PAUL...Joining us to discuss Fed head Bernanke, Fannie & Freddie, inflation and the dollar will be former GOP presidential candidate Rep. Ron Paul of Texas.

The market panel will weigh in with its response following our interview with Congressman Paul.

INTERVIEW WITH SENATOR SHELBY...Joining us to discuss Washington's approach to Fannie & Freddie will be Senate Banking ranking member Richard Shelby (R-AL).

SECURING AMERICA'S ENERGY…Decorated retired General James Jones will be aboard to discuss drill, drill, drill.

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

Bunning Squawks at Paulson and Bernanke … Good for Bunning

I see this morning that some of my CNBC colleagues are talking down to Jim Bunning, almost making fun of him as some sort of “odd duck,” because the Kentucky senator dared to squawk back at Henry Paulson (and for that matter Ben Bernanke) during yesterday’s Senate hearings on Fannie Mae and Freddie Mac. In fact, Bunning deserves credit for being a principled conservative.

I interviewed Sen. Bunning last night on CNBC and he was very clear about his strong reservations about the Paulson bailout plan. In particular, Bunning simply refuses to sign on to a blank check of any kind — whether it’s an unlimited line of credit from the Treasury to the GSEs or an unlimited injection of equity or debt capital into their balance sheets. Bunning quite rightly points out that the phrase “Treasury money” or “government money” is really taxpayer money. He’s got a point there, doesn’t he? A very good point.

What’s more, Sen. Bunning wants to see Fannie and Freddie restructured. Whether Paulson meant to or not, he left the impression that the government will backstop the two housing lenders without changing their business plans. The key issue right now is the portfolio/hedge-funds that both GSEs operate. Most of what Fannie and Freddie do is buy mortgages from local lenders or big banks, package them, and then resell them to institutional investors around the world. But oftentimes Fannie and Freddie buy the mortgages and put them in their own portfolios. This creates huge credit risk. And then they try to hedge their risk through various derivative contracts which create even more credit risk.

The stock market crash of Fannie and Freddie is directly related to their portfolio risk. Market sellers believe huge mortgage write-offs are coming, and that neither Fred nor Fan has enough real capital to safely take the earnings hit from the portfolio losses. What must be done here in return for government backing, at the very minimum, is to severely limit the GSE portfolios and over time force them to gradually sell off these portfolio holdings. Doing so would reduce taxpayer risk. It also would move Fan and Fred in the direction of future privatization.

Mr. Paulson didn’t talk about portfolio management changes, so I think Sen. Bunning is quite right in his criticisms. Notice that Fannie and Freddie stocks fell again yesterday after the Paulson hearing.

One more point: Sen. Bunning was highly critical of Ben Bernanke as the Fed head basically threw the dollar under the bus in yesterday’s hearing. Bernanke talked tough in June on dollar defense and inflation. But he was a dove yesterday. Today’s 5 percent CPI report as well as an increase in the core CPI illustrates Bernanke’s folly and Bunning’s wisdom.

The only good thing to come out of yesterday was President Bush’s drill, drill, drill message, which caused oil prices to fall sharply. But neither Paulson nor Bernanke hit the right notes in their testimonies. We should be giving Sen. Jim Bunning credit, not making fun of him. Taxpayer bailouts are very serious business. Some are even calling it Republican socialism. And a chronically weak dollar is merely feeding the problem rather than solving it.

My Interview with Senator Jim Bunning

What follows below is an unofficial transcript of my interview on Kudlow & Company last night with Senator Jim Bunning (R-KY). Mr. Bunning is a Republican member of the Senate Banking Committee.

Kudlow: Senator Jim Bunning, Republican from Kentucky, not happy today with either Treasury man Paulson or Fed head Bernanke. Now, Senator Bunning, here’s what you said at the hearing, taking direct aim at Treasury man Paulson’s bailout plan for Fannie and Freddie. Take a listen to your own words.

[Senator Bunning's remarks at yesterday's Senate Banking Committee hearing: “When I picked up my newspaper yesterday, I thought I woke up in France. But no, it turned out it was socialism here in the United States of America. And very well, going well. And the Treasury secretary is now asking for a blank check to buy as much Fannie and Freddie debt or equity as he wants. The Fed’s purchase of Bear Stearns assets was amateur socialism compared to this.”]

Kudlow: All right. So Senator Bunning, I heard two things, Republican socialism and a blank check. Could you expand on that?

Bunning: Well, both are true. The administration is absolutely wrong in bailing out Bear Stearns and Freddie and Fannie. And the Secretary of the Treasury, and the complicity of the Fed chairman to these two things, you’re absolutely right, we have socialism in the Republican Party and this administration.

Kudlow: Did you think that Ben Bernanke, you had some unkind - I won’t say unkind, let me just say you had some spirited discussion with him. Has Bernanke thrown the dollar over the side? Has Bernanke thrown inflation targeting over the side…

Bunning: Yes.

Kudlow: Is he too obsessed with this Republican socialism?

Bunning: Absolutely. He threw the dollar over the side when he lowered the rates to 2 percent and have kept them there. And we’re not going to have an increase in an election year Larry. You can mark it down somewhere, wherever you mark things down, it’s going to be January or February before we have an increase in the Fed Funds rate which we need desperately to shore up our dollar. If you don’t care about the dollar, let Ben Bernanke do his thing.

Kudlow: Well, stocks went down again today. Gold went up, even though the oil went down. I think Bush was the only guy that got it right with his drill, drill, drill. He’s trying to prod Congress. But let me ask you this. Coming back to Mr. Paulson, and his so-called bailout of Fannie and Freddie. Did you get any satisfaction, you asked him specifically about blank checks and credit cards. Did you get any satisfaction from Paulson?

Bunning: The only thing I got from him was doubletalk. And the doubletalk was that they didn’t want to put a limit, because they didn’t think they were going to use it. And my question was, well then why do it at all?

Kudlow: If we give them some backing and guarantees, as we apparently are, then shouldn’t we have the willingness, the ability, and the right, to totally restructure their operations…

Bunning: Ahhh…

Kudlow: For example, they have an inside portfolio which is like a little hedge fund. It’s about $700 billion dollars. Shouldn’t we do something about that? That’s the ultimate taxpayer hook, isn’t it?

Bunning: That’s the hook.

Kudlow: Did Paulson say anything about that?

Bunning: No, he didn’t say anything other than to keep Freddie and Fannie like they were. Or are.

Kudlow: So let me get this right, if we keep them like they were, with $5 dollar stock prices we are now giving them a total U.S. full faith and credit guarantee? And then they can go ahead off and pay themselves fat salaries and bonuses? Is that the deal here?

Bunning: Well, I don’t know if you heard Chuck Hagel today. But he said $15 million dollars to mismanage Freddie and Fannie as badly as they have mismanaged it? And the boards on each of those GSEs getting paid the prices they’re getting paid? No, that’s not America. You get paid when you do something right! You don’t get paid when you do something wrong.

Kudlow: Well I think that’s called moral hazard. We’re rewarding bad behavior.

Bunning: That’s exactly what we’re doing. That’s what we did with Bear Stearns.

Kudlow: Who’s gonna pay for this, Senator. Who’s gonna finance this?

Bunning: The good old U.S taxpayer always gets stuck with the bill.

Kudlow: All right. Senator Jim Bunning. Appreciate it. Good to see you.

Bunning: Thank you, Larry.

Kudlow: Great stuff. Take care. Many thanks to Mr. Bunning.