Wednesday, November 26, 2008

Robert Mundell's New Wisdom

Reduce corporate taxes, stabilize the dollar.

New economic stats on consumer spending and business durable-goods investment show an economy that’s sinking fast across-the-board. Wall Street economist John Ryding expects a 4 percent drop in fourth-quarter real GDP.

Of course, the Fed is pouring in new cash hand-over-fist. And plunging retail gas prices to about $1.85 per gallon nationally amounts to a huge consumer tax cut of perhaps $320 billion, according to Mark Perry of the University of Michigan. So we’ve moved from tight money and an energy tax hike a year ago, to easy money and an energy tax cut today. The former mix has generated a nasty credit crunch and a recession. But the new monetary/energy mix will generate recovery next year. I hope.

At a wonderful dinner last night I had a chance to talk to Nobel Prize-winning economist Robert Mundell about all things economic. What is to be done? I asked him.

Mundell, you may remember, was a leading supply-sider in the Reagan revolution. He argued for low marginal tax rates to spur the economy and a stable dollar to eliminate inflation. Bob Mundell also is the father of the euro. He is plainly an incredibly brilliant and distinguished man.

The dinner was put together by the indefatigable hard-money analyst Judy Shelton, a pretty smart gal herself. Our spouses were there along with some friends.

So here’s Mundell’s latest take on a pro-recovery, fiscal-monetary, growth mix. First, he’d like to see a complete corporate tax holiday for one year. He then favors corporate tax reform that would drop the current top rate from 35 percent to 15 or 20 percent. He believes this would generate badly needed business investment and job-creation to fight recession.

Incidentally, in today’s durable-goods business-investment report for October, capital-goods shipments are falling at a 12 percent annual rate versus their third-quarter average. Orders are down 35 percent. (By the way, that third-quarter average was a negative number.)

So Mundell is clearly on to something. Business needs help. Without healthy business, there will be no significant new job creation or consumer spending power.

On money, Mundell had two interesting thoughts: First, the U.S. dollar and the Chinese yuan should basically be re-linked at roughly today’s exchange rate (about 6.8 yuan to the dollar). There should be no more Chinese currency appreciation. Incidentally, Mundell thinks the Chinese economy is actually in some trouble. And he’d know. Mundell travels to China about once every other month as a key advisor to the Bank of China.

Also on the currency front, Mundell would prefer a floor under the euro at roughly $1.25. That’s about where it is today. It’s also roughly the same as the original $1.18 euro initial public offering in 2000. So Mundell is pressing for dollar stability relative to Europe and China. And he believes that would be consistent with domestic price stability here at home.

Unfortunately, Fed head Ben Bernanke simply doesn’t think in these global currency terms. Mundell has no real problem with the Fed’s huge balance-sheet expansion to push new cash into the credit-crunched recessionary economy. He believes there is a huge demand for dollars at home and overseas, and that the Fed should be accommodating this.

But Mundell frets that Bernanke is too much of a Phillips-curve unemployment-rate targeter, and that he doesn’t understand the powerful influence of a sound currency policy.

Putting it all together, Mundell’s anti-recession program is a reduction of the high marginal tax rate on business to reignite growth along with a stable dollar to contain inflation.

We also got around to talking about Paul Volcker, who is a friend of Mundell’s. He’s also my former boss from 1975, back when I was a young staffer at the New York Fed and Paul Volcker was the bank’s new president.

Volcker, of course, has been counseling Barack Obama during the financial crunch. And today, the president-elect appointed Volcker, the former Fed chair, to be the head of a new White House advisory board on the economy. This advisory board takes a page from Ronald Reagan, who set up PEPAB, the President’s Economic Policy Advisory Board, back in 1981. Members of that group included Milton Friedman, Art Laffer, Alan Greenspan, Arthur Burns, Herb Stein, and others. George Schultz was the first chairman. This group helped sustain Reagan’s supply-side policies during some difficult times in 1981-82.

Now, no one really knows what Paul Volcker really thinks about the myriad TARP financial-rescue packages being run by the Treasury, the Fed, and the FDIC. Nor do we know what Volcker thinks about the Fed’s ballooning balance sheet, or U.S. dollar policy for that matter. A lifelong Democrat, Volcker is properly credited with slaying inflation in the 1980s. But he is no supply-sider.

Presumably, however, the conservative-Keynesian Volcker, along with Tim Geithner, Larry Summers, and Christina Romer, will advise Obama not to hike taxes in the next two years.

But that’s a presumption. We don’t know who else will be on this Obama economic advisory board. Might they consider a stable dollar and a big corporate tax cut? Well, if Volcker listens to his friend Mundell, he’ll gain some important advice to be passed along to the new president-elect.

Jobless Claims as Percentage of Payrolls

Jobless claims fell slightly last week to 529,000 from 543,000. Yes, it’s a recessionary number, but when you look at jobless claims as a percentage of total non-farm payrolls over the last 28 years, what you find is a much less alarming picture.

Out of 137 million payrolls, October claims of 484,000 are only 35 one-hundredths of one percent or 0.35 percent. That comparison looks more like the 2001 recession than the really big bad one of 1980 to 1982.

Tuesday, November 25, 2008

Tonight's Show...

Please join us tonight at 7pm ET on CNBC.

CNBC’s Bob Pisani reports from the NYSE.

*Dawn Bennett, CEO of Bennett Group Financial Services
*Jason Pride, director of research at Haverford Investments
*Jack Gage, Forbes magazine associate editor

CNBC’s Hampton Pearson reports on the latest news and developments.

*Robert Reich, author, public policy professor & former Clinton labor secretary
*Steve Moore, Wall Street Journal senior economics writer

CNBC’s Charlie Gasparino will deliver a report with Messrs. Moore & Reich weighing in with their perspective.

CNBC’s Diana Olick delivers a report on the latest news.

CNBC senior economic reporter Steve Liesman will fill us in on the details and CNBC’s Rick Santelli will discuss with Mike Darda chief economist at MKM Partners.

Please join us. 7pm ET. CNBC.

Obama’s Pro-Growth Economic Team?

A liberal-conservative consensus?

When President-elect Obama had a chance to squash the tax-hike threat once and for all at his news conference Monday, he took a pass and let the question linger for another day. But his new economic cabinet appointments strongly suggest there will be no tax hikes next year.

Stocks, for one, like what they’re seeing from Obama’s latest cabinet selections. On Friday, Obama announced Tim Geithner will be his Treasury man, and on Monday he made Larry Summers his White House economics tsar and named Christine Romer to the top spot in the Council of Economic Advisers (CEA). Stocks rallied 900 points across this stretch. That’s not the end of the stock story. Markets also like the new super-TARP government plan to bailout Citigroup, which effectively guarantees the banking system with a massive insurance-like policy. But markets may also sense a little pro-growth good news in the Obama policy mix.

When asked about tax hikes on Monday, Obama said the debate is between repeal and not-renewal. In other words, repeal the Bush tax cuts in 2009, thereby raising tax rates on capital gains and successful earners, or wait until the Bush tax cuts expire at the end of 2010. Investors want to hear the latter, and Mr. Obama said his team will make a recommendation.

Here’s my thought on his team. Summers, Geithner, and Romer will all recommend no tax hikes in a recession. Maybe for Keynesian reasons; maybe a nod to supply-siders. Obama talked about a liberal-conservative consensus. But what’s especially encouraging is the appointment of Ms. Romer, who easily could serve as CEA head in a Republican administration (just like Geithner could have been McCain’s Treasury man).

About a year and half ago economist Don Luskin sent me a long article about taxes by Christine and her husband David Romer, who were writing for the National Bureau of Economic Research. From the introduction: “The resulting estimates indicate that tax increases are highly contractionary. . . . The large effect stems in considerable part form a powerful negative effect of tax increases on investment.”

Later in the article, the Romers write: “In short, tax increases appear to have a very large, sustained, and highly significant negative impact on output.”

That’s what makes the Romer appointment so interesting. In fact, there is no question that Obama’s economic team is right of center. All three are market-oriented. They’re also pro-free-trade. Hopefully Summers and Geithner maintain the Robert Rubin King Dollar policy of the Clinton years. And if Ms. Romer can stop tax hikes, that will help the greenback even more.

At a minimum, both Romer and Geithner could have served under Gerald Ford or George H. W. Bush. But they may be more pro-growth than that. Romer’s study of the damage of tax hikes on the economy and her emphasis on investment are right on target. In a New York Times story, a former Treasury colleague of Geithner’s says, “he’s no liberal.” As for Summers, while he has been mau-maued by Democratic feminists and some of the unions, he is a tough, clear-headed thinker who has for years tried to merge Keynesian and supply-side policies. No mean feat.

Now here’s the rub: all this talk about a $700 billion stimulus package. I hate to be the one to pull the plug, but government cannot spend our way into prosperity. The wish list of Democratic spending initiatives includes short-term tax rebates, massive new transportation bills, even more education money, exotic green-technology spending, a big-government embrace of health care, and heaps of cash for UAW-Detroit carmakers. None of that will stimulate economic growth.

Economist Paul Hoffmeister has it right: We need to invigorate incentives to produce and invest. Let me take it even further. We need to revive the dormant animal spirits, which 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.

Government policy must make it clear that new successes will be handsomely rewarded. This will be Obama’s greatest challenge. While he may not raise taxes in 2009 — a good thing — he hasn’t yet come up with a new bolt of electricity that will hardwire the serious risk-taking that lies at the heart of free-market capitalism. Right now, the missing electric bolt is lower tax rates and greater rewards for new risk investment by investors, successful earners, and business.

On the plus side, however, Mr. Obama talks optimistically. That’s good. He says he’s hopeful about our future. And he says he is confident that American spirits will be resilient in this difficult time. That’s Reagansesque, Kennedyesque, and FDResque. But while FDR’s big-spending and regulating prevented economic recovery, Kennedy and Reagan opted for across-the-board supply-side tax-rate reductions to get America moving again.

Monday, November 24, 2008

Tonight's Show...

Please join us tonight at 7pm ET on CNBC.

CNBC chief Washington correspondent John Harwood will report on the latest developments from the incoming Obama economic team.


*CNBC’s Bob Pisani
*Gary Shilling, A. Gary Shilling & Co. President
*Quentin Hardy, Forbes Silicon Valley Bureau Chief
*Dennis Kneale, CNBC media & technology editor
*Jim Paulsen, Wells Capital Management Chief Investment Strategist

*Jared Bernstein, senior economist at Economic Policy Institute
*Art Laffer, economist & chairman of Laffer Associates
*Jerry Bowyer, chief economist at Benchmark Financial Network

CNBC’s Charlie Gasparino and Steve Liesman will join former FDIC chairman Bill Isaac with a look at all the latest market news and developments.

CNBC’S Diana Olick will report with additional insight from the market panel.

Please join us. 7pm ET. CNBC.

Friday, November 21, 2008

Early Thoughts on Tim Geithner at Treasury

New York Fed president Tim Geithner has been chosen to lead Obama’s Treasury, according to news reports. The stock market cheered by rising 500 points on the announcement.

Geithner is generally well regarded on Wall Street in his handling of the banking crisis. He’s been the point man for both the Fed’s Ben Bernanke and Bush Treasury man Paulson in their various rescue efforts to deal with the ongoing credit crisis.

It is generally believed that Geithner would have bailed out Lehman Brothers, according to street gossip and some news speculations (although this has never been definitively confirmed). Nonetheless, Geithner has done a good job in dealing with the multitude of crises and setting up various lending facilities to keep the banking system afloat.

He was a protégé of Larry Summers in the Clinton Treasury and rose up through the ranks to become undersecretary for international affairs. Geithner collaborated closely with Robert Rubin and Summers in dealing with the Asian currency crisis and other fire drills in the late 1990s.

He is highly regarded by those who worked with him as a very smart, sharp, and insightful player. He has developed a strong working knowledge of markets and the economy as a central figure in the dramatic events of the past couple of years.

Presumably, as a former deputy to Rubin and Summers, Geithner shares their policy views on free-trade and a strong dollar. While it is too soon to know how trade and the dollar will play out in the Obama administration, it is likely that Geithner would represent a free-trade and strong-currency position.

Regarding tax policy, it is harder to say. When Bill Clinton finally signed a Republican capital-gains tax cut in 1997, it was reported that Rubin and Summers opposed the move. But I don’t know that with any certainty. And Geithner’s thinking on Obama tax policy — especially the threat to raise the capital-gains tax and upper-income tax brackets — is at this point unknown.

As for the TARP bailout story, it is generally believed that Geithner is a strong interventionist. And so we can expect him to move toward raising the second $350 billion tranche of the originally authorized $700 billion package by Congress.

Certainly, Geithner’s announcement today shows some movement by team Obama to fill the economic power vacuum that has taken over Washington during the transition. Stock market traders are cheering this movement. Nobody knows what Geithner might say about the GM/Detroit/carmakers bailout story. But Congress may actually take action on that in a couple of weeks — even before Obama is inaugurated.

It is interesting that Obama chose Geithner over Larry Summers and other names like Paul Volcker. Geithner is a young guy at 47 years old. And to the country at large and most of the Washington political establishment, he’s a new face.

Yes indeed, change is coming.

Tonight's Show...

Please join us tonight at 7pm ET on CNBC.


CNBC chief Washington correspondent John Harwood will report on all the latest cabinet developments from the new Obama team including the selection of New York Fed president Tim Geithner as Treasury Secretary.

*Steve Moore, Wall Street Journal senior economics writer
*Robert Reich, author, public policy professor & former Clinton labor secretary
*Jimmy Pethokoukis, U.S News & World Report senior writer Money & Business

CNBC’s Charlie Gasparino, Steve Liesman, and Rick Santelli will debate all the latest news.


Dawn Bennett, CEO, Bennett Group Financial Services
Jerry Bowyer, chief economist at Benchmark Financial Network
Andy Busch, global FX strategist at BMO Capital Markets
Stefan Abrams, Bryden-Abrams Investment Management Managing Partner

Please join us. 7pm ET. CNBC.

Mustard Seeds #1 and #2

Everyone on Wall Street and in the stock market remains highly fearful of banks and the credit crunch, which of course extends to the mortgage-credit and foreclosure problem. Fear is certainly trumping some very attractive fundamental valuations that may turn out to be a once-in-a-generation buying opportunity for stocks.

But there’s another crucial aspect to this story: A terrible oil shock and gasoline-price spike decimated the economy this year (actually beginning in the last quarter of 2007), with the onset of an energy bubble driving up oil prices from roughly $75 a barrel to nearly $150 and the retail gas price from $2 to more than $4. It’s one of the most underrated causes of the recession and the plunge in corporate profits that spilled over into share prices.

In fact, since the early 1970s, we’ve had six recessions. And every one of them was preceded by an oil shock. Plus, the Federal Reserve response to stop inflation has always dealt the economy a rough hand of very tight money on top of very high energy prices.

The oil shock of the past year surely has made the credit crunch much worse than would otherwise have been the case. The soaring energy costs killed consumer spending — including servicing mortgages. And that in turn made the mortgage-backed paper owned by banks much less credit worthy and much more damaging to their earnings and their balance sheets.

Yet now, as people are looking for a way out of the terrible stock market recession, the Fed’s tight-money policy plus the very big oil shock — a huge tax hike on the economy — are completely reversing. Notice the two charts below:

As Carpe Diem blogger Professor Mark Perry points out, the real price of gas has utterly collapsed. He believes this amounts to a $300 billion tax cut to bolster consumer purchasing power. That’s mustard seed #1 for a bull-market recovery.

But mustard seed #2 is a radical change in Fed policy. Notice the chart on the monetary base, which is a proxy for the Fed’s balance sheet. It was essentially flat in 2006, 2007, and the first half of 2008. The yield curve in the Treasury securities market was inverted — that is, upside down, with short rates higher than long rates — for about two and half years, another sign of very tight money. But in the last three or four months all this has changed. The Fed is pouring new cash into the financial system. The Treasury curve is positively sloped.

So what we have now is energy tax cuts and a very easy Fed. It’s the exact reverse of energy tax hikes and a very tight Fed. Obviously, this new easy-money/tax-cut mix is pro-recovery. And that’s why I think people are altogether too gloomy about next year’s economy and the stock market.

Thursday, November 20, 2008

Tonight's Show...

Please join us tonight at 7pm ET on CNBC.

The lineup:

*CNBC’s Bob Pisani reports from the NYSE.

*CNBC’s Phil Lebeau reports from Washington.
*Sen. Kit Bond with the latest on bailout talks from Capitol Hill.

*Jack Gage, Forbes magazine associate editor
*Joe Battipaglia, market strategist, Stifel Nicolaus
*Jeff Matthews, general partner of Ram Partners, LP

*CNBC’s Adam Bakhtiar reports from Singapore.

*CNBC's Phil Lebeau
*Jared Bernstein, Economic Policy Institute Sr. Economist
*Jerry Bowyer, chief economist at Benchmark Financial Network

*CNBC’s Charlie Gasparino reports.

*CNBC's Rick Santelli
*Lee Hoskins, former president of the Federal Reserve Bank in Cleveland
*Vince Reinhart, former Director of the Federal Reserve Board's Division of Monetary Affairs

Please join us. 7pm ET. CNBC.

Stock Markets Ascend with GM Bailout Hopes

After getting creamed yesterday, stocks opened down a couple hundred points this morning in what has become a truly dismal bear-market recession scenario. There were more bad numbers this morning on leading economic indicators that are sinking, a terrible manufacturing report from the Philly Fed index, and a big spike up in jobless claims.

However, by midday share prices started rallying again. Why? Because news coming out of Congress suggests the GM bailout has another shelf-life.

Apparently, key senators Carl Levin (Mich.), Kit Bond (Mo.), and George Voinovich (Ohio) are working out a deal that would shift the $25 billion originally earmarked for retooling auto plants (to accommodate better CAFE mileage standards) to general operating funds for Detroit automakers. On that breaking news stocks rallied sharply, suggesting that the market does not want GM and the others to run out of cash and go under.

The Chapter 7 liquidation scenario is the worst-case, because it would deepen the recession. A much better case is Chapter 11 bankruptcy, which would permit a complete restructuring of the car companies and a reopening of their uncompetitive compensation packages. But there are market worries that a cash-shortage liquidation would absolutely be the worst case for the economy.

We don’t know yet if this new deal to use the $25 billion as a direct bailout rather than its original greenie purpose can pass both houses of Congress today or tomorrow. Clearly, legislators will want strict conditions on the money — perhaps similar to what financial firms face when they accept TARP money.

Attempts by Barney Frank and others to get $25 billion from TARP are dead in the water as of yesterday. And that’s one reason why stocks dropped 6 percent. In other words, despite the obvious industrial policy of bailing out distressed industries, the stock market doesn’t want to risk a worst-case catastrophe right now.

Ironically, many Democrats who want to bailout Detroit do not want to use the greenie CAFE-standards money in the process. To the bitter end these Democrats still want higher mileage standards as the first order of business. That’s why they fought so hard for the second $25 billion injection from TARP.

I say “ironically” because it’s these very CAFE standards that have done so much damage to the auto business. As Holman Jenkins of the WSJ has pointed out, forcing Detroit to make smaller greener cars under outsized union compensation has dragged the carmakers to the brink of liquidation. Yet these Dems still want more CAFE standards, which would inflict more pain on the carmakers. It’s a bizarre story.

In any event, let’s see if Washington can put the new deal together — a deal that presumably will suspend the CAFE standards in order to stop a complete Detroit meltdown. What is interesting to me is that the stock market — which is a barometer of the longer-term health of the economy — has now placed itself firmly on the side of an immediate bailout for GM and the others.

As of this writing, Speaker Nancy Pelosi and other House Dems are calling the Bond-Voinovich-Levin deal a non-starter. Hard to believe, but the Pelosi gang would rather preserve the CAFE fuel-mileage standards than bailout the Detroit carmakers.

Greenies of the world unite.

Wednesday, November 19, 2008

Tonight's Show...

Please join us tonight at 7pm ET on CNBC.

The lineup:

*CNBC's Phil Lebeau reports live from Capitol Hill.

*Rep. Barney Frank (D-MA), Financial Services Cmte. Chmn.
*Rep. Spencer Bachus (R-AL), Financial Serices Cmte. Ranking Member

*Holman Jenkins, WSJ Editiorial Board
*David Yermack, NYU Prof of Finance
*Jared Bernstein, Economic Policy Institute Sr. Economist
*Dean Baker, Center for Economic & Policy Research Co-Dir.

*CNBC's Charlie Gasparino reports.

*CNBC's Bob Pisani reports from the NYSE.

*Mike Ozanian, Forbes National Editor
*Jim LaCamp, RBC Dain Rauscher Sr. VP, Portfolio Manager & Financial Advisor
*Vince Farrell, Soleil Securities Chief Investment Officer, CNBC Contributor

Please join us. 7pm ET. CNBC.

An Interview with FDIC Chair Sheila Bair

What follows below is a transcript of my interview last night with FDIC Chairwoman Sheila Bair. She's the most important woman in the country right now. Ms. Bair wants more federal help on foreclosures and mortgage modification. She is also rumored to be on an Obama short-list for Treasury secretary.

Larry Kudlow: A few moments ago, I spoke with FDIC chair Sheila Bair, and I began by asking her for a synopsis of this new plan to combat more home foreclosures. Take a listen.

Sheila Bair: Well basically, it’s a proposal to try to provide some financial incentives, some responsible financial incentives, to get these loans modified. There are a lot of loans that are unnecessarily going into foreclosure that could be restructured, and present greater value if they were restructured in keeping the homeowners in the home. So it’s based on the loan modification protocol we developed with IndyMac.

Pretty much, borrowers would get, borrowers with unaffordable mortgages can get a reduction in payment to 31 percent of their principal and mortgage payment related – principal/interest/taxes and insurance -- as a percentage of their pretax income down to 31 percent. Get there through an interest rate reduction, extended amortization, and in some cases, principal forbearance. And then, if the servicer and the investors would agree to modify the loan along those lines, there would be some loss sharing in the event that that loan would re-default later on.

Kudlow: Let me just ask you, because we’ve heard several of these kinds of proposals -- the Treasury, Fannie, Freddie and so forth -- are you going to be reducing the principal amount on the home loan?

Bair: No. The IndyMac protocol does not do that. Most of the pooling and servicing agreements, they provide wide flexibility to modify loans, but most do prohibit principal write-downs, or make it very difficult. So this protocol is based on making an affordable payment, not reducing principal, but getting to an affordable payment, again, through interest rate reductions, extended amortization, and in some cases, principal forbearance, meaning that some amount of the principal might be permanently deferred. But if the loan was refinanced, or the house was sold, it would have to be paid back at that time.

Kudlow: Okay, if a loan is underwater…

Bair: It’s not focused on whether you’re underwater or not. What we strongly believe is key is that most people are willing to ride this out. They view their home as a place to live, not as a leveraged investment. And if they have an affordable payment, they will want to stay in their homes and they will be motivated to stay in their homes and make their mortgage payment. So we’re focused on affordability.

Kudlow: But you are going to give them an interest rate break?

Bair: Yes, there would be an interest rate break.

Kudlow: And how would you determine that interest rate break?

Bair: Well at IndyMac, we pretty much start with giving everyone a 30-year fixed rate mortgage at the Freddie Mac survey rate, the prime rate, which is a little above 6 percent now. Some mortgages have to be reduced further than that to get to an affordable payment. For those, we’ll take the interest rate all the way down to 3 percent for a period of 5 years. And after 5 years, it will gradually increase by 1 percent until it gets back to the Freddie Mac rate. So if you were at 3 percent, getting back to 6 percent, it would be a total of 8 years. So it’s a very gradual reset after 5 years. Also, if that doesn’t get you to 31 percent (debt to income) we’ll extend the amortization to 40 years. And, as I said, in about 10 percent of cases, we also have to forbear a certain amount of principal. But most of the loans we find at IndyMac we can get there through an interest rate reduction.

Kudlow: Now let me ask you this. As I understand it, you’re going to put a federal guarantee behind this. So if there is a default, or a foreclosure, the lender is going to get at least half their money back?

Bair: That’s right. Except for loans with a loan to value ratio of 100 percent or less, it would be a 50 percent loss shared. That would gradually phase out for loans that had very high LTVs of 150 percent or greater. It would exclude early payment defaults though, I think that’s important to emphasize. The loan would have to perform for 6 months, before the government loss share would kick in. The statistics we’ve looked at show that the re-defaults go down pretty significantly once the borrower has been able to demonstrate that they can make the payment at 6 months. So that’s an important condition.

Kudlow: All right. Let me ask you this though. A lot of people have raised a problem with these loan modifications and so forth about re-default. That people get in these deals, but they wind up, 50 percent of them or thereabouts, wind up defaulting anyhow. Since you’re putting federal guarantees behind this it could cost taxpayers a fortune, but at the end of the day, we’re not really going to do a lot on the foreclosure issue. How do you respond to that criticism?

Bair: Well, I have a number of responses to that. First of all, I think some of the re-default rates that you’ve seen, what you’re talking about, you’re including the early payment defaults with that 50 percent figure. We would exclude the early payment defaults. We would also require a meaningful, real, permanent loan modification.

Some of the reason you’re having these high re-default rates is because loans are not being meaningfully modified. The principal and interest may be deferred for a couple of months, and then it’s stuck back into the payments, so that after a couple months the payment is even higher. That’s not a permanent sustainable loan modification. So, to the extent that some servicers have just been kicking the can down the road with even steeper payment hikes after a few months, that doesn’t really solve the problem. We think that has also fed into the high re-default rates.

Kudlow: So you’re sort of downplaying the re-default rate.

Bair: No I’m not. No…

Kudlow: It’s a tricky business. A lot of economists have looked at this…

Bair: It’s a very tricky business…

Kudlow: You know, I want to just juxtapose that, I want to play devil’s advocate.

Bair: Okay, please.

Kudlow: I don’t know who’s right and who’s wrong. You know more about this than I do.

Bair: Yup. We go through this a lot. Please, ask the question.

Kudlow: I just want to ask you, look, you’ve already seen in the difficult states out West primarily, the foreclosure rates have gone sky high, but the foreclosure prices at resale or auction have plunged and sales are rising. I mean you look at California and Nevada, Arizona, the places that have been hit the hardest, they’re the ones showing the sales coming back the fastest. Now to me, the marketplace is probably best at sorting this out and we’re probably, I don’t know 2/3rds of the way home. So are you gonna put taxpayers on the hook at a late stage in the game? Would it might be better to just let the market finish the job?

Bair: Well, if you’re right, and if the market is starting to bottom out -- and I’m not sure that’s the case because I think these escalating foreclosures are creating more artificial downward pressure on home prices -- the costs should be minimized if the collateral values are in fact bottoming out. If that is the case, that should reduce the cost of the program. We have looked at re-default rates very carefully. And we are assuming a 33 percent, 1/3rd re-default rate with our program in estimating the cost of this program at less than $25 billion dollars. And again, we think that’s a very conservative and prudent re-default assumption.

But again, this is a meaningful loan modification with a meaningful payment reduction. We’ve looked at statistics from a number of servicers, and the re-default rates, again, go down significantly if you get past that early payment default period. And, if you provide for meaningful payment reduction, a lot of the so-called modifications that have been occurring aren’t really modifications. They’ve just been kicking the can down the road for a couple of months. So we have looked at this very carefully.


Kudlow: As I understand it, the Treasury does not want you to take any of their TARP money to provide this loan guarantee.

Bair: That’s right.

Kudlow: They’re sort of harboring this TARP money.

Bair: Right.

Kudlow: I myself would like to put a tarp over the entire TARP. But I guess that’s a whole different segment. But let me go there. Where do you stand on this proposal, if the Treasury is against you, I mean, do you need a congressional authorization on this to start it up? How’s this gonna work?

Bair: Well we continue to talk with Treasury. Secretary Paulson has expressed receptivity to this plan and support for the general concept, but he doesn’t think this is the way to use the TARP funds. So in that area, we do disagree. I think you know, the original purpose of TARP was to buy mortgage related assets, distressed mortgage related assets, and foreclosure prevention and the promotion of loss mitigation and loan modification is expressly referenced in the statutory language. And I think we heard at the hearing today that Congress thought part of this money would at least be used for foreclosure prevention. So we think it’s very, very consistent with what Congress had in mind when they originally appropriated the funds.

Kudlow: So you’re saying in effect, when the new administration comes in, you might see the light of day on this plan.

Bair: Well, we might. I haven’t given up on the current administration yet. We continue to talk to Secretary Paulson and Chairman Bernanke. I think we would really like to see something put into place now. We’ve waited for a long time. We’ve waited too long. We’re behind the curve on foreclosures, and I don’t think that the housing prices are going to find their much needed bottom if we keep having unnecessary foreclosures occur because of the convoluted economic incentives that are currently provided in these private label securitization trusts.

Kudlow: And also, speaking of the new administration, now of course, you are the most powerful woman in America…

Bair: Oh right…

Kudlow: There’s no question about that. Have you had any feelers to become the Treasury Secretary under President-elect Obama? There are a lot of rumors Ms. Bair.

Bair: [Laughing] Well yes, if I had, I wouldn’t tell you. I wouldn’t comment on that at all. I’m very happy with the job that I’ve got. I think we’re doing a great job. I’m very proud of the FDIC staff. They are working 24/7. I hope the public appreciates what a great job and hard work that all the FDIC staff are doing. And we’re a good team there, and I’m happy there, to be at that helm. I do think the new administration should have wide latitude to pick who they want on their economic team. So I will accommodate whatever the new president’s wishes are. But I’m very happy where I am.

Kudlow: But there’s no question, your term goes to when? 2011?

Bair: 2011.

Kudlow: And I don’t hear you, you’re not saying you wouldn’t take the Treasury post if it were offered.

Bair: Well, I think that’s a very prestigious job. I think anybody would have to think twice about turning down a job like that. But I’m very happy with the job I have now. I’m quite content and very, very proud of our team at the FDIC. And you know I think we need to just keep focusing on the job we have to do right now.

Kudlow: All right, Ms. Sheila Bair. As always, we appreciate your coming on the show.

Bair: Nice being here. Thank you.

Tuesday, November 18, 2008

Tarp the TARP

It’s time for a reality check about what works and what doesn’t in fighting recession and promoting long-term economic growth.

Treasury Secretary Henry Paulson has called for a pause in the financing request for the Troubled Assets Relief Program (TARP), halting it at $350 billion. (The original request was for $700 billion.) I think that’s an excellent idea. But in a recent hearing of Barney Frank’s Financial Services Committee, Democrats went ballistic at the thought of no more TARP money. They want to keep spending. They want to throw money at GM, the other Detroit car makers, plumbers, auto-parts suppliers, homeowners, mortgage problems, and foreclosures. Candy stores all over America now want TARP money.

Meanwhile, senior Obama advisors are talking about another $600 billion to pull us out of recession. Some reports even suggest the development of a new industrial policy for big-government interference in housing, banking, energy, autos, and more.

But all this brings up a whole new problem in American finance: How are we going to transport and deliver trillions of dollars of new government money? It’s not an easy task. We’ve moved beyond show me the money. This is throw me the money. And shovels alone won’t do.

We’ll need to convert Caterpillar earth movers into money movers. We’ll need new streamlined helicopter fleets to drop money from the sky. We’ll need a trucking armada and full use of the railroads. And we’ll need an army of smaller trucks and SUVs to reach folks in the off-road areas. And let’s not forget FedEx and UPS — we’ll need them to make sure the money arrives on time.

We may even need high-level planners at the Department of Transportation to help coordinate this vexing money-delivery problem. Sending out trillions of dollars may sound great to your average liberal Congress member. But this will not be easy. Perhaps the transitioning Obama administration can designate a Transportation Monetary Tsar. These logistical realities must be dealt with.

Or maybe there’s a better idea: Maybe we take Mr. Paulson at his word but go one step further. Let’s stop any new TARP money — period. Enough is enough. The TARP has already done some good. Banks have more capital. Credit spreads in the money markets are narrowing. And there even are signs that business and consumer loans are flowing once again. So let’s cap the TARP — or tarp the TARP.

The new congressional Keynesians believe government can spend us into prosperity. They’re wrong. Everything we have learned in the last four decades tells us that governments don’t create permanent new jobs or capital investment. In fact, the more we spend, the more we’ll have to raise tax rates. And that depresses growth. Europe went down this road and failed. So did Latin America and parts of Asia before they wised up.

And for some reason no one in Washington is talking about cutting tax rates, which would strengthen incentives to work, invest, and take new business risks. We should be making it pay more after tax for entrepreneurial activity of all kinds. How about this: Let’s get back on the path of free-market capitalism.

Even at the G-20 meeting in Washington this past weekend, all one heard was “global fiscal stimulus” — or more spending on a worldwide scale to fight recession. It won’t work. It never has. Hundreds of academic studies over the past 25 years show clearly that countries that spend more, grow less; but that nations that tax less, grow more.

Why these lessons have been forgotten is beyond me. We have to restore market discipline and personal accountability. We should reward the economic good, but punish the bad. Instead we have launched a demoralizing government-spending nymphomania.

Incidentally, all this talk of big-government bailouts and a never-ending flow of government spending has disheartened the stock market, which is now down five of the past seven days. Since the November 4 election, the Dow is off 15 percent, or more than 1,400 points.

All this shows why, like the grounds crew at a baseball stadium on a rainy evening, we need to roll out the tarpaulin in order to preserve the field. To safeguard today’s economic field, it’s time to tarp the TARP. Let’s stop right here at $350 billion before everyone in the country demands a piece of the new TARP action. At the same time, let’s cut taxes to grow the economy. Slash the corporate tax rate. Reduce personal rates across-the-board. Promote investment with a lower capital-gains tax and a lower estate tax. Let’s restore the incentive model of economic growth.

Current political trends in Washington are gonna push us off some left-wing economic cliff. Instead, let’s have some sanity. It’s time for a reality check about what works and what doesn’t in fighting recession and promoting long-term economic growth.

I say tarp the TARP.

One-on-One with Sheila Bair

FDIC Chairwoman Sheila Bair will join me this evening at 7pm ET for an exclusive CNBC interview. We’ll discuss the growing debate over the priorities of the government’s $700 billion rescue package, and her wish to see loan modifications play a greater role in helping homeowners at risk of foreclosure.

AlsoRep. Charlie Rangel will be joining us to discuss his revamped plan to reduce corporate tax rates to 28 percent.

Please join us. CNBC. 7pm ET.

Friday, November 14, 2008

Bush Shows Obama the Way

The president reminds the president-elect that free-market capitalism is the best path to prosperity.

President George W. Bush came out fighting for free markets with a strong and stirring defense of American capitalism on the eve of the G-20 World Economic Conference. Stocks soared 550 points Thursday as Bush’s luncheon speech was played live on all the major cable networks. It was as though Mr. Bush was trying to leave an economic-primer to his successor-elect Barack Obama. Markets cheered because it’s the best thing they’ve heard in many weeks.

Here’s one of several great passages from Bush: “At its most basic level, capitalism offers people the freedom to choose where they work and what they do … the dignity that comes with profiting from their talent and hard work. … The free-market system also provides the incentives that lead to prosperity — the incentive to work, to innovate, to save and invest wisely, and to create jobs for others.”

In other words, free-market capitalism is the best path to prosperity.

During a gloomy period of financial crisis, recession, big-government rescues, and ailing banks and industrial companies, Bush has provided a strong visionary dose of big-picture economic prosperity and optimism that can lead the U.S. and the rest of the world out of its economic doldrums.

Here’s another uplifting passage from Mr. Bush: “Free-market capitalism is far more than an economic theory. It is the engine of social mobility — the highway to the American Dream. And it is what transformed America from a rugged frontier to the greatest economic power in history — a nation that gave the world the steamboat and the airplane, the computer and the CAT scan, the Internet and the iPod.”

Capping all this off, Bush said, “The triumph of free-market capitalism has been proven across time, geography, culture, and faith. And it would be a terrible mistake to allow a few months of crisis to undermine 60 years of success.”

That reference to 60 years harkens back to the original post-WWII economic-rebuilding conference held in Bretton Woods, N.H., in July 1944. At that historic meeting, the U.S. and Britain led 170 delegates from around the world into a new era of free markets, free trade, and stable currencies. It was a conference of global coordination that broke down the isolationist and protectionist sentiments that upset the world order so badly during the prior 15 years.

Ultimately, the free-market system forged at Bretton Woods, which was in no small way predicated on economic prosperity, led to a triumph of Western values over Soviet state socialism. And it was President Reagan — along with his friend, British Prime Minister Margaret Thatcher — who applied the final blow to the now-defunct Soviet system with his rejuvenation of free-market capitalism.

So what George W. Bush seems to be saying is this: Do not discard that triumphal system just because we’ve had a rough year in the financial markets and the economy.

In a few weeks Barack Obama will inherit the mantle of the capitalist system. What will he do with this responsibility? That’s the question being asked everywhere.

Since the election, and up until President Bush’s important G-20 speech, stock markets sold off nearly 15 percent. Investors want to know if economic rewards will be encouraged or penalized. Will trade remain open and free? Will we maintain competitive businesses that can compete worldwide? Or will we resort to the protection of ailing or failed businesses?

Will the U.S. lurch toward the semi-socialism of Old Europe? Or will we stay with free-market capitalism? Will we expand the nanny-state economy? Or will we keep the door wide open to entrepreneurial spirit and gales of creative destruction?

Investors want to know which way President-elect Obama is going to go. Might he reach back to the Democratic pro-growth supply-side policies of John F. Kennedy’s tax cuts, free trade, and strong dollar? Will he opt for Bill Clinton’s free-trade and strong-dollar policies, or even his capital-gains tax cut? Or will he fall back to the hopeless government tinkering of Jimmy Carter or the welfare-statism of Lyndon Johnson?

I’m keeping an open mind on Mr. Obama during this post-election honeymoon period. After all, he stole the tax-cut issue from Sen. McCain during the election. And surely he knows the conservative red states that joined his campaign for change didn’t vote for a leftward lurch to socialism lite.

Mr. Obama has a huge opportunity and an outsized responsibility to mend and revive the economy. It may be too much to ask, but perhaps he will give President Bush’s marvelous speech a close read. There is much wisdom there. And there is no iron-clad reason why a Democrat can’t adopt the economic-growth model that has worked so well and so long for this country.

Wednesday, November 12, 2008

Paulson’s Rescue-Plan Adjustments (They’re Better than Obama’s)

Remember that huge congressional swing-out two months ago over the Treasury’s request for $700 billion to purchase at auction a bunch of toxic assets that no one wanted to buy? And remember John McCain’s curious behavior, temporarily shutting down his campaign in order to fly to Washington and save the nation from financial collapse? (Some say that episode sunk Big Mac’s campaign.)

Well today, Treasury man Paulson announced that there probably won’t be any toxic asset purchases after all. Instead, he intends to forge ahead with more capital purchases to strengthen bank balance sheets and also, by the way, non-banks, which lend roughly 40 percent of total consumer credit. Think AMEX, GE Capital, maybe GMAC, and others.

Actually, Paulson has a good idea for a private capital injection into banks (and maybe non-bank lenders) that would then be matched by taxpayer capital. This was a good idea proposed a while back by Harvard economist and former Bush advisor Greg Mankiw. The more private capital the less the government-takeover threat and the healthier the banks will be.

But there’s more from Paulson today. He talked at some length about Treasury assistance for securitized credit-card student-loan and auto-loan assets, and he said the Fed is designing a lending facility to meet liquidity needs for asset-backed securities and their sponsors. This securitized-loan business is a whole new avenue of rescue operations. And it surely opens the door to a lot of non-banks that are going to play in the Treasury’s sandbox.

Mr. Paulson also said the Treasury is looking at FDIC chair Sheila Bair’s multi-billion dollar loan-guarantee program for foreclosure mitigation. This really means Uncle Sam will wind up eating some significant losses while the interest and principal on shaky mortgage loans are written down.

Stocks were off big today — before, during, and after Paulson — closing down over 400. Tough to pin it on the Treasury man, however, since the plunge started in the early-morning well before he spoke.

Some folks think the stock market is stalking Obama, whose defining moment may be a GM bailout. Plus, investors are waiting for a new Treasury appointee who will shed light on Obama’s tax and trade threats for 2009 as well as his UAW rescue mission that is so strongly favored by Speaker Pelosi and Senate Majority Leader Harry Reid. Policies protecting ailing industries would certainly set a France-like tone for the new administration.

Here’s a stat from my friend, blogger Mark Perry: Total compensation per hour for the big-three carmakers is $73.20. That’s a 52 percent differential from Toyota’s (Detroit South) $48 compensation (wages + health and retirement benefits). In fact, the oversized UAW-driven pay package for Detroit is 132 percent higher than that of the entire manufacturing sector of the U.S., which comes in at $31.59.

I don’t care how much money Congress throws at GM. With that kind of oversized comp-package they are not gonna be competitive. It’s throwin’ bad money after a bad cause. What a way to start the new Obama era.

I would still argue that rescuing banks and consumer credit companies removes systemic risk from our lending system. But the only thing systemic about the GM bailout is the hegemony of the UAW. Or maybe I should be more cynical: Republican socialism followed by more Democratic socialism.

Dennis Doesn't Like It

Dennis Gartman, editor & publisher of the Gartman Letter, discussing the latest government bailout proposal on last night’s show:

"In the United States nobody is allowed to fail. We don’t even give Fs anymore at school. You can’t even use a red marker. It’s very sad. I lost a little money trading today; I’m looking for a bailout. Anybody got any money to lend me today? I mean this is ridiculous what’s going on here. And when I saw the [loan modification plan] from Freddie and Fannie, I just shook my head and laughed and said, you have got to be kidding me…This is almost shameful."

Tuesday, November 11, 2008

Mustard Seeds

Many Wall Street analysts are forecasting a steep 3 to 4 percent Q4 contraction. But they are not factoring in the roughly $200 billion dollar drop in consumer energy expenses that is accruing from the collapse in oil and gasoline prices. This huge energy tax cut effect will be a big booster for consumers and businesses. Not only will it benefit consumer purchasing power, it will also improve the profits picture, and as a result, the stock market.

In addition, credit markets are continuing to thaw. Health is gradually being restored to these formerly frozen markets. Banks are beginning to lend to one another.

The bottom line is that we are experiencing short-run pain as excesses are wrung out of the financial system. It’s all part of the business cycle. When the dust clears, the mustard seeds of the next expansion will begin to bloom.

Friday, November 07, 2008

The Treasury/Taxes Guessing Game Continues

President-elect Obama gave a news conference today after meeting with his economic-advisor transition team. Wall Street was hoping to hear a Treasury-secretary designate and an Obama decision not to raise investor taxes next year (meaning capital gains). Unfortunately, neither announcement was made.

As a result, stocks traded down from plus-250 to plus-60. However, at the very end of the news conference, Obama was asked directly if he would postpone his upper-end tax increases next year. His response left the door open slightly. He said his economic plan in the campaign is the right program, but over the next several weeks and months he will take a look at the economy. So the guessing game will continue. Who will be his Treasury man and will he raise taxes next year?

Incidentally, after Obama answered that last question, stocks did trade back up plus-160, and they finished the day up nearly 250. In the two days following the election, shares plunged almost 1,000 points -- or 10 percent. I’m pinning this on the stock market vigilantes. These investors are rebelling against investor tax hikes and are trying to send a message to the president-elect not to go there.

During the 1980s, we had the bond-market vigilantes. They would drive up long-term interest rates whenever they saw inflationary money coming from the Fed. Today, by keeping the door open for no investor tax hikes next year, Obama seemed to quiet the new stock market vigilantes.

We are in a honeymoon period right now. Let’s wait and see what happens.

By they way, Paul Volcker was standing right behind Obama at the news conference, and he sat right next to Obama during the sit-down meeting of economic advisors. Will Tall Paul be the Treasury man? Most folks see it as a race between Larry Summers and Tim Geithner. More to be revealed.

Thursday, November 06, 2008

A Thought From Last Night's Show

"I do not want the government to run these banks. That is my single biggest concern; I do not want the government to run these banks. And with respect to the investment in the banks, they’ve basically made a three-year investment to buy preferred stock. In my opinion, that is as far as this should go. The government shouldn’t tell the banks how to make loans, to whom to make the loans, when to make the loans, dividend payments, risk strategies, all the rest of it. The government is going to make money; the taxpayers are going to make money. Basically, I don’t want us to turn our financial system into France. That’s all."

-CNBC's Kudlow & Company host, Larry Kudlow

Wednesday, November 05, 2008

Is Obama an Economic Moderate?

On the day after the election, stocks plunged nearly 500 points. It could be signaling an early end to the Obama honeymoon. At least on the economic side, the market wants to see early cabinet appointments to key economic agencies, especially the Treasury. The Wall Street buzz is Larry Summers, a free trade, strong dollar moderate Democrat, who served under Robert Rubin and then himself was top Treasury man in Bill Clinton’s last year.

Other likely appointments are University of Chicago economics professor, Austan Goolsbee for the Council of Economic Advisors. And Jason Furman for the National Economic Council, another free trade moderate who served under Robert Rubin during the Clinton years. If names like this surface this week they could calm stock market jitters.

There are, of course, a number of investor worries that President-elect Obama might lurch to the left in organizing his administration and developing his early policies. But in this honeymoon period I have to think that Mr. Obama cannot go far to the left for the simple reason that much of his election mandate came from red states like Ohio, Florida, Virginia, and Indiana. He also won key purple states like Iowa, New Mexico, and Colorado.

Yes, they voted for change, especially economic change to rescue America from the recession. But it is highly unlikely that these states voted for a radical left agenda. It is not a reach to suggest that these red states are sending a message to Obama that he must govern as a moderate. And, in fact, Mr. Obama’s victory speech last night called for Democratic Party humility in winning the election, a strong suggestion that he doesn’t want to go over the deep end or repeat the Clinton mistakes of 1993 that resulted in a Republican landslide in 1994.

The big question for the stock market and the economy is whether Obama will attack businesses and over-regulate key sectors. Will he insist on raising tax rates on capital, investors, and successful earners? Or might he at least defer those tax hikes until 2010, while at the same time making good on his middle class tax cut pledge?

His first test may come quickly as Congressional Democrats are clamoring for a big fiscal stimulus package that might provide temporary tax rebates and huge spending increases. This sort of demand-side government- driven stimulus will not create new economic growth incentives nor would it send a message of rewarding investment, which is so desperately needed for recovery of plunging asset prices in the stock market and the housing market.

Big battles lie ahead over organized labor’s card check proposal to end the secret ballot for unionizing companies. There’s no way to avoid this. There may be similar hammer and tongs battles over cap and trade and big government health care plans. But right at the start, with respect to the economy, Obama could signal that he is truly a moderate who chooses to effectively develop and govern a new coalition that includes liberals, moderates, and conservatives from red, purple, and blue states.

This will be his challenge. The direction of the stock market will be an excellent barometer concerning the president-elect’s earliest policy decisions.

Tuesday, November 04, 2008

Weak Dollars, Weak Presidencies

My friend John Tamny has written a beauty of a piece on politics, presidencies, and the dollar.

It’s a must-read this Election Day.

Is Obama Swiping the Tax Cut Issue?

Voters seem to think he’s the Ronald Reagan tax-cutter of the 2008 election.

Wouldn’t it be the height of irony if Barack Obama wins this election as the Ronald Reagan tax-cutter? His tax plans are severely flawed and his campaign narrative to support them is all wrong. And yet a recent Rasmussen poll shows that 31 percent of voters believe Obama is the real tax cutter, while only 11 percent choose McCain.

Believe it or not, Obama seems to have swiped the tax-cut issue from the Republican party. How can this be?

Well, for almost two years Obama has talked about cutting taxes for 95 percent of the people. McCain has no such record. And even though McCain has launched a strong Joe the Plumber investor-class tax-cutting surge in the last days of the campaign, it may not be enough to significantly impact Tuesday’s voting results.

This is bad news since Obama has some pretty strange views on taxes. Just look at his recent explanation for the decline in third-quarter GDP. He calls it “a direct result of the Bush administration’s trickle-down, Wall Street first, Main Street last policies that John McCain has embraced for the last eight years and plans to continue for the next four.”

Is Obama really blaming the Bush tax cuts for this recession?

After the bursting of the tech bubble and the 9/11 attacks, George Bush lowered tax rates across-the-board for individuals and investors. For five years the stock market rallied without interruption — the longest bull market without a correction in post-WWII history — while the economy expanded for six years, a bit longer than the average post-war recovery cycle.

And Obama wants folks to believe that tax cuts caused this downturn? Not the credit shock? Not the Obama-supported government mandate to sell unaffordable homes to low-income people and the pressure on Fannie and Freddie to securitize these loans? Not the oil shock?

No self-respecting Keynesian would buy into this. Yet Obama was at it again in Monday’s Wall Street Journal, saying, “It’s not change to come up with a tax plan that doesn’t give a penny of relief to more than 100 million middle-class Americans.”

Regrettably, not even John McCain has contradicted this. But the facts speak otherwise.

For example, the nonpartisan Tax Foundation says the Bush tax cuts — which McCain would maintain — provided substantially more relief than middle-class Clinton-era tax rates: A single earner making $30,000 will pay $2,756 under 2008 Bush tax law compared with $3,157.50 under Clinton tax law (in 1999). That’s a larger Bush tax cut by 8.7 percent. A married couple earning $50,000 will pay $4,012 under Bush compared with $5,085 under Clinton. That’s a bigger Bush tax cut by 21 percent.

So the facts of a middle-class tax cut are far different from what Obama claims. Obama also says his tax rates will be below those of Ronald Reagan. Wrong. Obama will raise the top rate to 39.6 percent, whereas Reagan left taxpayers with only two brackets of 15 and 28 percent.

Incidentally, the income cap for Social Security and Medicare taxes was about $42,000 when Reagan left office, compared with $104,000 today and the threat that Obama will raise that cap significantly.

It’s also worth noting that the Reagan tax-reform bill of 1986 mistakenly allowed the capital-gains tax rate to move up to 28 percent from 20 percent. Many believe this was a significant factor in the stock market crash of 1987.

Similarly, Obama intends to raise the cap-gains tax rate from 15 to at least 20 percent. It’s a risky move. Of course, Obama says only rich people will pay the higher cap-gains rate. But the reality is that a cap-gains tax hike will raise the after-tax cost of all capital, which will depress the future value of all equity assets.

McCain has recently proposed a reduction in the capital-gains tax rate from 15 to 7.5 percent. With 100 million-plus investors out there, and nearly two of every three votes in national elections being made by shareholders, this is right on target. Last Friday, McCain told me in an interview that a “low capital-gains tax is probably the greatest incentive for investment that we have in America today.”

In the frenetic final hours of the campaign McCain is also talking up his corporate tax cut, which would be a tremendous boost to plunging stock prices since corporate profits are the mother’s milk of stocks. Indeed, McCain’s overall tax-cut plan is far more powerful than Obama’s when it comes to creating jobs and stimulating economic growth. But his marketing effort appears to be too little, too late.

These things do, however, have a way of balancing out: If Obama and the Democrats go on a tax-hiking spree to penalize successful earners and investors, they will pay for it dearly in 2010 and beyond.