Tuesday, March 31, 2009

A New World Currency?

Going into the G-20 international meeting in London, the Chinese and Russians appear to be coming together in a call for a new world currency backed by gold. Now, I don’t want to see the dollar go into the dustbin of history. But I really like the idea of reinserting gold into the world monetary system.

Nobel Prize winner Robert Mundell -- who is advising the Chinese central bank -- undoubtedly put China up to this. I don’t know if he wants a new world currency. The last time I talked to him he wanted the dollar stabilized with the Chinese yuan and the euro. But if the Bernanke Fed and the Greenspan Fed before it had paid attention to gold, their policies would not have been nearly as erratic with the housing and commodity boom and bust.

You don’t have to be for the old gold standard to nonetheless favor the use of gold as a key monetary indicator, or for that matter a broad commodity index that includes gold. Monetary policy has been so bad in recent years that a gold price rule or a commodity-price reference point could only make it better.

I was talking to Art Laffer about this today. Art remarked that if helicopter Ben Bernanke continues to print new dollars, we’re gonna need a new world currency. And he agreed with Mundell that putting gold back into the world currency calculus is a good idea.

Incidentally, Art believes the best thing the G-20 nations can do at the London conference is to not coordinate policies. He thinks policy coordination will probably produce bad policy. He’s in favor of tax competition among nations, including so-called tax havens that the Europeans and Americans want to abolish. I totally agree. In fact, we ought to make the U.S. a tax haven by slashing the corporate tax, declaring a two-year capital-gains tax holiday, and moving towards a low-tax-rate flat tax. Of course, it ain’t gonna happen, but that’s my thought.

Art also believes that Obama’s economic policy is starting to resemble Richard Nixon’s: easy money, heavy regulation, industrial policy, and rapid spending. Government’s influence on business keeps growing. Think GM.

But I will say this: The exchange value of the U.S. dollar is up about 20 percent over the past year and remains firm in current trading. So maybe it’s possible -- at least in the short run -- that 20 percent growth at an annual rate in real M2 (hat tip to Mike Darda) and the upward-slopping yield curve that signals economic recovery and bank profitability are more positive signs for stocks and the business outlook.

Even during the Nixon years, we did have periods of good growth and rising share prices, even though the 1970s were stagflationary and economically disastrous.

Sorry folks, that’s the best I can do right now.

Tonight on The Kudlow Report

On tonight's show at 7pm ET on CNBC:

CNBC’s Margaret Brennan and Matt Nesto will lead us off.

CNBC auto and airline industry reporter Phil LeBeau will join us from Detroit.

*Mario Gabelli, chairman of Gabelli Funds
*Jim Chanos, founder & president of Kynikos Associates; chairman of the Coalition of Private Investment Companies

CNBC real estate correspondent Diana Olick reports.

*Bob Crandall, former president & chairman of American Airlines
*Andrew Ross Sorkin, New York Times M&A reporter

CNBC chief Washington correspondent John Harwood will report from London.

*Catherine Mann, Brandeis International Business School professor
*Art Laffer, chief investment officer at Laffer Investments; former Reagan economic advisor

Please join us. The Kudlow Report. 7pm ET. CNBC.

An Interview with Senator Bob Corker on President Obama’s 'Power Grab'

What follows below is a transcript of my CNBC interview on The Kudlow Report last night with Senator Bob Corker (R.,Tenn) concerning Team Obama’s ousting of GM CEO Rick Wagoner. [Video here.] Mr. Corker is a key member of the Senate Banking Committee and assumed the lead role for Republicans during negotiations to aid the ailing US auto industry back in December. As you’ll see below, he is alarmed by the Obama administration’s lurch toward centralized economic planning and control, a world where Washington calls all the shots. He believes that “a bright line was crossed” by the administration and that Americans are “becoming numb to this everyday erosion of what has made this country great.”

LARRY KUDLOW: All right, today’s GM move, “a major power grab by the White House”, that according to our next guest. We welcome back Republican Senator Bob Corker of Tennessee. In my opinion, he is the most knowledgeable congressional member on the issue of auto bailouts and other things. Senator Corker, you had a ripsnorting statement. Let me just read this real quick:

“This is a major power grab by the White House on the heels of another power grab from Secretary Geithner who asked last week for the freedom to decide on his own which companies are ‘systemically’ important to the country and which are not.” And then you say, “this is truly a breathtaking departure” referring back I guess to both GM and Geithner.

Tell me what you’re thinking here. Why is this a breathtaking departure?

SENATOR CORKER: Well Larry, today a bright line was crossed. First of all, the administration has been slow on the uptake as far as dealing with these companies. They’ve basically just let it go. They realized they were going to have a nothing burger kind of press conference today, and so they had to look like they were doing something. [And so] they fired [GM CEO] Rick Wagoner. And then now, in essence, they have taken over these companies.

I think the thing that probably got my attention more than anything else was last night on the conference call them explaining that in the Fiat/Chrysler merger, they are forcing Fiat to build energy efficient cars in this country as part of the deal. And so they are going to be deciding, obviously, which plants in this country stay alive, which plants are closed. They are going to be very involved in what I consider to be industrial policy, which is a very bright line that this country has not passed in the past. And we did it today. And I think it’s something that all of us need to stop. This is numbing what is happening to us. It’s like bowling an egg, it’s just kind of gradually happening. But today I think was a very bright line that all of us need to be aware of.

KUDLOW: Senator Corker, here’s a question. What gives the government—I’m going to ask you a legal or constitutional question, much less a policy question—what gives the United States government the right to tell manufacturers what plants to keep open, what plants to shut? But maybe even more, what products to make? Because your point about Fiat making green cars, if you read the Treasury term sheet on the Wagoner dismissal, and the GM failure to come up with a good plan by the deadline which is tomorrow, you know they mention green clean cars, they mention the failure of the Volt. Since when does government dictate the product line of an American company?

CORKER: Today.

KUDLOW: Today?

CORKER: That’s the point.

KUDLOW: So that’s the line. We’ve crossed the Rubicon here. I may as well use a Roman metaphor since we’re talking Fiat.

CORKER: That’s exactly right. And on the conference call last night, it was very evident to me that those comments were being said to pacify people on the left that were part of the call last night. So to me, again, this on the heels of Treasury Secretary Geithner’s announcement Thursday that he’s seeking, on a permanent basis, TARP-like ability—he wants to codify his ability to do the things that he’s been doing on into the future, and let him decide which companies pose systemic risk, I think that we all need to stop. We need to everything we can to reverse ourselves out of where we are. And I have great concern that that’s not where we’re going as we look at the many other policies that are buried in this budget that the administration has put forth.

KUDLOW: In our capitalist system, wouldn’t this better be the duty, the domain, of bankruptcy judges, bankruptcy court judges…

CORKER: Right.

KUDLOW: Which have always been the principal restructurers? If we’re going to violate contracts we leave it up to the judges to do so and then work out. In other words, is that what’s missing? You were for a pre-planned bankruptcy, I happen to agree with you sir. But isn’t this the role of bankruptcy court?

CORKER: It is. And I think on February 17th, when these plans were submitted, everybody knew that they were not good enough. The board could have been working towards a pre-arranged bankruptcy today. That’s what the terms of the agreement were. But instead, nothing happened. I met with the task force last week, which I appreciate, I could tell there were really no tangible conversations taking place. Then all of a sudden, in essence, a company is taken over. So working towards an orderly pre-arranged bankruptcy could have been done by this board. Instead, this administration has taken over the company. They are directing the company. They’re deciding who is going to be on the board of this company. And furthermore, they are going to be deciding the products and the plants that this company will make into the future. And again, it was a very bright line that we passed today.

KUDLOW: I’ve got two quick additional questions if I may sir. Did President Obama’s actions today, the actions of the auto task force, did they forget to include Mr. Gettelfinger, [president] of the UAW?

CORKER: You know I’m not—look there’s a lot of people certainly to blame for where this company is today. And I don’t know what their conversations have been. I know one of your earlier guests, as I was listening, was talking about the fact that they will be a focus very, very soon. So I think I’ll leave that to the administration. I do hope, I know there’s been a lot of prognostication about what’s going to happen. I hope for the sake of all those folks who depend upon these companies, that this administration gets it right. But they’re doing it in the wrong way. And I think that’s the thing that to me, again, is scary. And I think the American people, Larry, all of us, are becoming numb to this everyday erosion of what has made this country great.

KUDLOW: Well I think there’s a very strong populist revolt—by the way, populism from the left and populism from the right—against bailout nation. And that’s my last question to you sir. What happens next in terms of taxpayers? Taxpayers are going to pony up, what, 60 more days? I don’t know why. We’re going into bankruptcy. The president’s people admitted as much in a late afternoon breaking Wall Street Journal story. Why are taxpayers having to do this another time? And what do you reckon, how much is this going to be, this next tranche?

CORKER: Well I don’t know. If you remember, Mark Zandi, in our second hearing, which is why I got as involved as I did in this to try to solve it in a different way, he said if one dollar went into these companies, we’d ultimately spend between $75 and $125 billion dollars. And it looks very much to me like that’s the direction we’re heading.

KUDLOW: We’re on track. I am sorry to hear that. But I have no doubt that you’re right. I have no doubt my friend Mark Zandi is right. Senator Corker as always sir, we thank you ever so much for coming back on our program.

CORKER: Thank you. Thank you Larry.

Monday, March 30, 2009

A ‘Truly Breathtaking’ Departure

Has Obama officially ushered in a new era of government-controlled business?

Team Obama fired GM CEO Rick Wagoner Sunday afternoon, just a short time after Treasury man Tim Geithner told the television talk shows that some banks will need large amounts of new TARP-money government assistance — even though the bankers don’t want it. Does this smack of big-time government planning and industrial policy? Another lurch to the left for economic policy?

Remember, as bad as Wagoner’s performance has been over the years, it was the federal government — not shareholders or the board of directors — that threw him under the bus. (By the way, GM’s board is being thrown under that same bus.) And I’m not arguing in favor of Wagoner or his board; they’ve made a zillion mistakes. But I am wondering if we’ve officially entered a new era of government-controlled business.

Sen. Bob Corker (R., Tenn.), probably the most knowledgeable man in Congress about the car bailout, and someone who argued months ago in favor of a pre-planned government-sponsored bankruptcy for GM and Chrysler, calls the Wagoner firing “a major power-grab by the White House on the heels of another power-grab from Secretary Geithner, who asked last week for the freedom to decide on his own which companies are ‘systemically’ important to our country and worthy of taxpayer investment, and which are not.” Corker calls this “a marked departure from the past,” “truly breathtaking,” and something that “should send a chill through all Americans who believe in free enterprise.”

Mr. Corker has hit the nail on the head. And I think his idea of “a truly breathtaking” government departure from American free enterprise — whether it’s the banks or the bankrupt Detroit carmakers — is exactly what caused stocks to plunge 250 points on Monday.

Incidentally, most of the big bankers who met with President Obama in the White House last Friday want to pay back their TARP money, not take more of it. But the Treasury is conducting stress tests that could stop the TARP pay-downs and force the banks to take more taxpayer funds in return for even more federal control.

The big bankers say they are profitable. And with an upward-sloping Treasury yield curve and some market-to-market accounting reform coming from the Financial Accounting Standards Board (FASB), the outlook for banks should be getting better, not worse. So why is the Treasury jamming more TARP money down bankers’ throats, especially after announcing a new plan to use private capital to clean up bank balance sheets and solve the toxic-asset problem?

It kinda sounds like the Treasury doesn’t want to let go of its new uber-regulator status.

As for Detroit, the carmakers should have been in bankruptcy months ago. And it is a bankruptcy court that should have fired GM’s Wagoner and his board. Along with some serious pain for bondholders, bankruptcy would have broken the high-cost labor contracts with the UAW as well as carmaker contracts with dealers across the country. That’s what bankruptcy courts are for. They’re part of the free-market capitalist system.

Former SEC chair Richard Breeden is arguing against a systemic uber-regulator for banks, and in favor of special financial bankruptcy courts. Once again, the story is court-ordered restructuring, not government control by political bureaucrats who like their power so much they want to keep running the various companies in question.

And why isn’t Obama’s special auto task force ordering a replacement for Ron Gettelfinger, the UAW’s president? Weren’t their oversized pay and benefit packages a big part of the problem? Well, that’s never gonna happen. The election power of the union is too strong. But this does reveal the political nature of these government bailout operations.

Incidentally, in President Obama’s speech on Monday about the Wagoner firing, as well as in Treasury term sheets for GM and Chrysler, there are multiple references to “the next generation of clean cars,” to new CAFE-standard mileage increases, and to green power-train developments. All this is a big green climate-change priority for the new administration.

But the simple fact is, small, tinny, and expensive green cars just don’t work for consumers. And even if those cars are designed better, the cost structure of the carmakers will have to be brought down so far that UAW wages will be forced below those of the non-union shops in Detroit south (including Honda, Toyota, and other foreign carmakers who are now producing in the United States).

So add the green revolution to the industrial-policy plans of the White House. Expect a big increase in CAFE fuel standards, even though small cars are simply not profitable. And plan on bailout nation taking a new left-turn toward the kind of central planning that has held down economic growth in Europe and Japan for so very long.

Tonight on The Kudlow Report

On tonight's show at 7pm ET on CNBC:

CNBC’s Phil LeBeau will join us live from the White House.

CNBC’s Margaret Brennan and Matt Nesto will be aboard with a look at today’s market news.

*Quentin Hardy, Forbes national editor
*Jerry Bowyer, chief economist at Benchmark Financial Network
*Vince Farrell, chief investment officer at Soleil Securities
*Jim Paulsen, chief investment strategist at Wells Capital Management

A Major Power Grab?
Sen. Bob Corker (R-TN) will join us with his take from Washington.

*CNBC’s Phil LeBeau
*Holman Jenkins, WSJ Editorial Board Member
*Steve Moore, Wall Street Journal senior economics writer & author of "The End of Prosperity"
*Keith Boykin, CNBC Contributor, Daily Voice Editor, Former Clinton White House Aide

*Steve Moore, Wall Street Journal senior economics writer & author of "The End of Prosperity"
*Keith Boykin, CNBC Contributor, Daily Voice Editor, Former Clinton White House Aide

Please join us. The Kudlow Report. 7pm ET. CNBC.

Friday, March 27, 2009

Tonight on The Kudlow Report

On tonight's show at 7pm ET on CNBC:

CNBC's Rebecca Jarvis will be aboard with today's top market news.

CNBC chief Washington correspondent John Harwood has the story.

Also...Ed Yingling, American Bankers Association president & CEO will join us with his perspective on what occurred inside today's meeting with President Obama.

*Don Luskin, chief investment officer at Trend Macro
*Art Nunes, market strategist at IMS Capital Management
*Dawn Bennett, founder & CEO of Bennett Group Financial Services

*Peter Wallison, former Reagan official; former Treasury Dept. General Counsel, AEI
*Chris Mayer, Columbia University economics professor

*Dick Bove, bank analyst at Rochdale Securities
*Robert Albertson, chief strategist at Sandler O'Neill

CNBC's Scott Cohn will report.

Joining us to discuss will be Dick Breeden, chairman of Breeden Partners and former SEC chairman.

Please join us. The Kudlow Report. 7pm ET. CNBC.

Thursday, March 26, 2009

The Market, Mustard Seeds, and Monetarism

Despite President Obama’s big-government, lurch-to-the-left, Keynesian spend-and-borrow plan — including future tax hikes for successful earners and businesses (as well as legal offshore and overseas earnings) — the stock market has turned hot as a pistol.

The S&P 500 is up over 20 percent since early March, and it’s now above the level reached when Obama’s budget was published and only 3 percent below the level met when Obama was inaugurated. So while government economic policies seem set to punish investors, businesses, and entrepreneurs, the stock market barometer of the future economy is turning up.

Many believe the market rally and the numerous mustard seeds that will grow into recovery are occurring in spite of Obama’s policies — not because of them. I am quite sure Team Obama would violently disagree with this view. But as I have written before, the most powerful immediate source of economic stimulus is the Fed’s easy-money policy, which is now seven-months old.

The Obama spending offensive has yet to take effect. The all-important Treasury yield curve is upward sloping. With banks borrowing short for next to nothing and lending long at a profitable rate, net interest margins and profits are rising nicely. The Fed’s balance sheet has more than doubled, and the M2 money supply is growing at a near 20 percent annual rate (since last August). Credit-fear spreads are declining. The dollar is up nearly 20 percent from its low of a year ago. Commodity prices have stabilized. And while oil has moved back to $50 a barrel, that’s still a lot better than $150. The same can be said for retail gas prices: $2 a gallon is a lot better than over $4.

And some new economic numbers suggest a bottom for the economic slump. The positive data include monthly gains for new and existing home sales, a surprising jump in business capex durable orders and shipments, two straight monthly increases in core retail sales, and five straight monthly gains for after-tax, post-inflation consumer incomes.

While many fret that the Fed’s pump-priming will raise future inflation — and it probably will — right now inflation is at rock bottom. With rising stocks and commodities signaling a bottom in the turnover of money — with the strong possibility that velocity will rise over the remainder of the year — the easy-money stimulus will become even more powerful in the months ahead.

Sure, universal health care will be hugely expensive, and the cap-and-trade tax hike on energy will damage the future economy. But all that is off in the future.

Right now the big story traces back to the late Milton Friedman: Pour in the money and the economy will expand. There’s too much money chasing too few goods today, but there will be a stronger-than-expected pickup in the future production of goods and services. Money matters.

Later on, higher taxes will matter too as an economic depressant. But again, that’s way off in the future. Right now the rising stock market is signaling economic recovery. Even Team Obama has turned more optimistic following its stock market thrashing last month. The president and his men are now much more circumspect, and they’re pushing their pessimistic message aside.

Yes, I believe it’s Freidman monetarism spurring the better outlook, not Keynesian spending. In any case, the stock market could roar through midyear and maybe beyond.

Tonight on The Kudlow Report

On tonight's show at 7pm ET on CNBC:

CNBC’s Scott Wapner will be aboard with today’s top market news.

Rep. Frank’s Hearings…Geithner Testimony…and Regulator Talk
CNBC’s Hampton Pearson reports.

Also… CNBC’s Mary Thompson will provide an additional report on investor protection and regulation of securities markets.

*Ed Yardeni, founder of Yardeni Research
*Doug Kass, president of Seabreeze Partners Management
*Bill Baldwin, Forbes editor

CNBC’s Scott Cohn has the story.

*Richard Breeden, chairman of Breeden Partners, former SEC Chairman
*Charles Calomiris, Columbia Business School professor of finance
*David Malpass, economist & president of Encima Global

CNBC’s Julia Boorstin will report.

Markets…Volcker Tax Reform…Oil Cos Under Attack
*Steve Moore, Wall Street Journal senior economics writer & author of "The End of Prosperity"
*Christian Weller, Senior Fellow at the Center for American Progress

Please join us. The Kudlow Report. 7pm ET. CNBC.

Mustard Seeds Market Debate

Great debate on last night's Kudlow Report with our investment all-stars. Joining me were BlackRock's Bob Doll; Strategas's Jason Trennert; and Jim LaCamp from RBC Wealth Management. Note the three mustard seed charts toward the beginning of the discussion (charts are also pasted below). I think it's high time to recognize we are forming a base for economic recovery.

Wednesday, March 25, 2009

Tonight on The Kudlow Report

On tonight's show at 7pm ET on CNBC:

CNBC’s Bertha Coombs will be aboard with a rundown of today’s market action.

FDIC or Fed? Currency Questions & Gordon Brown’s Dressdown
*Bill Seidman, former FDIC Chairman & CNBC chief commentator
*Vince Reinhart, former Director of the Federal Reserve Board's Division of Monetary Affairs; AEI resident scholar
*Bill Isaac, former FDIC Chairman, The Secura Group, LLC Founder & Chairman
*Lee Hoskins, senior fellow at the Pacific Research Institute & former president of the Federal Reserve Bank in Cleveland

Reform Hearings…Volcker Tax Panel…Obama’s CEO Meeting
CNBC chief Washington correspondent John Harwood reports.

CNBC’s Jane Wells will join us from Los Angeles Ports.

CNBC’s Mary Thompson has the story.

*Bob Doll, vice chairman & Global CIO of Equities at BlackRock
*Jason Trennert, chief investment strategist & managing partner at Strategas Research Partners
* Jim LaCamp, RBC Dain Rauscher Sr. VP, Portfolio Manager & Financial Advisor

Please join us. The Kudlow Report. 7pm ET. CNBC.

An Interview with FDIC Chair Sheila Bair

What follows below is a transcript of my CNBC interview on The Kudlow Report last night with FDIC Chairwoman Sheila Bair. Ms. Bair wants the FDIC to be the systemic super-regulator capable of shutting down non-bank financial firms (like AIG) and all banks. She is competing with Treasury and the Fed for the spot. Also, she looks to be setting up Dutch auctions for whole loan toxic asset sales, as part of the new Treasury plan using public and private money. Plus she is considering some mark-to-market fair value forbearance for regulatory capital purposes. Note her cautious optimism on the story.

LARRY KUDLOW: We welcome back to the show one of the most powerful women in the financial world—wait, take out financial, in the world. We have FDIC chair Sheila Bair. Miss Bair thank you for coming back.


KUDLOW: Let me just pursue this issue today, to solve AIG and other non-bank problems in the financial world, Mr. Geithner and Mr. Bernanke both said that we need this aggregate, systemic regulator—a super-systemic regulator. Mr. Bernanke cited your agency, the FDIC. Mr. Geithner kind of held back and said, ‘no, no, how about the Treasury’. First of all, do you want the job? Do you want to be the systemic regulator?

BAIR: Well, I think we need two different functions. We need a prudential regulator for very large, systemically important, institutions. Most, but not all of them, are regulated now by the Fed. But we also need, more importantly I think, a resolution mechanism for very large, systemically important financial organizations. We didn't have that type of legal framework. We didn't have the ability of the government to come in and take over an AIG in an orderly way, unwind it, the way the FDIC has the authority for banks…

KUDLOW: Receivership? Conservatorship?

BAIR: Receivership. Or conservatorship. A bridge bank. Yes…

KUDLOW: Essentially it’s quasi-bankruptcy.

BAIR: Yes, but it's a more controlled process. It’s an ability to address the systemic issue through a more controlled, orderly unwinding and enabling the government to come in, repudiate employment contracts, pick and choose who you want to keep, who you want to get rid of, what you want to pay them. Replace the management, get rid of the boards, bring in better management and do an orderly unwinding of the entity. So yes, we think our model is good on the resolution side.

KUDLOW: You have done this before?

BAIR: Yes, we have.

KUDLOW: How many times have you--I mean I always have [former FDIC chairman] Bill Siedman on here talking about this.

BAIR: Well he’s the expert.

KUDLOW: You know something about this?

BAIR: Well we have. The largest institution that we resolved last year was WaMu, and we were able to sell that on a whole bank basis. That was a very seamless process. IndyMac, we put into conservatorship. It was a weaker institution. It took some time to right that ship and get it sold, but the deal just closed last week. Going back in time, Continental Illinois was under FDIC conservatorship…

KUDLOW: So you want the job? That’s what you’re saying?

BAIR: Well I think it makes sense.

KUDLOW: Do you apply? Do you submit a resume? How does this work?

BAIR: I think it would make sense. We’re not lobbying for it. I think it would make sense to give it to the FDIC. You know, closing banks, or putting them into a conservatorship is a cyclical business.

KUDLOW: Do you give like—in the NHL, the hockey playoffs, you give a hip check to the Treasury…

BAIR: [laughter] Get the elbows out.

KUDLOW: Right, a little elbow to get them out of the way so you can head towards the goal?

BAIR: Well Tim [Geithner] and I have talked about this and I think we're all working together to try to figure out what the best structure is. But clearly, the FDIC has a lot of resources and experience, a good model already. This is cyclical work. You know, you go through cycles where you have to close institutions. So to keep multiple agencies fully staffed to be able to do a receivership function probably doesn't make much sense. So I think it does make sense to give it to the FDIC.

KUDLOW: All right, very good. Now, insofar as the public/private partnership, and I myself think Mr. Geithner is absolutely on the right track here, bringing in private capital.

BAIR: Yes.

KUDLOW: I think this is a good thing with a lot of potential. The FDIC is basically in charge of the whole loan, of legacy asset program, the whole loan. You're going to set up an institution, you're going to guarantee it. You're the ultimate backstop on this. Just briefly, I want to get some points on this to illuminate it for our viewers. What does the backstop mean?

BAIR: Right. Well the first [inaudible] will be the equity capital investments that will be 50-50 Treasury TARP funds and private investors. And the private investors are being brought in for two very good reasons. One is we think there's significant private investment dollars to leverage government resources better. And more importantly, provide the pricing decision. We didn't want the government making the pricing about what the value of the assets are. So they have the first [inaudible] position. And then the rest of the purchase price will be funded through an FDIC guarantee on debt that will be issued by the PPIF…

KUDLOW: To fund this-- what is it exactly? Is it a number of investment funds or is it one large fund?

BAIR: Yes. We will set up individual PPIFs for each pool of assets. And usually those will be probably done on an institution-by-institution basis for the larger institutions. For the smaller institutions…

KUDLOW: Who are coming in to essentially bid and presumably buy these assets?

BAIR: Yes, that’s exactly right.

KUDLOW: All right, I want to ask you, you're going to run an auction. The pricing has always been the vexing part of this.

BAIR: Yes.

KUDLOW: Now Mr. Paulson, what is it, six, eight, nine months ago, talked about this, never quite got it done. It looks like it's going to happen. What kind of an auction are you going to run?

BAIR: Well we’re actually going out for comment on that question. We're thinking, most of the input I have gotten so far, people are suggesting a Dutch auction to allow multiple bidders.

KUDLOW: A Dutch auction! Which is precisely what the Paulson Treasury talked about.

BAIR: Yeah, well we think it might work.

KUDLOW: Low bids. In other words, you start the low bid and then you move up from there?

BAIR: That’s right. It’s counterintuitive. It would actually, by executing at the lowest price, you give people an incentive to bid higher prices because they don't have to worry about being undercut. So we think that is worth a try. You know we may have to make adjustments on this along the way, and we are soliciting comment on that very point. But our initial thinking is that we’ll run a Dutch auction.

KUDLOW: What induces these banks to sell the toxic assets? In this case we're talking about the whole loans, the individual loans bundled up into pieces. I guess it's mostly real estate, but there's more in it than that. If you don't give them some mark to market regulatory accounting relief, aren't they going to rip up their balance sheet again and have a gigantic hole in it? I am told, no matter what FASB does, ultimately it’s the regulator that decides to either forebear capital requirements or not. Can you share with us your thoughts on this?

BAIR: Well yes, the regulators decide what the capital treatment is. All the banks obviously must adhere to US GAAP. But we decide on what the capital requirements will be. And I think this program is interrelated with the stress test and depending on how strong the banks are given the stress test, they may be encouraged to use this facility as part of their re-capitalization efforts. They might have to take—probably will have to take a mark at first, especially on the accrual assets, those are being held to maturity, so they haven't been fair valued yet. But we think that that will clean the balance sheet and enable to them to go out and raise private capital to fill the hole...

KUDLOW: I don't mean to interrupt, but a big issue among those proposing mark to market reform is cash flow accounting, rather than just a distressed market accounting.

BAIR: Right, right.

KUDLOW: Will you be tolerant on that? Because that spills over as I understand it into the capital structure.

BAIR: Well I think it's a separate issue. In terms of the assets that remain on the balance sheet, they will not be sold. [inaudible] So they don’t have to be marked. I think we’ll require very aggressive reserving. For the fair-value assets, yes, the FASB has provided some significant more flexibility and guidance in terms of being able to look at underlying cash flows.

KUDLOW: But will you? Will you at the end of the day?

BAIR: Well again, we can’t alter the accounting standards...

KUDLOW: But will you forbear them on capital? If not won't that make them shy away and say I'm not going to do this? I'm not going to sell into this? I’ll wait it out? The yield-curve is upward sloping, the net interest margins are getting better. Profits are coming in, won't they wait it out unless you help them?

BAIR: Well there is that sense. I think there are different ways to do it. One way is to buttress the capital, the additional capital injections from the government. Another would be to provide this facility, we think actually that by cleansing their balance sheets of these assets, they'll be in a better position to raise the private capital over the longer term. So I think in two different ways, the government can increase the capital buffers. No, we haven't used the forbearance word, and that can have a mixed connotation. We do want to make sure that the banks obviously remain solvent and have enough of a buffer to keep lending.

KUDLOW: Are you bullish or bearish on this? This is a giant step. There are a lot of ifs here. I mean, I am very happy with the use of private capital, 50-50 with the Treasury’s capital. I don’t have any problem with the FDIC backstopping it. And I reckon you probably ought to be the systemic regulator of last resort. But this is tricky, okay? You’re going where people have tried to go for the last six, nine months, Bullish or bearish, Miss Bair?

BAIR: Well I'm optimistic. I’m cautiously bullish, I guess I’ll say. I am seeing glimmers of hope. I mean you cited some of the positive news in your opening remarks. So we are seeing some signs of encouragement, but that's not to discount the very challenging situation we still find ourselves in. But I think the market validated the asset purchase program.

KUDLOW: I do too. I think it was a heck of a good sign. It’s sure a lot better than it was a month or two ago. FDIC chair Sheila Bair. We appreciate it very much. Thank you for giving us your update.

BAIR: Happy to be here. You bet.

My Statement on a Possible Senate Run

From last night's Kudlow Report:

Tonight I want to talk to you for a quick moment about me. Several weeks ago, I was approached by the Republican Party to consider a run for the US Senate in the great state of Connecticut. It was a flattering conversation, and one that I thought about, but to me it was never really a serious proposition.

However, this story seems to have a life of its own. It started as a solitary blog post and then spread like wildfire. Now CNBC, my network, is getting questions from a number of high-profile reporters wanting to know what I’m going to do. I’m glad they care.

So this evening, I'm letting the world know that I am not running for the US Senate. And here's why: in my heart I know that I belong right here at CNBC. This is my love. I just signed a new long-term deal here and I can’t think of anything else I would rather do.

I’ve invested and worked very hard at this job, and I am so blessed to have it. My great hope is I’ll be around this network, doing my thing, for many years to come. So I appreciate your interest and support. The case is closed.

Tuesday, March 24, 2009

Special Washington Edition of The Kudlow Report Tonight

On tonight's show at 7pm ET on CNBC:

Live from Washington...

CNBC's Bertha Coombs reports today's top market news.

CNBC's Hampton Pearson reports from Washington.

CNBC chief Washington correspondent John Harwood reports from the White House.


*Quentin Hardy, Forbes Silicon Valley Bureau Chief
*Dennis Gartman, editor of the Gartman Letter
*Jerry Bowyer, chief economist at Benchmark Financial Network

*Rep John Campbell (R-CA)
*Rep. Brad Sherman (D-CA)

Bonuses, Budget & The Banks

Sen. Evan Bayh (D-Indiana)
Sen. Bob Corker (R-Tennessee)


Please join us. The Kudlow Report. 7pm ET. CNBC.

Friday, March 20, 2009

A Hidden Agenda?

Taking advantage of the populist revolt against Wall Street and AIG bailouts, the House Democrats have passed a vengeance tax on TARPed financial firms that amounts to a 90 percent marginal tax rate on bonuses.

This is being done in the name of AIG outrage, and nobody wants to defend the insurance company -- including me. The financial-products division helped blow up the global credit system, and it shouldn’t be rewarded. Yet one wonders about this 90 percent tax rate. If it passes the Senate, will it ever be repealed? This could be the ultimate class-warfare spread-the-wealth redistribution scheme, aimed squarely at punishing success and penalizing the so-called rich.

Note that the $250,000 cut-off point for the tax is the same line drawn in the sand in Obama’s budget for tax hikes on investors and successful earners. The president is proposing a tax rate of 40 percent, not 90 percent. But connecting the dots between Speaker Pelosi and Pres. Obama, it will be interesting to see if the president dares sign this bill.

And even though the 90 percent tax is a reaction to the AIG bonus fiasco, you have to wonder if the very-liberal-left House Democrats have a much broader agenda: to completely overturn the supply-side tax cuts of Ronald Reagan and John F. Kennedy.

A bit of history is in order. Following WWI, the Harding-Coolidge-Mellon Republicans returned the country to tax normalcy by reducing Woodrow Wilson’s 75 percent wartime tax to 25 percent -- thus triggering the roaring growth of the 1920s. Then came the Depression, spawned in large part by Herbert Hoover and FDR, who raised the top tax rate to 63 percent, 70 percent, and finally 94 percent.

The Robert Taft Republican Congress elected in 1946 lowered those tax rates, but they later bounced back to 91 percent, where they held until JFK proposed sweeping tax reform in the 1960s. The top tax rate was reduced to 70 percent, igniting the 1960s boom -- until it was undone by the inflationary Fed and Nixon’s de-linking of the dollar from gold. But Pres. Reagan slashed the top tax rate all the way down to 28 percent. This launched a multi-decade boom, with the top rate not straying far from Reagan’s vision.

Now, Pres. Obama has said that he has no intention of returning to the 70 or 90 percent tax rates of the past. But one wonders if the 90 percent House Democratic tax rate on so-called unearned income (bonuses) might not be the congressional tail that wags the presidential dog.

Most folks will say this scenario is farfetched. But it’s worth pondering. Is there truly a tax-the-rich hidden agenda in Washington that goes far beyond the Obama budget?

I wonder about this simply because there’s a much better way to recoup the misbegotten AIG bonuses. Though no one in Congress is paying any attention to beleaguered Treasury man Tim Geithner, he explained in a March 17 letter to Nancy Pelosi that the Treasury “will impose on AIG a contractual commitment to pay the Treasury from the operations of the company the amount of the retention awards just paid. In addition, we will deduct from the $30 billion in assistance an amount equal to the amount of those payments.” So the AIG bonus problem can be remedied in a much calmer and simpler way than returning to 90 percent tax rates.

But the bigger point is this: A 90 percent tax rate on financial bonuses is so punitive that it will surely drive away the best and brightest from the very banks that must heal the credit system. Do we really want D-minus students -- who are willing to accept massive tax punishment -- in charge of a trillion dollars in taxpayer money and spearheading economic recovery? The perverse incentives of tax retribution against AIG and other TARPed banks will surely backfire, and taxpayers and economic recovery will take the hit.

You see, taxes matter. They hugely impact economic behavior. The whole economic system is run on incentives to work, invest, and take risks. And it must pay, after tax, to ignite the entrepreneurial activity that really drives the economy. Like it or not, our free-market capitalist system is driven by the economic activist, provided he or she is properly rewarded.

So the real battle here in fact could be a war between the left wing of the Democratic party and the Reagan supply-side incentive model of economic growth.

Republicans in the House who just voted for massively high marginal tax rates had better think twice. When financial calm returns to the country, the GOP will not want to be accomplice to a confiscatory tax system that will stifle the economy and push America into decline for decades to come.

Thursday, March 19, 2009

Tonight on The Kudlow Report

On tonight's show at 7pm ET on CNBC:

CNBC’s Rebecca Jarvis will report today’s top stock market news.

CNBC’s Hampton Pearson has all the latest developments from Washington.

CNBC chief Washington correspondent John Harwood reports.

Sen. Jon Kyl, Republican Whip (R-AZ) will offer his take.

CNBC ace Charlie Gasparino will be aboard.

A Return to the 1970’s? … Loose Money, Taxes & Regulation
The Wall Street Journal’s
Steve Moore will join us along with Connecticut Attorney General Richard Blumenthal.

CNBC’s Melissa Lee will deliver a report.

*Bob Froehlich, chairman of Investment Committee for the University of Dayton; "A Bull For All Seasons" author
*Michael Pento, Delta Global Advisors, Inc. Senior Market Strategist
*Stefan Abrams, Bryden-Abrams Investment Management Managing Partner

CNBC’s Phil LeBeau will report.

Please join us. The Kudlow Report. 7pm ET. CNBC.

Debating the Fed's Shock-and-Awe Strategy

Wednesday, March 18, 2009

Shock & Awe Meets the Four Prosperity Killers

In a surprise move today, the Bernanke Fed launched another shock-and-awe stimulus plan that will expand the Fed’s balance sheet another $1.2 trillion through the purchase of $300 billion in long-dated Treasuries, $750 billion in mortgage-backed securities (Fan/Fred), and another $100 billion in U.S. agency debt. The Fed also is launching its Term Asset-Backed Securities Loan Facility (TALF), which could go as high as $1 trillion when it’s all said and done.

The money quote in the FOMC statement: “To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further . . . .” The decision was unanimous — no dissents.

In response, Treasury rates plunged at the long end (as prices were bid up in expectation of Fed buying) and yields fell 50 basis points. Gold surged $45. The greenback plummeted. And stocks moved up 91 points, continuing the rally of the past week.

Of course, the Fed wants to get mortgage rates down toward 4 percent, and some on Wall Street will cheer this. However, it all has a 1970s feel to it.

The Obama budget raises tax rates on investors and businesses, and supports a cap-and-trade tax, universal health care, and various regulations for unionization. Meanwhile, a spate of trade protectionism is breaking out with Mexico and China. All of these are anti-growth policies. And now the Fed is ramping up its monetary pump-priming. So the obvious risk is too much money chasing too few goods producing a stagflationary recovery.

The dollar is out the window. Monetizing debt is back in style.

I go back to Art Laffer’s four prosperity killers: inflation, higher tax rates, re-regulation, and trade protectionism. You can put a check mark next to each box.

While the country is bashing AIG for its ridiculous bonus payments to the traders who blew up the global credit system — and AIG deserves to be bashed — the bigger reality is that economic policies appear to be moving in the wrong direction.

We will get an economic recovery. And there’s a pretty good short-term stock market rally in the cards. But you just have to wonder where all this is leading. Supply-side economics is out, along with hard money.

At a dinner two months ago with Nobelist Robert Mundell, one of the authors of Reaganomics along with Laffer, Mundell told me that we should stabilize the dollar, slash the corporate tax rate, and declare a two-year capital-gains tax holiday. Instead, top marginal tax rates are going up and the dollar’s going down. It can’t be a good thing.

Tonight on The Kudlow Report

On tonight's show at 7pm ET on CNBC:

CNBC’s Jane Wells will be live from Costa Mesa, California with the latest on President Obama’s trip.

CNBC’s Mary Thompson reports from Washington.

CNBC senior economics reporter Steve Liesman has the details.

CNBC’s Bertha Coombs reports today’s top stock market news.

Also…CNBC’s Rick Santelli will join us with a bond report.

*Steve Liesman, CNBC senior economic reporter
*Art Laffer, Chief Investment Officer at Laffer Investments, former Reagan Economic Advisor
*Lee Hoskins, senior fellow at the Pacific Research Institute & former president of the Federal Reserve Bank in Cleveland
*CNBC’s Rick Santelli

*Rich Karlgaard, Forbes Publisher, "Life 2.0" Author
*Zach Karabell, CNBC Contributor, River Twice Research President
*Michael Cuggino, president & portfolio manager of Permanent Portfolio Family of Funds

CNBC’S Scott Cohn will join us.

Rep. Connie Mack, Budget Committee Member (R-FL) will be aboard to discuss his call for the Treasury Secretary’s resignation.

Please join us. The Kudlow Report. 7pm ET. CNBC.

One-on-One with Mitch McConnell

Here's last night's interview with Senate Minority Leader Mitch McConnell on the AIG outrage, Obama's tax hikes, budget and more.

Tuesday, March 17, 2009

The AIG Outrage

The government shouldn’t run anything, because it cannot run anything.

This whole AIG fiasco — where the entire political class is suddenly screaming over bonuses paid to derivative traders in AIG’s financial-products division — is just a complete farce. What it really shows is how the government has completely bungled the AIG takeover. Blame the Bush administration and the Obama administration. It also shows, once again, why the government shouldn’t run anything, because it cannot run anything.

AIG should have been placed in bankruptcy last fall under some sort of government sponsorship. While in bankruptcy, all the salary contracts (and every other AIG contract) would have been nullified and voided. At the same time, there would have been an orderly liquidation and sale of AIG’s assets and separate divisions.

But as things stand now, there still is no clear roadmap for the dissolution of AIG. There are ideas, but nothing is set in concrete.

And as for the $165 million or so in AIG bonus payments, the Obama administration — including the president, Treasury man Tim Geithner, and economic adviser Larry Summers — knew all about them many months ago. They were undoubtedly informed of this during the White House transition.

So there’s no big surprise. Nobody should be shocked. But President Obama is doing his best play-acting ever. He knows full well that the nationwide outcry against federal bailouts and takeovers is only going to get worse on his watch. His poll numbers are already falling, and this AIG episode is going to pull them down more.

Incidentally, has anybody asked Team Obama why it is more than willing to break mortgage contracts with a bankruptcy-judge cram-down, but won’t cram-down compensation agreements for AIG, despite the fact that the U.S. government owns the company? Kind of odd, don’t you think?

The Wall Street Journal editors get it right when they ask: Who’s in charge and what’s the game plan? The whole AIG story is an outrage.

What’s more, AIG is acting as a conduit for taxpayer money that is being sent to dozens of derivative counterparties, including foreign banks and American banks like Goldman Sachs. If we’re going to bail out all these other firms, why not bail them out in full taxpayer view? Why is the money being laundered furtively through AIG? And where exactly is the end game for AIG? How are the taxpayers going to be repaid?

And what is Treasury man Geithner’s role in all this? He appears to be the biggest bungler in what has become a massive bungling. My CNBC friend and colleague Charlie Gasparino thinks Geithner can’t survive this. I am inclined to agree.

Nevertheless, behind the furor over AIG, there is some good news to report on the banking front. This week’s decision by the Federal Accounting Standards Board (FASB) to allow cash-flow accounting rather than distressed last-trade mark-to-market accounting will go a long way toward solving the banking and toxic-asset problem.

Many experts believe mortgage-backed securities and other toxic assets are being serviced in a timely cash-flow manner for at least 70 cents on the dollar. This is so important. Under mark-to-market, many of these assets were written down to 20 cents on the dollar, destroying bank profits and capital. But now banks can value these assets in economic terms based on positive cash flows, rather than in distressed markets that have virtually no meaning.

Actually, when the FASB rules are adopted in the next few weeks, it will be interesting to see if a pro forma re-estimate of the last year reveals that banks have been far more profitable and have much more capital than this crazy mark-to-market accounting would have us believe.

Sharp-eyed banking analyst Dick Bove has argued that most bank losses have been non-cash — i.e., mark-to-market write-downs. Take those fictitious write-downs away and you are left with a much healthier banking picture. This is huge in terms of solving the credit crisis.

In a column last week I suggested that not one more dime of government money is necessary for the banks. Instead, the marriage of the cash-flow valuation of bank assets and the upward-sloping Treasury yield curve will do the trick. Net interest margins are rising as banks purchase money for near-zero interest and loan it out at profitable rates. And the new mark-to-market reform will allow banks to hold their toxic assets for several more years and work them out — just as they did back in the 1990s.

We don’t need more TARP. We don’t need to take over more big banks. And we don’t need to have the government run things it simply isn’t capable of running.

Tonight on The Kudlow Report

On tonight's show at 7pm ET on CNBC:

CNBC’s Rebecca Jarvis will report today’s top stock market news and Matt Nesto will take a look at financials.

CNBC’s Mary Thompson has the latest developments.

CNBC ace Charlie Gasparino will be aboard.

CNBC Scott Cohn will join us with a report.

*Doug Kass, president, Seabreeze Partners Management
*Gary Shilling, president of A. Gary Shilling & Co.
*Mike Ozanian, Forbes national editor

*Sen. Mitch McConnell (R-Kentucky)
*Sen. Ron Wyden (D-Oregon)

CNBC senior economics reporter Steve Liesman has the story.

*Bill Isaac, former FDIC Chairman, The Secura Group, LLC Founder & Chairman
*Lee Pickard, former director of the SEC's division of market regulation

Please join us. The Kudlow Report. 7pm ET. CNBC.

An Interview with Jack Welch

What follows below is the transcript of my interview with legendary former General Electric chairman & CEO Jack Welch on The Kudlow Report last night. We covered a lot of ground. Mr. Welch awarded high marks to Fed chief Ben Bernanke for his handling of the financial crisis, and described his performance on 60 Minutes Sunday evening as “magnificent”. He wasn’t as charitable to Washington policymakers though, chiding them for fumbling the AIG bonus boondoggle. Welch said the Feds ought to start acting like a board of directors in dealing with AIG brass. In other words, Washington owns AIG, so they ought to start acting like it. We also discussed the recent brouhaha surrounding his comments on shareholder value to the Financial Times.

LARRY KUDLOW: Now, CNBC exclusive, we welcome back business legend Jack Welch, former chairman and CEO of General Electric. All right, Mr. Welch, it is always wonderful to see you sir. We’ve got to do the news of the day, it’s not exactly what I thought we were going to talk about, but we will get to your Financial Times interview in a moment or two. I’ve got sound from Ben Bernanke last night on 60 Minutes about AIG. If you would just take a listen, and then we’ll talk.

Fed Chairman Bernanke on 60 Minutes:

I slammed the phone more than a few times on discussing AIG. I understand why the American people are angry. It's absolutely unfair that taxpayer dollars are going to prop up a company that made these terrible bets, that was operating out of the sight of regulators, but which we have no choice but to stabilize, or else risk enormous impact, not just in the financial system, but on the whole U.S. economy.

KUDLOW: You know Jack, I hate like heck to sound like Barney Frank, but I think I’m going to sound like Barney Frank by asking you this question. If the US government can cram down General Motors auto workers, the UAW contracts, compensation, benefits and what not, why can’t we cram down AIG? After all, really unlike GM, at least so far, the American taxpayer is the primary owner of AIG, certainly the primary creditor.

JACK WELCH: Hey Larry, why don’t we step back for a minute. There’s been 24 hours of wild emotion over this thing. Who owns AIG? The US government owns AIG. Now why are they not taking charge of their situation? They appointed a CEO; it’s their CEO. He happens to be a very good man, Ed Liddy, who ran Allstate for many years. They ought to be working as a board of directors with their CEO on what the compensation ought to be. Then they ought to be either agreeing with their CEO, who’s making $1 a year, and doing it as a good citizen, or they ought to get their own man in there, this administration ought to put somebody in.

KUDLOW: But they’re saying, you know Liddy, okay he’s a good man. Basically I agree with you Jack. But you know Liddy is throwing up this blue smoke at us about the contracts. He says there are contracts.

WELCH: Larry, Larry, Ed Liddy is their CEO! They’re the board of directors! Why are they not working with the CEO to get a resolution? These guys want to be critics on the outside, and not owners on the inside. They are owners.

KUDLOW: Geithner and his group should have called Liddy down to Washington. I don’t understand this. And just sat him down and say, okay, here is the way life works. Here’s the way it’s going to work. Is that what you’re saying?

WELCH: It should have been resolved between Liddy and the Treasury, or the Fed, or whoever it is that represents the US government who is the owner of AIG! The idea that these guys who own it, can now all throw rocks at it, makes no sense. It would be like a board of directors throwing rocks from the outside and not being responsible.

KUDLOW: Well why didn’t we put them in bankruptcy in the first place? Some kind of government sponsored bankruptcy which nullifies and voids all the contracts? Why didn’t we do that? In fact, for that matter, why didn’t we do it for General Motors?

WELCH: Look Larry, I’m not going to get into whether Lehman was right, AIG was right, the way they handled that. We’ve already crossed that bridge. I want to stay on this one though. I don’t think these guys as owners, are acting like owners who want to get their $180 billion dollars back. They’re not acting like owners. Let’s challenge them to work with the chairman, to work as a board of directors. Have them designate Geithner, or Bernanke, or whoever, and have them work it out so that the government is working in concert with the CEO, not at cross-purposes, Larry.

KUDLOW: So what you’re saying is we need a grownup in the Treasury. Is that what you’re saying? We need someone with some business seasoning in the Treasury to do exactly the kind of thing you’re recommending?

WELCH: We need a government group representing the owners who are responsible for dealing with the CEO in the same way governance happens in any company. Not having—we’ve got the New York State attorney general, we’ve got Barney Frank, we’ve got everybody—the government owns the company!

KUDLOW: So they’re really not doing their job. They’re whining a lot. They’re whining a lot, they’re throwing a lot of faux populism. But you’re saying they have other tools. They should just do their job.

WELCH: My argument is Larry, they ought to work with the CEO as any owner would. As we do with our private equity companies. Try to encourage the CEO to get the right answer so we get a return on our money. I don’t want this $180 billion to just go up in smoke because we’re all fighting with each other.

KUDLOW: All right, I hear you. Now hang on Mr. Welch, hang on. We have so much more for you to do…Kudlow Report, stay with us, we’ll be right back.


KUDLOW: All right we’re back with business legend and great friend Jack Welch. Of course, the former chairman and CEO of General Electric, the parent of this network. Mr. Welch I cant help but admire your green tie. I’m sure there’s an inner meaning to that.

WELCH: [Laughter] I don’t think so.

KUDLOW: Okay, tomorrow’s St. Patrick’s Day. Anyway, Ben Bernanke makes his national television debut on 60 Minutes. They have a couple more viewers than his usual CNBC venue. Here’s Mr. Bernanke on the economy with a touch of optimism. Let’s hear it.

Fed Chairman Bernanke on 60 Minutes:

Ben Bernanke: We’ll see the recession coming to an end, probably this year. We’ll see recovery beginning next year. And it’ll pick up steam over time.

Scott Pelley: You think the recession is going to end this year?

Bernanke: In the sense that this decline will begin to moderate, and we’ll begin to see leveling off. Now we won’t be back to full employment, but we will see, I hope, the end of these declines that have been so strong the last couple of quarters.

KUDLOW: All right Jack, what do you think? That’s his forecast. Now he’s had some that turned out okay, and some not okay, and we’re all guilty of that. What do you make of it?

WELCH: Well I’m sort of in his corner. I’m not a great expert on this, but I’m in his corner. Larry I have a fact here that may be of some interest. I’m involved with a private equity firm, a partner in a private equity firm, Clayton Dubilier, where we have several companies. A beauty company; a car rental company; an industrial distribution company; a food services company. And February was the first month since May, where we did not have sequential downs over the prior month. February was about equal to January, and so was early March.

Now I gave this comment, this little tidbit, and said don’t take it to the bank or do anything else at a JP Morgan conference a week ago. And as I went to lunch, several CEOs came up to me and said, ‘you know we’re seeing the same thing. We didn’t want to say it.’ So Larry there is sort of a feeling, now it’s by no means guaranteed, but there is somewhat of a feeling that the acceleration down has somewhat moderated. And we seem to be flattening out a touch.

KUDLOW: Well I like the story, and we try to show some of this stuff each evening. We’ve seen a bottoming, even an increase in key commodity prices—the Baltic Dry Index. Here’s one Jack, core retail sales, underlying retail sales, which feed into GDP, have actually been up two straight months. And the energy price plunge in retail gas, real incomes, disposable incomes from consumers have been up the last four of five months. So there may be some stability.

Let me throw one more Bernanke sound tape at you. Here’s his pitch to Main Street and backing around the country.

Bernanke on 6o Minutes:

You know I come from Main Street, that’s my background. And I never have been on Wall Street. And I care about Wall Street for one reason and one reason only. Because what happens on Wall Street matters to Main Street

KUDLOW: Jack is he making the sale in your judgment? Is he winning the support of the people? This is such a controversial issue. Opinion polls show that folks do not like these bailouts. Do you think Bernanke himself personally made the sale last night?

WELCH: Well he gave a tremendous presentation Larry last night. He was thoughtful. He was measured. He really radiated confidence. And we need more than anything else, confidence. And he also laid out the challenge for the political forces. He said the pressure will be do we have the political will to make the fix? And that is a real challenge for Washington. He said we’re going to need to go after it with a vengeance. He studied the Depression more than anyone. He’s making a lot of right moves; he’s made a lot of right moves. I’ve been supporting him in our column for the last four months. I think he’s made a ton of right moves, and I happen to believe that he laid the gauntlet down to Washington. Do they have the political will to back up what he needs, the firepower he needs, to get the job done Larry. I think he did a magnificent job.

KUDLOW: You know, I worked for Arthur Burns and Paul Volcker at the New York Fed. Of course like you I knew Greenspan very, very well. I think this is the best television communications performance of any Fed chairman in my lifetime. And I agree with you sir, he did get the job done. And I think he did more to help Obama and all the issues toward recovery than anything we’ve seen so far. He stood alone. He deserves reappointment doesn’t he?

WELCH: Absolutely Larry. He did a job on a broad spectrum. H e grabbed the country and he challenged the politicians.

KUDLOW: All right. So Jack, let me go to this controversial Financial Times—holy cow, I’ve never seen such a thing for you. You give a little interview in the Financial Times and you’re all over the blogosphere, the Internet, and what not. It says here Jack Welch regarded as the father of shareholder value, he is now saying the obsession with short term profits is all wrong. And I’m going to read you the key quote, the money quote. “On the face of it Mr. Welch said, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy.” Please, elaborate.

WELCH: Larry, I was having an interview on the future of capitalism. And I was asked, what do you think of shareholder value as a strategy? I said it’s the dumbest idea possible. It isn’t a strategy; it’s an outcome. A strategy is something like, an innovative new product; globalization, taking your products around the world; be the low-cost producer. A strategy is something you can touch; you can motivate people with; be number one and number two in every business. You can energize people around the message. They come to work every day. It’s tangible. It’s something they can feel and be proud of.

Shareholder value? What the hell is that Larry? It’s the result of you doing a great job, watching your share price go up, your shareholders win, and dividends increasing. What happens when you have increasing shareholder value? You’re delivering better employees to their communities and they can give back. Communities are winning because employees are involved in mentoring and all these other things. Customers are winning because you’re providing them new products, value propositions…

KUDLOW: But we’ve got to have profits. Profits are the mother’s milk…

WELCH: Absolutely!

KUDLOW: …not just of the stock, but of the whole company. A healthy company’s got to have earnings. And it’s got to have capital investment. Now, what do you say now? What’s your advice now? Or let me put it differently. If you were at the business roundtable meeting yesterday, all the bigwigs met with President Obama—not yesterday Thursday, I beg your pardon. I’m time insensitive. If you were there, what strategy would you have recommended to your colleagues and to your president?

WELCH: Look, it’s always the same. You’ve got to eat while you dream. You’ve got to deliver on short-range commitments, while you develop a long-range strategy and vision and implement it. The success of doing both. Walking and chewing gum if you will. Getting it done in the short-range, and delivering a long-range plan, and executing on that Larry. That is what it’s all about. That’s what management is—making choices. Any jerk can have short-term earnings. You squeeze, squeeze, squeeze, and the company sinks five years later. Any jerk can sit there and say, ‘hey, come back in five years, I’m doing my long-range thinking.’ Get out of here. Management is all about managing in the short term, while developing the plans for the long term.

KUDLOW: Is it time, as some people say—now this is interesting, Fred Smith, our great friend, the CEO of FedEx, he’s got to be one of the smartest businessmen in this country.

WELCH: Very good.

KUDLOW: He says we’ve got to do something to boost American manufacturing and industry, the stepchild of business. We always talk about tech. We always talk about financial services, and Lord knows, we’re spending multiple fortunes of taxpayer money today on financial services. Jack, GE once was a great industrial manufacturing superpower. I don’t know, it seems to have receded in its priorities. I’m not asking you GE specific. In general, what could this country do to boost its manufacturing and industrial base?

WELCH: Larry, again, obviously we have to do the education job, we can’t be having H1B visa restrictions and sending the best and brightest technical people we get and send them home. We’ve got to change government policy on that regard. But just a quick line on GE Larry, I can’t let you get away with that. GE is without question, the leader in jet engine manufacturing, with sophisticated engineering and design. It’s the leader in power generation, power plants all over the world, powering electricity…

KUDLOW: But it’s a smaller share of the company. I mean, I’m not an analyst of General Electric. As I’ve said on this program…

WELCH: Larry…

KUDLOW: I heard [GE CEO] Jeff Immelt give a brilliant speech, I was there in South Carolina at the New Years weekend. But Jack, it has shrunk. Right?

WELCH: No it hasn’t shrunk!

KUDLOW: Look at financial services. GE Capital became the big swinging you-know-what and the manufacturing side took second place.

WELCH: Larry, manufacturing grew from something in the neighborhood of $20 billion to $90 billion over the period. Financial services grew faster. But manufacturing became bigger and more powerful during that period. That’s why manufacturing throws off $10 to $15 billion of cash flow that will support the financial services through this period.

KUDLOW: So you’re saying it never left, it’s still there, and nationwide it’s still there. Is that your message?

WELCH: Well I think you’ve got some great industrial companies. You’ve got United Technologies, you’ve got Emerson Electric, you’ve got Eaton, you’ve got all kinds of good industrial companies. Larry, this is somewhat of a myth. But I’ll tell you one thing, Fred’s right. We’ve got to have the policies to keep the best and brightest in our country.

KUDLOW: Well he wants immediate write-offs of investments. He wants full cash expensing for investments to lower the cost of capital. That is something I am not hearing from Washington, frankly, in either party right now. And I think that would help. You’re right about the H1B visas. We’ve got to get out of here. Mr. Jack Welch, I love getting smacked down by you. It is my favorite smack down anywhere.

WELCH: I didn’t mean to Larry, I love being with you. Thanks for having me.

KUDLOW: All right sir, it’s wonderful to see you again.

Monday, March 16, 2009

Tonight on The Kudlow Report

On tonight's show at 7pm ET on CNBC:

CNBC’s Matt Nesto will report.

Team Obama Starts Talking Positive
CNBC’s chief Washington correspondent John Harwood will be live with a report.

CNBC’s Hampton Pearson reports from Washington.

Former GE chairman & CEO Jack Welch will be aboard to discuss the AIG bonus brouhaha, Bernanke, economy, Team Obama and more.

Sen. Tom Coburn (R-OK) will join us to talk about President Obama’s budget, earmarks and AIG.

CNBC’s Mary Thompson has the story.

*Neil Weinberg, Forbes executive editor
*Michael Farr, president of Farr, Miller & Washington
*Andy Busch, global FX strategist at BMO Capital Markets

Please join us. The Kudlow Report. 7pm ET. CNBC.

Jack Welch on The Kudlow Report Tonight

Legendary former GE CEO Jack Welch will join us this evening to discuss his latest Washington to Wall Street thoughts and perspective. Topics will include the AIG bonus brouhaha, Bernanke, markets & economy, Team Obama and more.

Please join us. The Kudlow Report. 7pm ET on CNBC.

Friday, March 13, 2009

A Shotgun-Wedding Proposal

Is it really necessary for taxpayers to spend another dime on the TARP? We’ve already committed $700 billion, half of which was spent under Pres. Bush and half of which is coming under Pres. Obama. And now, as we wait with baited breath for Treasury-man Tim Geithner’s detailed plan to purchase bank toxic assets, the TARP could rise by another $1 trillion or more.

But we may not need it at all. Here’s why:

Out of the blue, bank stocks mounted an impressive rally this week, jumping nearly 40 percent on the S&P financial list. One after another, big-bank CEOs like Vikram Pandit of Citi, Ken Lewis of BofA, and Jamie Dimon of JPMorgan are telling investors they will turn a handsome profit in the first quarter, their best money gain since 2007. This is big news. And it triggered the first weekly stock gain for the Obama administration.

But this anticipated-profits turnaround doesn’t seem to have anything to do with the TARP. It’s about something called the Treasury yield curve -- a medical diagnostic chart for banks and the economy.

When the Fed loosens money, and short-term rates are pulled well below long rates, banks profit enormously from the upward-sloping yield curve. This is principally because banks borrow short in order to lend long. If bankers can buy money for near zero cost, and loan it for 2, 3, or 4 percent, they’re in fat city. Their broker-dealer operations make money, as do all their lending divisions.

So the upward-sloped yield curve is the real bailout for the banking system.

Now, turn the clock back to 2006 and 2007. In those days the Treasury curve was upside down. Due to the Federal Reserve’s extremely tight credit policies, short-term rates moved well above long-term rates for an extended period, and that played a major role in producing the credit crunch. Since interest margins turned negative, the banks had to turn off the credit spigot, and all those exotic securities -- like mortgage-backed bonds and various credit derivatives -- could no longer be financed.

The Fed’s long-lived credit-tightening also wreaked havoc on home prices and was directly responsible for the recession that began in late 2007. At the time, Fed head Ben Bernanke said the inverted yield curve wouldn’t matter. Gosh was he wrong.

Today, however, after about a year of a positively sloped yield curve, bank interest margins and profits are turning up. In fact, despite the perpetual pessimism, the normalized yield curve is a leading indicator of economic recovery, according to models created by the New York Fed and others.

Here’s the second big point: Instead of spending a trillion TARP dollars to rescue toxic assets, why not ease or liberalize mark-to-market accounting rules? You see, banks still have a bunch of underwater toxic assets on their balance sheets. And unless the SEC or someone in Washington changes these rules, the banks may have to erase their new cash-flow-rich profit margins by marking down the value of mortgage- and consumer-related loans.

These loans can’t be sold in the current market. But if somebody tells the banks they don’t have to sell these loans at distressed prices, and therefore don’t have to take a big hit on profits and capital, the banks will enjoy plenty of breathing room to reap the benefits of the upward-sloping yield curve.

Let the banks hold these investments over a long period, rather than force them to sell now. The economy will get better, as will housing and other impaired assets.

You could even have a two-tiered disclosure process: Accounting purists could be satisfied with a full mark-to-market disclosure, while regulators could forbear capital-standard rules that shouldn’t apply during this period of severe distress. As a result, banks would be in better shape to pass the Treasury’s new stress test and wouldn’t need new TARP capital-injections that further extend taxpayer liabilities.

Think of this: As net interest and profit margins rise while the yield-curve is upward-sloping, higher bank profits can be used to replenish capital. Meanwhile, government authorities can cease and desist -- not only their punishment of private-equity shareholders, but also their clumsy attempts to control various bank operations (compensation, golf outings, means of transportation, etc.). Then, if bankers are so dumb they still can’t make money with zero borrowing costs, the FDIC should shutter them and sell them off piece by piece.

Right now there are promising signs of mark-to market reform, with bipartisan support in Congress. New SEC chair Mary Shapiro says she’s looking into it, as is Robert Herz, the head of the Financial Accounting Standards Board (FASB).

So let’s have a shotgun marriage. Let’s wed the upward-sloping yield curve with mark-to-market reform. It sure beats another trillion in taxpayer dough, or a federal takeover of our biggest banks.

It all seems like such a simple solution.

Tonight on The Kudlow Report

On tonight's show at 7pm ET on CNBC:

CNBC’s Matt Nesto & Michelle Caruso-Cabrera will report today’s top news and developments.

CNBC’s Hampton Pearson reports from the White House.

*Joe Battipaglia, market strategist at Stifel Nicolaus
*Jerry Bowyer, chief economist at Benchmark Financial Network
*Dick Bove, bank analyst at Rochdale Securities
*Dawn Bennett, founder & CEO of Bennett Group Financial Services

CNBC Mary Thompson reports.

Also…CNBC’s Charlie Gasparino and Dawn Bennett will discuss.

CNBC Guy Johnson reports.

Dan Yergin, chairman of Cambridge Energy Research will be aboard with his perspective.

Obama/Volcker/Summers & the Latest Polls

*Jimmy Pethokoukis, U.S News & World Report senior writer Money & Business
*Robert Reich, “Supercapitalism” author, public policy professor & former Clinton labor secretary

Please join us. The Kudlow Report. 7pm ET. CNBC.

Where Was Obama's Veto Pen?

The Dynamic Duo debated this important question on last night's show.