Gov. Jenny Sanford? It’s Got a Nice Ring to It [Larry Kudlow]
The Business & Media Institute picked up my conversation with the WSJ’s Steve Moore last night about Jenny Sanford, South Carolina Gov. Mark Sanford’s wife, being a possible replacement for her husband in the governor’s mansion. Both Steve and I agreed that Jenny Sanford has the credentials and would make an excellent governor.
Madoff Sentenced, but He Didn’t Sing [Larry Kudlow]
So Bernie Madoff was sentenced to 150 years in the slammer today. He also delivered one of his now-patented non-repentant repentance speeches in the courtroom. Oh, by the way, his wife Ruth also issued a statement, and she threw him under the bus.
Yet while everyone can now cheer that the greatest crook in financial history will die in jail, Madoff also may die keeping his secrets with him. So far, prosecutors have come up with very little about this case. And under the tutelage of the clever lawyer Ike Sorkin, Madoff has given almost nothing up. No singing in jail. (Maybe he should have been waterboarded.) We don’t know if his wife or two sons were part of the scam. Nor do we know where most of the money — estimated up to $65 billion — has gone. There’s a number being used that bankruptcy trustee Irving Picard has recovered $1.2 billion of the $13.2 billion in estimated net losses. But the strength of those numbers is somewhat in doubt.
Where’s the money? Who are the accomplices? And what about some of these big-time fat cats who invested with Madoff, people we thought were victims but may turn out to be the real winners in the story?
There are several reports about Jeffry Picower and Stanley Chais, two rich businessmen who may have taken $6.1 billion in returns from the Madoff fraudulent funds — more than they put in. There’s also businessman Carl Shapiro, a close Madoff pal. And while there is yet no number as to what he took out of the funds, years ago the guy sold his garment business for $20 million and grew that sum to nearly $1 billion — most of it from investing with Madoff.
I’m using reports from the Wall Street Journal and the liberal investigative group ProPublica. I’m also using first-hand accounts from friends of mine who are circulating these rumors down in Palm Beach, Fla. They’re very close to the Madoffs, their funds, and their investors.
The point is, it’s been six months since Madoff was first arrested, and the actual case against him has progressed very little from his own self-confession right at the start. Neither his wife nor his two sons have been deposed. Nor have these other characters who probable looted the funds.
The thing about a Ponzi scheme is others besides Ponzi can get rich. And there are names in circulation of people who may also have gotten rich. But where’s the money? When will these people be brought in to testify under oath? The thousands of other smaller investors and charities who were totally ripped off by Madoff could recover a lot more if these big shots are finally hammered.
Madoff will die in jail. And he deserves it. But the justice system has much more work to do following today’s sentencing.
King Dollar Liked the FOMC Statement [Larry Kudlow]
The Federal Reserve’s policy statement yesterday elicited a strong King Dollar reaction with its mild dose of hawkishness, which I applaud. I’m reading the Fed positively here. There was no announcement of any new debt monetization via Treasury purchases, a slightly more positive economic view, and an end to deflation worries. This all to the good.
The result was a stronger dollar in world currency markets. King Dollar. This is very good.
I was encouraged that the Fed cited rising commodity and energy prices. It is another nod to a market-price rule. That is clearly the best way to conduct policy, rather than the goofy Philips Curve tradeoff between inflation and unemployment.
Now, the Fed is going to keep the target rate near zero for the foreseeable future. But remember, the Fed’s balance sheet has flat-lined over the last six months as it has slowed down the overworked printing presses. So, while the Fed didn’t mention an exit strategy, it may already be building one.
The markets basically voted in favor of the Fed. While the Dow was off slightly on the news, the S&P gained almost 1 percent, with the NASDAQ finishing up a solid 27 points. As you know, markets conduct an up-or-down election vote every single day on the economy, Washington, and policy. It remains the most important opinion poll there is.
Finally, I think this sideways market correction we’re in is nearing an end. As a result, I think this could be a strong buying opportunity for investors, who can put some of their sidelined cash back into stocks.
President Obama said at his press conference yesterday that no second stimulus package is being contemplated right now. Well, I sincerely hope that’s the case, because the current package is a disaster. It spends far too much for far too little in return. All of this frenzied fiscal nymphomania is placing a tremendous burden on Treasury-bond rates and the U.S. dollar. It is undermining the confidence of key foreign investors like China, Brazil, Russia, and others who have to buy our bonds.
But the worst thing I heard yesterday was the snare-and-delusion proposal announced by Vice President Biden. Apparently, Joe Biden wants to create a new government council to help laid-off autoworkers who are supposed to transition to solar, wind, and biotech industries. Huh? Are you kidding me?
Look, if you really want to help manufacturing workers everywhere, then cut that ridiculously high business-tax rate by 15 to 20 percentage points. Then allow full cash expensing for immediate tax write-offs for new business investment. Heavy industries will soar. This is FedEx CEO Fred Smith’s idea, and I totally agree with it. It would boost the manufacturing, auto, and transportation sectors.
And by the way, let’s move forward and deregulate the energy industry so we can drill, drill, drill and nuke, nuke, nuke. We’re talking about an enormous potential job-creator here. The fact of the matter is that alternative energy will be a tiny part of the energy calculus for many years to come. That’s just the reality. So let’s get real and eliminate all these ridiculous regulatory roadblocks standing in the way of American job-creation and energy independence.
And what’s this about a sub-czar for cars? Talk about a sub-par idea. I’m sorry Mr. Biden. Personally, you’re a good man. But economically, this is a terrible idea. Tax incentives are what will help the blue-collar middle class rise out of the doldrums.
We Don’t Need Obama’s Big-Bang Health-Care Plan [Larry Kudlow]
It looks like President Obama’s big-bang health-care reform is going down to defeat. This is good. But my question is why do we need it at all? According to a recent ABC News/USA Today/Kaiser Family Foundation survey, 89 percent of Americans are satisfied with their health care. That could mean up to 250 million people are happy. So why is it that we need Obama’s big-bang health-care overhaul in the first place?
There’s more. According the U.S. Census Bureau, we don’t have 47 million folks who are truly uninsured. When you take college kids plus those earning $75,000 or more who chose not to sign up, that removes roughly 20 million people. Then take out about 10 million more who are not U.S. citizens, and 11 million who are eligible for SCHIP and Medicaid but have not signed up for some reason.
So that really leaves only 10 million to 15 million people who are truly long-term uninsured.
Yes, they need help. And yes, I would like to give it to them. But not with mandatory coverage, or new government-backed insurance plans, or massive tax increases. And certainly not with the Canadian-European-style nationalization that has always been the true goal of the Obama administration and congressional Democrats.
Instead, we can give the truly uninsured vouchers or debit cards that will allow for choice and coverage, and even health savings accounts for retirement wealth. According to expert Betsy McCaughey, instead of several trillion dollars and socialized medicine, this voucher approach would cost only about $25 billion a year.
But the Democratic agenda has never really been about just the uninsured. And it certainly hasn’t been about real cost-cutting or true market choice and competition. Nor has it been about tort/trial-lawyer reform. Instead, the Democratic agenda has always been a class-warfare, anti-business attack on private-sector doctors, hospitals, insurance firms, and drug companies. It’s all about control, knocking down their profits, and telling them what to do.
Because government planners know best, right? Wrong. Absolutely wrong.
Does the Obama administration really want to grant a virtual dictatorship to the Federal Reserve on monetary policy and banking oversight and regulation? The Fed already has enough trouble figuring out monetary policy. So this business about the central bank engaging in systemic-risk regulation and all the accompanying regulatory bells and whistles makes no sense.
A host of factors contributed to the credit crisis. But it was ultimately the Federal Reserve — with its bubblehead policy of ultra-cheap rates, monetary explosion, and a sinking dollar — that created it. The Fed was the chief culprit, just as it was ten years ago when it unleashed the tech bubble. It not only created this current crisis, it totally missed it as well. So why would anyone think it has the right stuff to fix it?
I say put Sheila Bair and the FDIC in charge of systemic-risk regulation. Make them totally independent from the Treasury. And while we’re at it, let’s get the Fed to return to a market-price rule for money, including gold, the dollar, bond rates, and commodities. This would mark a sorely needed return to the stable-money period that stretched from the early 1980s to the late 1990s. That was before the central bank embarked on this crazy pillar-to-post stop-go-stop-go monetary-meddling insanity that completely destabilized the economy and undermined the stock market.
On a related note, Washington is spending far too much time focusing on regulations right now. They’re not devoting nearly enough time to figuring out ways to truly grow our economy. It is a statist governmental approach. This great country of ours is thirsting for free-enterprise incentives and solutions. And as the latest polls show, Americans are becoming fed up with the out-of-control spending, borrowing, debt-creation, and tax increases.
What we need is serious economic growth. That is priority number one. What we need is risk-taking and entrepreneurship. Of course, we need transparent markets. But it is the growth message that is being overlooked.
And by the way, speaking of limits to reckless borrowing and debt, the Treasury is going to auction $104 billion in debt this week. That’s yet another record. The previous record was set a few weeks ago, which came a week after another record. Talk about the need for limits. This is total fiscal insanity. It needs to stop now.
But this Fed-dictatorship proposal is a terrible idea. The Fed needs to stick to its knitting and focus on stable money. That’s what’s been missing for ten years under Alan Greenspan and Ben Bernanke. That’s why we experienced two nasty recessions. And that’s why the stock market has gone nowhere.
Former GE CEO Jack Welch discussing Obama’s financial reform plan on Squawk Box this morning:
My whole feeling [not just on the financial reform plan] is let’s slow down. I mean, we’re touching every corner of this economy. We’re going from healthcare, 20 percent of the economy, to the environment with cap-and-trade, which touches every corner. And now this. And he’s only been in there four or five months. I hope somebody in Congress says, “Whoa, let’s discuss these things and what the implications are.”
Amen. The latest polls reveal a growing public revolt against massive deficits and massive government intervention, especially among independent voters. We sorely need limits on spending, borrowing, debt creation, TARP-ing, bailing-out and government expansion. Limits! This limits theme was my message at the GOP Senate policy lunch on Tuesday. Washington has run amok, and folks don’t like it.
Two terribly bright stock market minds joined me on last night’s Kudlow Report — Jason Trennert of Strategas Research and Dougie Kass of Seabreeze Partners Management — to discuss the stock market and economy. Both the video and Dougie’s recap of the discussion follow below.
The Fed in Charge of Systemic Risk? What a Mess [Larry Kudlow]
The big winner of the Obama financial-regulation plan appears to be the Federal Reserve, which becomes the consolidated supervisor of large, systemically important banks.
This is like the fox guarding the henhouse. After all, the Fed’s overly loose money policies created the asset bubble — including housing, commodities, and energy — in the first place. Near-zero interest rates, huge money growth, and total disregard for the plunging dollar are what set up the housing boom and the unfortunate overleveraging by consumers, mortgage borrowers, and Wall Street securitizers.
It also set up the astronomical $150 oil shock, which came alongside the Fed’s overly tight money policies to offset the prior loose policies that would cause this credit crunch and deep recession. In fact, looking back to the last two bubbles — the tech bubble of 1999-2000 and the housing/energy bubble after that — it was the Fed’s pillar-to-post go-stop-go-stop lurches that deserve the principal blame for the economic messes that ensued.
The Great Moderation of the ’80s and ’90s has given way to extremism in Fed policy. And we may be in danger of repeating it all over again, with a new round of near-zero interest rates and a massive 11 percent growth of M2 over the past nine months.
There is one positive in the Obama plan: Sponsors of securitized asset-backed bonds will be forced to put 5 percent equity-skin in the game, in order to improve incentives for more appropriate risk and responsibility in lending.
But it strikes me as somewhat ironic that the Fed would be placed in charge of systemic risk.
We also don’t know if any of the new regulations from the Obama White House and Treasury will deal with the moral-hazard question of “too big to fail” that was pointed out in Paul Volcker’s China speech last week. There will be new resolution authority to close down banks, but whether that will apply to the big banks remains to be seen.
Then there’s the new Consumer Financial Protection Agency. This provision was apparently written by liberal-left Harvard professor Elizabeth Warren, a staunch foe of free markets and an overzealous supporter of consumer-as-victim rights. Among its massive powers, this agency would enforce the Community Reinvestment Act, which has for years forced banks and other lenders to throw mortgage money at borrowers who cannot afford it. And the consumer protection would reach deep into bank supervision as well. What a mess.
Missing from the package is a reform that would put Fed monetary policy back on a commodity-price rule, including gold and the dollar. This rule was basically used from the early ’80s to the late ’90s, during Paul Volcker’s Fed term and the first half of Alan Greenspan’s term. This would have been the best-possible reform, but of course it’s not in the proposal.
So now the Fed has become the supreme Keynesian unemployment vs. growth Philips-curve tinkerer. Until this totally mistaken policy is changed, we can have ten more reregulation plans that will not fix the real problem.
5 Reasons to Reject Class-Warfare Tax Policy [Larry Kudlow]
Cato’s Dan Mitchell just sent over his latest video explaining why President Obama’s soak-the-rich tax increases are economically foolish. He’s got the story right. Raising taxes robs incentive power from entrepreneurs, investors, and small-business owners. In other words, it is precisely the wrong recipe for recovery and economic growth.
Did the Federal Reserve’s Ben Bernanke lie about pressuring the Bank of America not to back out of the Merrill Lynch merger? BofA CEO Ken Lewis made this charge to New York AG Andrew Cuomo, and basically repeated it with a bit of sugar-coating in a House hearing today on Capitol Hill.
The central issue was whether Lewis would invoke the material-adverse-change clause (the MAC clause) to back out of the Merrill deal last December, when Merrill’s books showed far greater losses than were first recognized. Of course, the deal is now succeeding profitably, with the whole financial world having changed for the better since late last year.
But a bunch of e-mails and documents clearly show that Bernanke was hammering Lewis, as was former Treasury man Henry Paulson. So far as I know Paulson has never denied this. But Bernanke did, and therein lies the Fed head’s problem.
Last May 5, in front of the Joint Economic Committee, when asked if he pressured Lewis, Bernanke responded: “Absolutely not, that I absolutely did not in any way ask Mr. Lewis to obscure any disclosures or to fail to report any information that he should be reporting.”
However, an e-mail reveals that Richmond Fed president Jeffrey Lacker spoke at length with Bernanke about all this: “Just had a long talk with Ben . . . says they think the MAC threat is irrelevant because it’s not credible. Also intends to make it even more clear that if they play that card and they need assistance, management is gone.”
In other words, Bernanke acknowledged to Lacker that if BofA management disclosed to shareholders the terrible state of Merrill, even in considering a withdrawal from the deal, Bernanke would fire them. This directly contradicts the Fed head’s public statement before Congress’s JEC.
At that time, Lewis was strongly considering a material-adverse-change clause to stop the Merrill deal. So Bernanke put a gun to Lewis’s head, but he won’t fess up about it. A House investigative committee will probably call Bernanke to testify on this subject. If so, the whole world will be watching. As former Reagan prosecutor Joe diGenova told me last night on CNBC, the Justice Department won’t prosecute Bernanke. But his political and monetary credibility may suffer enormously.
Now the question is whether the Obama White House will issue a statement strongly supporting Bernanke, as they have in the past, or whether they will let the Fed head twist slowly in the wind. Perhaps my Larry Summers/King Dollar preference over Bernanke for Fed head next year is not so far fetched.
Right now, with oil trading through $71 a barrel, Treasury bonds closing in on 4 percent, and commodity indexes up 25 percent year-to-date, inflation fears are circulating through the markets.
There’s a way to nip this in the bud: First, the Treasury and Fed should work together to protect the value of the dollar. Here’s how they do it. At the Fed’s June meeting in two weeks, Ben Bernanke should put in the FOMC minutes a clear reference to an exit strategy that will curb the massive money creation that Art Laffer wrote about in today’s Wall Street Journal. Next, at its September meeting, the Fed should raise its target rate — which is now 0.0 to 0.25 percent — pulling it up to 25 basis points, the upper end of the current range. That’s a small, even tiny, move that would represent about a 12 basis-point hike. But the move would at least send a signal that the Fed has an exit strategy from excess money that it intends to implement. Just that tiny move would go a long way towards protecting the dollar and knocking down inflation fears.
At the same time, the Treasury should purchase dollars in the open market to reinforce the much-neglected King Dollar scenario. In the long-run, Treasury interventions won’t work. But in the short-run, when combined with a Fed exit strategy, a dollar intervention will work.
Moving together, these two agencies can resurrect King Dollar and snuff out inflation fears. These fears have helped boost the price of oil and retail gas at the pump. But there’s a second factor at work in energy. The U.S. and world economies are starting to rise. This leads to drill, drill, drill. Onshore and offshore drilling restrictions for oil and natural gas have to be removed. Deregulate the energy sector. Open the door to nuclear power. Drill the shale regions for natural gas.
Exploration has dried up in the new Obama environment, which is so very anti-fossil-fuel and anti-nuke. If we are going to power our way to economic growth, fossil fuels and nuclear energy have to play key roles. Alternative-fuel technologies may grow up, but that’s gonna take several decades. Right now they’re about 2 percent of our power. That’s all. And the idea that cap-and-trade can be implemented without taking a huge toll on the economy is an Obama hallucination. Cap-and-trade would severely limit economic growth by knocking out fossil fuels. Right now, the jump in retail gas prices could really hurt the nascent economic recovery.
In short, King Dollar and drill, drill, drill would be major pro-growth measures. Why not show the rest of the world that the U.S. can move from a position of strength rather than weakness?
Drill, Drill, Drill: An Interview with Sen. Mary Landrieu (D., La.) [Larry Kudlow]
Senator Landrieu agrees with me on drill, drill, drill. She’s on the right side of this issue, with retail gas prices rising at the pump to $2.62. That’s up from $1.60 at the beginning of the year. The Conrad amendment will open up the Eastern Gulf for drilling. It’s a good start. But the White House and congressional Democrats will stand in the way. I give a lot of credit to Sen. Landrieu for hanging in there on this issue. Here’s my interview with the senator from last night’s Kudlow Report:
LARRY KUDLOW: Senator Landrieu, welcome back.
SEN. MARY LANDRIEU: Thank you Larry, happy to be back.
KUDLOW: All right, we appreciate your time. Now as you know, though gasoline prices are way down from last year’s $4 dollars at retail, today according to AAA, they’re $2.60. They were $1.60 at the end of the year. Some folks are saying this could hurt recovery, that it’s a tax hike. It could raise inflation. What is Congress going to do about this? And isn’t it time to drill, drill, drill?
LANDRIEU: Larry, it absolutely is. These prices are going north, and pretty quickly, and alarmingly because we’re trying to recover. And one thing we could do is drill more here in the United States. Not just for oil and gas, that’s important, and also reach for alternative fuels. But on the drilling issue, you’ve been right on this for a long time. And today we had a very important vote on the energy committee. We opened up a large section of the Gulf which is good, but we did not include revenue sharing which in the long run will not encourage states to drill offshore. And there are lots of resources there.
KUDLOW: How much is this revenue sharing [issue] going to be a sticking point to possible legislation? I mean, I think opening up the Gulf, or the Eastern Gulf, is a terrific idea, at least as a partial solution. How much of the revenue sharing is going to stand alone as a problem?
LANDRIEU: Well actually, it could be a help Larry, in the long run. Because as you know part of the reason that we don’t have a lot of offshore drilling right now in America, although we have a lot of gas, and a lot of oil off our coast we believe, is because there’s really no reason for the states, the coastal states to engage in drilling. They don’t get any direct benefit. They get indirect benefit, it helps the nation. But they don’t get any direct benefit, unlike the interior states that keep 50 percent of their revenues. So I think it’s an important partnership for production. We hope to open up drilling on the eastern seaboard in some places. We hope to open up the Eastern Gulf. But you know Larry, what we did today will open up the Destin Dome, which has 3 trillion cubic feet of gas at $10 a cubic foot. That is not small change. It’s $30 billion of value. So it’s important that the companies get a share of that, that drill. The state of Florida and the Gulf Coast states should share. And then the Treasury for deficit reduction. It makes a lot of sense to me.
KUDLOW: What are you going to do — the ban on drilling expired last September 30th if my memory serves me. Where does that stand now? Is that ban still banned and does that open the door for the kind of offshore drilling you’re talking about?
LANDRIEU: Larry, the ban is still banned. But the door is opening just an inch. And in fact, about two or three weeks ago, the door was actually slammed shut by a very bad, very detrimental opinion in the DC Court that basically threw our current 5-year drilling plan into limbo. So we’re not moving forward Larry, we’re moving backwards. And the way to move forward again is to continue to present partnerships with the states for drilling. If Florida opens drilling, or North Carolina, or Virginia, let them share in the revenue. Then take that revenue, invest in energy infrastructure, invest in the coasts. Give some of those coastal communities a share of this money and it will benefit the whole nation and we’ll get more oil and gas.
KUDLOW: Well cut a deal, it’ll probably be cheaper for the taxpayers…
LANDRIEU: Absolutely.
KUDLOW: …than bailing out those states anyway. Let me ask you though, I mean it’s a very interesting thing. Oil prices on the world market are now back to $70. They were up $2 bucks today as I’m sure you know. But natural gas prices are real cheap. $3.76. That’s a 19:1 ratio, it’s very interesting. Why not go the Boone Pickens route? He wants to develop natural gas everywhere, liquefy it, turn it into fuel for those big 18-wheelers. He wants to lift the drilling restrictions. He wants to lift the refining restrictions for heavens sake. And lift the shale restrictions. Isn’t this part of the problem? If we put more oil and natural gas on the open market, those prices are going to fall and motorists and consumers are going to be helped.
LANDRIEU: Absolutely, I agree with you 100 percent. And I agree with Boone Pickens on many of his points, but I would just raise this caution. We don’t want to Larry, in America, be over reliant on any one fuel. We want more of it all. We need more oil. We need more gas. We need to develop solar and wind. But in the right way. And so what I cautioned Boone Pickens about, and I have had this discussion with him personally, we don’t want America to be overly dependent on natural gas. We have many resources that we can use, even though I’m a big proponent of drilling. So let’s, you know, let’s go forward with our brains and our heart, and I think we can.
KUDLOW: Well the other thing is refiners aren’t refining. I mean there’s all kinds of restrictions about refining…
LANDRIEU: Yes.
KUDLOW: …It seems to me that’s got to be changed. And I want to ask you Senator Landrieu, will you be voting against the tax hike on oil and gas? I can’t imagine how a tax hike on oil and gas is going to encourage anybody to produce, invest and explore.
LANDRIEU: Absolutely. I will be not only voting against it, but I am lobbying against it. I am doing everything I can to convince this administration that they’re wrong. We don’t want to discourage energy production. We want to encourage it, as well as new production, wind and solar. But you don’t want to step on the traditional industry that is doing everything it can to produce energy, despite the fact that Congress keeps putting bans, keeps raising taxes. We’ve got to reverse our policies. You know, President Obama has an opportunity. I hope that he will take it.
KUDLOW: But has not — last question Senator — has not President Obama really tilted the playing field against this? I mean he seems to be opposed to drilling — whether it’s oil, whether it’s natural gas, whether it’s shale. He’s ruling out nuclear because he hasn’t funded the Yucca mountain nuclear waste disposal. And I wonder, has the White House weighed in on this bill from the energy committee that’s going to open up the Eastern Gulf?
LANDRIEU: They have not weighed in yet. But again, I remain hopeful. You’re right. President Obama’s team out of the box has not looked good on these issues. But they have time to adjust. And we’re hoping they will. I am against the taxes on oil and gas. I think the President will hear those objections, not just from me, but from many. I think the President wants to be open to nuclear and to find a way to dispose of this waste. Even if we don’t do Yucca, Larry, there are other ways that we can take care of that waste. I think the President has made it clear that he wants a goal of energy independence. And one more thing Larry, one of the guys you should interview, he’s a great guy on this, is Ken Salazar. Secretary of Interior.
KUDLOW: Mmm-hmm. We’ve talked to him.
LANDRIEU: [He’s] very balanced, wants America to be energy secure. And I think he knows it can’t be done without oil and gas, as well as alternative fuels. So let’s keep talking.
KUDLOW: All right, we’ll go after him. Drill, drill, drill.
Summers vs. Bernanke? I’d Take Summers [Larry Kudlow]
The New York Times ran a front-page story today on personal tensions between Larry Summers and other top Obama economic advisors. Parsing through it, it looks like Austan Goolsbee, who argued against the Chrysler bailout, has the cheekiest relationship with Summers. Christina Romer takes a shot at Summers. Geithner does not, though the Treasury man says he’s not afraid to push back against the former Clinton Treasury official and Harvard president.
It’s hard to know what to make of stories like this. Conceivably, White House chief of staff Rahm Emanuel planted it as a Summers put-down, because the latter is getting too powerful. But I truly do not know the meaning of this part of the story. In the Reagan days we had plenty of internal economic tensions, which I think are good for policymakers — not bad.
But the most interesting part of the Times story, at least to me, is the speculation about Summers vs. Bernanke. With Bernanke’s term expiring in January 2010, President Obama will make a decision about the Fed head before year-end.
So given the choice between those two, who do I like? Well, meaning no disrespect to Mr. Bernanke, I think I’ll go out on a limb and choose Summers. Why? Because during the Clinton years, when Summers held several Treasury posts (including Treasury secretary), a strong-dollar policy was in place. Back then I called it King Dollar. And I frequently praised Robert Rubin and Larry Summers for backing King Dollar.
And since I believe in a price-rule approach to Fed policy, where the dollar should be stable and the Fed head should watch open-market prices such as the dollar, gold, and commodities in order to promote price stability and economic growth, Larry Summers’s résumé as a Clinton-Rubin alumnus is closer to my liking.
And in terms of Mr. Summers’s so-called prickly personality, that might be an excellent credential for a truly independent Fed chairman. Paul Volcker had a prickly personality, but he was the inflation slayer (with Ronald Reagan’s help).
Ben Bernanke, on the other hand, seems to be targeting the unemployment rate, and he has never given much emphasis to a stable dollar as a key Fed-policy variable. Right now the bond markets are pricing in five or six Fed tightening moves as the economy shifts toward recovery. And at least until recently, the dollar was soft and gold was strong. But if Mr. Bernanke targets the unemployment rate, the Fed will overstay its easy-money welcome and inflation will shoot up in the years ahead.
Now, I can’t be sure that Summers would stick to a dollar-related price rule. But if history is any guide, he might. Of course, I can think of some other names that I would prefer to take over the Fed: Robert Mundell, Steve Forbes, Art Laffer, David Malpass. There’s even the late Milton Friedman, who after all said a computer should run the Fed.
A quick programming announcement for all of you Twitter fans out there in cyperspace: Yours truly, Larry Kudlow, is now officially on Twitter. You can now follow all of my latest pithy thoughts, Kudlow Report updates, and more throughout the day at @larry_kudlow. I’ll be Tweeting away.
Isn’t it fascinating that stocks rallied over 200 points today, despite Obama’s command-and-control government takeover of General Motors? I think it’s because GM’s old-economy operation is yesterday’s story. The new economy doesn’t need GM. We’re only talking about 25,000 employees left in the car company’s domestic operation. Compare that to the millions of workers at new-economy companies like Intel, Microsoft, Cisco, Wal-Mart, Home Depot, Apple, and on and on.
Obama’s so-called GM rescue is a needless intrusion at huge taxpayer expense, and a political payoff to the union movement that helped elect him. And the central-planning mandate to produce little green cars at a domestic plant almost guarantees that taxpayers will never get their money back. Apparently GM cannot make these little green cars in China or Mexico and then have them shipped back to the U.S. for assembly and sale.
And we do not know the total compensation per hour for UAW workers — both salary and benefits — under the new agreement. That number hasn’t been published. So we can’t compare it to the compensation figures of the foreign transplants in order to measure competitiveness.
The U.S. now owns a whole portfolio of companies — AIG, Citi, Fan, Fred, and now GM. The long arm of the government has never reached deeper into the private sector. I have no doubt that American entrepreneurs could produce great cars if they weren’t saddled with greenie regulations and outsized union compensation levels. That’s why the preferred route here would have been a real Chapter 11 bankruptcy, where GM assets could have been taken over by someone like Wilbur Ross, who would then bring in the best and brightest to make great cars and trucks.
Rasmussen reports that only 21 percent favor the GM bailout plan while 67 percent oppose it. And only 18 percent favor a national sales tax to pay for Bailout Nation, national health care, and who knows what else, while 68 percent oppose a VAT tax.
By the way, 62 percent say Bush, not Obama, should be blamed for the economy. Most regrettably, it was W. who launched Bailout Nation in the last months of his administration.
But new statistics showing economic recovery is on the way provided the much bigger news for stocks today. The ISM manufacturing index rose for the fifth-straight month. And the new-orders component moved to 51.1 — an actual recovery. Meanwhile, private construction surged in April by 1.4 percent. That includes a 0.7 percent monthly gain for housing and a huge 1.8 percent increase for commercial building — the third-straight monthly rise. China’s manufacturing index gained, too, showing the third-straight month above 50. That’s a big recovery signal.
These are the things stocks are looking at. All that Fed pump-priming, plus some old-fashioned Keynesian stimulus, is moving us into some kind of economic recovery.
We are still a free-market economy. Even though Team Obama is moving the wrong way on a number of fronts, there still is room for American entrepreneurship and technological advances. This GM thing really is yesterday’s story.
In an interview that aired on the Kudlow Report last night, Dick Cheney told me that Obama’s big-government-bailout-nation-TARP-GM rescue efforts were a big mistake. He compared them to Nixon’s wage-and-price controls. He also inferred that former Treasury Secretary Henry Paulson drove the process, not the White House. And Mr. Cheney himself totally opposed the GM bailout. He also welcomed Colin Powell back inside the GOP tent, but with strict conditions. And he said that Team Obama is totally nuts to de-fund the missile-defense program in the face of North Korean nuclear developments. Here’s the complete transcript:
LARRY KUDLOW: Mr. Vice President, welcome back to the Kudlow Report.
FORMER VICE PRESIDENT DICK CHENEY: Well, it’s good to see you again, Larry.
KUDLOW: Thank you, sir. Let me begin. I want to talk about the economy and business and perhaps we’ll get to the foreign policy troubles in the back end. Despite a torrent of conservative criticism over President Obama’s economic policies, there are, nonetheless, unmistakable signs of economic recovery. In fact, in the news this morning, we had home sales rising. We’ve had leading indicators rising, we’ve had better credit spreads. The stock market is up about 35 percent from its lows in early March. Let me ask you, sir, is there an economic recovery out there in your view?
CHENEY: Well, Larry, I’m reluctant to tell an economist what’s going on in the economy.
KUDLOW: It never stopped you in the past.
CHENEY: Well, that’s true. It never stopped me before. No, I’ve always been impressed with the tremendous resilience of the American economy. I think over the years, over the decades, it’s demonstrated this tremendous ability to take severe body blows, if you will, and bounce back. And I think what we’re seeing here at some point the recession’s going to end, at some point we’re going to enter into recovery, and I think I see, as you do, some signs out there that are positive. I follow the stock market, home sales and unemployment numbers and so forth, and they all seem to indicate that we’re — if we aren’t at the bottom, we’re getting close.
KUDLOW: All right. Will President Obama, therefore, get credit? Again, with the barrage of criticism coming from conservatives and so forth, if there is an economic recovery, isn’t he going to get a lot of credit for it? Isn’t that going to be a very powerful political plus for him? Regardless of causality, nonetheless, that’s the way this game works, does it not?
CHENEY: Well, I think that’s the way it’s worked in the past, to some extent, but I — the thing I’m concerned about and the thing that I think ultimately is the most important set of issues or concerns, if you will, in terms of how this economy’s being managed is what the long-term consequences are of the policies that have been put in place by the Obama administration. And we have short-term swings in the economy. I have, you know, if the economy turns up now, we come out of the recession, that’s fine, it’s all to the good. I hope that happens and, if he had something to do with it, he deserves some of the political credit for it. The problem — the big problem I have, though, is that I think the recession we’ve been through is being used by the administration in ways that fundamentally change the relationship between government and the private sector. That’s what worries me most.
KUDLOW: You know, this business of unprecedented interference in the private sector, as you’ve just described, I mean, we can walk through the issues. Basically, the government’s going to own General Motors. Some people call it Government Motors, that’s a big story on the front pages today. They’re going to take 70 percent of the new General Motors. The government already owns AIG. The government owns Fannie Mae. The government owns Freddie Mac. There’s a lot of discussion about the government interfering, intervening in the tax-free municipal bond market to help states run money. Mr. Obama himself told C-SPAN over the weekend, in an interview, that the U.S. was out of money because of the unprecedented spending and borrowing. Now, is that what you’re referring to? And I want to be direct here, some conservatives say Mr. Obama is a socialist or a socialist-light, and he’s running socialist type policies. Do you agree with that criticism?
CHENEY: Well, I agree with the criticism without using the labels. I don’t want to get into trying to label President Obama. He’s our president. At this point, he’s the only one we’ve got. He won the election, and he obviously is entitled to pursue those policies that he wants to pursue. My concern is that we entered this period with a big, big problem, with the whole area of entitlements, Social Security, Medicare, the expectation that we were going to run out of money not too far down the road in terms of keeping those basic commitments. Nobody even talks about that anymore. And what we’ve been seeing, though, and what’s been advocated by the president and what looks to be in store if he’s successful is that we’re seeing a vast expansion, not only the power of the federal government over the private sector, but also in terms of spending. Massive, massive amounts of new spending and presumably new taxes to pay for it that I think will do fundamental, long-term damage to the country. And I do think it’s a more liberal agenda, if you will, than any in recent memory.
KUDLOW: But, in truth, isn’t it fair to say that many of these policies, central planning policies, command and control interference policies, whether it’s socialism-light or European market social kinds of policies, they really began under the Bush-Cheney administration, did they not? I mean, after all, Fannie Mae and Freddie Mac are under government ownership 80 percent. That began under your administration. The first General Motors loan began under your administration. And, of course, the great TARP program to allegedly prop up the banking system, which has turned out to be partly bank ownership, we don’t know the last story on that. No one knows when TARP is going to ended. All these things really began under your administration. At what point President Bush, I believe, said we have to — we have to stop — we have to suspend free market capitalism in order to save free market capitalism. What’s your take on that? How much blame of this shift to the left do you think the Bush-Cheney administration bears?
CHENEY: Well, I would — I would bust it up into two segments, Larry. I think there’s no question but what the tail end of the Bush administration, Bush-Cheney administration, that we took steps specifically geared to try and free up the financial sector. There was the view reporting from economists, from the Fed, from Treasury and so forth that the credit system of the country had, in effect, frozen up or was close to it, and when you get into that kind of situation, the government is the only area of last resort with respect to trying to deal with those issues. You can’t fall back on the private sector and say, ‘You take care of the nation’s banking system.’ That’s a fundamental function of the government, the Federal Reserve, the Treasury and the FDIC, etc. All of those agencies have a major role to play there.
KUDLOW: But if I may...
CHENEY: If it’s not working, then the federal government has to deal with it.
KUDLOW: But did you anticipate the degree of government control over the banks? No question throwing a safety net from Federal Reserve liquidity was appropriate. I don’t think any economist left or right disagrees with that. On the other hand, what we’ve seen now is that this Congress has moved in to declare, for example, compensation and pay limits, repurchase agreements, dividend policies, merger and acquisition policies. You yourself know these things because you were a CEO of a big company once upon a time. Did you anticipate how Congress would move in to take control of the banks when you made these initial loans?
CHENEY: No, I don’t believe we did. I don’t recall any debate within the administration. There may have been some over at Treasury or someplace that focused on the extent of which government would try to control these institutions once they provided financing for them. You know, I’ve got experiences going back to the wage price controls in the Nixon administration where, in effect, we had what I think was a terrible mistake, in that case a Republican administration, where moved in and tried to control the wages, prices and profits of every enterprise in America. It was a huge mistake. We finally got out of it, but it took a long time to do it, and it does a lot of damage. One of the things we see now, you mentioned it, is the fact that government, in some cases Congress, in some cases the Obama administration, telling General Motors they’ve got to fire Rick Wagoner, making decisions that traditionally and historically have been made by the private sector.
KUDLOW: And running roughshod in the bankruptcy proceeding with Chrysler, running roughshod over the bond holders...
CHENEY: Mm-hmm.
KUDLOW: ...thereby abrogating contract rights. I mean, did you think, for example, when you made the first loan to GM and Chrysler, at the end of the administration, of your administration, did you think at that time the government would wind up owning 70 percent of General Motors? Some people are now calling it Government Motors.
CHENEY: Well, some of us at the time wanted GM to go bankrupt, go to Chapter 11.
KUDLOW: Were you in that camp?
CHENEY: I was. The decision was made that, in the final analysis, since our administration was almost over and a brand-new team was about to take over that the president wanted, in effect, not to take a step that wasn’t necessarily going to be followed by his successor, but rather to set up a situation which the new guys could address that issue and make a decision about what the long-term policy was going to be. And we came up with a short-term package, in effect, that got us through the — through the inauguration.
KUDLOW: What would you do differently now? Again, you, in some sense, I think a clear sense, that the Bush-Cheney administration laid the groundwork for this big government intervention. Mr. Obama is taking it further probably, perhaps, than you all might have, although one will never know. But what would you be doing differently right now?
CHENEY: Well, I think the budgets he submitted are way out of whack. I think what it does not only to the short-term deficit but long-term debt situation is very objectionable. I think the notion that we’re going to get up to a point where the debt equity ratio for the country’s going to be what, over 50 percent, 60 percent? I’ve seen even 80 percent at the end of a 10-year period of time.
KUDLOW: Some people are worried the United States is going to lose its AAA credit rating.
CHENEY: Well, that’s got to be of concern. The last time that we had debt to equity ratios, or debt to GDP ratios was 1950...
KUDLOW: Yeah.
CHENEY: ...at the end of World War II after we’d fought a major war and obviously had major governmental obligations as a result of that. So I don’t hear anybody in the administration expressing concern over that massive growth in the national debt and what’s that going to mean long-term in terms of our currency, in terms of inflation.
KUDLOW: Is it going to lead to a general sales tax? Big story in the Washington Post this morning about talk of a national sales tax or a VAT, a value added tax, which will ultimately be brought in play — it’s a European-style tax — to finance all the spending and borrowing. Do you think there’s a VAT tax in America’s future?
CHENEY: I would hope not. We’re at a point now where to look at the levels of spending that are being contemplated, six hundred and some billion dollars, for example, in unfunded planning with respect to their medical reforms, somebody’s got to pay for that in some fashion. It’ll be paid for either by printing more money or raising taxes. He’s already talking about a set of policies that I think grossly undermine the notion that the way you grow the economy is to stimulate the private sector, to minimize government’s role in the private sector, to cut taxes as much as possible, to minimize the regulatory burden that the government imposes on the private sector. All of those principles that I think a lot of us believe in are now pretty much being ignored in favor of a much larger government, a much greater involvement in the society — you say ownership of General Motors, etc. — so that we’re seeing some very, very fundamental changes with the important political as well as economic consequences.
KUDLOW: Speaking of political, I guess you’re trying to outline a message for the Republican party here to limit government and limit taxation and so forth. You kind of took a shot at General Colin Powell the other day, said you didn’t know he was still a member of the Republican party. He responded to you by saying that you were mistaken. He is a member of the Republican party, and he regards himself a, quote, "Jack Kemp Republican," end quote. Could you react to what Mr. Powell is saying?
CHENEY: Well, we’re happy to have General Powell in the Republican party. I was asked a question about a dispute he was having, I think, with Rush Limbaugh, and I expressed the consent, the notion I had that he had already left since he endorsed Barack Obama for president. But I meant no offense to my former colleague. I wasn’t seeking to rearrange his political identity.
KUDLOW: So you welcome him back into the party.
CHENEY: We’re in the mode where we welcome everybody to the party. What I don’t want to do, in the course of trying to expand the overall size of the Republican party and expand our base, is to talk away from basic fundamental principles. I think it’s very important that we remind people out around the country what it is that we stand for, that we do believe in a strong national defense, in low taxes and limited government; and giving up on those principles, in order to try to appeal to people who are otherwise going to vote Democratic, seems to me is a — would be a fundamental defeat for those of us who are essentially conservative, who’ve been long-time supporters of the Republican party.
KUDLOW: Let me just in the remaining moments go back to another headline, unfortunately, and that is North Korea’s launching all these nuclear missile tests. Last evening they launched some more. I do know intelligence agencies may or may not have expected this barrage. What is your comment on this? And how in the world are we going to deal with North Korea, which has become a long-term and vexing problem?
CHENEY: It is one of the biggest problems out there today. It’s a difficult one that we dealt with, obviously, and the Obama administration’s now facing a major test. They’ve set off another nuclear device. They have been proliferators in the past, both of nuclear technology and missile technology. They did, of course, build a nuclear reactor in the Syrian desert designed to produce plutonium for the purposes of having Syrian nuclear weapons and that got shut down when the Israelis bombed it. The fact is the North Koreans are one of the worst operators in the world today, and you’ve got to find some way to change the course they’re on or they’re going to be a major threat. One of the things that I think is a wrong thing to do is, at this particular time, to cut our program for missile defense in the Defense Department. That’s more important than ever when you’ve got a rogue nation out there, like North Korea, that operates in accordance of a whole different set of standards than normal people do, with the possibility that they can ultimately deploy a weapon that could hit the United States.
KUDLOW: Why do you reckon that Secretary of Defense Gates, himself a Republican, served under numerous Republican administrations, is going along with this?
CHENEY: I don’t know. I haven’t talked to Bob about it. Bob stayed on because he was asked to stay on. I thought it was a good thing that he did continue in office, but, obviously, somebody made the decision and he’s supporting it to reduce the amount of money that we devote to missile defense. We’ve gotten a long way on missile defense. We know how to do it. We know how to take down incoming warheads, but we need to do a lot more work in order to be — to deploy a system that’ll defend the United States against those kinds of limited strikes that might be possible by a nuclear armed North Korea or Iran.
KUDLOW: Isn’t the absolute key at the end of the day China? And couldn’t the U.S., working together with China, essentially defund, definance what’s left of North Korea’s economy and stop the power flow into North Korea, just cut off their power all together? Beyond that seems like it’s more empty talk to me. UN conferences and resolutions seem to have virtually no meaning. Isn’t this China the key here?
CHENEY: I think it is. I think you’re absolutely right, Larry. The Chinese have got a long international border with North Korea. They have more commerce with North Korea than anybody else. They clearly are in a position, if anybody is, to try to put the screws to the North Korean economy to get them to change their behavior. So far, they’ve been willing to enter into the six party talks, but that’s about the end of it. There have been no real sanctions, no penalties imposed on North Korea for their past behavior. And every time they go through one of these cycles, then they go out and demand — the North Koreans demand more concessions in order to get — go back to the table again to resume the talks. But, through this process, we’ve had numerous missile tests, we’ve had now two tests of nuclear weapons in ’06 and then again now. We’ve had them building the reactor in Syria for the Syrians. These are probably today the worst proliferators in the world of nuclear weapons technology to rogue regimes or to terrorist-sponsored regimes.
KUDLOW: Is there’s one — final question — is there one piece of advice you would give President Obama right now to deal with this North Korean problem?
CHENEY: Well, going forward, I’d say insist upon the North Koreans keeping their commitments, and when you say you’re going to impose sanctions, impose sanctions, make them stick. And again you’ve got to work with the Chinese if you’re going to try to do this peacefully. I think you also need to emphasize the fact, and I think it is a fact, that — and this is an argument to be made with the Chinese as well as others in the region — that if the North Koreans are successful in deploying a significant nuclear capability, that others in the region who have the capability, the technical capability, are going to want to do the same. The Japanese are going to have to reconsider their no nukes policy. Taiwan could be in that camp, certainly South Korea. All of these states living in an area where you’ve got a North Korean government that has nuclear weapons and is as irresponsible as it has been for decades are going to have to reconsider what they require for their own security. China needs to understand that the whole region is likely to become less stable.
KUDLOW: Hm.
CHENEY: And I can’t believe that it’s in their interest to have any of those developments occur that ought to give the Chinese the incentive to work with us to get the North Koreans to stop.
KUDLOW: We’re going to have to leave it there. Mr. Vice President, I can’t thank you enough for this interview and I wish you all the best.
Everyone should closely read today’s Washington Poststory on the value-added tax, or VAT. The cat is now out of the bag. For months I have argued that Team Obama and the Democratic Congress were going to be forced to consider a VAT in order to pay for their extravagant spending. Now borrowing almost 50 cents on every new dollar spent, the Democrats will at some point begin to deal with the politics of deficit reduction as a way of countering Republican criticisms about deficit expansion. And the VAT’s part of their answer.
Senate Budget Committee chair Kent Conrad calls the VAT “fundamental tax reform,” and he argues for a VAT plus high-end income-tax hikes. The WaPo story talks about a White House conference earlier in the year where “a roomful of tax experts pleaded with Treasury Secretary Timothy F. Geithner to consider a VAT.” Budget chief Peter Orszag hired prominent VAT supporter Ezekiel Emanuel — the brother of White House staff director Rahm Emanuel — as an adviser.
Of course, President Obama blew an even bigger budget hole into long-run planning with a cap-and-trade proposal that would exempt 85 percent of the tradable emissions warrants from any auctions. In other words, it’s a free lunch, making a bad idea even worse. But the Democrats are going to want to hang on to their massive increases in social-spending transfer payments, along with the big expansion of health care and who knows what else.
Now remember, this VAT tax would come on top of existing income, payroll, and business taxes. This is how the European countries and many others do it. And the VAT is a tax imposed throughout the economic food chain, at all levels of production, finally ending up inside the consumer pocketbook.
The VAT is a sure way to permanently depress economic growth. It’s also a sure way to Europeanize the American economy. But at some point, after the economy gains at least some cyclical economic-recovery traction, the Obama Democrats will want to re-label themselves as deficit-reduction fiscal hawks. Hence the VAT, a real bad idea.
My Commencement Address to Monmouth University in New Jersey [Larry Kudlow]
Here’s the footage of my commencement address to Monmouth University’s graduating class Wednesday where I received an honorary Doctorate of Laws. I delivered an optimistic message to the graduates who I exhorted to go out there and make their way in the world. There are opportunities galore in this great country of ours, as long as we keep it free. One man, one woman, can make a huge difference. I loved doing it. It was a great honor.
