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CNBC EXCLUSIVE: CNBC TRANSCRIPT: CNBC'S LARRY KUDLOW SITS DOWN WITH FORMER VICE PRESIDENT DICK CHENEY TODAY ON "THE KUDLOW REPORT" AT 7PM ET

WHEN: TODAY, WEDNESDAY, MAY 27TH AT 7PM ET

WHERE: CNBC'S "THE KUDLOW REPORT"

Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Former Vice President Dick Cheney tonight on CNBC's "The Kudlow Report" at 7PM ET.

All references must be sourced to CNBC's "The Kudlow Report."

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LARRY KUDLOW, host: 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?

Mr. 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.

Mr. 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?

Mr. 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 US 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?

Mr. 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?

Mr. 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...

Mr. 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?

Mr. 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...

Mr. 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 now calling it Government Motors.

Mr. CHENEY: Well, some of us at the time wanted GM to go bankrupt, go to Chapter 11.

KUDLOW: Were you in that camp?

Mr. 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?

Mr. 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.

Mr. 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.

Mr. 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?

Mr. 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?

Mr. 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.

Mr. 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?

Mr. 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?

Mr. 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 US, 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?

Mr. 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?

Mr. 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.

Mr. 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.

Mr. CHENEY: Well, it's good to see you again, Larry.

KUDLOW: Thank you, sir.

Mr. CHENEY: Good luck.



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