Kudlow's Corner Money & Politics with Larry Kudlow


  Tuesday, 25 Mar 2008 | 10:13 AM ET

Ben Bernanke Is My Kind of Guy

Posted By: Larry Kudlow

The Fed’s rebate is about three-times bigger than what Uncle Sam is promising.

I have really learned to like Ben Bernanke. He’s the man. And his interest-rate cuts are vastly more effective than the so-called economic-stimulus rebate plan coming out of Congress and the White House.

Why do I say this? Simple. I just got my latest adjustable-rate mortgage statement from the bank. When I originally refinanced this loan, it was 5.75 percent. And last summer my ARM soared to 8.25 percent. But guess what? Through February it has round-tripped all the way back to 6 percent.

So I’m now saving $2,000 a month, or $24,000 a year, because Gentle Ben has slashed the fed funds target rate to 2.25 percent from 5.25 percent last fall.

He’s my kind of guy. And you know what else? I’m not even getting a tax rebate from Washington. I make too much money.

That’s the message I just got from the IRS. They sent me—and about 135 million other taxpaying households—a recent notice. As I thumb down this little letter I learn painfully that taxpayers with adjusted gross incomes of more than $75,000, or more than $150,000 if married and filing jointly, will have their rebate payments reduced or phased-out completely.

I showed this letter to my beautiful bride. We concluded that we’ll be phased-out completely.

By the way, this little IRS letter cost the taxpayers a cool $42 million. That’s right. The administrative expense of this “phased-out completely” IRS note is costing all of us 42 very, very large.

But who cares? Gentle Ben has come through with a wonderful windfall.

Incidentally, those of us whose rebates will be reduced or phased-out completely comprise the top 5 percent of taxpayers and pay 60 percent of all personal income taxes. In total, three-fifths of hard-working Americans will get little or nothing from the famous rebate. Doesn’t hardly seem fair, does it?

But like I said, who cares? The Fed has come through. And not just for upper-income earners, either.

I did some back-of-the-envelope calculating for so-called median-price homeowners. The latest news from the National Association of Realtors is that falling home prices are spurring at least a small increase in home sales. That’s called the free-market. When the price of something falls, we buy more of it. So as existing median home prices dropped again in February (they’re down 14 percent from the peak two years ago), home sales went up slightly, by 2.9 percent. Of course, home sales are still down 30 percent from the peak set in mid-2005. But the market is adjusting. And as it continues to do so, more and more people will purchase homes and realize their great American dream.

So right now the so-called median home price is $196,000, roughly back to 2004 levels. And it’s still about 60 percent higher than ten years ago. (Studies show homeowners generally don’t sell for about a decade, so I use ten years as the comparison.) But here’s where Gentle Ben comes in. A $196,000 home and a 10 percent equity down payment leaves $176,000 to be financed, perhaps with an adjustable-rate mortgage. And since the Fed slashed its target rate and LIBOR rates dropped roughly in sync, the owner of this median-price home is now saving $300 a month compared to last summer, or about $3,600 a year.

That’s a big rebate from the Fed. It’s about three-times bigger than what Uncle Sam is promising. The official IRS notice says the average married couple filing jointly may get $1,200. But Fed head Bernanke is giving median homeowners $2,400 more than that amount. A lot better, right?

Incidentally, all of Bernanke’s emergency machinations to fight the recession in housing and housing-related credit are starting to show very positive effects. Along with various new schemes to backstop the banking system and provide short-term lending help to banks and broker-dealers, many on Wall Street are coming around to the view that something called “systemic risk” is being reduced in the financial world. That includes all those lousy sub-prime securitized mortgages, along with various buyout loans and nasty things like collateralized debt obligations. Sharp-eyed Wall Street analyst Dick Bove puts it quite simply: The worst of the financial crisis may well be behind us.

This, in turn, has caused a big rally in stocks. On top of that, the value of the dollar on foreign-exchange markets is beginning to go up and the price of gold has plunged nearly $100. All this has moved longtime inflation bear Donald Luskin to suggest that the worst of the future-inflation threat may now be over.

So you know what? Let’s give this guy Bernanke a little credit. I think I may make him my new best friend.

»Read more
  Thursday, 20 Mar 2008 | 2:41 PM ET

Time for Some Treasury Dollar-Defense

Posted By: Larry Kudlow

With the dollar rising all of a sudden, and commodity prices plunging, this would be a great time for the Treasury to get out there and buy dollars. Totally squeeze the short sellers. Right now. Send a clear statement that the U.S. wants a stronger dollar. It would do a lot to reduce inflation expectations. And it would drive gold prices down $200 from here.

On the fifth anniversary of the Battle of Iraq, this kind of dollar defense would be a definitive statement that neither the United States nor its currency is weak. Folks betting against America would be proven wrong.

This would also be a great time for Sen. McCain, who is traveling overseas, to talk about a strong dollar — both for financial reasons and to promote American prestige. It would underscore that the U.S., despite its temporary economic slowdown, is not weak in any way.

The Fed helped the dollar and hurt commodities by its “less is more” policy decision Tuesday, where they cut the fed funds rate by 75 basis points instead of 100. They also devoted more attention to the inflation threat in their policy statement. Meanwhile, two Reserve Bank presidents — Dick Fisher in Dallas and Charlie Plosser in Philadelphia — dissented from the 75 basis point cut due to their concerns over inflation.

The Fed is coming to the end of the easing road. They are laying the groundwork for a sounder greenback. Now’s the time for the Treasury to come in and punctuate the change in Fed policy and commodity- and currency-market sentiment.

»Read more
  Thursday, 20 Mar 2008 | 1:07 PM ET

Why Not Optimism?

Posted By: Larry Kudlow

And by the way: Who you calling Hoover?

What exactly is wrong with an optimistic president who has confidence in the long-run future of the American economy?

President Bush took this stance in a recent interview with me and at the Economic Club of New York. He told me, “Like any free market, there’s also downturns, and we’re in one. But I am confident in the long-term strength of our economy.”

Optimism, after all, is one of the few levers our chief executive can use every day. By remaining optimistic, Bush is borrowing a page from Ronald Reagan, and rejecting a whole book of malaise from Jimmy Carter.

Bush is dealing with the housing and mortgage credit virus. But he will avoid anything that will doom future economic growth. He wants to stop overzealous regulatory legislation that will turn the U.S. back thirty years. And he won’t bow to tax hikes and trade protectionism. While the rest of the world is embracing free-market American-style capitalism, he won’t lurch left with big-government programs.

Home prices must adjust lower to end the housing downturn. And it’s precisely these lower prices that will allow young families to afford new homes. Prices may fall, but homes don’t go away. Markets, not government, are the best way to sort this out.

Bush gets all this. And yet he’s attacked for his free-market moorings. Liberal columnist Maureen Dowd says he’s “plum loco.” She and Sen. Charles Schumer call him the new Herbert Hoover.

But let’s take a closer look.

It was Hoover who signed the Smoot-Hawley trade-protectionism act and overturned the Coolidge-Mellon tax cuts. These disastrous measures — along with monetary contraction from a fledgling Federal Reserve — turned a recession into a depression. FDR didn’t help matters, either. His misbegotten tax hikes on successful earners and businesses, and his alphabet agencies to control the industrial and farming sectors, extended the depression and held unemployment near 20 percent.

Today, it’s the Hill-Bama Democrats who want to raise taxes on successful producers. And they want to turn protectionist by reopening NAFTA and stopping any new open-trade treaties. Schumer himself has spent years bashing China, threatening the nation with huge tariffs if its currency policies don’t conform to demands.

If anyone has resurrected the party of Hoover, it’s today’s Democrats. They’ve adopted pessimism as their national pastime, and want us to believe we’re already in a long and deep recession.

But not so fast.

The growing export sector is showing considerable strength. So are agriculture, energy, industrials, and international infrastructure. The e-forecasting economic service says GDP had a small gain in February and a positive reading of 1.5 percent over the past six months. The economy isn’t collapsing. And while it may be flat, there’s no deep recession.

Hooveresque monetary contraction? It’s not there, either. After numerous Fed easing moves, the three-month growth of the monetary base has shifted from minus-4 percent last December to plus-6 percent in mid-March. The broader M2 money supply has registered an 11 percent annual gain over the past three months.

Inflation remains a worry. And despite dissenting votes by Reserve Bank presidents in Dallas and Philadelphia, the Fed slashed its target rate by 75 basis points this week. But the Fed’s statement put a greater emphasis on inflation — which has risen to 4.5 percent — and the inflation-sensitive gold price dropped $65 on the news.

Big inflations cause deep recessions, and hopefully the central bank is moving back toward price stability. In fact, now would be a perfect time for the Treasury to publicly support a stronger dollar, and to conduct some dollar diplomacy with the G7 nations to defend the greenback.

On the housing-credit front, University of Michigan economist Mark Perry, using data from the Mortgage Bankers Association, points out that of the 46 million mortgages outstanding, only 2.04 percent were in the foreclosure process in last year’s fourth quarter. And most of those were confined to Nevada, Florida, Michigan, and Indiana.

Meanwhile, commercial mortgage delinquencies ended 2007 near record lows. And get this: Over the past year bank loans to businesses have grown by $250 billion. During the credit crunch of the early 1990s, these loans fell by $60 billion. Believe it or not, credit is still available, even to small businesses.

In the stock market, the best-performing sectors since the January 22 bottom have been transports (trucking and railroads), basic materials, energy, and industrials. These economic-sensitive areas point to a solid near-term pickup in economic growth.

Even John McCain is picking up. New polls from Zogby and Rasmussen give him a 6 to 8 point lead over Hill-Bama — a nod to Reagan-Bush pro-growth policies instead of high-tax, protectionist big-government from the Democrats.

So I’m glad President Bush is taking an optimistic view. That’s called leadership.

»Read more
  Thursday, 20 Mar 2008 | 12:59 PM ET

McCain Surges Ahead

Posted By: Larry Kudlow

Has anyone noticed that John McCain is surging in the polls? According to the latest print from Rasmussen and Zogby, McCain now holds a 6 to 8 point lead against Hill-Bama. And I doubt that Senator Obama’s speech Tuesday will change anything. It was nothing more than a non-denial denial of his fidelity to Reverend Jeremiah Wright and Wright’s hard-left anti-American agenda.

(For those interested in especially good commentary on Obama’s speech, I suggest reading Ronald Kessler’s piece over at Newsmax, as well as the editorial in Investor Business Daily. Both have insightful critiques.)

McCain’s surge means that it is much less likely that Herbert Hoover-style high-tax and trade-protectionist proposals will come from Hill-Bama. This point will not be lost on the stock market.

And what about Congress? Well, there’s a good article by John Gizzi in Human Events suggesting that Republicans will actually pick up seats in the House this November. According to Oklahoma Republican Tom Cole, chairman of the Republican Congressional Committee, 61 House Democrats are running in districts that President Bush carried in 2004, while only 8 Republicans are running in districts carried by John Kerry.

What’s more, of the twenty-five districts in which the Democrat was last elected with less than 55 percent of the vote — historically a sign of vulnerability — all but eight are districts carried by Bush.

The current breakdown in the House is 231 Democrats and 198 Republicans, with 2 vacant seats formerly held by Democrats and 4 vacant seats formerly in GOP hands. 218 would constitute a majority. So, if my math is right, the GOP would need a 20-seat pickup this November to carry the House. It doesn’t seem a likely outcome according to nearly all the pundits. But, then again, pundits continue to underestimate the strength of John McCain at the head of the GOP ticket.

According to the latest Zogby poll, McCain scores 46 to 40 percent against Obama. Just last month it was 47 to 40 — in Obama’s favor! That’s a huge turnaround, undoubtedly traceable to Obama’s recent problems with his pal Reverend Wright. As for Sen. Clinton, Zogby also shows McCain leading, 48 to 40. In Rasmussen’s daily Presidential Tracking Poll, McCain leads Obama 48-42, and Clinton 49-43.

If and when Sen. McCain moves to 50 percent or better in these polls, it would be a true sign of electoral strength. It would lift spirits for a strong GOP showing in the House and Senate. And, as I mentioned earlier, the chances of Hoover-like high-tax and trade-protectionist policies — which would be inimical to economic growth and devastating to the stock market — grow slimmer and slimmer.

That’s good news.

»Read more
  Thursday, 20 Mar 2008 | 12:53 PM ET

Laffer Curve Tutorial - Part III

Posted By: Larry Kudlow

Here's the third and final installment in the Laffer Curve video series. It explains why lawmakers need to ditch their dreadful static scoring model when it comes to the revenue-estimating process, in favor of the more accurate dynamic scoring model.

Unfortunately, Congress's revenue-estimating process is still based on the preposterous theory that changes in tax policy don't affect economic growth. Huh? In other words, the current system assumes the Laffer Curve doesn't exist. This of course leads to a bias for tax increases and against tax cuts. Hello Hill-Bama...

»Read more
  Tuesday, 18 Mar 2008 | 10:21 AM ET

Was Bear Stearns the Sacrificial Lamb?

Posted By: Larry Kudlow

Did Bear Stearns really need to go down in flames? It’s a question that needs to be asked, and my answer is no.

Of course, I don’t know the value of Bear Stearns’ assets, and whether they could have served as collateral for private or government loans. So I cannot be entirely certain that my answer is correct. But here’s how I see it:

Since the elimination of the Glass-Steagall Act in 1999 -- a move that broke down the wall separating commercial and investment banks that had existed since the 1930s -- the Federal Reserve never changed its discount lending policies. In other words, until Sunday night, when Bear Stearns was already destined for the dustbin, the Fed was able to make loans to commercial banks like JPMorgan Chase , but not directly to brokers like Bear Stearns.

Throughout the credit crisis, which dates back to last summer, the Fed’s discount lending to banks was supposed to trickle down to brokers. But it never really did. Big banks either horded their cash or spent it for their own various purposes. As one Bear Stearns official noted to me, this is the first credit and lending crisis since the end of Glass-Steagall. And the consequences for Bear Stearns were catastrophic. While the Fed announced a $200 billion auction lending facility for both banks and brokers last Tuesday, that facility won’t be activated for a couple more weeks. So no help there.

But if the Fed had changed its discount polices to reflect the post-Glass-Steagall era, Bear Stearns could have accessed short-term Fed loans, even for a few days. That could have made all the difference in the world.

Watching the venerable old firm pawned off to JPMorgan Chase for a couple hundred million bucks -- basically a bag of peanuts -- is painful to me. The building itself is worth at least $1.5 billion. And even though Bear made big mistakes with sub-prime hedge funds, the firm is chock full of talent and brainpower. Down through the years, the smart people at Bear were able to avoid numerous financial difficulties while helping the firm stay profitable. Bear alumni are scattered everywhere, as successful investment bankers, broker-dealers, and financial advisors.

And yes, even one TV broadcaster. I served two stints at Bear Stearns, as chief economist and partner. I was there from 1978 to 1980, before heading to Washington to work for President Reagan. I was there again between 1986 and 1994, after which I resigned for difficult personal reasons.

But I won’t let my personal involvement with Bear cloud my judgment of recent events: In waiting so many years to revise its discount policies in a manner consistent with congressional legislation, the Fed is guilty of a serious policy error.

All of this kind of makes me wonder whether Bear Stearns wasn’t some kind of sacrificial lamb. Did government policy makers hope to convince the public that a big Wall Street firm could indeed fail? Or wouldn’t be bailed out? Listen, they were buried, not bailed out.

The fact is, Bear shareholders got creamed with the $2 per share purchase price. The shareholders include all the men and women who’ve worked there for years, and who own roughly one-third of the firm’s equity.

I applaud the Fed for backstopping the financial system and preventing a run on the whole banking sector. That’s what it’s there to do. Treasury Secretary Paulson said repeatedly, “the government is prepared to do what it takes to maintain the stability of our financial system.” He is absolutely right. So is President Bush, who said “we’ve taken strong and decisive action in challenging times,” adding that “in the long run our economy is going to be fine.”

While the media is trying to make pessimism our new national pastime, the president is right. The U.S. has faced numerous credit crunches down through the years and the free-market economy has survived very well.

What’s more, while the usual clamor for more government action is coming out of Washington, let’s not forget that it’s the private sector that drives our great economy towards success. Prosperity-killing actions from Washington, like tax hikes, trade protectionism, or massive over-regulation, would certainly stunt the long-run health of the economy.

Ultimately, market prices in the housing sector must adjust. That is the only viable solution. And while some families will be forced to become renters, other families will have a chance to purchase a new home at affordable prices. Capitalism is all about winners and losers, and it’s the market that must drive the adjustment, not the government.

And for all the disappointed Bear Stearns partners out there, including the many families and friends that I know well, hold your heads up high. Better days are coming.

»Read more
  Friday, 14 Mar 2008 | 10:10 AM ET

Are Paulson and Bush on the Same Dollar Page?

Posted By: Larry Kudlow

Is there a rift between the White House and the Treasury on U.S. dollar policy?

»Read more
  Thursday, 13 Mar 2008 | 10:24 AM ET

The $436 Billion Dollar Solution

Posted By: Larry Kudlow

Here’s a table showingexactly what the Fed did Tuesday,and how much they have already done.

Tuesday was the central bank's $200 billion dollar announcement. This is the Term Security Lending Facility (TSLF). Prior to this move, we had the $100 billion dollar, so-called Term Auction Facility (TAF). There's also the $100 billion dollar term RPs (roughly one-month, but it can be rolled over.) And finally, the Fed announced $36 billion in currency swaps with foreign central banks. (They may save the U.S. dollar, before we save it ourselves).

The grand total is $436 billion dollars. That’s a nice chunk of change.

Here’s the key in all this: So far as I can determine, none of this liquidity is expanding the Fed’s balance sheet. They’re actually doing this quite cleverly. They are not expanding reserve back credit. They’re not expanding the monetary base. They’ve “sterilized” part of this, and the rest of this is just a bunch of swap agreements.

»Read more
  Wednesday, 12 Mar 2008 | 5:30 PM ET

'A Disaster for the Democratic Party'

Posted By: Larry Kudlow

Democratic Strategist Bob Shrum had strong words on last night’s show about the Hillary Clinton camp’s relentless attacks on Obama. The latest attack of course, came from Hillary-supporter Geraldine Ferraro -- Walter Mondale’s 1984 vice-presidential running mate.

Shrum thinks Democrats are courting disaster. I agree. Democrats are hopelessly divided. My take? John McCain winds up walking away with 20 percent of the Democratic vote come Election Day. (Come to think of it, 20 percent might actually be a bit too conservative.)

Here's what Mr. Shrum had to say:

I used to work for Geraldine Ferraro. I like her a lot. But I think the comments were way off base.

"I think alternatively you could say, if Barack Obama had been born white, to a very wealthy family in this country, and had gone to Columbia and Harvard Law School, he’d be exactly where he is today. I just think all of this is a disaster for the Democratic Party.

"Race has been injected way too much in this campaign. Going all the way back to [Hillary Clinton's New Hampshire Co-Chair] Billy Shaheen in New Hampshire. Going [back to Hillary Clinton’s chief strategist] Mark Penn talking about cocaine on television.

"All of this is a disaster. It’s a disaster in terms of the loyalty of African-American voters, if Hillary Clinton wins the nomination. It’s a disaster if she loses the nomination, because she’s doing great damage to Barack Obama in the process.”

»Read more
  Wednesday, 12 Mar 2008 | 4:04 PM ET

Fed Rescue: Game Changer or 1-Day Wonder?

Posted By: Larry Kudlow

Yesterday marked the Federal Reserve’s largest liquidity injection yet to banks and brokers. The Fed announcement produced Wall Street’s best day in five years . The Dow rocketed over 400 points. Stocks rallied around the world. The key question now becomes whether or not the news is a real game-changer or a one-day wonder. Here is some interesting stock market and economic insight on all this from last night’s Kudlow & Company.

Andy Busch, global FX strategist at BMO Capital Markets:
The Fed action [Tuesday was] a very good thing. They needed to relieve part of this credit crunch in the repo market. You and I have talked about this before, it’s a very good thing. And I’m happy that the Fed did it. Obviously, the stock market is extremely happy. [But it doesn’t yet change fundamentals.]

The key structure that’s underlying these markets is home prices. That’s the key thing that hasn’t changed yet. We haven’t seen home prices stop falling. But they’re getting close. I feel that in the next 2 or 3 months, we’ll see that occur. [If we see that occur, it is bullish for stocks], absolutely. That is the key thing. For all these ABS, mortgage-backed securities, the underlying security underneath these things is home prices. And if that stabilizes, then that gives us some sure footing where we can evaluate these securities and feel confident that we know what their prices are—and therefore all the companies that own this stuff…It does alleviate a major problem.

Don Luskin, chief investment officer at Trend Macro:
Well, [the Fed] finally did the right thing. I only wish they’d done it in August…[But] they finally figured out how to do it. They finally figured out how to convert the excess supply of mortgage-backed securities that nobody wants, into T-bills that everybody wants. It’s a beautiful, risk-bearing arbitrage. The Fed has created a bridge across the chasm of risk to bring cash to people who need it. To bring T-bills to people who need it. It’s just an amazingly brilliant thing.

The only problem is, this perfect treatment is being applied to a patient that’s already about three-quarters dead. So timing is everything, but at least they finally did it.

Stefan Abrams, managing partner at Bryden-Abrams Investment Management:
I don’t believe this is time to unzip your wallet. What the Fed has done today is a terrific step…better late than never. But until we see credit default swap prices down, spreads in the corporate market, spreads in the mortgage market, spreads in the junk bond market, until we begin to see a resumption of more normal -- and I won’t say totally normal -- but more normal lending practices, the stock market is still hostage to the credit markets…I think [investors should] take a long lunch hour. There’s no need to rush here.

»Read more

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