Exclusive Interview with Larry Kudlow - Part 2

Here's the second part to a two-part inteview with Larry Kudlow:

Chip Hanlon: That's right. We're back again. Thanks for joining me. Chip Hanlon here, exclusively at redcounty.com. And because of the nature of today's conversation, or specifically the guest himself, we'll also be broadcasting this at our sister website, greenfaucet.com. We're speaking, of course, with Larry Kudlow, in part two of our two part interview.

Again, we're thrilled to speaking with Larry Kudlow. As you know, this is part two. Larry, let's go into some issues of today. One of the big issues is the Federal Reserve, the Fed. Is it time that we should simply reassess the basics, like even the Fed's dual mandate?

Larry Kudlow: Well, look, I think that it would be great not to have a dual mandate, because I think the primary purpose of all monetary policy should be price stability and currency stability. And I believe market prices should guide the Fed, not the unemployment rate, or GDP stimulus, and I'd like to see gold in that calculation. I've always been a strong believer, not necessarily in the gold standard, but gold signaling when the Fed is too loose and too tight. And I do bond markets, and currency markets, and commodity markets.

But I think that, the last 10 years, we've seen a big change in the thinking of the Fed, even under the dual mandate, because, in the '80s and '90s, Volcker and Greenspan's first few terms, the argument was that a low, low inflation rate was essential to promote economic growth [Chip laughs], and I thought that was pretty good.

And, in fact, both Volcker and Greenspan kept a strong eye on gold and the dollar, for most of that period in the '80s and '90s.

When you get to the 2000s however, the argument changes and it becomes one of more monetary stimulus will promote economic growth, and we don't have to worry about inflation. And that's a huge change, and that's where Bernanke is today. And that's one of the reasons I'm so opposed to Bernanke's programs and policies.

And, on our show, we've been interviewing John Taylor of Taylor rule fame, which may not be the most perfect vehicle, but it's a good one. It's basically an inflation barometer.

He was right, in the 2000s and Bernanke was wrong. And Bernanke has been attacking Taylor and Taylor is pushing back. And all I would say, in respect to John Taylor's rule is to use these sensitive price indicators, like gold, to aid his Taylor rule.

I'm very unhappy with Bernanke and, frankly, I do not support him. I'd like to see John Taylor as Fed Chairman. I'd like to see Paul Volcker as Fed Chairman. I'd like to see Steve Forbes as Fed Chairman. I mean, I'm not a Bernanke fan.

Chip: Understood. And it's interesting. He won't take any blame for the current situation at all.

Larry: Right, which is just appalling.

Chip: Stunning.

Larry: His speech, two weeks ago, has been badly criticized by all sides, liberals and conservatives - it's interesting to me - the New York Times, Dean Baker, on the left of center, and then people like myself, on the right of center, and, of course, John Taylor. The idea that the Fed should duck culpability for what happened in the housing and commodity boom is nuts, just nuts. And it's something that I find alarming, because it tells me more of the same is coming, the next five years.

Chip: Right. So, from a bigger picture standpoint, something else that I find, I find alarming is, OK, so the Fed won't take blame for any of its past actions and it leads to a bigger narrative. And that is one that elected officials on the right don't seem very good at countering. And that is in the sell off, in the economic collapse, capitalism is what failed. And that the answer is more government. In fact, it's never well pointed out all the ways in which government was actually the prime driver leading up to the bust. How do we counter that?

Larry: I think the biggest culprit, in this whole financial meltdown and the prior bubble, was the Fed. I rate them number one. And number two, I rate government policies that promoted unaffordable mortgages and the financing of those by Fannie and Freddie. And you had housing, HUD, regulations that actually pinpointed low income mortgages, from Andrew Cuomo and others. So, yes. I mean, look, I think the banks made very bad mistakes managing risk, as it turns out, and that's the subject of these hearings that we're seeing today. Yes, and the banks were too highly leveraged and, in some cases, sold very bad products with very bad credit ratings attached to them.

But, to some extent, once the Fed starts bringing up easy money and negative real interest rates, for example... I mean, it's like parents leaving the house for a weekend to their kids [Chip laughs] and not locking the liquor closet [Chip laughs]. Or it's like throwing bloody, red meat into a bunch of sharks in the ocean.

So when the Fed kept rates too low and real rates negative, then to some extent the sharks on Wall Street did what you would expect them to do.

They structured products with massive leverage, and people were reaching for high yield instruments, and the fundamental credit, and the idea that housing prices could never fall, all that played in, much to their detriment, OK.

So, they were wrong, but in some sense they were a response function to bad government policies, both monetary and housing. I think that can not, I hope this commission deals with that. I suspect it will, because I know the Republicans will raise that.

Chip: So with regards to Republicans and the political landscape in 2010, it's shaping up pretty positively. Let me voice a small concern that I have, and tell me if I'm off base. It seems clear we're going to pick up a number of seats, and maybe we'll even pick up a House majority, largely in a protest of this administration and this Congress. I'm not certain, in fact, I'm convinced that on the Senate side, our own GOP leaders don't really understand the error of their own past, recent, free spending ways, and that if we do gain back the majority, it will be more as a result of Obama's, primarily his stumbles, then our return to our senses, fiscally.

If we get the majority back, are you convinced that it will be the answer, or will it be better than now, but still we'll have some folks in charge that really don't realize where they went wrong on the spending front.

Larry: Well, it will be better. I mean, you've got to restore some balance in Washington. Right now democratic reign is just tax, and spend, and regulate, and control the economy. I think that the public will want to rectify that imbalance by putting a bunch of Republicans in as a protest against Democratic policies, from Obama, to Reid, to Pelosi and Warner[?]. That's always the way these things work.

I do agree with you, though, the GOP is in the early stages. Hopefully they're listening to the Tea Party Movement, which fascinates me. I call them Free Market Populists, and I like what I'm hearing. It's funny, I interviewed this Marco, what's his name, Marco Rubin, or...

Chip: Rubio, in Florida, sure.
Larry: Rubio, from Florida, last night on the show, and he was very good. I think it's very important that the GOP go back to it's basic roots, which is, low tax rates, a strict limited control of government spending, and as few regulations as possible. I think it's very important, and I think they've got to go after things like, an exit strategy from Tarp, an exit strategy from bale outs, and things of that sort.

I think they've really got to be much tougher on low tax rates and moving towards a flat tax. Low tax rates on businesses, on business depreciation write offs, on middle income Americans, things like that, on capital investment.

It's very important that they renew the message that worked so well in the 80's, and at least much of the 90's. It's hard to speculate on this because I've spoken to many of them, they know this, and they haven't developed a coherent message yet.

I wouldn't be surprised, however, if sometime by the middle of this year, before the election, the Republicans don't have something that looks like a contract with America that is a reinstatement of basic supply side, or free market, or limited government principles.

They must do that, it's absolutely essential, not only for the midterms but also for 2012. You've got some good young leaders in there, you know, the Paul Ryan's of the world, or the John Kyl's of the world. Those guys are pretty good.

Chip: Pence.

Larry: I think they're beginning to understand how they blew it in the mid 2000's, and so hopefully they'll recover.

Chip: My understanding is, they are currently working on a new contract with America, even if they don't call it that, but it's my hope that it's not merely a marketing vehicle, that they actually believe it.

Larry: Well, and I've said to them, by the way, you're talking about Bernanke and the Fed, that one of those principles, one of those first principles for economic growth, should be a stable dollar. They've got to get that in there to prevent oil booms, or housing booms, or any of these speculative waves. It really is going back to the Regan principles, and I think if they do that, they'll really be able to move towards 2012 in a very, very strong, positive, political way. I think this year's going to turn out to be pretty darn good. That's my guess.

Chip: Again, we've been speaking, of course, with Larry Kudlow. Thanks again for joining us here exclusively at Red County, Larry.

Larry: All right Chip, thanks very much for having me.

Chip: And that does it for another edition of Last Call here at redcounty.com, exclusively, and again because we've been speaking with our very special guest, Larry Kudlow, we're playing the show at greenfaucet.com, as well. Thanks again to that special guest, and of course, you can catch the Kudlow report every night at seven p.m. Eastern, on CNBC. To learn more about Larry and his various activities online, in person, on TV, go to kudlow.com, kudlow.com. Thanks again for joining me. I'm Chip Hanlon with Red County.

 

 Click here to read the transcript to the first part of the interview.