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Larry Kudlow reacts to the Romney speech, and criticizes Mike Huckabee’s fiscal policy

Friday, December 7, 2007
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HH: We’re now joined by Larry Kudlow of CNBC’s Kudlow & Company. Larry, Merry Christmas to you, I hope your holidays are off to a great start.

LK: And back to you, Hugh.

HH: Thank you. Now we’ve got a lot of ground to cover. You’re a devout Catholic. You’ve talked about your faith before. You care about your faith. What did you make of Romney’s speech yesterday?

LK: Absolutely superb. Absolutely superb. I mean, he just made a lot of very important statements, and I myself particularly liked his idea that religion and freedom must go together. I liked that a lot. And it’s not just religious freedom, which was one of his key points, but he basically acknowledged that we get our freedom from God. We must have a country of ethics and morality, and that comes from religion. But it is so essential that we are protected, and we are free to practice whatever religion we want. I think these were great points, and I think he scored a home run. I sense, I can’t prove this yet, but I sense that he rally increased his stature by making this speech.

HH: Now obviously, the Newsweek poll is out today that says he’s 22 points behind your guest this afternoon, Mike Huckabee. Fred Barnes disputes that, but it’s a dogfight in Iowa, though he’s clearly ahead in New Hampshire, which begins to vote on Monday by absentee. And the speech is certainly timed well there. What did you think of Mike Huckabee and your conversation today?

LK: Well, I’ll say this, I do think Romney’s in trouble, and I don’t know this precise polling, but I can tell you that the internal Romney polls, this is from Romney folks, you’ve probably heard this, Huckabee is getting 56% of the Evangelical vote in Iowa. Romney is all the way down to 16%. So clearly, there was a political motivation for his speech. And we don’t know if the hemorrhaging has stopped, but he is definitely hemorrhaging. Regarding Governor Huckabee, Governor Huckabee is a very interesting guy who is not running as the kind of traditional, free-trade, cut taxes, limit government, supply side conservative. He is not. And we walked through a whole bunch of things on trade and China and taxes, and also, he just blurted out CEO pay, which he violently disagrees with. And in fact, he said he would…he doesn’t want to regulate it, but he said at one point he would regulate CEO pay as a last resort.

HH: Oh.

LK: I thought that was very important. He’s very biased against China trade. He’s skeptical. He says the middle class is in trouble. He didn’t acknowledge the prosperity. I really asked him about today’s excellent jobs report, and the general prosperity we’re enjoying. He didn’t want to go there.

HH: You know, Larry, last night I watched Glen Beck as I was preparing to give a speech. I’m told it was a replay of a Huckabee interview. But what I heard last night, he was talking about the ruling class in America.

LK: Yeah.

HH: You know that’s populism, Huey Long yahooism.

LK: Yeah.

HH: That’s not the Republican Party.

LK: Nope. It’s interesting to me, because I mean, I said are you a pessimist, I say you sound pessimistic on the campaign trail. And he said I’m not a pessimist, I’m a realist. And I think he’s the only candidate, Hugh, who is acknowledging these middle class anxieties, almost reaching out to them. He doesn’t have a solution except to curb trade. But he’s really playing to that, in that sense, just like the Democrats are. And the thing is, you have to look at this in a serious vane, because he’s doing so well in the polls. I mean, it would seem that the more his message gets out, the better he’s doing. And I find that quite troubling, but I think that’s the reality. I’m going to look at the tape of my interview tonight, because as you know, it’s awfully hard when you’re on the spot, I’ve got producers in my ear…

HH: Right.

LK: And I want to look at the whole thing. I didn’t dwell on his sales tax hikes and all that in Arkansas, because he’s already answered those charges, and he’s been beaten up. I was interested in what his future policy was, and it’s very vague. The reality is his future policy is very vague.

HH: Now let’s get to the economics, Larry. We got a jobs report today. It’s a little bit weaker than people thought. Does the Fed cut next week?

LK: No, no, no, no. Better.

HH: Better? Was it more than 189,000?

LK: Well, 189,000 was the ADP survey.

HH: Right.

LK: The Street expected non-farm payrolls to come in at 80,000.

HH: Okay.

LK: And they came in above 90,000. And we had a 300,000 increase plus in household jobs. And unemployment stayed at 4.7%, wages at 3.8%. It’s really a very solid report, very solid report.

HH: Well then, does the Fed do a cut? And if so, how much?

LK: You know, I think the Fed will go for 25 basis points on the federal funds rate. They may drop the discount lending rate 50 basis points. But I would prefer they go the full 50 on the fed funds rate, because even though the economy is functioning pretty well, there’s a backup in these short-term credit markets, and the sub-prime issue is, I mean, commercial paper’s not functioning. The London inter-bank market is not functioning. And that is quite worrisome if it continues. That’s the one missing piece in this puzzle, and I think the Fed’s going to cover it. But I spent a lot of time this week trashing and bashing the idea that we’re going into a recession. And I want to note, we had a number yesterday that didn’t get the publicity it should have. Family household wealth, all assets minus liabilities, were up again, close to $59 trillion. It’s a new record. It’s 7.5% above a year ago. And here’s the key point. Real estate values have fallen, but they’ve been more than offset by rising stock market values. So households have a lot of spending power, and this idea of a recession is just nonsense. The other big issue was the Bush-Paulson sub-prime rate freeze…

HH: Right.

LK: …which is quite controversial, although I don’t know why, it’s really pretty small potatoes.

HH: It is, and I want to go back to the big potatoes, because I don’t understand it. Talk to me about the London credit markets.

LK: Yeah.

HH: And what that means, and break it down for people like me, you know, we follow markets, but we don’t quite know the consequences of this.

LK: Well, it’s all about short-term lending from, say, 30 days to 90 days. And people should think working capital for your business. And the commercial paper market, and the London inter-bank market, is absolutely essential. That’s where these loans come from. And what you’re seeing is short term interest rates are skyrocketing, and the differences between the commercial paper, or the LIBOR, and U.S. treasuries, which are risk-free, those spreads are widening.

HH: Okay.

LK: It’s a very bad sign. Commercial paper itself in the United States continues to decline. We’ve lost, I don’t know, $400 billion dollars of commercial paper. That’s working capital for businesses. And if that continues, then the economy is going to have a problem, because businesses won’t be able to get capital.

HH: Now Larry, I’ve got to tell you this, because a guy came up to me, said he loves this segment, but he’s a trucking guy. He tows cars. And he said tell Larry Kudlow that the cost of gas is killing some sectors in the economy. Now I said you knew that, but you don’t think it’s significant. 15 seconds, does gas kill us?

LK: No, absolutely not. It’s some people like truckers who are going to be affected more. There’s no evidence that motorists, consumers, are being damaged by this, because you know what? It’s only 50% as important as it was 20 years ago, we’re so efficient nowadays. I think the economy’s chugging along quite nicely, and stocks were up 2% this week across the board.

HH: Larry, we’re out of time, my friend, always a pleasure. Have a great weekend.

End of interview.

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