CNBC "The Kudlow Report" - Transcript

Interview

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MR. KUDLOW: Is the Fed's power grab actually dead on arrival on Capitol Hill? The returns on this thing are really lousy so far. And let's hear from it. We have Democratic Senator Maria Cantwell from the Senate Finance Committee. We have Republican Senator Bob Bennett from the Senate Banking Committee.

Thank you to both of you.

Ms. Cantwell, let me begin with you. What's your take on this? Is it dead on arrival? Is it too much power for the Fed?

SEN. CANTWELL: No. I think the president has put a good proposal on the table. I expect to be an ally in helping him get this legislation passed. I think I agree with your guest there that it's not too much power for the Fed. The real issue is to make sure that we have transparency on derivatives and make sure that that market functions correctly. And that's what the president wants to do.

MR. KUDLOW: All right. Thank you for that.

Senator Bennett, I want to get your response to that. Because as I heard today, you are a critic.

SEN. BENNETT: Yeah. What I've seen of this, I think I worry about too big to fail, and we're possibly creating a regulator that will be too big to function. And particularly, my concern is that they're going to eliminate a number of sources of credit that exist in the market now that have no problems, that have been adding to the pool of credit, that are simply going to be wiped out because the Fed will cancel their charters.

Now, I'll admit to be provincial about it. Many of these institutions are in my home state of Utah or headquartered there. But I think we need to take a much longer look at this than rush it through on the timetable the president has in mind.

MR. KUDLOW: Senator Cantwell, I mean, there are other aspects to this beside the Fed. Just let me follow up with you and Senator Bennett on the Fed. Didn't the Fed create this bubble problem in the first place with their overly easy money policies? And didn't they fail to detect the bubble? In the second place, why do we have so much confidence they're going to do it any better? I mean, it worries me right now, with near-zero interest rates we may be at the early front end of exactly the same mistake.

SEN. CANTWELL: Well, I think the failure to really have oversight on credit-default swaps and to make sure that they had financial banking is the real culprit here. And it really did allow for this implosion of our economy. So you can go back and say, is the Fed responsible for looking at the systemic problems that might occur? I think that that is a good critique to say that the Fed should have been more on the ball.

But the real issue is if you don't have a regulation in place to have transparency, we can't have hamburger in America. Beef futures have more regulation that credit-default swaps that were a key tool of the housing industry, or on oil futures. We need to have real transparency and oversight, and that's what the president is calling for with derivatives.

MR. KUDLOW: Senator Bennett, I think that Senator Cantwell makes some very important points about the transparency of derivatives and credit-default swaps and other markets. I think that's a good point.

SEN. BENNETT: So do I.

MR. KUDLOW: Yeah, I figured you would. But I somehow don't think that's the meat and potatoes of this. And I want to ask you, is the Fed too big for its britches? In this sense sir, that they seem to have bungled monetary policy and regulatory policy, and now we're rewarding that. And you have this systemic risk council which is run by the Treasury Department which really doesn't have a better track record. Wouldn't we be better off, if we're going to have a systemic risk council, either let the grownups at the FDIC run it, or put an independent person in there?

SEN. BENNETT: Well, number one, as I understand the council, the Fed can consult them and then completely ignore whatever they had to say. So you ask yourself, why have the council in the first place?

Secondly, in the housing aid bill that we passed out of the Banking Committee, we created a commission to study this whole situation we're going through and determine exactly what did happen, because there's a lot of quick answers. Oh, the housing bubble caused it. No, it was credit default swaps. No, it was this, it was liar loans, it was something else.

And that commission is scheduled to report back to us in December of 2010. All right. We create a commission to report exactly what's happened, but we want to create the regulator that will fix what has happened before we get the commission's response? I think that's putting the cart before the horse.

SEN. CANTWELL: Well, I definitely, Larry, I think it's very important to have the commission and figure out what happened because I was not a TARP supporter. I didn't support either version of TARP. And I think it's very important to get to the answers.

But one reason I think it's important to think about this systemic issue, and that is if you look at both Enron, which was basically off-the-books accounting, and you look at the CDO credit- default swaps off-the-books accounting, while we can say we're going to now regulate that, the question is, what's the next exotic tool that someone is going to come up with that might have the impact?

So somebody who is looking at it in a systemic way might be better able to help us look at the dangers of those new kind of accounting tools.

MR. KUDLOW: Well, when it comes to transparency, Senator Cantwell, I am just totally 100 percent with you on this. And the off-balance-sheet stuff, I'm with you on that as well.

SEN. CANTWELL: Thank you.

MR. KUDLOW: No. I mean, truly, I think that's just very sensible, pragmatic stuff.

SEN. CANTWELL: Well, it's important for functioning markets.

MR. KUDLOW: I'm just -- I'm sorry. Please, go ahead. I didn't mean to interrupt.

SEN. CANTWELL: No, no. I was just going to say, you know, I've been in business. I know you're looking at this from a business perspective. And to have functioning markets and have people believe in those functioning markets, you need to have transparency.

So I agree, we need to have as light touch as possible but enough to make sure that markets function on their own with enough transparency.

MR. KUDLOW: Senator Bennett, the banking community and others are up in arms over this consumer protection piece. Some people are saying that Harvard Professor Elizabeth Warren is the person that really wrote this thing. She's not known as a pro-market person. They've got things in there about underserved communities, reinstating the Community Reinvestment Act to give mortgages perhaps to people that cannot afford them, which is one of the issues involved in this story, and getting deeply involved in bank deposits, bank regulations and bank products. What do you think about this consumer protection piece?

SEN. BENNETT: Well, I'll have to look at it in more detail before I have a definitive answer for you. But the one concern I have, Senator Cantwell has been in business, as have I, we both understand that the only way you create new wealth is when you take a risk. And the concern now is we want to squeeze all of the risk out of this whole system. Well, the one bank that takes absolutely no risk is the bank that makes no loans. The one bank that's absolutely safe and sound is the one whose doors are closed.

And in an effort to make sure we protect the consumer from any kind of risk, we run the risk, and I think it's a very real one to the system, of shutting the thing down so tightly that ultimately you cannot take care of the financial needs of those who are willing to take a risk and thereby create new wealth, create new jobs and drive the American economy.

It's the American entrepreneurial spirit that sets us apart from the rest of the world. The rest of the world is less willing to take risks than Americans are. And for that reason, America is richer than the rest of the world. I think we need to be very, very careful.

Obviously, I'm for consumer protection. I believe in those kinds of transparencies that help the consumer make wise decisions. But I've got to study this one a whole lot more carefully before I'm going to come out and say that it's doing it in the right way.

MR. KUDLOW: Senator Cantwell, let me just add one more at the end here. Paul Volcker in China gave an important speech. It was in The Wall Street Journal the day before yesterday. He says we're not grappling with the issue of moral hazard. That's his main point. He says there may be "resolution authority," quote-unquote, but he doesn't believe that bad banks will actually be allowed to fail and sold off by the FDIC who should probably do it. And I don't see any particular text in President Obama's plan that will say once and for all, we will close down big banks if they fail to perform. Citibank is coming under government ownership. Where do you come out on that?

SEN. CANTWELL: Well, Larry, I think you're going to have to invite me back for a long discussion about this on your show. It's something that I feel passionately about, having the situation happen to Washington Mutual that it did. And so I don't like it when government chooses winners and losers. I like more what you're articulating, which is the actual business functioning successfully or not successfully, and that being determined in the private sector.

So I think it's something that we're going to have to look in the details of this proposal and really understand how that's going to help it in the future. Because the government doesn't -- we do good things, which is putting the full faith and credit of the government behind financial institutions. But picking winners and losers is not something we do well.

MR. KUDLOW: Senator Cantwell, you always have a place on this program. I want you to come up here to Englewood Cliffs and co-host with me one night, to use your business experience. We appreciate it.

And Senator Bennett, your point about taking risk is so darn important. I hope Washington considers this.

Can I get a forecast? Will this Fed power grab pass the Congress?

Senator Bennett, you first. Yes or no?

SEN. BENNETT: Certainly not on the timetable the president has outlined because there's so much on the plate ahead of it. We're not going to get to this for quite a while. And then we'll see what the political atmosphere is when we take it up. So I give you that much of a waffle. I think it's in a little bit of trouble short term, and I won't predict long term.

MR. KUDLOW: All right.

Senator Cantwell, real fast, will the Fed survive this?

SEN. CANTWELL: The American people need transparency, just as you've called for, Larry.

MR. KUDLOW: I just don't know that the Fed will give it to us, Ms. Cantwell. I guess that's my big skepticism. But you're both terrific this evening.

SEN. CANTWELL: Well, call your congressman.

MR. KUDLOW: Thank you very much. I will, in both states.

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