how do you jack up the rate for those small business owners what make up 45% of the small business incomes? i don't get it. then turn around and use $30 billion of t.a.r.p. money, which may be illegal, to give them loans. huh? tax them and then lend to them? i don't get it. besides taxing the most successful the budget reduces their deductions and limits those available for deductions all the way down the 28% bro bracket. it comes to $700 billion out of private pockets into a bloated government over the next decade. why can't we keep our money? why not put money into private pockets to spur growth the free market capitalist way? why slam bankers, businesses and hedge funds to the tune of nearly $500 billion? once again it takes liquidity from the private sector and reduces economic growth and incentive and gives money to government. all this incidentally, and here

is the key point, all this fat cat rich people allegedly tax hiking actually reduces investment and capital formation so much that jobs and wages will falter on main street. that's what they don't tell you. taxing businesses and so-called rich people hurts ordinary folks. that's a fact and we're not talking class warfare. we're talking growth. my way is the growth way. so far team obama way is a social policy on the left that has nothing to do with spearing jobs and economic growth. the better news is in the scott brown congress many tax hike proposals may never see the legislative light of day. if new senator scott brown can rally republicans and moderate democrats perhaps to extend the bush tax cuts and then move towards across the board flat tax reform, then they -- the new

scott brown gop -- would really be setting a pro growth agenda that would do the nation tremendous good. now, interestingly, stocks rallied today by over a hundred points after yesterday's plus a hundred as well. the market may be betting that the new scott brown scenario will take effect. i'm going to make the case laterer in the show that strong earnings along with a moderately v-shaped economic recovery is, in fact, helping equity shares to hold the high ground ef een though we are not creating the jobs, we are creating profits and there is a lot of growth going on out there. now to today's heated senate hearings on this budget. treasury secretary tim geithner was in the cross hairs. hampton pearson never in the cross hairs, full of lucidity joins us with the details. good evening. >> good evening. the treasury secretary was giving it his beth shot saying the obama administration's $3.8

trillion 2011 budget, yes, a balancing act. in the short run job creation including tax breaks for small business and more incentives for banks to provide credit is a top priority. however reducing the deficit but not enough to risk return to recession. at one point in a hearing arizona republican senator john kyle pushed geithner to connect the dots between skyrocketing debt and the threat to the dollar. >> if we do not make people believe that we are going to bring down the deficits over time we will risk losing confidence in financial future and that will raise interest rates, less investment. that's bad for the american economy. >> finance committee republicans were skeptical about the bank tax designed to raise $90 billion over ten years to recoup t.a.r.p. money used to rescue financial institutions. >> we have proposed a fee on the largest financial institutions

in the country, those institutions that benefitted the most from trying to repair the of financial system that will help ensure american taxpayers aren't exposed to a penny of losses under t.a.r.p. >> elsewhere on capitol hill budget director peter orszag said for the tax to be effective congress will have to change the law regarding the use of t.a.r.p. money. larry, we are now onto the politics of the budget, basically the democrats in the obama white house trying to get republicans in a position where they are casting votes against the bank tax, using t.a.r.p. money to pay the credit for small business. that's what the president talked about today in new hampshire. however, treasury secretary geithner got a push from moderate democrats on certain areas of the budget. jay rockefeller concerned about incentives for clean coal. blank lincoln talked about taking away subsidies for oil and natural gas and farm

subsidies and about $1.2 trillion over ten years in proposed tax hikes on businesses and wealthy individuals including $120 million targeting u.s. multi naturals. that's all in play. >> that's what i think. you make a great point bringing up the dissatisfied democrats. one liberal and one conservative. but i think the new scott brown congress will diss this high tax policy. i don't think the votes will be there. that could be a stock market message, hampton. let's bring in stock market experts. we have jimmy paulson of wells capital management and michael zanian of forbes magazine. i know you're a fierce supply cider such as your host today, your humble reporting host. i want to ask you now with all the talk about high taxes on wealthy individuals and investors and banks and whatnot, maybe, mike, the market rally this week is saying, no, it ain't going to happen.

what's your thought? >> i agree 100%, larry. after brown won with the massachusetts miracle, the dollar was rebounding. there was a lot of optimism. what we have seen since they started leaking the budget and the state of the union and the actual budget came out, the dollar has been back in a tailspin. gold and commodities have been up. i think there is a big war going on between, you know, is the republican revolution going to take place in the mid-term elections and are we getting back to a pro growth agenda or back to a tremendous binge of government spending? 23% of gdp now, the budget represents. that's insane. >> this year it will be 25%. you're right, it levels off at 23. at state and local it's up to about 45%. before we get to jim paulson, the stock market is having a bull versus bear debate. we are still running around 1,100 on the s&p. it got above it today, but it's

still in a corrected mode. almost like stocks are trying to figure out what you discussed. can we bet on congress, the new congress, the scott brown congress to stop tax hikes, leftist social policy class warfare or not. if the tax threat is real that's going to be better for stocks. if not, that could be positive for stocks. >> i think the bet now, larry, is going toward the brown and republican victory. the enterprise multiple on the s&p 500 is 9.2. the average for the last 15 years is 8. so clearly, investors are thinking that the republicans and the house and everything will get back to a pro growth agenda. i think that right now, i'm a little afraid that they may not win. >> all right. let me bring in jim paulson. jim, on the other hand, stocks are stabilizing here. earnings continue to be good. 80% of reporting companies. i'm pushing for a moderate

v-shaped recovery. i'll put charts up in a few minutes. but a v-shaped recovery, solid earnings. does that mean new highs on the stock market or not? >> well, you know, i think, larry, i would position what we are doing like this. for much of the last year there's been a tremendous volatility and uncertainty created in washington on an ongoing basis and the same thing bailing us out throughout this period of time has been bailing us out in the last week. that is economic momentum, earnings momentum keeps coming out much better than anticipated and despite all the volatility and uncertainty created by government, it's wagging the overall dog. i think it's hard no matter how much your fears are aggravated by what obama's doing in washington, what it may mean down the road, it's hard to stay out of the stock market when you have 5.7% gdp growth, an ism number that's good. when you have the employment

component come up. personal income goes up in each of the last two months at a decent rate. i think the flow of information is sort of staving off washington. >> you have a good point. in fact, i have gotten production liberties. we're going to use the full screen here. i have three v-shaped charts if i remember correctly and you mentioned a couple of them. starting with the ism manufacturing index out yesterday which was a total blowout. i can't draw the v but i think viewersee the v and the peak of the v is over 55 which is a very strong recovery number. it hints at at least at 3% and maybe 5% growth. now to real gdp. that report came out last friday. now the year-to-year change is slightly above zero but you can see the v effect. that includes, what, 2.5% in q-3 and almost 6% growth in q-4. we haven't started yet with the real rebuilding of inventories

and business capex looks pretty good according to the ism. another v, the durable goods report. this is beginning to move toward positive territory. if i had limited this to only capex business investment spending that v would have been above the zero line. jim paulsen it seems to me, earnings strong, v-shaped recovery. a we may be looking at 4 or 5%. i'm not smart enough to know. if tax attacks don't go in the way how much is there upside in the stock market from here? >> i think it's pretty good, larry. what happen ifs the scenario is that the massachusetts election is, indeed, the sign in the sand where we are moving politics to the middle, putting gridlock in washington and letting nothing come out the ledge slay ty pipe such that we are left only with the economic and earnings momentum profile we got going. if that's the case you're going to be looking at a world where

earnings are growing rapidly in a world where there is still record low interest rates and 1% core inflation which means you could have much higher valuations on the earnings. i think there is a decent bet here yet that the stock market will win out, primarily because the economics and earnings dominate washington. >> well, there's a good point. mike ozanian, back to you. we are seeing a big new rally in gold. gold has been hot as a pistol in the last two trading days. the dollar has levelled off. i see a big jump in oil and also in copper. some of that's growth expectations globally and in the u.s. but the old bugaboo, inflation and ben bernanke, will the fed reduce the balance sheet and get rates to more normal levels in my lifetime? >> hopefully you will live a long time, larry, so yes.

unfortunately i have never seen the fed or bernanke articulate how to downsize the balance sheet. i haven't seen a plan out there to say, this is how we can do it. they are owns and backing these mosh mortgage-backed securities now and they will weigh reducing the balance sheet with propping up the housing market. we may see another republican revolution and a cut-back on the huge obama taxes on hedge funds, bank pay, small businesses and letting the bush tax cuts expire, i am not confident that bernanke has a plan to deleverage and 2.7% year-over-year growth in the cpi isn't scary, but it's not comforting either. >> you have cut back on your equity allocation, is that right, mike? >> yes, i am. i'm pretty much now at about 20%. jim points out the strong growth in corporate profits. a lot of it is from cutting

overhead, cutting employees, but some junk bonds are attractive now for the companies that will have the cash to meet their debt covenants and interest payments, but we have to grow the top line. entrepreneurship is dead in this country now. there are no ipos. you look at past recovery and we had a lot of ipos. microsoft had a blowout quarter in terms of earnings but the stock sank because of disappointing top line fwrout. >> it's a tax attack. we'll have that later in the show. jim, what's your response? you have a more optimistic stock market weighting, don't you? >> yes, i certainly do, larry. let me say a couple things on that. we did see top line emerge in the fourth quarter. we had 5.p 7% real gdp if you put on a percent, percent and a half for pricing you see seven handle numbers that top line gdp numbers. i think this is even before we start creating jobs. in the quarter we're in we'll

start to create positive jobs. >> how many positive jobs? you have a report coming out friday. this is jobs week at cnbc, pros and cons. 20,000? 30,000? that's the street consensus, jim. are you above that? >> i wouldn't be surprised. i haven't put a lot of work into putting the monthly numbers. i have a lot of noise, but i think this quarter we're going to have a fairly solid positive job quarter. >> you need a couple hundred thousand to reduce the unemployment rate. you just do. my big beef in this whole thing is if you tax investment, if you tax successful investors and entrepreneurs by raising their tax rate, capital gains tax rate, getting them with lowered deductions and exemptions you're taxing main street. obama goes, good for me, my leftist policy, my new class

warfathwar fare populism but you can't create businesses, can't create jobs and productivity-driven higher real wages. why don't they understand capital in washington? the role of capital? >> tim geithner, you talking about taxes. my big concern is government spending. geithner's dumping government bonds on the balance sheets of banks and banks aren't lending money. they're making it off the sprit. they're borrowing next to zero and collecting the free no-risk return on the treasury bills t. capital has to get to private enterprise. >> we need capital formation in the private enterprise. mike thank you. jimmy paulsen, thank you. coming up, how much can $2 trillion on businesses, banks -- you know, look, this is insane. it is our money to begin with. i don't care who you are in

america. if you do good you should be able to succeed and not be penalize bid the tax system which should be there to promote growth not some weird left wing college professor's vision of social justice. congressman paul ryan, house republican leader, weighs in on this in a moment about the obama budget and the tax attack. this is cnbc, first in business worldwide. >> announcer: you're watching "the kudlow report" on cnbc. first in business worldwide.

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all right. let's look at the obama budget possible stock market impact. seems to me too many tax hikes to call it pro growth. let's see what the ranking house budget member says. mr. paul ryan from the state of wisconsin. before i get to you on the question of pro growth i want you to comment. there's a very heated exchange between new hampshire senator jim greg and peter orszag. >> one of the problems in financial market is access to credit for small businesses -- >> no, no, no. you can't make that type of

statement with any legitimacy. >> okay. >> you cannot make that statement. this is the law. >> they're not suffering -- >> let me tell you what the law says. you don't appear to understand the law. the law is very clear. the money's recouped from the t.a.r.p. shall be paid into the general fund of the treasury for the reduction of the public debt. it's not for a piggybank because you want a political event in new hampshire. >> whoa. who is right, mr. ryan? >> do you really want me to answer that? judd greg. i worked with him on the language which says all t.a.r.p. money goes back to pay off the deficit. it's not a slush fund for boutique programs the administration is cooking up. the law is really clear. t.a.r.p. goes back to pay down the deficit. end of story.

>> let me ask you this. i said it at the beginning of the show. i don't understand. the obamaites want to use $30 billion in t.a.r.p. money to shuttle it to small businesses to make loans, but, paul, they are going to raise the top tax rate on the principle small business owners and revenue generators. >> most are sub chapter-s corporations. >> so on one hand they will tax them and on the other hand, take the taxpayer t.a.r.p. money and loan them? i don't get it. i thought i knew about economics. i have only been doing this 40 years. take me through it. i don't understand it. >> it's simple, larry. the secret success of the administration is the capital markets don't flow through new york. they flow through washington. washington's in control. you're talking about class war fare poplism. it makes bad economics but they are doubling down on class war

fare. they have political problems so they will go to people and prey on emotions of fear, envy and anger and try to tap into it as a way to survive the next election. >> all right. we have a full screen of all the tax proposals in this budget. >> $2 trillion in total. >> yeah. we're going to put it up there. you're talking about banks, business tax hikes, top end earner tax hikes, lower deductions and qualifying for the taxes. you're talking about hedge funds, capital gains, dividends. now, paul, here's the thing. i don't understand if you're taxing capital in the name of left wing social justice, social visions, whatever. >> redredistribution, sure. >> if you're taxing investment, doesn't that hurt job creation and wages on main street, in the heartland? >> it lowers the after tax rate of return. it makes risk taking, lending,

investing, entrepreneurship go down, sure. it did it when carter did it, clinton did it, jack kennedy did it. democrats have put good tax lowering proposals in place before. you raise taxes on capital and you get less of it. lower taxes on capital, get more of it. that's what creates the jobs. look, where i come from, almost all jobs come from small businesses. 70% are from small businesses. pass-through entities and we'll raise the tax rates to 40%. we'll raise the seed capital, gains and dividends by almost 100% when it comes to dividends. even with the tax increases, larry, the deficit in the budget never goes down below 3% of gdp which all economists say is the maximum level a deficit should get. >> this is another thing i don't get. larry summers is a smart guy.

we may not agree but he's a smart guy. so is kristy roberts and tim geithner. they are smart people. if you jack up the top tax rate the small business owner operators are going to move from the small business s-corp back to the c-corp rate which is 35% whereas the small business personal income rate is 40. you will never see the money. investors will move into tax exempt bonds and everyone will avoid income. besides holding down growth -- >> the c-corps will be hit with a dividend as well. you will be hit with higher taxes. it will hurt job creation. it won't materialize the revenue. if you look at the administration's budget they are deficit as far as the eye can see doubling and tripling the national debt, spending increases that eclipse all of that, they're saying to bring

this into balance they will have a commission, which is partisan the way they are designing the commission, to fix it all. that means more tax increases down the road. this is just the beginning of the tax increase onslaught that's being prepared. >> here's what i'm calling the new senator scott brown congress and all the political implications. the white house is tone deaf to the revolution. tea party pop youlism, a return of jfk reagan supply side economics. can you join with moderate democrats and extend the bush tax cuts and start pushing for broad-based across the board tax reform? >> that's exactly what we are trying to do. speaker pelosi and majority leader reid are good at closing ranks, preventing members from working with us. we have yet to penetrate the democratic machine here in congress. we'll keep trying, larry. the problem, by the way, even with scott brown's election, the

fiscal policy, tax and spending, that stuff can go through what we call reconciliation and you can't filibuster. those tax increases happen with 51 votes. a lot of them are automatic, but the new ones, you need 51 votes in the senate. so we had the scott brown election but it's not enough to stop the onslaught of taxes. >> that's one of the big debates in the stock market. one debate obviously is what kind of recovery. the other debate is the tax attack. what you just said, it may not be possible to stop the tax attack or we don't know. i wish you luck. you have been good to us. congressman paul ryan from wisconsin. much more on this subject. president obama's big government budget was released yesterday and guess who's paying for it. here we go again, rich people or successful earners. we have michael linden and art laffer joining us to debate. is raising taxes on the most successful earners and investors

the right way to go? gee whiz, whatever happened to free market capitalism on the supply side? we are "the kudlow report." stay with us.

once more, will the obama proposal to let the bush tax cuts expire and hike up the rates on investment and work kill any chance of a real positive jobs recovery? let's talk to associate director of tax and budget at the center

for american progress michael linden and former reagan adviser art laffer of laffer investments. were you always the chief investment officer? >> i have never been chief of anything, larry. >> i want to start with you. we are taxing now according to the obama budget all the top end ear earne earners, investors, hedge funds and the hike. i want to ask you what i asked paul ryan and our stock market investors. how can you tax capital which is up there at the top end and not damage the prospects for jobs and wages? >> you do damage the prospects for jobs and wages. just to put it in simple terms, if you tax people who work and you pay people who don't work, which is what this budget does, don't expect more people to work. it just doesn't work that way. if you tax rich people and give it to poor people you will get

lots and lots of poor people and no rich people. it's simple. that's what they are doing and it's a catastrophe waiting to happen. >> michael linden, your response? >> it's simple and very wrong. we have spent eight years cutting taxes, cutting more taxes and what do we get? falling median incomes, no job creation, sluggish economic growth. eight years before that under president clinton taxes went up but we had eight years of growth, 23 million new jobs, incredible wage growth -- >> at the reagan tax rates. >> i'd be happy to go to reagan tax rates. let's go there. >> 28% and 15%. those were the top two tax rates. he had virtually a flat tax which some of us, michael, and i will let you react, some of us launched a 20 if not a 25-year boom in equity, family wealth, 45 million new jobs and real gdp

growth of 3.5%. >> with president reagan -- >> the reagan tax structure has held -- >> when you point to president reagan you forget he raised taxes after cutting them because he realized he went too far. we have also gone too far under president bush. we need to go back to a normal -- >> all right. these are the talking points. i never heard reagan raise aed tax rates. >> he raised the capital gains tax rate in the '86 act from 26 to 28%. ha he did do. if you look at bill clinton and i'm a strong supporter of bill clinton. i supported him in both elections. i thought he was a great president. i wasn't fond of him as a man but as apt he was great. he cut government spending as a share of gdp by 3.5% t percenta points.

that's not obama. he cut capital gains. exempted owner occupied homes from capital gapes. that's not obama. he reappointed reagan's fed chairman twice who was tight with money. now you have bernanke. he was -- >> yes, he was. >> he was appointed by reagan. >> i'm sorry. bernanke. >> no. he was appointed by bush. i'm not a fan of bush. if you want to compare it, obama's worse, but neither was good. >> michael, let me ask you this. >> clinton was spectacular. >> let me ask you this question. we need capital, jobs and labour d day. do you agree? >> i do. >> why raise the tax rates on capital which is what you are doing with top end investors and workers? why not promote more capital to promote more labor? i would lower the payroll tax rate or the 28% rate and maybe

the 15% income tax. in other words, isn't this a moment when we want the liquidity to stay in the private sector and all the incentives for growth we can get? >> larry, we need to bring down the deficit. you agree with that, we all agree. the long-term deficits which are not driven by a major spending growth under president obama. they are driven by long-term trends -- >> mr. obama hasn't raised spending? >> most of the new spending that happened in 2009 happened under president bush. >> did i miss the $850 billion stimulus -- >> it was -- larry, it was $800 billion and a third of it was tax cuts. guess what -- only $100 billion was spent in 2009. no, there wasn't a huge increase in spending in 2009. there was a huge drop in tax revenues. >> my jaw hurts so much because it dropped so much after what mike said you have to respond.

>> look at the numbers. >> i don't know if i can, larry. i think he's a professor at hogwarts. >> i wish. >> i don't know where he's getting the magical things. we know what obama has done, what he's trying to do and what he's going to do. you will have a good economy this year. you are. but once we get to the tax border you will see the train go off the tracks in 2011. once the tax rates hit you will see the opposite of delaying tax cuts. they are delaying tax increases and the train's going off the tracks. right today, that's my call. >> michael, you're a good sport. >> you are. >> one final question because my jaw still hurts that obama didn't raise spending. be that as it may, do you believe that these high end tax hikes will really lower the deficit? because the history of, for example, the capital gains taxes, when you cut the capital gains tax rate, the deficit goes

down, revenues pour in. you're doing the reverse. do you really believe this will lower the deficit? >> listen, with all due respect to professor laffer, the theory has been disproven over and over again. you cut taxes and revenues go down. that's what happens. if the last eight years taught us anything, if you cut taxes repeatedly you get lower revenues. we are collecting the lowest share of revenues as a share of gdp -- >> why not grow the economy instead of raising taxes? art, last word. i thought the laffe rerks curve worked at least on capital gains. >> it does on capital gains and high income earners. everyone knows it. go to the statistics of income of the irs and see that the rich were paying the largest share ever with the lowest rates. >> i need emergency medical help for my jaw after this motion that obama didn't raise spending but michael linden we love

having you here. >> i love coming on. >> tune in tomorrow night. i'll talk live with former congressman and ohio gubernatorial candidate john kasich. he knows about taxes and spending. that's tomorrow at 7:00 p.m. tonight, president obama says the new bank tax only goes after big banks who took t.a.r.p. money. what about a successful bank that never took a dime from uncle sam? we'll talk to a mid-level bank ceo who doesn't like the bank tax. keep it here at "the kudlow report." my jaw hurts.

all right. president obama say it is new bank tax goes after big banks who took t.a.r.p. money. what about a successful bank that never took a dime from uncle sam but their assets now surpass $60 billion. i think the level for the tax is $50 billion. how will they make up? let's ask the president and ceo ron hermantz who joins me now. you have gone from $40 billion in assets to $60 billion. you didn't take t.a.r.p. money but now you have to pay 15

percentage points on uninsured liabilities. have you talked to obama about this? did you call him and say, what's up? >> not exactly, larry. i think this was a shoot from the hip proposal to start with. i know your show is about taxes. this is one that i don't know who is doing the arithmetic here. they are telling us already what the t.a.r.p. shortfall is and from what i have seen the big banks who paid it back paid plus interest, the warrants were purchased at a profit and it seems to me the government has done well. >> is it just left wing populist policies? let me ask you this, too. i understand if the banks have to pony up on a risk basis or a size basis some money to the fdic for the insurance fund. that i understand. this is not about that. >> right. >> this is a punitive bank tax. now if you have to pay it, what's it going to mean to your loans, your stock price? what does it mean if you have to

pay? >> it's interesting you say that. i did an investor presentation today. we have figured out that it looks like they are recant aing their ways a little bit about repo financing. they are done on a thin margin. half of our leverage is repo finance done usually at a quarter profit. it's small. now tack 15 basis points on that and repo goes away. >> they will exempt re purchase? >> that's a conversation people have been having. what you have seen so far is a let's throw it on the wall and see what sticks proposal. >> mm-hmm. >> the more they took through it they will find people like us that all we did -- and you made the point -- 2007 were $44 billion. that's when the problems hit. we made $17 billion in mortgage loans, single family. >> real loans. you stayed with them. >> exactly.

we didn't sell to the gses. we kept them in portfolio and qualified forrer a tax. >> that's the model. let me switch gears. paul volcker wants a narrow banking definition. i want to ask you about it. he says essentially no securities trading, no proprietary trading. is that the problem? >> no. what got banks into trouble is the leverage. it's what we are talking about overall, not just banks but consumer where is leverage started. it's the government with their leverage. the government is the greatest leverage user of all. face it. when they continue to borrow and create debt like this, they're merely leveraging and saying to you as a consumer, don't you leverage and banks, don't you leverage, but let us leverage. >> the sec removed those borrowing ratios as one of the greatest stupidities in government history. i want to ask you regarding too

big to fail which i think -- i think voek sr. is getting to a point but we need resolution authority to let failed banks fail. is that realistic on my part or is too big to fail always going to be the case for the top 10 or 15 banks? >> i don't think it is going to be the case. i think what he's trying to get at and probably what old glass steigel did better was define who did what. investment banks were investment banks. the only borrowing or lending they were doing was to consumers in margin accounts or they were creating, you know, debt structures but didn't usually take too much of that on themselves. >> commercial banks today are their own bank. it's the holding company that owns the affiliate that does trading. bank of america and merrill-lynch is the perfect example. i thought there were clear firewalls, chinese walls.

you could not use insured deposits to trade. is that wrong? >> i think that's right. >> that's the law a. it may be abused in which case people should be prosecuted. it's too big to fail, ron, that bothers me. i think the world of volcker, but i think this trading strategy isn't correct. we need the government to say to bank of america, to j.p. morgan, to any of them, to the hudson bank, if you fail, you're going to fail. >> that's right. >> we'll have a safety net while you're in bankruptcy, but we are not going to bail you out. what's hard about that? >> it's not hard. it should have happened in the auto industry as well. >> right. >> in other words, nothing is too big to fail. >> that would restore competition, restore honesty, remove the moral hazard of risky assets. to me, that's where paul volcker should zero in on, not trying to rearrange the deck chairs. >> and the chairs he's trying to reachange aren't the ones that caused problems. >> next one, better or worse

economy? >> it's largely better. really what we have to have obviously two-thirds of the economy is the consumer. he hasn't had the confidence in his government yet and in the plans they have come out with on either side of the aisle. >> is there business borrowing going on? >> i don't think so. >> it's down the road. >> this $30 billion didn't make sense the today. >> t.a.r.p. money. thank you very much, ron hermance. >> you're welcome. >> $60 billion and you make mortgages and keep them. >> we keep them. not only that, we have been public for 11 years and every one is a record. >> that's the old-fashioned way. thank you very much. >> thank you. >> coming up, does the volcker rule do anything to prevent a crisis? peter moricci and mark calabria will debate. they make the mortgages, put them in the account. that's the way to do it. forget exotic stuff. do it the old fashioned way.

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the problem today is look ahead and try to anticipate the problems that arise that will

give rise to the next crisis. sure as i am sitting here if banking institutions are protected by the taxpayer and they are given free reign -- rein to speculate i may not see the crisis but may soul will come back to haunt you. >> that was a pessimistic former fed chairman paul volcker demanding his plans. we'll have a lightning round debate. university of maryland professor and chief economist at the trade commission peter moricci and mark calabria. is volcker on the right or wrong road or in between? >> i think he's some place in between. i share his pessimism. too big to fail is a problem. i think we have to get to a world where banks don't expect bailouts. more importantly where the creditors don't expect bailouts but the plan presented doesn't do that. he admitted it. there was debate during the

hearing and at no point did anybody say it would have stopped a crisis. there were examples people gave where you would look at behr and lehman. >> lightning round. lightning response. is it too big to fail or bank holding company trading activities? >> it's both. banks should be limited in the securities they hold. if they will perform trust activities for individuals, companies and so forth they shouldn't trade on their own account. they can't advise people how to invest. we don't want goldman sachs telling people to buy swaps and short the market. >> do you think they should be private, peter? >> i think they should cease to be a bank. it should sell the industrial bank that it used to get the federal charter. be an investment bank. get out of the banking business. no federal guarantee. >> mark, i don't like the federal guarantee as far as too big to fail. we had a hudson banker here, a mid-sized banker.

to me, this is where volcker should put his strength. you have a chance to get a real change in too big to fail. >> i agree. one of the remarks he said today that raised my eyebrow is where he said the house bill fixes that. i have to ask whether he's read the house bill. in fact, the bill passed by the house would allow creditors to be bailed out. >> and a $4 trillion safety net to fail. >> exactly. >> all right, peter, last word. is any of this going to pass the volcker plan up or down? >> i think the plan will pass. i don't know if we'll get comprehensive reform. >> sorry for the brevity, but you were enlightening on the lightning round. stay here for last thoughts.

i'll say on the obama budget raising tax rates on successful earners and investors is not the way to help main street. tax the top end and you hurt the middle and lower end as well. we need capital and labor this the country. why not lower all tax rates across the board in some serious flat tax reform? we'll be back tomorrow night. [ crowd gasps ]

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