and then there's the rest of europe. everyone kind of feels that germany has to blink. but the longer they don't blink the worse it will be for the estimates for every international company. tech. okay? for banks. they will do badly. the industrials. the oils. today was a day where people feel it's about to end. so you have to buy those stocks. if tomorrow germany's bad and the european stocks go down, all the stocks that went up today that are from international will be for sale. that's no way to run a market. stay domestic. there's always a bull market somewhere. i promise to try to find it for you right here on "mad money." i'm jim cramer. i'll see you tomorrow. hey, larry, welcome back. what are you looking at tonight? >> thank you, jim. i am back. investors seem to be back at at work. and mitt romney is back at making a very strong white house run. good evening, everybody. i'm larry kudlow. this is "the kudlow report." top story tonight, team obama unveils a new ad personally demonizing mitt romney in order to disqualify him.

like all those other personal attacks, this one will backfire. obama is running an amateur campaign, and he is the one getting hurt. the polls are showing it. and he's badly splitting and dividing his own democratic party. and mitt romney does not want a grand bargain deal on the so-called fiscal cliff because a lame duck democratic congress and a lame duck democratic president. why do it? instead, romney will want his own program to go into place in his first 100 days to reignite economic growth. and yes, the dow climbs 125 points despite some bad consumer confidence numbers, a weak factory report, but i still fret the dollar deflation is in the air, may harm stocks. so here's the question i have. will the u.s. fed come to the rescue of europe by swapping more dollars to the europeans, who are literally begging for dollars? and we have some breaking news. the feds are investigating mark zuckerberg. this as the facebook stock continues to plummet.

first up, a likely win in texas tonight officially is going to hand mitt romney the gop presidential nomination. meanwhile, team obama unleashes the attack dogs in yet another personal attack. this time targeting romney's association with donald trump. cnbc's john harwood has all the gory details. good evening, john. >> reporter: good evening, larry. this is the night that mitt romney is going to go over the top, but he's not in the state, texas, that is going to put him over with its primary. he is instead in nevada. i think you can see a live picture of him now. he is trying to keep the focus on why he would be a better steward of the economy than barack obama. >> we need to have presidents who understand how this economy works day to day, small business, middle size business, big business. i do. i want to use that experience to get us to work again. a. >> now, of course, team obama is trying to make mitt romney pay a

price for the fact that he's attending a fund-raiser with donald trump tonight. donald trump was on our air this morning on "squawk box" repeating his questioning of president obama's birth certificate. but this is not a subject that mitt romney wants to deal with. in fact, he put out a statement saying he believes barack obama was born in the united states and he himself put out a new ad today that focuses squarely on the economy, answering the bain capital attacks by going after president obama's stimulus program. >> president obama is spending your tax dollars to create jobs. how's he doing? you've heard of solyndra. they took $535 million in taxpayer loan guarantees and went bankrupt. but that's not even half the story. >> reporter: but of course, larry, money is the name of the game for this trip. and even more important than the fund-raiser that mitt romney is having tonight with donald trump, he met for an hour today with sheldon adelson, the billionaire casino magnate who bankrolled newt gingrich during

the campaign. mitt romney wants him on his side and his super pac side all through election day. >> how much is adelson going to pony up? what's the buzz? >> reporter: well, he ponied up $10 million for newt gingrich and he's put up another 15 million for other conservative causes this year. he's got the capacity to help mitt romney about as much as he wants to. and mitt romney reached out to him during the primaries while adelson was backing newt gingrich. now it's time for him to try to cash in that whatever connection he's been able to build with adelson. and adelson wants to be on the team. and if he wants to be on the team, he can write some very large checks. >> the great part of that story is if adelson wants to he can bail out greece as well. john harwood, thank you ever so much. you're terrific. president obama's on a major losing streak. his attack on bain capital has completely backfired, divided the democratic party. his catholic contraception mandate a huge mistake. you've got 43 institutions filing 12 lawsuits. probably all this going to swing

catholic democrats away from obama. then he goes after romney for his ties to donald trump. that is just stupid. earlier today mitt romney said the president's lost his footing and is grasping at twigs. take a listen to romney. >> his campaign these days is trying to find a twig to hang on to. some little excuse they can grab and say, well, look, things are getting a little better, aren't they? and the answer is yeah, things are getting a little better in a lot of places in this country. but it's not thanks to his policies. it's in spite of his policies. >> so president obama running what looks like a very amateurish campaign that is putting him in a very deep political hole. let's talk. we have david goodfriend, former clinton white house official, co-host of "left jab" on sirius xm radio. good friend really has his work cut out for him tonight. we also welcome back distinguished michael steele, former republican national committee chairman, and cnbc contributor jennifer rubin.

she is the author of the "washington post's" "right turn" blog. michael steele, i'll start with you because -- >> yes, sir. >> -- it just seems like everything obama does turns to stone. particularly this attack on bain capital, which seems to have split the democratic party very badly. exactly what obama would not wish to happen. >> exactly. and i think you put the right word on it. stupid. i think the approach that the campaign has taken, and you've read accounts from the "wall street journal" to "usa today," that are saying that they're thinking right now we're going to push the negative narrative, we're going to come hard early on this to help define romney. the problem is romney's doing a pretty good job of defining himself and he's making a very solid economic argument in the face of what's about to come with respect to job numbers and the like. so i think the obama team is a little bit on their heels right now. i think they need to get off this negative narrative and start talking about what the president has accomplished. it's more than just killing osama bin laden. talk about how his policies have

helped this economy turn that corner. >> how can he talk about that? there's no such thing. >> that's exactly the point. >> i do want to say one thing before you gear up here. >> i was trying to give david a good lead-in here. >> i love you guys. i love you all. >> but i want to say this. obama's response to the bain capital, when he said profits don't matter. that's what he said. profits are not all that help businesses and jobs. prove to me beyond a shadow of a doubt that he is economically illiterate for the simple reason that you cannot have a successful job-creating business without profits. and you cannot attract capital without profits. this president, who is an economic illiterate, thinks government creates jobs and doesn't understand how the private sector works. i would like you to address this problem because i think this is his biggest gaffe yet. >> i will. first of all, it's good to have you back. welcome back from vacation. second of all, i think we have

to not go through this revision involvement history. let's not forget that it was mitt romney who came forward and said i can fix this economy, i ran bain. he put it in play. that made it fair game. and all the president did was ask, really? how many net jobs did you create at bain? and when you run those numbers, net net, it's a much less pretty picture than what mitt romney's trying to paint. that's number one. >> it's still a pretty darn good picture. >> let's address -- >> now wait a minute. >> let's talk about profits because -- >> you guys are investing in bain capital. see, this is what obama blew. you know this. all right? cory booker, hal ford, ed rendell, those are mayor and a governor -- >> but they're not running for president. >> yeah. not running for president. >> not running for president. i'll tell you why. i'll tell you why this matters. >> union pension funds and -- >> yes, wllarry. >> -- middle-class people are investing in the bain capitals of the world because those private equity funds are highly profitable. >> it's where the profits are. >> i want to answer the question. i won't take too long, but let me just tell you this. this election is being fought in

nine states. this is nine statewide elections. >> better make that six. it was nine. it's six now. >> let's just take one of them. ohio. >> right. >> now, in a place like ohio the profit question goes this way. did somebody make profits at your expense? did they create jobs? did they actually build something useful or not? and in ohio and in florida, by the way, you have examples of where bain capital bought out a company, loaded it up with debt, took their fee, and left. >> smart as they are in other places. and they understand -- and this is why i think the obama liability here is in fact solyndra and the crony capitalism which feeds on your theme, larry, that he doesn't understand basic economics, free market economics. romney's making a simple argument. i did create wealth for people, and it's not a zero sum game. our good friend here just gave a perfect example of the democratic mentality. if someone's getting rich, someone else is getting poor. someone else is getting screwed. that's not the way our economy

works. and i think the average american doesn't want rich people not to get rich. he just wants to get rich too. and i think part of the problem with the obama people is that they have gotten so negative. there's a piece in "new york" magazine today, must reading by john hellman, which demonstrates how overtly negative, -spirited, really frenetic has the obama campaign become. >> meaner than republicans? >> absolutely. >> oh, come on. now you guys -- >> to jennifer's point. it's a very important point. a column by mark thiessen, which has been proven, using taxpayer money, running his own private equity or hedge fund, obama has lost -- listen to this. razor technologies. e-coattality. nevada thermal power. first solar app bound solar. sun power. bright source. and let's not forget solyndra. now, obama could have used mitt romney to run his portfolio in the government --

>> that's actually an incomplete list. i'm very familiar with this -- let me tell you something. >> incredibly bad with the taxpayers' money. >> first solar, sun power, these are multibillion dollar mpanies that are listed on public exchanges. you run it on the ticker here. >> they're gone. >> and they're actually -- >> they're down -- >> what you actually have to understand is there was always going to be a loss when you do these loan guarantees. >> that's the argument -- >> wait a minute. >> but you lost their jobs. >> the -- >> and that was zblsh people lost their -- >> you just made -- >> come on -- >> thank you so much. of course. >> it was always going to be a loss. >> boom, boom, boom, this is it. we've got -- >> bain capital -- >> now, understand -- >> the whole -- >> with bain capital what the voters see is heads i win, tails you lose. the bain capital rule is always win. >> can i ask you -- >> the whole nation -- >> thank you, david. i appreciate that. >> after this light bulb

experience i've got to move on. but i do want to raise this seriously. i want you both to weigh in. other serious issues that obama has bungled. for example, the way he handled the same-sex marriage. polls do not believe his sincerity. whatever your opinion is on the issue, polls do not believe that he was sincere, that it was political. you have now 46 catholic institutions filing 12 lawsuits over the hhs obamacare contraception, including the president of notre dame, who tried to do business with obama a couple of years ago, and of course cardinal dolan. i wanted to add those things on. i suppose i could put on the anne romney war against women. but that wasn't necessarily obama who started that. >> right. >> what i'm asking you is as a former rnc chairman have you ever seen so many bungles, so many bungles by a group that had previously heretofore been touted as geniuses? >> particularly when you go and look at the 2008 campaign and how they ran that operation.

yeah, it had its rough spots but overall it was very well run. they were very fine-tuned with their message. and they knew how to position their candidate to have him take advantage of those opportunities that would come from their opponents. this seems to be reversed. you've got the romney team now reaping the benefits from the solyndra decisions of the world. from the catholic decisions. and all these other missteps, gaffes -- >> these are divisions inside the democratic party. >> and they're ripping at that fabric. one, in trying to sew the body together and remember kumbaya from 2008. >> that's gone. >> you've got folks at the other end kind of slowly -- >> i don't mean to be rude. i've got to get jen in for the last 30 seconds. what is the practical impact of this? how badly is obama on his heels from these divisive mistakes dividing the democratic party? >> well, i would like to say as a republican and as a mitt romney supporter that the election's over, it's may, we're done. but of course we're not. we have months and months to go and a lot is going to happen. but i will say he is burning out the negativity way too soon.

he's going to run out of things to be negative about. and he has a fundamental problem. he'll have it now. he'll have it in november. he doesn't have a record he can run on. that's the fundamental -- >> i can't believe you said the election's not over. anyway. many thanks to david goodfriend, who just had the intellectual firepower to change his position, live tv, on the air. i've never seen anything like it. and i love him for it. and chairman michael steele and jennifer rubin. thank you ever so much. coming up after that elongated segment, stocks are surging. the dollar is up. and gold is sinking. greece signals commitment commitment to the euro. maybe investors anticipating a little fed q.e. action maybe. don't forget, free market capitalism is the best path to prosperity. i want president obama to please read what i just said. free market capitalism, sir, with all due respect, sir, includes profits, which are the heart of the business situation. and it is profitable businesses that create jobs. i'm larry kudlow. we will be right back.

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now it's time to do some stock market work. dow did finish up 126 points for the day. all the major indices rallied more than 1% across the board.

did have a disappointing read on consumer confidence. that was trumped by optimism from greece's context to remain in the euro zone. that last one, folks, i wouldn't bet the ranch on it. anyway, we have a rapid dollar rise, and that may be throwing off some deflationary pressures. but like a shark in the water they're still out there. and that's something i want to talk about with our two distinguished panelists. we bring back keith mccullough, ceo of hedge iris management. and jeff, chief market strategist. my friend jim cramer ended today's show by saying he didn't trust today's stock market rally. and frankly, jeff, neither do i for lots of reasons. more to the point, what are you thinking? >> well, we still believe in the summer slide, larry. we've been talking about it for a couple of months now. don't think it's quite over yet. the market did a valiant attempt today at trying to climb but really on the back of some of the news on greece's polling data.

unfortunately, greece's polls are like greeced poles. they're tough to climb. the market tried climbing it today. i think it made a valiant effort. but ultimately this is a slippery thing and i think we've seen flooding deposits moving out of the southern european nations no matter what the outcome of that election is. i wouldn't trust this as being a sign of things to come. i think we've got a lots of ups and downs ahead of us in the coming weeks. >> meth mccullough, i know you love a strong dollar, but i just have to wonder. the dollar is rising very rapidly. it isn't stable strong. it's kind of hiccupping strong. almost spiking strong. you can see that dollar index jumping up from, what, the end of april. it's up better than 5%. keith, is this a deflationary event that is bearish for natural resources, bearish for energy, bearish for gold, bearish for a lot of growth cyclicals? how do you read it, keith? >> it's bearish for commodities. in the end this is exactly what we need. we need dough nate inflation. the only way you can deflate the inflation is through strong

dollar. and more importantly, or really moreover the expectation of a continued strong dollar. so to your poirnths this has been very expedited. the dollar's been up for four consecutive weeks, up well over 4% on the u.s.-dollar index. at the same time you've seen things like wti come down on the oil side down about 17%. gold feels like it's crashing. in the end, larry, you know what i think about that. in the end that could be quite good because what really leads this economy is u.s. consumption. so you get that oil price down and sustainably so. you're going to get consumption up. and you might just get growth back. >> that's very interesting and very important voint of view. jeff kleintop, i want to get your reaction because while i think keith is right in some medium-term sense i wonder if all this european demand for dollars isn't exporting deflation here to the united states, jeff. >> keith is right in that we do need to get some of that inflationary pressure off of the world so we can see at least emerging market central banks continue to cut r to . that's important to the overall

backdrop. but one of the reasons the dollar's going up, of course, is because foreigners are buying u.s. treasuries, putting further pressure lower on yields, keeping investors buying bonds rather than buying stocks. and that's been just a big negative for this market. we've seen an unbelievable -- in the last five months we've seen more money come out of the stock market from individual investors than we saw in 2008. so it's been a real drag here. but in terms of bringing deflation into the u.s., certainly we've seen some relief there. maybe that means ben bernanke feels a little bit more flexible when it comes to announcing some qe-3 later in june. >> keith mccullough, i'll give you the last word. what jeff kleintop just said is part of my thesis this evening. actually, i start td before i went away. that these european-based debt and dollar deflationary pressures may just get the fed to move at exactly the time when most investors thought the fed might not move. maybe they will now, keith. >> actually, we're net long here, but it's for a trade. if the fed comes out with qe-3,

i will sell everything into that rally because that is the very thing that slows economic growth. >> all right. we're going to leave it there. thank you, gentlemen. sorry a little bit abbreviated tonight. keith mccullough, jeff kleintop, i really appreciate it. later on on "the kudlow report," king dollar is up almost 5% in the past month. is the fed about to throw more dollars at europe, maybe throw those dollars at the u.s. as well? we're going to find out from former fed governor randy krausener. but first up, pull america away from the fiscal cliff or else. recessi recession, disaster, even another downgrade. but wait a minute. why should republicans support a grand design in a lame duck democratic congress with a lame duck democratic president? the gop is coming into power. it'll have its own program. so let's maybe go slow about this fiscal grand design fix. we'll talk more about it later. i'm larry kudlow.

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welcome back to "the kudlow report." i'm larry kudlow. in this half hour, king dollar on a roll. europeans practically begging for u.s. greenbacks. so will the fed throw more money at europe, and could they also be throwing qe3 in our direction? and today jpmorgan sells $25 billion of securities to shore up the $2 billion lost. it's making me ask some bigger questions about the whole jpmorgan story. and you'll hear them a bit later on. but first up, the congressional budget office has warned of a returning recession if congress doesn't break its partisan paralysis on taxes and spending.

but should republicans really support a deficit grand bargain before the end of the year? here's my quick thought. president obama's job approval average currently stands at about 48%. there you see it. 48%. now, that does not bode well for his re-election. job approval often translates to election results, which means romney could win in november by 52% to 48%. in other words, if the incumbent's under 50 on a consistent basis, check out his approval rating. oftentimes that is the final result. also, things are looking up for the gop in the senate, where democrats do currently hold a slim majority but fearlessly i predict republicans could pick up at least four senate seats. that would give them the reverse of the 51-47 control of the senate that democrats have now. i say at least. so joining me now to help break it all down is cnbc contributor robert costa of the "national

review." good evening, robert. first question. am i wrong if the president, an incumbent-s under 50% consistently, doesn't his approval rating have a pretty strong correlation with his final tally? >> sure. and you see obamas's numbers on the economy even worse, hovering around 30%, 40%. john boehner is putting the pressure on the president. he says that capitol hill has to play a role in this presidential campaign so, they're trying to take your advice. take those expiring bush tax cuts and extend them this summer, don't wait till that lame duck congress. >> that's all i would do. and i heard and read a pretty good interview from "time" magazine that mitt romney gave. and romney said, you know what? i don't know about a grand design. maybe we need to wait on that. and then i got to thinking, and you and i talked about it a bit on the radio this weekend, why should there be a grand design with a democratic senate and a democratic president when in fact it's all going to change? >> you're exactly right. romney has his whole plan 20:00% across the board cuts in all six brackets. he's saying i want to do tax

reform but let's wait until january '13. but you're seeing the strategy in the house because they have to put the pressure on the democratic senate. you can't wait till the lame duck. there has to be a little narrative framing happening on capitol hill. but romney's right. he has his own agenda. he wants to wait till he's president. and as you said the gop has some real pickup opportunities in a lot of states. >> so boehner and cantor. okay? i'm reading a lot. they want to work on extending the tax cuts. that's really all i care about. that's the fiscal cliff. spending cuts are fine by me. tax hikes would not be fine. what's your prognostication about getting votes in the house and senate this summer on extending the bush-era tax cuts? >> they want to do it before the election for a real reason. i think it's going to pass easily out of the house but someone like claire mccaskill in missouri running for re-election as a democrat, they want to put the pressure on them to have that vote in the senate because there are also some bruises from december 2010. last lame duck session was very messy. a lot of liberal policy got passed. republicans want to avoid that and make democrats get on the

record on the taxes. >> robert costa -- >> larry kudlow. >> -- as always, terrific stuff. now, why should the gop let the democrats dictate a grand fiscal bargain? after all, as i said, mr. costa agrees with me and he actually knows politics. a republican president and senate and house should be able to push their own dynamic pro-growth program. so here now let's talk. we have democratic pollster, 1996 clinton campaign advise yeh mark penn. we have also have former house majority leader dick armey. he's co-chairman of freedomworks. former white house deputy press secretary and cnbc contributor tony fratto joins us. dick armey, let me begin with you, my good friend. why should romney and the republicans give up some grand bargain on entitlements and spending and taxes? why should they absolutely do anything with that until the swearing in of mitt romney and the swearing in of a republican senate?

why shouldn't they wait and get their own agenda through, have their own 100 days? why should they do it right away? >> well, first of all, john boehner shouldn't get drawn into another negotiation with people who don't negotiate. president obama never showed up. the senate democrats stonewalled him. we ended up with this silly debt commission that couldn't even get $1.2 trillion in spending cuts while, for example, in our shop we got $9.7 trillion in ten years just by talking to real people in america. now, if he did, if he did in fact do one thing that would help encourage this market that waits in optimistic -- just waiting for this election outcome, he should put the extension of the current tax code through, send it over to the senate. harry reid will not put it on the floor because he knows he'll

lose those democrats that are worried about their re-election. so, i mean, the fact of the matter is there's no way that harry reid -- or obama would allow harry reid to put it on the floor. but put it through the house and let them explain to the american people why not. >> mark penn, isn't dick armey right on both counts? number one, romney and the gop, who are going to sweep this fall, should wait for their own 100-day agenda. but number two, the gop in the house should put the pressure on democrats in the senate just on one item. extend the tax cuts. because all those democrats are up for re-election, mark, and they may lose if they vote against tax cuts. >> well, as you know, the republicans are really scraping the bottom of the barrel when it comes to approval. i doubt some symbolic show votes about the bush tax cuts are going to do the republicans any good at all. look, if there was a deal now before the election, it would

obviously help president obama and actually probably help the republicans in congress, just as president clinton won re-election in '96 and -- but that's not happening. i think both sides are well dug in. you're not going to see any progress until there's an election. it's just not happening. >> well, then tony fratto, why shouldn't an income iing presid romney, and this is what he hinted at in this "time" magazine interview, why shouldn't he be able to put his issues on the table? he wants to break it up. he's not saying he believes in the grand bargain. what he said was tax reform, extend the bush tax cuts and then go to tax reform, then spending reform, then entitle titlement reform and then regulatory reform. he has an act viv first 100 days. why should that all get done in november and december under a hostile democratic regime? >> i can't imagine any incoming president would want to be gifted policy that's they think they need to preserve in that

case, especially when presumably a president romney, should romney win the election, it's very likely he will have a republican senate to go along with him and a republican house. what that means is for the first time in four years we'll have regular order. and we'll be able to take care of these really large economic questions, regulatory policy, tax policy, fiscal spending policy, in regular order with a budget, an actual budget where the house passes a budget and the senate passes a budget. >> and they held hearings, tony. >> they held hearings and discuss it and debate it and score it -- >> committee votes, score it, and then go to the floor of the senate. like a real functioning senate. >> just like the old days. >> the old days. i was around for that, when we actually had it, working for reagan. you know, dick armey, it's never easy to push your agenda through. it was tough in '81. but reagan had his own ideas. he didn't want to wait. you guys had it in 1994 when you

won. so in '95 and '96. in other words, i guess i'm asking you, why not wait? why do this grand -- simpson and bowles are on tv yesterday saying get it done now, get it done now. why? i would just stop the tax hikes and leave the whole thing to the reform agenda and hearings and process that tony fratto suggested. dick, why not? you've been through this. >> well, that's exactly the way to do it. first of all, remember this. the economy at large, the markets and people, investors, venture capitalists looking for something to build, they're going to become actively -- actively work out their newfound optimism when they see the end of this era on election day. and that will start the ball rolling. the only reason they should move forward with extending the existing tax code is to prevent a hiccup that is unnecessary. get it out.

it's good policy. then let the new team that really want to wrestle with a real conservative and hard-working house and senate with a new president, let them start putting things together by what? first get rid of obamacare, give the nation a break there, and then do the real reforms that are necessary to provide a real restructuring of this federal government's budget and functioning in the private sector of the economy. and i think governor mitt romney's got it absolutely right. we can't make a deal with the democrats that results in real action beneficial to america. they're just not interested. they proved that already too many times. >> all right. so -- >> stop the bad stuff from happening and move on to the good stuff after the election. >> january 3rd for the new congress and january 20th for the inauguration of the new president romney. now, mark penn, i want to give you a chance for equal time,

buddy. i appreciate your coming on. the fearless kudlow forecast. romney 52, obama 48. and the senate goes republican by 51-47. if my arithmetic is right. what do you think? >> i just think you're counting your chickens before they're hatched. i think right now obama's ahead. romney has not yet shown any real stuff that can take him past obama. maybe he hasn't come out yet. i think he's got some opportunities. but remember, at 48% approval the president's close enough to the 50% mark that if people don't like romney -- and look, this dream that there's going to be an all-republican governor. america typically likes a divided government. no party's going to have 60 seats in the senate. the only way that this country is going to move forward fiscally is if democrats and republicans together solve problems the way they did in '96 and really decide how much

they're going to do in spending cuts and how much they're going to do in tax increases. and until they get real, until they understand that one party is never going to win it, you know, we're never going to move forward in this country. and if that's what romney's going to run on, he's going to lose to obama. >> i don't know. we will see. anyway, i appreciate the disagreement. mark penn, thank you. dick armey, always, thank you very much. tony fratto. i appreciate it. up next on "kudlow," the dollar is on a tear, but will friday's jobs report put a kibosh on king dollar? we're going to find out from former fed governor randy krausener. still ahead, i still have some more questions about jpmorgan's $2 billion debt gone bad. we'll ask those questions and think about too big to fail. "the kudlow report" will be right back. right back. recently, students from 31 countries took part in a science test.

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all right. the ultrastrong king dollar rally rolls on. greenback has gained almost 5% since late april. you can go back a yeah, it's gained almost 15%. anyway, europeans want more dollars. question, will the fed give it to them? here now is randy krozner. he is our favorite former federal reserve governor. and he's professor of economics at the university of chicago, booth school of business. as always, randy, welcome. look, we know that the demand

for dollars among banks, depositors in europe, businessmen and women, corporations there is a humongous demand for dollars right now because they don't trust their own situation. question, will the federal reserve put more dollars into europe? will they conduct more dollar swaps, randy? >> well, they already have a big facility open with the european central bank. so they actually don't have to do any more in order to allow more dollars to get there. the european central bank just has to ask for it, and it will come forward. and my guess is they'll be doing a lot of asking. >> is there a limit to that swap? >> i think basically they can get as much as they want. and fortunately from the fed's perspective their risk is not with the individual borrowers in europe. it's just with the european central bank. that pretty much eliminates the risk -- any credit risk the fed might have. >> let me just kind of walk through this. suppose we're both right. suppose the european demand for dollars continues to rise and

the fed tries to accommodate that. what's going to happen, randy, is the dollar's exchange value relative to the euro and probably every other currency is going to continue to rise. now, question, what will the fed do about that? because as you know, sometimes rapid rises in your currency can create deflationary price pressures, putting downward pressure on the u.s. economy. what's that mean? is there a fed policy change coming here as well as in europe? >> i don't think it's coming quite yet because the u.s. isn't nearly as open an economy as other countries are. it's still important and certainly around the fomc table they think about what the impact of the rising or falling dollar is ones inflation. certainly when the dollar gets stronger that means that it's cheaper to buy imports since that at least in the short run is less inflationary pressure. but i don't think that's going to be enough to change fed policy. unless there's a disorderly change either in the value going up very strongly or going down

very strongly. >> it's that disorderly change that i'm kind of hinting at or at least thinking about. we like the fact that the strong dollar's bringing down oil prices and bringing down gasoline prices. he with like that a lot. but it's also bringing down industrial prices. and that kind of thing could snowball. it's something bernanke has warned about in the past. you saw today the dow's fed factory index down. richmond fed was down. philly fed was down. i mean, it ain't great, randy. what i'm hinting at is if this dollar goes up another 5%, 6%, 7% is that going to change the fed's mind about qe here at home? >> i don't think that's going to be enough to do it. i mean, if it goes like that in a day, then it's going to be problematic. if it's gradually going up over a few-month time horizon i think the fed will not really change policy just based on that. but certainly they'll be looking at the consequences for the rest of the economy. if we're still getting some really weak numbers. and of course the jobs report's going to be really important on friday. then that's going to be the

basis for maybe making some changes. >> all right. so i'll up the ante. you mentioned it. in addition to a rapidly rising dollar, and you've had some slowdown in the factory orders in the manufacturing, if you got a third straight weak jobs report, it will be published at 8:30 a.m. on friday, if you get 100,000 non-farm payrolls or, you know, something real immediate yokar like thar, how much would that move the fed? again, against the backdrop of a rising dollar. it's almost like you don't want this to happen but it's happening. >> i think all these are pushing the needle in the same direction. that as you get less inflation pressure and inflation expectations have been low, inflation's coming down because energy and food prices are coming down, partially because the dollar's rising but partially because demand is lower around the world, that reaves for room for the fed to act. but i think unless it's a really weak number plus some negative revisions to the previous months, the fed's probably a little bit more in a wait and

see mode. but we're kind of in a wait and see mode to see what the number's going to be on friday. >> but operation twist would be renewed. >> i think what they might do, instead of a slow path for concluding it -- because that's what they've done with other programs rather than suddenly ending something. they'll smooth it out. but i'm not sure they feel there's a lot more bang for buck left in doing that twisting of buying long-term securities and getting rid of the short. because you look at the long rate, the ten-year rate, it's down so low already. >> i agree with you on that point. i myself am watching the price of gold as well as the dollar. i don't think you are. if gold drops another 100 bucks or more i think that's a very clear deflationary signal. fed may have to act. usual l. i don't want the fed to ease. but i don't know. i'm watching deflation. randy krozner, our favorite former fed governor, university of chicago. >> thanks. >> thank you, sir, as always. coming up on kudlow, jpmorgan sells $25 billion in securities. it's a bandage on the billions

they lost. but it is making me ask some other questions about the bigger picture. "kudlow report" coming right back. it's delicious. so now we've turned her toffee into a business. my goal was to take an idea and make it happen. i'm janet long and i formed my toffee company through legalzoom. i never really thought i would make money doing what i love. [ shapiro ] we created legalzoom to help people start their business and launch their dreams. go to legalzoom.com today and make your business dream a reality. at legalzoom.com, we put the law on your side.

welcome back to "the kudlow report." jpmorgan chase sold an estimated $25 billion in profitable securities. an effort to prop up earnings after it lost roughly $2 billion in the so-called london whale story. a lot of that's been written. but here's what i don't hear

being questioned. the bank has disclosed that it has a $374 billion portfolio of securities that hedges jpmorgan's credit risk. fine. i have no problem with that. and i'm sure it's all very money good. but i do suggest this. that roughly $400 billion, i'm rounding up, is roughly twice the amount of the $200 billion of equity capital held by the bank. i just want to know, does anyone have trouble with the hedge being twice as big as the equity capital? that's all. brian gardner, keith brieton-woods, washington research analyst, and cnbc contributor jimmy peth kooukis of the american enterprise institute. i'm not casting any aspersions on the value of the hedge. the hedge may be great, the extra $400 billion. i'm not saying they should have done it. but i want to know, does anyone get nervous when any bank is running a hedge that is twice as much as their equity capital? is that something that should come up in the congressional

hearings, for example, that mr. dimon will participate in? >> i think it should come up. i think it very well might come up. as the overall topic of the too big to fail status of these banks. now, remember, dodd-frank was supposed tonight mechanism that's going to prevent another financial krierks that's going to get rid of too big to fail, that's going to instill market discipline, get rid of moral hazard. i see no evidence that's the case. these big banks still have their funding advantage. remember, they're big. this is key, this whole argument. the reason these banks are big is not a natural market outcome. it's an outcome of government policy, which is why i have a problem with it. >> brian, let me go with you on another related matter. jpmorgan has roughly 1 trillion, 1.1 trillion or so in deposits and they've got a loan portfolio of 107 billion. i think those numbers are roughly right. all i'm trying to say is jpmorgan's deposits are much greater than their loans.

therefore, some people, i'm not making this assertion but i've heard this along wall street, are asking were any of those excess bank deposits which are fdic, and therefore taxpayer backed, did they go to finance the hedging operation that jpmorgan runs? >> you know, it's an interesting question, but one of my colleagues, david conrad, who covers the bank, put out a report last week questioning how investors should be looking at jpmorgan, and advocating not that the regulators break up the banks but that the market do it. and his argument, one of his arguments is that, you know, contrary to the view that the banks supporting the investment bank, the commercial bank supporting the investment bank, at jpmorgan it's actually been the opposite. it's been the investment bank that's been carrying the commercial bank for the last couple of years. so we've actually gotten into a bit of a flip situation here. i'm as worried about too big to fail as anybody. it's a question of political will. but i think instead of letting

regulators handle it, people who have failed to do their job so far, we should be letting the market do it. >> last time we tried to let the markets break up these banks washington would not let them. washington had a huge capital infusion. >> i understand. but i would argue that the market actually is starting to work here. one thing we're seeing is that the premium -- the discount that investors are paying for the largest universal banks is falling behind what investors are willing to pay for the large regional banks. so investors are starting to step in and -- >> let me ask you. jimmy p., it's an interesting question. it's probably too risky. if the investment bank carries the commercial bank, that may have too much taxpayer risk. maybe for shareholders, though, jimmy, your idea of breaking up the banks and selling off the pieces would get better returns for shareholders. help me t in the last 25 seconds. >> i think -- shareholders, remember, if these banks go down it's going to be shareholders, of course, who suffer. and i'm not sure i want the

government saying exactly how i would break up those banks. i'm sort of agnostic on the exact method. but i'm quite sure it needs to happen. >> we're going to leave it there, gentlemen. more to be discussed. appreciate it. brian gardner, jimmy p. that's it for tonight's show. thanks for watching. i'm larry kudlow. we want more free market capitalism. it's great to be back from vacay. we'll have much more tomorrow night. ttd#: 1-800-345-2550 let's talk about market volatility. ttd#: 1-800-345-2550 in times like these, it can be tough to know which ttd#: 1-800-345-2550 way the wind is blowing. ttd#: 1-800-345-2550 at charles schwab, we're ready with objective insights about ttd#: 1-800-345-2550 the present market and economic conditions. ttd#: 1-800-345-2550 and can help turn those insights into ttd#: 1-800-345-2550 a plan of action that's right for you. ttd#: 1-800-345-2550 so don't let the current situation take you off course. ttd#: 1-800-345-2550 talk to chuck. ttd#: 1-800-345-2550

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