not good for stocks. plus, the fed almost surely going to add stimulus in just a few weeks. gee, it hasn't worked for the economy in the past. i doubt if it's going to work in the future. and maryland millionaires tax cost them jobs because people are fleeing the tax and the state. "the kudlow report" is moments away. [ applause ] thank you to my amazing audience. tonight on "american greed" the jersey score! watch how an fbi informant goes undercover to pull off the largest corruption sting in new jersey history. boeing and caterpillar aren't done going up. there's always a bull market somewhere and i promise to find it for you right here at "mad money." i'm jim cramer. see you tomorrow. hey, larry, what do you have for us? all right, jimmy. breaking news. the full extension of the bush era tax cuts gets voted down. a victory for class warfather and a victory for a potential recession. the whole thing is bad for stocks. good evening, i i'm larry kudlow. this is "the kudlow report."

we begin with the breaking news. the senate votes down the full extension of the bush era tax cuts and instead votes to raise taxes on the most successful earners and investors. me, i think this is nothing but class warfare. you have to be out of your mind to raise taxes on anybody right now. senator mitch mcconnell just moments ago. here's what he said. >> here is the democratic plan for the economy. we'll get this thing going again. we'll get it going again by raising taxes. >> he's got a point. i think because of the left-wing ideology democrats risk pulling the country over the tax cliff spo a double dip recession that frankly this country cannot take. also this evening, former citigroup chairman sandy weill, the man who built it into a giant shocks wall street by saying right here on cnbc that the big banks should be broken up. well, they are too big to fail. they are too big to manage. i think sandy has an excellent point to make.

however belatedly he's making it. powerful banking insider joins us as does former t.a.r.p. inspector general neil barofski. first the senate vote on the tax cuts. john harwood joins us with the details on two votes. good evening. >> good evening, larry. it won't surprise you or the viewers to hear the united states senate engages in exercises sometimes that are all about politics and not legislation. that happened this afternoon on the floor when the senate defeated a republican plan to extend the bush tax cuts for a year, passed a democratic plan both on party line votes. that plan is immediately going to die in the house. here's how senate leader mitch mcconnell of the republicans and harry reid of the democrats described the arguments. >> here's the democratic plan for the economy. we'll get this thing going

again. we'll get it going again by raising taxes. let's take more money out of small business and send it to washington. >> if the republicans in the house fail to act on the bill taxes will rise by over $the,2, for the typical middle class family of four. >> this will be useful for both sides in the campaign. the condition isn't going away. this issue will be right back on the table when the bush tax cuts are due to expire at the end of the year. >> many thanks, john. appreciate it. is this what the election will be about -- class warfare instead of growth? we don't seem to respect success or risk. putting the economy and markets in jeopardy for the next bunch of months. we get reaction from both houses of congress. from the house we'll be joined in a moment by republican conference chairman jeff henderling of texas and utah

republican mike lee. senator, look. to me this is a great opportunity to help the economy. instead, class warfare gets in the way. now it's an opportunity to cause a double dip recession. why did it have to happen this way, senator lee? >> it didn't have to happen this way. it shouldn't have had to happen this way. it's not the fault of the american people that congress hasn't done the hard things, that congress hasn't made the decision to cut where cutting is needed. raising taxes is not going to help the situation. yet that is what's happening. in the process of raising taxes, we are not only not going to solve the problem because 94% of our deficit still remain intact. what we are going to do is kill 710,000 jobs according to ernst & young, jobs from the people who can least afford it. they are not top 1% jobs, mind you. >> jeb, welcome back to the show. we appreciate it.

you will be our last bastion. please tell us there is no chance the senate bill will pass the house. no class warfare. no tax hikes on success. tell us you will hold the fort. >> larry, the chance of that bill passing is somewhere between zero and a negative real number. house republicans will stop the tax hikes. you know, when we have an economy that's basically at stall speed, the weakest most tepid recovery in the post-war era, why you would want to raise taxes on anybody is beyond me. as mike pointed out, this not only doesn't help, it hurts. according to ernst & young we are looking at $710,000 jobs lost by the tax increase plan. it will impact almost a million small businesses. why you would want to precipitate a double dip recession is beyond me. i mean, this borderline economic

insanity at this point in our nation's economy. last but not least as you well know, it doesn't solve the debt problem. it's all about the politics of diversion, division and envy. that's what this is about. >> senator lee, there was a great article in the wall street journal yesterday, the day before, by my friend ari fleischer using a new cbo study that uh shows, in fact, this is a progressive tax system. the top 1% pay 30%. the top 20% pay 23%. the middle pays only 15% and the bottom pay virtually nothing. this is the part i don't understand. there is a class warfare going on that the statistics coming out of the congressional budget office and elsewhere proves are untrue. the rich not only pay their fair share, they pay more. >> that's exactly right. they do pay an enormous amount. much more than the numbers reflect. this is part of the left's campaign to divide americans, to

try to pit one group against another. you know, we deserve better than that, particularly at a time when we are suffering as a result of washington's failure. its refusal to do the right thing. >> jeb, is this going to be part of this whole milieu for the election that we want to tax the rich rather than promote economic growth instead of growing the pie we want to tax the rich? if you start your own business you really didn't create your own business. government created it. is this of a piece this tax vote in the senate? the vote was close. there was more discipline than i thought and you will get more in the house. is this just election stuff and that's it and the themes are laid out? >> well, bless his heart. i think the president is clueless on what it takes to go out and create a job. when he looks at, you know, millions of entrepreneurs and small business people and essential points his finger and says, you did not build this. not only did the president not

build it. he's trying to tear it down through sataxation. in the history of man kind there was never a society that taxed its way into prosperity. here is a president presiding over the worst economy since the great depression. he has to try to change the subject. that's diversion. then he wants to divide americans. frankly, as you put it, out's class warfare, envy. you know, fairness is not to be found in taxing some people more. it's about subsidizing them less. the president still rejects fundamental reform of the tax code. >> senator lee, i still don't hear discussions of getting spending down. people believe if the tax hikes on the rich went through and jeb said they will not pass the house, okay. i don't hear senator lee, i don't hear spending cuts, what we'll do about the defense budget, what happens with the balanced budget amendment, cut cap and balance. i don't hear that stuff. deficits, debt.

it seems like it's endless. once again, washington has broken down. >> well, it has. when you look at the president's proposal, what the democrats passed today this knocks off 6% of the deficit. assuming all of the tax rates go up as planned, it still adds 11 trillion to the national debt. this shows the democratic party and the white house are fundamentally unserious about dealing with the debt and deficit problem. that's where we have to focus. we have a spending problem, not a revenue problem. >> jeb, have you ever seen a tax hike that wasn't spent? isn't that the real interest here? ing pand government? i don't hear riders that say we'll use this to retire the debt. it will be spent. >> you're absolutely right. if you give this extra revenue to washington they will waste it

unless you put spending discipline in place first all it will do is harm economic growth. >> all right. we'll leave it there. thank you. we appreciate your time very much. coming up on "kudlow" the lousy economy has ben bernanke and crew in a panic. qe-3 may sail sooner than we think. we'll talk to the man with sources inside the fed. great reporter of the wall street journal will help us out. later in the show, president obama and mitt romney face off on foreign policy. so has obama put america in decline on the global stage? don't forget, free market capitalism is still the best path to prosperity. that means incentives to reward, not punish success. uh-uh'm kudlow. we'll be right back. i don't spend money on gasoline.

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texas congressman ron paul won a big one today. the house of representatives passed a bill requiring a full audit of the federal reserve and the regional fed banks. the bill needed a two-thirds means it needed 89 democrats joined 2378 238 republicans to pass it. the bill goes to the senate

where another poll rand paul is pushing a similar bill. now, ace wall street journal reporter who covers the fed and economy broke news last night that the federal reserve is considering more stimulus perhaps sooner because of the slumping economy. jon hilsenrath, welcome. before we get to the fed action what do you make of the audit of the fed passing so overwhelmingly with huge democratic support? does that get in the way of any fed action that may be coming up here in august or later? >> i don't think it gets in the way of fed action. i think it does point to, you know, the political fire that the fed has been in for the last four years. you know, frankly i don't think the bill is going to make it past the president's signature. i don't know that the senate will pass it. i don't think tim geithner would advise barack obama to sign it. it's a sign that the fed is

being more scrutinized now than ever before. it has to really work at explaining itself. there are a lot of people on both sides, right and left, republican and democrat, who don't understand what it's doing and don't like what it's doing. >> you're right about that. i just wonder in terms of the potential fed stimulus, and maybe they will buy treasuries or mortgages as you wrote this morning, last night, and have more quantitative easing. maybe it slows them down. maybe it doesn't. >> on the politics, the situation for the fed is it's damned if it does or doesn't. chuck schumer, ironically, is saying get to work. that's ironic that a law maker is telling the fed to get to work when they won't work on the budget. then republicans like jim demint are saying to be cautious. whether the fed acts or doesn't act it will be criticized by some group in the next few months. >> do you have a sense, jon, that they will move at the july

31, august 1 meeting? do you have a sense of that? you hinted in the article but you weren't sure. >> that's the case. what i can say is we know what the reaction function is. the fed wants to see the economy pick up. the status quo, what we have now. no reduction in unemployment in the last six months -- little. and 2% growth is unacceptable for the fed. they need a pick-up in the growth rate and more jobs created in order to be prevented from acting. it's only a question of how much more evidence e they need to see that we are not getting it before they decide to go ahead and act. frankly, there are plenty of impatient people who might say, let's do it in august. there are a lot of reasons about why they might want to wait until september. they get a chance to look at more data. they have a press conference. they update the forecast. there are a lot of reasons to say, let's just take it another month or so and make sure we've got this right before we go ahead. it's going to be controversial.

>> it is. among other reasons, jon, we have talked about this. this would be the third time they go out and create money by buying bonds and/or mortgages. it will be the third time. the worst recovery in modern times in terms of growth rate, jobs, the joint economic committee put it out. whatever short-term stimulus you get, it doesn't last. heck, today, i noticed the stock market department really do much of anything about it. you had a little bit of a jump yesterday at the end. do people believe this is going to work? it hasn't so far. >> the analogy i have been thinking through is when you go to a doctor and he taps below your knee to test your reflexes and your leg jumps and nothing about the anatomy of the leg changes. the stimulus programs are like that. you get a jump but it isn't lasting. they feel at the fed and there is evidence to support this. it's helped to hold down

interest rates. we saw mortgage refinancing picking up a little bit. they feel without the steps they have taken, the economy would be worse. >> i thought bernanke had it right, jon. this is the last one, but i think it's a tax cliff problem. it's a regulatory problem. it's an obama care problem. i mean, the senate voted today to raise taxes on top earners and investors. i think that's what's plaguing the stock market. that's what's plaguing the economy. the fed's money creation. i don't think that's plaguing it. they have already created enough money. >> they wouldn't disagree with you about the problems you listed. the question that bernanke asks himself, is there anything i could do to help, even a little bit? it's not going to solve the world's problems, but even if there is a little something i can do to help, can i? if the answer is yes then they will do more. he's not going to wait. >> okay. ace reporter of the wall street journal, thank you, jon. up next, the democratic tax

the rich proposal could send stocks spiralling down. it could push us into a recession. it might have even moved the market down today. i don't know. don luskin is here ready to share wisdom about tax cliffs and other things. we'll be right back on "the kudlow report." flu so... [ gasps ]

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nasdaq closed lower for a fourth straight day. here is my great pal don luskin. the democrats fell over the tax cliff by passing a bill that would jack up taxes on investors and successful earners. it looked like the market was selling off on the news, a missed opportunity. is there anything to that? >> i think the story here is that we all know how this is going to turn out. the republicans control the house today. they're going to control the house after the election. they are going to control it in the lame duck session, and in 0 2013. that means the bush tax cuts are going to get extended for everybody. because unless they are, the republicans won't let them get extended for anybody. that's instant doom. everybody knows that. that's the way it's going to turn out. so all of the gestures we saw today are just nauseating, exploiti

exploitive, shakedown artists, political theater. that's creating the uncertainty that drives the market crazy. we are all being held hostage by people who know exactly how it will turn out, shaking us until the votes come out of our pockets. >> the problem is, as you infer, we don't know when. you know, we might think we know the outcome but we don't know when the outcome might happen. this could go on for a long time and hurt stocks. all right. don, you have some of the big reporters. we have talked about it before. i want to go there again. uh'm worried about a global recession. i'm worried about the american economy. you see the big companies like mcdonald's, u.p.s. and apple. sales are coming in poorly. it's the first time in quite a while. it's a global impact. it doesn't make me happy. >> it's terrible. this is the worst earnings season since the great recession ended. it's only the thing that came close was two years ago when everyone was sure we were

falling into a double dip recession. this is what it looks like when investors around the world poured cash. they were afraid to put money to work in factories, jobs and technology and software. they are even afraid -- i mean, that kind of deer in headlights thing is what causes the global economy to freeze up. that's why we had a great recession and a not great expansion. it's an l-shaped recovery and the only thing that will pucks it is when policy uncertainty in europe, china and the united states vaporizes. we are just going to have to sweat it out. >> i don't see a single example of pro growth, pro market, pro supply side anywhere. not in europe, in the usa, in china where i think they are going backwards. i don't see any of what i will call reagan-thatcher-era pro growth. i will throw clinton in there,

too. >> sure. >> i don't see anywhere around the world now. we have a problem and we don't have a clue how to get out of it and get back to growth. >> it's terrible. you've got people who are trying. you have mario monte in italy, rahoi in spain swimming against the tide because they have to deal with a mountain of eurocrats subjecting them and their economies to horrible uncertainty. every time the e.u. meets in a summits, they are just shaking, waiting to see whether they will be helped, hurt, delayed another two weeks. even the poor guys who are trying to make the best of a crisis are being wiped out by the old guard around them. >> where do you go to run for cover? what do you advise? >> the thing for equity investors to remember is the uncertainty is impounded already

in stock prices. so we have stocks that are so cheap right now, everywhere in the world. so if something -- if this gets worse, most of it is already built in. that's the amazing thing about the markets. >> thank you, buddy. appreciate it. optimism at the end. we appreciate that. coming up, obama and romney in fierce foreign policy face-off on the campaign trail. governor romney suggesting america is weaker because of the president's policy. is he right? we'll debate it next up on "kudlow." i'm freaking out man. why? i thought jill was your soul mate. no, no it's her dad. the general's your soul mate? dude what? no, no, no.

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welcome back to "the kudlow report." i'm larry kudlow. in this half hour, former citigroup chairman sandy weill shocks wall street by saying, break up the banks. i think he's right, however belatedly he may have said it. and the federal department of agriculture puts out a warning that food prices will soar. the reason -- the drought. by how much? we'll tell you. first up, mitt romney arrived in london today kicking off a

sunscreen-day three-country tour over seas. romney harshly criticized obama's policies suggesting america is weaker as a result. listen to what the former massachusetts governor told me monday night here on "the kudlow report." >> i think from the very beginning we misread the setting in syria. the secretary of state said assad was a reformer. that's a phrase which will obviously go down in history as being poorly timed and entirely inaccurate. this is a person killing his own people and was at the time. america should have come out aggressively from the beginning and said assad must go. >> all right. joining us in a few minutes we have chris lehan, former white house add a visor and senior adviser to al gore's 2000 campaign. and vin weber, a mitt romney economic policy adviser who will talk to me about foreign policy.

all right. did, in fact -- do you believe, vin, and do you think mitt romney will make this a campaign issue that hillary clinton and president obama have bungled syria? let me start with syria. did we bungle syria? is that on the campaign agenda? >> it certainly is a high mark. it's a difficult situation. nobody questions that. we have not set a strong clear message about syria from the beginning. as a result, potential allies who could be helping like turkey and saudi arabia are doing a minimal amount. we haven't done much. this is the same lack of a strong, clear message that we saw when the iranians were ready to protest against their government and president obama's government was silent. same thing in egypt. across the board it's not so much that the president has always done the wrong thing. he hasn't done anything. >> i mean, what governor romney told me in our interview, he said the administration lacks

clarity, a consistent vision. a lot of people say it isn't clear that the united states now stands for democracy, free market capitalism in our negotiations. and that we turn our backs on allies like israel, maybe like great britain, maybe like the czech republic. we spend too much time playing footsie with bad actors like iran. >> right. >> i'm sorry mr. lehain isn't here, but we have you, vin. are these key campaign themes? >> they are going to be part of the broader campaign theme. you remember when president redpan came into office and restored american strength based on three things -- strong economy, strong military, strong advocacy of american values. under this presidency the economy is deteriorating. the military strength is seriously undercut by budget cuts the president has yet to address and our american values are not being promoted effectively across the world.

on all three scores we are falling behind. we need a president who can restore american strength in all the areas and governor romney will do that. >> all right. i believe we have mr. lehain. thank you very much, former clinton and gore adviser. i appreciate it. i want to give you time to catch up. the rap made by team romney against your man, obama, is they are bungling syria, not tough on iran and don't have an america-first, america greatness vision for foreign policy. your response, please. >> well, three words. osama bin laden. i think the president has documented, demonstrated that he is very strong when it comes to keeping america safe and national security. the issue is what's mitt romney's vision? he's doing this where is waldo tour overseas. did you want seem there will be a single syria substantive piece of information, vision. any bigger idea of where he

stands in foreign policy that will come out of that. >> chris, to give you time to catch up, the criticism made again by team romney, i heard it from the governor the other night on the show. america is turning its back on great allies like israel, maybe britain and the czech republic and poland. meanwhile spending too much time playing footsie with iran and other bad actors. that could include china, north korea. in other words, there is no clear american principles of democracy and free market capitalism that are being put out by the administration. your reaction? >> i my reaction is, first of all, look where the public is. the public gives the president high ratings for how he's handled foreign policy, specifically national security in what is a dynamic and challenging world out there. again, i come back to what i mentioned earlier. we have gone through several administrations. not one was successful in being able to track down terrorist number one which is osama bin laden, which this president did

decisively. look at where we are in the world. he handled the libya situation. something you needed -- >> o come on. >> he did a great job with libya. he came into office with a war in iraq, in afghanistan. you look where we are three and a half, four years later. in all those situations he's held them extremely well. let's talk about mitt romney. this is a campaign of choices and contrasts. we have yet to hear a single vision from mitt romney on national security and foreign policy. embrace the olympics? >> this president said he would deal directly with north korea, iran, the rogue states. those situations are all deteriorating. governor romney is coming -- will come in promising to restore american values around the world, restore the trust of

israel, poland, the czech republic who all feel betrayed or undercut by this administration. that's a vision for the future. >> the vision i have seen from mitt romney is in the united states. the foreign policy seems to be to go to the olympics. is he dealing with venezuela at the olympics? he has not given a single vision about what he'll do differently. >> chris, big story in the wall street journal. republicans make big push for jewish voters. a lot of disenchanted jewish voters don't like the way president obama handled relations with israel and mr. netanyahu, the famous open mike. but there are other examples. do you expect a battle for another 10% for jewish voters switching over to romney, maybe getting the total up to 30%? that could swing an election in key industrial states as you know better than i. do you think that's a problem

for president obama? >> yeah, and the key state you're probably looking at is florida there with particular regard to the jewish vote. if you look at the data from the polling available to us in a number of key states, it appears that barack obama is maintaining the same level of jewish support he had in 2008 and democrats have historically held, particularly in key states. one of the interesting things and we have seen it in the books that have come out out including in the new york times foreign policy writer's book which talked about what the administration has been doing specifically on issues related to israel and israeli security. >> vin, last word. i have only 30 seconds. >> as far as -- >> will romney make headway with jewish voters? >> absolutely. the only place we had an election to test this was a special election in new york where a democratic district with a large jewish population elected the first democrat congressman in decades. we are debating about where the

president stands. polls in israel show the israeli people have little confidence in the president. at one time confidence with president obama among the israeli population polled in the single digits. this is a country that has historically loved america and that america has loved. >> got to levee leave it there. chris lehane, appreciate it. vin, great to see you. the commission on presidential debates announced the topics for the formats for the mano a mano meetings between president obama and governor romney. first one october 3 in colorado on domestic issues with a moderator. secondly the veeps in kentucky on october 11, also with a moderator. romney and obama back on october 16 from new york in a town hall format with questions from undecided voters. finally, we'll watch the foreign policy face-off on october 22 from boca raton, florida.

"the kudlow report" will have complete coverage. up next tonight, high tax policy has millionaires fleeing the state of maryland, costing the state a lot of jobs and revenues. our high net worth reporter robert frank has more when we come back. stay in the moment sanya.

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the country is in the worst drought in nearly half scene. americans will be paying the price for food. the government report today says consumers can expect higher prices for milk, beef and pork starting next year. here now is the anchor of ag daily tv in south bend, indiana. what are the props looking like? what price hikes are we talking about? >> crops are horrible. indiana, illinois, michigan, missouri. crops should be seven to eight feet tall. they are three, four feet tall with no ears. there are places in illinois already harvesting and they shouldn't be harvesting until october. when you talk about the corn crop you are talking about basic supply and demand economics here. this is a commodity that should be going to feed our livestock. dairy, pork, beef, poultry.

that's who will be hurting next year. when we talk about consumer prices at the grocery store that's where we'll see thing big impacts. >> give me a number. clinton, what kind of growth rate will we see from the food component of consumer prices? >> absolutely. we'll see beef that's probably 3 to 55% higher. pork higher. dairy, 4% higher or so. if we look at poultry we'll see another 4% higher. we'll pay more at the grocery store. >> all right. food taxes is what they are. thank you very much. now, folks, a tax battle driving millionaires out of maryland is escalating job losses. maryland lost more than 10,000 jobs in june alone as one of the highest tax states in the nation. what's going on here? why has it become such a political football? robert frank joins us with the details. what is going on here? >> the last time you and i

talked about this we dug into the numbers. it caused a huge war of words in maryland between the governor and change maryland, ab anti-tax group. there is new data out that shows maryland lost 11,000 jobs in june alone. for the year they are down 10,000 jobs. june made them one of the worst states in the country for job performance. now change maryland says this is because of high taxes, regulation. more than 24 taxes and fees levied in maryland since 2007. governor o'malley says we are going okay relative to the rest of the country. 6.9% unemployment. they say change maryland cherry-picked numbers. on a year-to-year basis maryland is up. they say despite the millionaires tax they have more millionaires today than they had in 2007. >> is that true? do they have more millionaires today? >> there is data that shows 7,000 morel millionaires today

than in 2007. there is irs data that shows net-net they are up but thousands of millionaires have moved out during that period. >> very good. robert frank, we appreciate it. up next, former citigroup ceo sandy weill sending shock waves across america today. the architect of super banks has now had a change of heart. he says big banks should be broken up. wow. we've got two heavy weights to square off on this one. former special inspector of t.a.r.p. neil barofski and our friend from sullivan & cromwell will be back. with the idea of hybrid technology... it's already ingrained in our dna. during the golden opportunity sales event, get great values on some of our newest models. this is the pursui of perfection.

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major shocker on wall street today. the father of the financial supermarket sandy weill said to break up the banks on "squawk box." take a listen. >> i think what we should probably do is go and split up investment banking from banking. have banks be deposit takers. have banks make commercial loans and real estate loans. have banks do something that's not going to risk the taxpayer dollars that's not going to be too big to fail. >> all right. there you have it. big change of heart. now let's turn to eamon javers for the washington reaction. good evening. >> good evening. sandy weill's comment es echoed

around washington today. i got to catch up with treasury secretary tim geithner on his way to a capitol hill hearing. earlier this morning i asked for reaction to weill's comments but geithner focused on going into the hearing, chose not to respond at all to the questions i put to him. meanwhile, members of congress on both sides of the aisle reacting today. >> it is absolutely huge that sandy weill called for the break-up of the big banks. what does this mean to the financial crisis? >> would you support breaking up the big banks? >> we need to look at it. it's worth considering, absolutely. >> meanwhile treasury secretary geithner was asked if he thought the glass-steagall should be reinstated. he didn't say yes. >> we look at what more we could do to make the system safer, absolutely. you should always go back and examine the judgments in this case. it's a tough set of constraints against the risk you said. we should give reforms a chance

to take effect and work. >> well, larry, i guess you could say it's a safe assumption the treasury secretary doesn't think it should be reinstated. he said dodd-frank need mrs mor time to work. back to you. here now, neil barofsky, former t.a.r.p. inspector. and roger cohen. thank you, gentlemen. neil, if banks are too big to fail, are they then too big to manage risk, too complex to manage risk and can you do what sandy weill wants -- split off the investment bank and go back to old fashioned commercial banking? >> it's possible and necessary. all we have seen in the last few weeks and months is scandal after scandal that arises from the fact that banks are too big to manage and incentives drive them to take bigger risks.

i will say something i never thought i would say. sandy weill was right today. the other thing, big surprise, tim geithner going on the hill protecting the status quo of the too big to fail banks yet again. >> sheila behr, richard fisher, dallas fed head, tom hoenig, kansas city fed head at the fdic are all saying the same thing, that banks should be broken up. how do you see it? >> well, we have to start with the proposition which mr. weill was advocating to reinstate glass-steagal will recollect. the debate has gotten off track. when you talk today about reinstating glass ste e agall ar the volker rule it is prohibiting bank affiliates from underwriting, being market makers and engaging in hedging

activities. all three of these activities have been termed by chairman volker himself to be beneficial to our economy and society. >> not in the commercial bank aspect. he said he doesn't care where they do it. he's not opposed to market making, dderivatives, synthetic. just don't do it in the banks because the taxpayers are behind them. that's my understanding of the position. >> you're right. that's the point. the remnants of glass steagall prohibits the bank from engaging in those activities. what it does. >> neil, let me ask you.

force those operations into affiliates. that was the intent of the law that broke down glass steagall. do you believe it's possible? take jpmorgan and the investment office in london. were they hedging or investing for the bank's portfolio using excess deposits not used for loans? in other words, can we possibly tell and isn't what that volker and sandy weill are worried about? we can't tell. >> this is the beauty of breaking up the banks and doing that. you don't have to worry about the rule anymore. you know, the 9,000 pages in comments and complexities. you don't have to worry about answering the question. ultimately we get the banks down to a manageable size. they make bad risks and blow up. the taxpayer doesn't have to bail them out. we can do this through common sense. not through complex games that are set up that the banks can weave through the loopholes and accumulate risk.

this is about monetizing the implicit guarantee, the subsidy the taxpayers provide through too big to fail. we need to break them up. otherwise we are going to see a repeat of the same crisis. i'm excited to see gathering momentum against something i have been advocating for a long time which i make the case for in my book. this is a real sign that, you know, there is a real -- people are jumping on the bandwagon. >> isn't it possible that some of the big banks could just sell investment subsidiaries? jpmorgan, bare stearns. they could sell it no problem. bank of america selling merrill-lynch may be a tougher transaction. morgan stanley selling off dean witter a witter. could this return us to the wall between cheryl banks and asset sale. >> it is possible. one would have to think who would possibly be the buyer in a case like this. i think we need to divorce some

of the rhetoric and theory from fact, including the fact that glass steagall us was enacted on the basis of a false premise which is that bank securities activities caused the banking collapse in the 1930s. every historian who looked a at that shredded the argument. it never happened. the last thing we want to do is repeat the mistake again today. >> do you think -- stay with that for a minute -- the charge is frequently made at banks and investment subsidiaries and capital market subsidiaries that they created ultra risky loans, mortgage-backed securities, derivatives, synthetics, et cetera. you know it better than i do. they created that, they were too risky, put together badly. neil thinks some of them should have gone to jail. the same or similar argument made today as was made in the '30s. do you believe with the argument today that the banks are heavily to blame?

>> i do not agree with the argument. certainly a number of banks were engaged in overly risky activities. not just the large banks. hundreds of smaller banks failed because they engaged in overly risky activities. for me, the answer is robust regulation. strong capital, strong liquidity. strong risk management, not absolute prohibition. >> neil, last word. we have 35 seconds. were the banks mainly to blame for the financial meltdown? >> absolutely. it was the incentives that came from too big to fail and the financial supermarkets that sandy weill today had a big role in creating the frankenstein monsters that destroyed the economy. now he knows the right thing to do is take them apart. let's remember we have had decades of bank stability under glass steagall. once that came down the financial system was soon to follow. we need an up to date version.

>> to be continued. thank you very much. programming note, former senator chris dodd will be on "squawk box" tomorrow morning. interesting talk about the whole issue. that's it for tonight's show. thank you for watching. tomorrow we talk about settling fiscal cliffs in washington, d.c. on free market principles. i'm kudlow. see you tomorrow night. my volt is the best vehicle i've ever driven. i bought the car because of its efficiency. i bought the car because i could eliminate gas from my budget. i don't spend money on gasoline. it's been 4,000 miles since my last trip to the gas station. it's pretty great. i get a bunch of kids waving at me... giving me the thumbs up. it's always a gratifying experience.

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