colleague, writes with me at the street and here, and i've got to tell you, we both admit until this election, there's going to be many more days like today. it's torturetoday. it's torture out there. so stay diversified, have some yield, but accept the consequences. nothing until this election. like to say there's always a bull market somewhere, promise to try to find it just for you right here on "mad money." i'm jim cramer, and i will see you tomorrow! hey, larry, what are you looking at tonight? >> all right, jimmy. former fed governor, former bernanke right-hand man kevin warsh, he's coming here to tell me whether a new president romney could have any quick effect on interest rates and the fed. good evening, everyone. i'm larry kudlow. this is "the kudlow report." we begin tonight with this. how in the world can the president and the secretary of defense leon panetta, knowing we were being attacked in benghazi, not send heavy firepower to save the lives of the men? we know tonight that the white house, the state department, and the defense department all new in real time about that attack.

meetings were held. nothing was done. instead, four good men died. and still today the white house is sticking to their cover story. we are doing this because it stands to the credibility of our national security and that of the administration. and this evening a new timeline has emerged from e-mails sent from the state department to top national security officials, including the white house situation room, begging for help. nbc's mike viquera takes us through the chain of events. >> a series of e-mails sent from the state department to officials here, sent in real-time as the assault on that compound in benghazi was unfolding, show that the administration was at least aware of claims that terrorist elements were involved in the attack that left ambassador stevens and three other americans dead. it may not have been entirely a result of a spontaneous reaction to that anti-islamic video. i'll read for you the last in the series of e-mails. this is really the crux of it.

update to ansar al sharia claims responsibility for benghazi attack. "nbc tripoli reports the group claimed responsibility on facebook and twitter and has called for an attack on embassy tripoli." remember, this was sent in real time as the assault was just ending, this last e-mail. now, in the days after the assault white house spokesman jay carney insisted that there was no information to suggest that the attack was anything other than an inflamed response to that anti-islamic video that you recall had embassies -- american embassies across the islamic world under siege. today aboard air force one carney said he told reporters that the "e-mails were about all sorts of information" in the aftermath of the attack. and secretary of state hillary clinton herself responded today. >> posting something on facebook is not in and of itself evidence. and i think it just underscores how fluid the reporting was at

the time and continued for some time to be. >> and larry, the secretary went on to say that there is an active investigation looking into everything that went op, everything surrounding that attack on the benghazi compound smep said they are not simply cherry-picking information. larry? >> all right. many thanks. nbc's mike viquera. we are also getting this news alert in. a new e-mail sent shortly before midnight on 9/11 indicated that the assault on benghazi had escalated with reports of mortar fire. now, that makes it six hours after the initial attack began. that is important. six hours. hold on to that thought. let's get right to our special guest, nbc military analyst, retired four-star general barry mccav raye and retired army colonel jack jacobs. general mccaffray. i'm not interested in motive right now. what we knew from these e-mails is that the embassy in benghazi was under attack, the consulate was under attack.

we knew that beyond a shadow of a doubt. what i want to know is why the department of defense and the joint chiefs didn't send the heavy artillery from siganella to defend our men. that's the first question i'm asking. >> well, larry, i don't think there was any possibility once that attack started of that coming out in any way but bad. there's only two things clear to me when you look at it. number one, there was inadequate security in benghazi and the embassy in tripoli. and if they couldn't provide the security because of budgetary or bureaucratic reasons, they should have pulled the mission. and then the second thing, clearly there was a variance between the public story in the week after the attack, which was probably aimed at protecting libya as a diplomatic success. they'll eventually sort it out. i'm sure the facts will come out. but it looks to me like the story was distorted for a week. >> jack jacobs, at this moment i agree with general mccaffrey. the story will sort itself out. i'm not looking for motives

here. here's what i want to know. you're getting these e-mails in. 4:05 p.m. 4:54 p.m. the embassy's under attack. that's clear. whoever is doing the attacking, it's under attack. we don't need to know them by their first names. and later on we find out it's al sharia. i don't even care about that part. what i care is is if we know we're under attack. and as has been written and covered, we know there's a meeting in the oval office between president obama, vice president biden, and secretary of defense panetta. we know that from the bing west reporting. what are they talking about? they know the embassy's under attack. these guys are in the oval office. why aren't they pulling out the heavy artillery? fighter jets to strafe them. from sigonella. it could have been in one hour there to stop it. and then the commandos could have been bused in there in three hours. why wasn't that decision made to protect our men? >> well, a couple of reasons. the first is a quick reaction force has to be quick. it has to be big enough to

overwhelm the enemy. and it has to have good intelligence. and i don't think any of that stuff existed. >> these are e-mails, jack. >> no, i understand. >> these were e-mails one coming after another. and as we just reported from other stations, we now know more e-mails coming that they were holed up in the annex for six hours. six hours. we could have sent a whole army there in six hours. >> let me tell you the reprehensible part. it is that they knew from the very beginning that it was not a reaction to the video on the tube, that it was actually an attack that had been planned in advance. you can't have small arms, automatic weapons, mortars and rocket-propelled grenades, and it's not being practiced and rehearsed and planned in advance. everybody who ever wore a uniform, and by the way, washington's crawling with them, knew from his own experience this was a planned attack. the reaction to that i think was slow or non-existent purely for political reasons -- >> that's the reason -- general mccaffrey, i want to know, why

was the reaction slow? let me go through this again. it's not only the e-mails we're reporting tonight. it's the bing west report. there was an oval office meeting, apparently at 5:00 p.m. that day. the president was there. the vice president there. the defense secretary was there. they're getting these e-mails from benghazi saying we're under attack. forget for a moment who was attacking us. our men and women were under attack. why didn't we have a rapid response from the defense department? why didn't defense secretary start a chain reaction to actively protect our men and women or whoever was there? that's the part i don't understand. >> their best defense is you can't do it at 5:00 in the afternoon. i mean, you can't ring up the navy and have them get a carrier aircraft overhead. you don't have jsoc waiting at aircraft sides. they don't know what's going on on the ground. so larry, i would put that one aside. they were dead or in trouble the minute that attack started.

the problem was instead of having a 20-man special forces protection unit at the consulate they had four or five of these militia guardsmen. so they were in trouble. they did not have adequate security. and it cost them their lives. >> but sir, are you saying in effect when these surprise jihadist attacks occur we can't have some kind of quick response? >> right. >> i mean, again, we had sigonella. we used to have a fleet in the mediterranean. i want to come back to that in a second. but are you saying in effect that we are defenseless, we can't go and help the men and women under attack? >> well, i don't think practically speaking there was any way to respond to that in a matter of hours. they were way out on a limb. we're talking about there were less than 20 americans out in benghazi. and you know, four security guys. so there -- it just wasn't plausible that they could have -- >> but general, they were there for six hours, sir.

six hours. it seems like we could have mounted a whole something or other to go after them. >> let me turn this around to the larger issue, which is afghanistan. if we leave 15,000 people spread out all over afghanistan and a few of them are special operations troops and a bunch of advisers, this will happen to us every week starting in 2014 after the combat forces leave. you can't magically put small teams anywhere on the face of the earth. we can go back and punish them later. i hope we do that. i hope there's a targeted strike soon on the militants we think carried out this murder of our arm ambassador and his senior people. but no, i think you're doomed if you're out there on a limb and you don't have adequate security. >> another one. jack jacobs, come back to you, this morning's paper, "new york post," retired admiral joe callow writes that we had inadequate naval forces in the 6th fleet in the mediterranean and if we had spent more money

and put better forces in he talks about carrier battle groups and amphibious-ready groups. he talks about submariners with special forces groups. he said if that stuff were ready they could have come in but it wasn't ready and we are neglecting the navy. that's essentially what former admiral, retired admiral callow was saying. >> even if you had the forces there, it would have to be targeted and all the rest of that stuff, and you have to have very, very good intelligence. but the point is well taken. do we have enough forces to take care of the worldwide interests and threats of a nation of 310 million people? and the short answer to that is absolutely not. and quite frankly, pretty soon we're going to have even fewer. leon panetta at the time that the army was being drawn down, and it was like 525,000, 530,000, said publicly he would like to see the army even smaller than 490,000. trust me, i don't think we can defend the country with the forces we currently have. we're moving them around, and we can move them around all we want but it's not going to -- >> same topic.

i've got to close down. but do you think that these budget cutbacks from the department of defense and the services, army, navy, air force, et cetera, marine, do you think that is part of the story here of the inadequate security that general mccaffrey was talking about in the first place? is it already showing up that budget cutting in the defense department is preventing us from protecting our men and women who are out there on the front lines? >> i think it contributes to it. but i still believe what i said earlier, that the decision perhaps not to launch the forces but certainly the lies about it afterwards were purely political in the face of a very, very close national -- >> we will talk about the alleged cover-up later on in the show. general mccaffrey, as always, sir, thank you very much. colonel jack jacobs, i really appreciate it. now we're going to switch to another very serious topic. today's fed meeting where the central bank will stay right on course and keep pumping in more money. but if mr. romney is elected

president, might interest rates finally rise? we're going to ask the distinguished former fed governor kevin worsh. later in the show, something straight out of a james bond movie. boeing completes tests for new technology that literally fries enemy electronics with no collateral damage. and as always, folks, don't forget, free market capitalism, it is the best path to prosperity. we will talk more about that later in the show. i'm larry kudlow. hmm, it says here that cheerios helps lower cholesterol as part of a heart healthy diet. that's true. ...but you still have to go to the gym. ♪ the one and only, cheerios

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no surprises today from fed head ben bernanke on his qe infinity policy. and of course zero interest rates. the question tonight, would a new president romney have any effect on rates and the fed? here now is kevin warsh who knows a thing or two. he's a former federal reserve governor. kevin, as always, welcome back to the show. since you were here last, we have had the quantitative easing 3 and the zero interest rate was pushed back to the middle of 2015. all right. i'd like to get your take on that. what do you think about this new policy? >> so the policy was put in place really six weeks ago. and as you said at the outset, the central bank didn't have much to add today. today they called the economic growth as a snapshot moderate.

but i think they revealed in their action six weeks ago how gravely concerned they are about the economy, how concerned they are about its prospects, concerned they are about the fiscal cliff in europe. so they must be pretty worried to be this aggressive. >> but do you think a zero interest rate and $40 billion a month, which is -- that's $480 billion of new money creation per year on top of the 3 trillion, right? on top of the 3 trillion. do you think this stuff is going to work? my question, kevin, if it was going to work, why hasn't it worked? that's what i'm asking you. and why isn't this new stuff going to work? >> so i'm not impressed with the efficacy of qe forever. i'm not impressed that this is the right medicine at the right time for the right problems. but the central bank clearly feels they're doing this all by themselves. they don't think they're going to get help from the congress, from the president, from the administration, and it's about time that the politicians step up. >> what's the biggest obstacle to growth right now?

before i get on to president romney. in your judgment is the fed the obstacle or are there other obstacles we should be looking at? >> so you're going to hear from most economists about the deleveraging, about the weaknesses of any economy coming out of crisis. and there's something to that. but if you look at the four economic policies that really matter, trade policy, regulatory policy, fiscal policy, and monetary policy, it looks to me as though those four policies are growth defeating. policies don't have to be perfect. washington policies, as you know, larry, are never perfect. but you really can't be 0 for 4. >> but the possible major league tax hike at the end of the year. >> these kind of fiscal cliff that washington now talks about, that's all over the newspapers. these guys talk about the fiscal cliff as if they could not have foreseen it, as if it was an iceberg coming at them. the fiscal cliff was a creation of washington. they put in place these temporary timely targeted policies. and now they're somehow shocked that six weeks after an election the bill is coming due. >> let's go, i want to talk

political economy, if you will. if there is a president romney, a new president, a lot of people -- we hear this on cnbc quite a bit. they're wondering, does he have, would he have any impact on the fed and the zero interest rate policy? and it's worth asking because of course, a, you were in the thick of it for so many years. but b, romney has been critical of qe and he has been critical of the zero interest rate. and he has said on several occasions he would not reappoint bep bernanke if it came down to that. bernanke's term ends in 2014. now, for novices out there and maybe for me too, what leverage does a new president have on the fed? >> so a couple things. first, chairman bernanke's term is expected to go about a year after then president romney would be inaugurated in your assumption. i have every expectation that chairman bernanke is going to stay through to the end of the second term. the other opportunity that a president would have would be to fill open seats. because as you know, the federal reserve is not a dictatorship. it's a democracy.

the chairman's the leader. he speaks for the institution. but he's also got to get the votes. so central banks rarely make radical changes in policy. rarely change their communications radically. >> for elections. >> for elections. but i'd say over time. >> i remember -- >> it will take some time for policy to change. and my guess is if governor romney is president romney there will be a lot more focus at the treasury and at the budget office in the very near term. >> and you're right. taxing and budgeting and spending is going to be a huge thing. but look, i was there in reagan's first term and it was a hell of a ride with the fed driving -- paul volcker driving interest rates to 20% to conquer double-digit inflation. now, reagan met with volcker on a regular basis. and it turns out reagan gave volcker the ground to stand on to fight inflation. a lot of reagan's advisers disagreed. but the gipper said you do what you have to do, i can't get a recovery, and my tax cuts won't work until we get inflation and

interest rates down. okay. now, is it possible that a president romney brings bernanke in for lunches, just the way this game works, or consultations, and says you've got to raise interest rates, i'm getting reports that small businesses can't get hold of all the money, it's just big businesses and big banks? we're getting reports of higher inflation, we're getting reports that the dollar is falling. could you conceive of a president romney doing that and influencing ben bernanke? >> so chairman bernanke would be listening and hearing what the president has to say. i presume he continues to meet with president obama. i know that ben used to meet with president bush. so his lunches would happen, just as you say. but the fed's independent. ben considers himself a fiercely independent guy. and by the way, he's got to count votes around that table. so even if the chairman of the federal reserve were persuaded by the arguments of a president, that doesn't end the story. it just begins it. >> but we have had, unfortunately, moments in the past, and the famous story is richard nixon, jawboning arthur

burns in 1971, i think, to get money easy, so to pump up the economy, inflate the economy for the '72 election. now, romney in his first year wouldn't have that issue. but could he be -- could romney be persuaded -- let's say the dollar is the issue and romney's advisers are telling him interest rates are so low the dollar is crashing. and you've got to explain that, you've got to tell that to ben bernanke. could he make bernanke bend a wee bit on that? >> so i think ben bernanke's been at this game for a very long time. >> right. >> i think he's seen treasury secretaries come and go. and in your assumption he would see presidents come and go. and he would certainly have -- be interested in what the president, the then president's views are and how he's going to deal with the tax problems and the entitlement problems. and as he thinks about what the other action would be at the other end of pennsylvania avenue, could that go into his thinking about how strong the economy might be away from the federal reserve? you bet. but i don't think that our

experience or anyone else's experience with having politicians setting interest rates -- >> he won't bend. that's your problem. bernanke won't bend. >> i don't think that served us terribly well. >> now, last one, quickly. you're on the short list -- you're on everybody's short list if there is a president romney to become the next treasury secretary. first, would you be interested if you were asked? >> so larry, i left washington 18 months ago, and i didn't leave with intentions of turning around and racing back. very happy. >> but if you were asked to be treasury secretary, kevin warsh, you have a great record, you worked in the whouts, you worked in the fed, you were the only guy in the building at the fed who had any major league banking experience, you wouldn't go down as treasury secretary again? >> you're a very kind interrogator on this. if anyone calls any of us to serve, we'd have to listen. but i've got to tell you, i didn't leave to return and i am awfully happy where i am. there are a lot of great people that haven't served. the new administration, whether to be president romney or president obama, they need a lot

of fresh thinking. they need a lot of new blood. and they need to really start taking policy action away from the central bank. >> all right. i get it. kevin warsh, thank you ever so much. we'll see how it plays out. coming up, folks, hurricane sandy maybe an unwanted trick or treater. the full story on that plus late-breaking headlines coming into cnbc. that's next. that was kevin warsh, folks. keep your eye on him. i'm telling you, he's destined for bigger things. [ male announcer ] at scottrade,

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in front of the judge. here now is cnbc's bertha coombs, who was at the courthouse today with that and all the other headlines. good evening, bertha. >> good evening, larry. highly pedigreed corporate insider rajat gupta was sentenced to two years in prison today and a $5 million fine for his part in feeding secrets from the goldman sachs boardroom to hedge fund operator raj rajaratnam. in court judge jed rakoff said gupta's past good deeds contrast with the nature of his crimes. gupta, who's appealing his conviction, must surrender in january. nbc news reports that fbi and postal inspectors in florida are investigating phony but official-looking letters sent to voters in at least 28 florida counties questioning their right to vote and threatening arrest and imprisonment. the florida secretary of state's office is encouraging people receiving those letters to come forward. the government is suing bank of america, meantime, for a billion dollars. the case is a legacy of the

mortgage crisis and a countrywide financial home loan program called hustle. bank of america acquired countrywide as the crisis deepened four years ago. the bank says it has acted responsibly to resolve legacy mortgage matters. and boeing is crowing about a missile test in utah. the experimental missile fires a pulse of microwave radiation that knocks out power to infrastructure without knocking down buildings, limiting collateral damage but making enemy technology useless. boeing says seven targets were hit in a one-hour test. and just in time for halloween, here comes hurricane sandy. the 19th named storm this year is heading north from jamaica toward cuba and the bahamas. there are tropical storm watches and warnings in florida from the upper keys halfway up the state to sebastian reef. larry, we're going to have to keep an eye on sandy as the weekend approaches. and i know our producer sandy's going to get an awful lot of grief over the headlines this week. >> many thanks. cnbc's bertha coombs. appreciate it. coming up on "kudlow," romney

turned up the heat on obama. so now obama's touting his new agenda. the only problem is it's the same as his old agenda. it looks to me like tax and spend and tax and spend. but we will have dick gephardt and dick arm yeerks two distinguished former house majority leaders from both sides of the aisle, face off for the discussion. next up on "kudlow." americans believe they should be in charge of their own future. how they'll live tomorrow. for more than 116 years, ameriprise financial has worked for their clients' futures. helping millions of americans retire on their terms. when they want. where they want. doing what they want. ameriprise. the strength of a leader in retirement planning. the heart of 10,000 advisors working with you one-to-one. together for your future. ♪ if you're a man with low testosterone, you should know that axiron is here. the only underarm treatment for low t.

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welcome back to "the kudlow report." i'm larry kudlow. in this half hour we go back to our major story of the evening. new e-mails show the white house and the state department were advised just minutes after the benghazi attack began. why the lies? why the cover-up from the white house? you'll hear straight from the chairman of the house intelligence committee. plus, it's no secret. it's a 2% economy. but a year-end tax hike could turn us right into a recession. so why don't folks see that? but first up, when obama unveiled his 20-page second-term agenda booklet to ohio voters, here's what he had to say. please take a listen. >> you know, how you know me. you know i mean what i say.

you know that i do what i say i'm going to do. >> well, frankly, that's what i'm afraid of. another four years. america hopelessly stuck on repeat. the "wall street journal" writes today, "a second first term. meet obama's new agenda, same as the old agenda, only less." i say much less. in fact, there isn't a single true economic growth incentive in his scant plan. nothing. nada. in my view the president has three goals right now -- one, have all the bush tax cuts expire so he can grab the revenue. two, slash defense. and three, spend more. but i may be too harsh. let's ask our guests. here now we have dick gephardt, former democratic house majority leader and former presidential candidate, and dick armey, former republican house majority leader. dick gephardt, thank you for coming back. thank you both. i want to begin with you. on the democratic side. i am extremely cynical about mr. obama. i think he wants to slash

defense, spend on other things, and raise as many taxes and revenues as he possibly can. tell me why i'm wrong. >> well, i just don't think that's the case, larry. he obviously wants to raise taxes on the wealthiest americans, as bill clinton did back in the '90s. when we had a good economy. but he wants to cut taxes for manufacturing incentives. he wants to hold down taxes for middle income taxpayers. and obviously, he's interested in education and infrastructure and trying to give incentives, as i said, for manufacturing. i think all that will be in his program. what's left unsaid, i guess, on both sides of the aisle right now is what to do about the deficit past over the next ten years. >> of which he has nothing to say in this plan. he has nothing to say on entitlements, nothing to say on spending restraint, nothing at all except more spending. and look, i was a great fan of yours during the tax reform under reagan. you were a tax reformer.

in those days you wanted lower marginal tax rates and broaden the base, get rid of the deductions. why have you turned into a tax the rich guy? >> no, i'm not. i'm for tax reform. and we need tax reform in the context of getting the budget straightened out over the next five and ten years. and if people will work together in the next two years and work together in a bipartisan way, they can get tax reform that lowers rates, broadens the base, and creates incentives for growth in jobs. >> i think that's what we need. but dick armey, i don't see any spending restraint. obama said during the debate he's against sequestration, he's against across the board spending cuts. what do you make of this, dick armey? where are we going with this little plan that obama just put out? >> well, again, i look at the president. i think this is a fella who's out of touch with reality. he puts forward a plan that's

supposed to be his vision as it was and as it will be, and i look at it and i say, well, there are some things and some things that are true relative to that vision but what's new isn't true and what's true isn't new. so the fact is he's just sort of stuck with that vision, that dream from his father about income redistribution. when he looks at taxes, he doesn't think about taxes as a source of revenue to fund the government. he thinks of taxes as an instrument of justice to redistribute income and punish people for their successes. he's just simply not in touch with reality. and yes, dick, we could get to real serious and effective, productive growth-oriented tax reform, but we couldn't get there with this fella. he's just not in touch with reality. he doesn't understand. >> dick gephardt, let me just quote. this is interesting. from an interview that was originally blocked out but then they finally released it. from the "des moines register."

this is obama telling the des moines register he thinks this fiscal cliff is going to bring on a big debate. he thinks it's going to force a debate and he thinks it's going to force a grand bargain. i want to get both of your point of view. that grand bargain will include spending cuts, health care spending cuts, and tax increases on wealthy taxpayers. that's what he told the "des moines register." is that a good idea, and do you think that's what it's going to turn out? dick gephardt, you first. >> well, you know, larry, we did this in 1990 when george bush the first was president. we did more of it when bill clinton was president. and incidentally, dick armey was in the leadership in the republican party. and i was in the leadership in the democratic party. look, deficit reduction and getting a deficit path that makes sense is hard work. it's politically difficult. there's nothing more difficult you will ever do in a legislative body. but we did it for the good of the country.

we cut entitlements. we cut medicare. we raised taxes on the wealthiest americans. we cut spending across the board, and we got down to 20% of gdp coming in and going out. >> that was a democratic congress. >> that's what needs to be done. >> i hear you. and of course i recall it very well. but dick armey, you did it differently. you had a republican congress and you did it differently. tell us about that. obama's saying he would cut spending. i don't know if you agree with that at all. obama's saying he would cut health care spending. i don't know if you agree with that at all. and obama's saying he's got to tax the rich. >> no, this is a fella who would rather cut the marine corps than cut americorps. i don't think you could depend on him to ever really cut spending. i don't think he understands the budget. when we sat down at the table with president clinton, he understood every detail of that budget. he had hands on. he had ideas. he would listen to ideas. he would exchange ideas. he was involved in the process.

i've never seen any president as detached as president obama is. and i think he's detached because he knows he simply doesn't understand the world in which he's living. i've never seen anybody in such a high office of trust and responsibility who's so incapable of understanding his own job. i just don't think there's any hope that we can proceed to any effective outcome with this person in the white house who's so far out of touch with reality. >> well, he couldn't put it together. you're exactly right. dick gephardt, let me just ask you, from missouri. polls are saying romney's going to win missouri by a lot. is that true? >> he's ahead substantially right now. >> what about, dick, let me ask you, across the midwest, i've seen polling data on this show. it's awfully close where one wouldn't think it was close including iowa and wisconsin, maybe even michigan. certainly ohio. dick gephardt, do you think

there's going to be a romney sweep in the midwest, something no one's anticipating? >> i don't think so. the polls that i'm looking at maintain an obama lead in states like ohio, michigan, pennsylvania, iowa, wisconsin. and if he wins those states, i think he'll be the next president. he'll succeed himself. obviously, anything can happen. two weeks is a long time in our politics. but these leads in those midwestern states have been pretty steady throughout the period. >> all right. we'll leave it there. thank you, gentlemen. dick gephardt and dick armey, two former majority leaders of the house. up next, where is our economy headed? will a year-end tax hike immediately throw it into recession? harsh realities and what it might mean for your money. we'll talk about it all after the break. in america today we're running out of a vital resource we need

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on gasoline. i am probably going to the gas station about once a month. last time i was at a gas station was about...i would say... two months ago. i very rarely put gas in my chevy volt. i go to the gas station such a small amount that i forget how to put gas in my car. [ male announcer ] and it's not just these owners giving the volt high praise. volt received the j.d. power and associates appeal award two years in a row. ♪ the general economy, i think it's a little bit better in the u.s. certainly better in the u.s. than it is in europe. and in terms of the rate of decline in asia, it's reasonably steep. and we're still inching ahead. but it's inching. >> all right. that of course was warren buffett on cnbc's "squawk box" this morning. question. is the u.s. economy inching ahead like he says, or are we

inching toward a recessionary year-end tax hike? here now we welcome back michelle gerard, senior economist, managing director with rbs, and david malpass, senior president and former deputy assistant treasury secretary. inching ahead, michelle. and what happens if we run smack into a tax hike? >> well, that's it. we are moving ahead at around a 2% pace in the third quarter, and i think that's where we'll be in the fourth quarter. but you're right. it doesn't matter because if the full fiscal cliff were to hit, and we're not just talking about the bush tax cuts, we're talking about the amt, which is really just as much of a drag as the middle-class tax cut, the payroll tax hike going -- or cut going away, unemployment benefits going away. if all of that happened, i think we'd be talking about a contraction in gdp in the first quarter on the magnitude of perhaps 3%. >> and how much would that drive up unemployment, michelle? just to follow through. >> well, i think if you were to see that kind of contraction, you'd probably be talking about maybe an 8.5% unemployment rate

over a three-month period of time. you know, by the end of the first quarter, let's say, or into the early spring. >> all right. dave malpass, let's come to you. on the other hand, there's always another hand when we talk economics. we have seen, and we saw today, new home sales up smartly. existing up smartly. new construction. new starts. prices are rising, david. it looks like there's a certain wealth effect going on from the stock market. maybe not in the last three days but over the last year, up almost 25%. what about that, dave malpass? maybe warren buffett is right and things are moving in the right direction. >> i didn't hear warren buffett say that. he said that things were inching forward. and i agreed with the way michelle phrased that. so i think there is a housing recovery going on from a very low base, but it's a relatively small portion of the economy. in other areas let me give you some cause for concern. total bank assets on a year-over-year basis are only up

2%. and over the last three months the bank lending, the actual lending growth has slowed all the way down to 1.7% on an annual basis. so there's kind of a closing down of many of the small business portions of the economy. i think that's waiting to see the outcome of the election and what the first statements by the new president will be. >> you know, michelle, talking about loans are slowing down, it really doesn't seem like the fed's easy money has done very much good. and i want to just ask you, some of these earnings reports, speaking of not doing very well, a lot of them are being -- not just lousy earnings but some of these industrial companies, 3m and dupont, brian kelly mentioned this on the show last night, michelle, they're reporting layoffs and they're shuttering down factories and production. they're not the only one. they're talking about the global recession. andrew liveris of dow chemical today was on the tape talking about the tax hike we could get and so on. that's worse than an earnings

slump. that sounds almost recessionary. >> i do think it's kind of interesting that it does seem a lot of the concern and growth concerns are overseas. it's funny that actually u.s. has seemed to be kind of one bright spot and companies obviously are doing better in terms of those that are more focused on the u.s. economy. but i think you're really making a good point here. and like david mentioned as well, where we're seeing strength right now is housing is turning around and that is helping consumers and consumer confidence. but what's really down right now is the business sector, which has really been the source of our strength through this recovery. they're not hiring. business spending is looking very weak. we'll probably in the third quarter show an outright decline in invest investment on computers and other equipment. the business sector is hunkered down. they're unsure about what the election means, where the economy is going. and that's really the key. the consumer is not going to continue to power ahead if this employment situation doesn't pick up and if the business sector doesn't begin to feel better about the prospects they face in 2013. >> dave malpass, on the other

hand, hong kong's stock market is hitting a 52-week high today. and that is sparking a lot of people to say you know what? we are going to have a soft landing in china, they're not going to go below 7 1/2% gdp, and we're going to come out of this okay. are we too pessimistic about -- when we talk global, i'm not stalking europe. i'm talking china. that's a major factor. what do you think? are you buying hong kong stocks? >> i like hong kong among the emerging markets. you know, the emerging markets as a whole, meaning including brazil and russia and so on, have actually been weak, but the asia ones are stronger. and the reason for that is because china is managing to engineer some bottom. they're still reflecting the global slowdown. china's being hurt a lot by europe and by the u.s. weakness, but they've found a way to get more of the growth to come from their consumers. and that's enough, people are celebrating in hong kong. so i think that is a stabilizing force in this global recession

risk that we're in. and it's going to come down to what the actions -- how the u.s. actually deals legislatively with this tax increase. we can focus right down onto that and say, for example, after -- let's say president obama is re-elected. if his first words coming out of the block are that he'd like to have an extension of time in order to sort out some of the fiscal cliff, that would be very bullish. and vice versa. if governor romney wins and president obama says i'm willing to give you or grant you as i leave office an extension of time on the tax hike -- >> but he hasn't really said -- michelle, i don't want to politicize this whole thing, but so far, michelle, what we know, president obama has said he will not extend all the bush tax cuts for a second time. he did extend them back in 2010. but he said the upper brackets, i don't know, 2% or 3%, must go up for him to sign that bill. >> right. that's what worries me.

right. >> that leaves us vulnerable to a gridlock, michelle, where then the whole bloody thing is going to go down and you're faced with a 450-some-odd billion-dollar tax hike right away. >> you're exactly right, larry. that is the thing. even if romney wins, he's not going to take office until the third week of january. and if the president is dug in about not raising -- or not extending all of the bush tax cuts before he leaves office, then we will go over the cliff. now, there is some things that, you know, the treasury can do, for example, when president romney is sworn in he can have the treasury adjust the withholding tables, for example. so that'll offset some of the pain. but that's also a big risk because if they don't end up finding a way to come to an agreement in 2013 and now everybody's under withheld, then we talk about that being the mother of all fiscal cliffs, if you will. so there are some risks here, even in the near term under a romney victory, just beginning with what the president does. >> it was very interesting, larry, to hear dick gephardt in the previous segment. it's important what the senior

democrats try to counsel the president, the sitting democrats counsel the president. >> right. we've got to let it go. we'll come back and visit this another time. two weeks until the election, and then comes the lame duck congress. michelle girard, thank you. david malpass, as always, i appreciate it. coming up on "kudlow," the politics of benghazi. e-mails. still, how did this massive security screw-up happen? even when the white house got e-mails and watched it on real-time video. why didn't we fight back? i'm still asking that question. why don't we save their lives? the house intelligence committee chairman coming up next to help illuminate this awful story. we, the better you trade. so we have ongoing webinars and interactive learning, plus, in-branch seminars at over 500 locations, where our dedicated support teams help you know more so your money can do more. [ rodger ] at scottrade, seven dollar trades are just the start.

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all right. we go back to our top story. nbc news confirms that the white house received an e-mail from the safe room inside the benghazi embassy six hours after the attack. my question is with this e-mail intelligence and real-time video why didn't we deploy our military assets to save their lives? let's bring in house intelligence chairman mike rogers, republican from michigan. chairman rogers, thank you very much. you know, 4:05, 4:54, 6:07, you know all about the e-mails came in. bing west says there was a meeting in the oval office, chairman, between the president, the vice president, and the defense secretary. what were they talking about in that meeting in the oval office? they sure didn't defend our people in benghazi.

>> well, and that's certainly a big question, larry, that we're going to have to try to get an answer to. and what's so concerning about this is this is more information. think about all we know. all the information leading up to the 9/11 event that took the life of our ambassador and three employees showed that al qaeda in the maghreb, that northern area of africa, was committed to committing a terrorist attack on western targets. so we know they hit that exact consulate in april and in june. some think it was prepping for a more serious event. this event occurs. they've got those e-mails, as we've learned today, from the state department. within 12 hours my committee, the committee on intelligence, received a report from the intelligence community that described this as a military-style attack. so it went from that to what you saw ambassador rice do on the sunday shows, which is to say for sure and for certain it was a mob gone wrong, spontaneous, and it was all about the video. >> look, these e-mails and those videos -- yes, you're right. we saw it in real time.

the e-mails and the videos. and they run through the situation room in the white house. which means it spreads out. i worked there but you know this better than i do. national security council. everybody gets it. so they meet in the oval office. the defense secretary panetta, biden, and president obama. they meet. do you think at that point they concocted this cover-up story? do you think they decided to try to sell that it was this anti-muslim video and a spontaneous demonstration rather than a straight-up military attack? do you think at that moment in the oval office they concocted this cock and bull story? >> well, i can't speak to what happened in the oval office or in the situation room on that day. we just don't know. but what i can tell you, larry, is again, all of this information certainly would lead an experienced analyst not to come to the first conclusion, that it was spontaneous and it was caused by this video. so something happened between all of that information coming in, what we knew in real time, what we knew leading up to the

event. remember, in april and june it had been attacked already. the conclusion immediately should have been, well, obviously, they're back again. that didn't happen. and here's what we lost. this is important. so they made policy decisions to go out on the road and take that message out on the road, including internationally, that it was this video, who most of the middle east hadn't seen, and nine days later bought advertising on -- a whole bunch of advertising in pakistan saying we're sorry about this video, which inflamed the pakistanis. we lost at least a week and a half if not two weeks about focusing on trying to go after the people who had actually committed the event. that's what i'm most concerned about. >> last 30 seconds. do you think the president owes the country an explanation? he owes it a timeline and a full explanation. we haven't really received one. >> absolutely. this is a serious event. it's the first ambassador killed since '79. by the way, we had a tunisian event, the country right next door, two days later that we believe was by the same group,

attack our embassy. four people killed. not americans. and they also stormed the american school there. so there's a pattern here. absolutely, america deserves the truth. and we'd better get after these folks or we're going to have more problems down the road. >> thank you, sir. >> thank you. >> house chairman mike rogers, chairman of the intel committee. thanks for watching. i think the white house has got to give the american people an explanation. why did we lose those four lives in benghazi?

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