on starbucks as gillead because those are probably the next places that rally. i like to say there's always a bull market somewhere. i promise to try to find it just for you right here on "mad money". i'm jim cramer, and i will see you tomorrow. special edition of the kudlow report coming live from washington, d.c., and the breaking news tonight is here in washington where a budget deal in congress has finally been reached. congressman paul ryan and senator patty murray made the announcement moments ago. we'll talk about this agreement with our special guest tonight house republican majority lead eric cantor who is also live. another big story in washington, comes from cnbc's own steve liesman. he's reporting all the triggers for a fed bond tapering have been hit and the fed may come out this month of december at their meeting next week and give

us a first low down in bond purchases and another reason why that's an important story don't forget our main event tonight on kudlow we'll host a historic first-ever face to face debate between former fed chairman alan greenspan and former treasury undersecretary john taylor. taylor says that greenspan and his fed policies created the housing bubble that ultimately led to economic and financial collapse. mr. greenspan vehemently disagrees. i'll be a completely impartial moderator, all those stories and much more coming up on "the kudlow report" beginning right now. good evening, everyone i'm larry kudlow. this is "the kudlow report". we're live here in washington, d.c. it's 7:00 p.m. eastern out there in california it's 4:00 p.m. pacific time. we begin with breaking news from

the u.s. capitol right behind me with a december 13th deadline looming large house and senate budget committee chairs paul ryan and patty murray announced just half an hour ago that they've reached a compromise. it's a two year budget deal. we go to cnbc's chief washington correspondent john harwood. he joins us now with all the details. good evening, john. >> reporter: good evening. just in time for your show. it's not a grand slam home run. call it an infield single but something that republicans and democrats have agreed on. john boehner called it a modest deal. it has $63 billion over two years in relief from the sequester. that's raising the caps equally for domestic and domestic priorities. it has an additional $22 billion in deficit reduction. just $22 billion over two years. it does not raise taxes and does

not touch medicare and social security. therefore, it avoided the hot buttons but does eliminate the threat, we believe, of a government shutdown in january and likely with it a potential debt crisis in february. you had a press conference with paul ryan, the republican chair of the house budget committee. patty murray, democratic chairman of the senate budget committee. paul ryan said conservatives can get behind it and so did patty murray. here's their comments. >> as a conservative i think this is a step in the right direction. what am i getting out of this? more deficit reduction. the deficit will go down more if we pass this. point number two, no tax increases. point number three, we're finally starting to deal with auto pilot spending. >> because of this deal the budget process can now stop going from crisis to crisis. >> reporter: that last point is the biggest thing the white

house gets. president obama was sick of the brinksmanship to the end of the fiscal year resulting in shut downs and debt living bringsmanship. he praised this as a good first step. not the end point but a first step. when i talk to democrats and republicans on the hill they say they do believe it can pass both chambers. republicans are also expecting at least half of the democrats in the house to vote for the deal but you've got somebody sitting right with you larry who can tell you more definitively how strongly republicans and conservatives will get behind this deeshlal, hopefully pass i. >> john harwood thank you very much for all those updates. now to respond, we have the house republican leadership, the majority leader, exclusively, eric cantor, republican from virginia. mr. cantor thank you very much as always coming back on "the

kudlow report". first take on this, the sequester and budget caps have been broken. they have been lifted. now i was around here in washington, d.c. during the reagan days when we had something called the gramm-rudman ho gramm-rudman hollings bill. some are saying we'll never have that budget discipline. your thoughts. >> i think the important piece to this deal and yes it is a modest deal is we maintain the savings of the sequester. remember the sequester was in place because a supercommittee back two years ago failed to come up with an agreement. what this is, is an agreement that less than 10% of that massacre money. the savings are maintained and what we've always said was we need the savings in the mandatory, the entitlement, the auto pilot spending arena.

and the savings that are inside this budget deal really are primarily derived from reforms to the pension benefits for federal employees. this is the federal government finally trying to do what most responsible states are doing in dealing with their unfunded liabilities connected with their pensions. >> i want to get back to that in a moment. a lot of people are saying and have for the last, whatever, 24, 48 hours, a lot of people are saying, you know, the house republicans really didn't want to lift the budget caps, didn't want to lift the sequester but the defense committee didn't want to take a $20 billion hit. that was the long and short it. and if you had kept the sequester it would have lost on the floor of the house, would you have lost 40 to 50 republican votes, the defense hawks, so to speak. was that truly the genesis of this so-called deal? >> part of the down side of an across the board cut like a sequester is cuts take place for

the good programs and the bad. those of us who are strong national defense folks and believe in a strong national security policy don't like the indiscriminate nature of the cuts and how they impact the pentagon. but the last commitment on the part of republicans to maintain those spending reductions. the reason why this deal allows us even a better path forward is it maintains the savings, but places those savings in an area, frankly, that are much smarter and so that we can go about the business of reassuming our role in setting budget priorities and continue to ratchet down the wasteful spending. >> do you have an idea when this will be published. a whole lot of people want to see how the savings are being reallocated. >> this will be up on the website, posted on the house rules committee website tonight. >> transparency. transparency. >> we always try to live by the three day rule after what the prior majority had done so that

the american people can realize -- >> no health care scams. we don't have to find out later and we can read about it first that's what you're saying. let me ask you another thing. i notice absent from this is the $25 billion extension of unemployment compensation which many democrats want. i am told, mr. majority leader, that there will be a vote on that unemployment compensation outside the package. i have no idea what that meant. i only worked in omb for four years, outside the package is new nomenclature. >> as far as i know the president has not come forward with a serious plan of unemployment insurance, and meanwhile we in the house remain focus on how you grow the economy, how you get the unemployed back to work. that should be our focus. that is our focus in the house. trying to afford more opportunity by promoting growth

because as we know upward mobility can only come from a growing economy. >> i want to get to your growth vision the speech you gave to the virginia republicans just the other day. there are a lot of fees. i used to call them revenue enhancement. a lot of fees. some kind of airline passenger fee which supposedly is going to be for safety purpose%. federal employees their co-pay will go up. guarantees for the federal pension benefit guarantee corporation which is a bit under water. now, question, will conservatives go for those fees. will they call them revenues? i've already read senator marco rubio say he'll not sign off on this. i know it's not the biggest priority in the sophisticated. the fact is will conservatives go along with those fees or call them tax hikes and object to this package? >> first of all there's no tax

increases in this package. larry if you're asking me would i rather see a deal without fee increases, yes. we're in a divided government right now and obviously very frustrating we can't get everything we want. so this deal has in it some fees, but if you look at the largest piece of that, which are the tsa fees, when you go to the airport and go through security, that agency needs to be supported and, in fact, that agency even with the fees reflected in this deal is still not self supporting. >> one of the most hated federal agencies in america and you're giving them morgan. >> i don't disagree with that. the taxpayers are giving them more money. this way users should be supporting that agency. and even with this fee adjustment, it's still not supporting itself and the taxpayers -- why is it fair for somebody in my district of richmond who never flies to support tsa for all those who do. >> reagan believed in user fees.

>> that's what this is. and on the tsa side which is the largest piece of the fees in the deal. >> as you were talking and dealing with this with budget chairman paul ryan, okay, did you and mr. boehner, i'll just call you two the leadership, quote-unquote, did you and mr. boehner give paul ryan a green light a, to lift the sequester caps and b, to go into the fee and revenue area? did you say go on ahead, we'll support you? were you behind him the whole way? >> first i want to say how proud i am of the work that chairman ryan put into this. his team, his committee, the budget committee that came to this agreement because as we know having been in divided government now since 2010 it's tough. it's tough because we have a lot of disagreement on tax, on fees, on health care with this administration, this president and the democrats in the senate. so i think in working with

chairman ryan, what the speaker and i continue to advocate was our position has always been across the board indiscriminate cuts, random arbitrary cuts associated with the sequester were not as good as mandatory permanent cuts if we could achieve those. unfortunately, again, the democrats, they weren't going to sit down if we could only get what we want, they wanted what they want. >> did mr. obama show up at any point in these negotiations. i haven't heard that de. >> i'm not aware that he did which s-again, par of the problem around here, larry. we could be working together a lot more, setting aside the difference, saying no to tax increases because that's what chairman ryan said from the outset, that's what the speaker and i always felt you shouldn't be raising taxes we have a spending problem here in washington. if the president would say okay republicans are for pro growth

policies let's figure out what we can do to grow the economy. >> on that last point. you gave a very important speech to the virginia republican party which suffered mightily in the last election. okay. you said, basically, that republicans have got to have a positive agenda and be united in order to win. now, last week president obama gave a speech where he said the greatest challenge facing america is inequality. do you agree with that? is that the positive message you're thinking about for the republican party or do you have a different contrasting vision? >> the greatest challenge that this country has is to make sure that everyone has equal opportunity to go and earn success. upward mobility can only come -- first of all, growing this economy and seconds of all, at the human level people have the tools and skills they need to get up on that ladder of success. that is the aperati atspirationf

our party. >> is 2014 going to be the year of hammering obama care, okay i get that but to the exclusion of what you just said which i'm going to summarize, a rising tide lifts all boats. >> we're promoting solutions to real problems that people are having. when you think about an inner-city mom that has to wake up and send her child to a poor performing school, what is that mom and child want more than anything? they want just an opportunity to go to a safe place to learn. i met a child like this in new orleans a couple of weeks ago, 11 years old. he actually doesn't know his mother. his father is in jail. his grandmother that's raising him just found out had cancer. but he has a vision. he actually wants to go to

college. now that would never have been the case if it wasn't for the case of governor jindal's solution saying hey we should have the ability for kids like brian to go to school and have a quality education. we'll talk about things that can lift people up to go about their lives and earning their success in getting ahead. >> many thanks. republican house majority lead eric cantor. great vision. now debate. we'll debate this whole budget deal. we have an expert financial panel. they will tackle these. first for kudlow report, first for cnbc and first for the nation, former fed chairman alan greenspan will face off against treasury undersecretary john taylor. mr. taylor accuses greenspan of creating the housing bubble that wound up decimating the economy and our financial markets. greenspan versus taylor live in just a few moments.

don't forget free market capitalism is the best path to prosperity. we'll investigate the monetary side of free market capitalism. i'm kudlow. we'll be right back. please stay with us. ♪ [ male announcer ] this december, experience the gift of exacting precision

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once again our top story tonight, late breaking president obama's job approval, listen to this, his job approval, before i get to the budget has hit another new low. take a look at the latest quinnipiac poll. his approval rating has dropped down to 38%. that's before this budget deal was unfurled and undoubtedly has plenty to do with obama care. let me bring in my two guests. i'm not going to ask you, speaking of cheney the whole liz cheney thing out in wyoming. we'll save that for another time. it's a family break up. let me go to you first. is this deal going to pass muster among the conservative side of the gop, the club for

growth and the prosperity caucus and the other activists who are on the conservative side of the gop, and i'm already hearing some protests from senator rubio from the conservative side in the senate. what do you think? how do you think this will work? >> senator rubio is not relevant in this case because it will passing the senate pop your question, yeah a lot of tea party house conservatives that will say, you know what, this doesn't work or go far enough. >> why? >> the whole sequester thing. that's the main issue there. also too, i don't think they trust paul ryan. >> really? >> i think so. >> i think -- >> we think he's running for president. >> i think ryan is a great tool here. the issue here, steve, once you break the caps, once you break the sequester they are gone. they will never be -- you'll not make up for them. i saw this years and years ago

with gramm-rudman. many many believe this is the republicans signature policy. the spending gdp has come down. how do you see this? >> i see it i think the way you two do. it's a train wreck inside the republican caucus. what the negotiators will do is take to it the floor so it doesn't have to go through the committee process which means it doesn't have to comply with the boehner rule, the majority of the majority. a lot of noise you're hearing from conservatives in house is just noise. >> let's say that the republicans walk away, i don't think 40 or 50 will walk away but say 20, 25 walk away. will democrats cross over? >> yeah, i think they will. >> not y. whelmingly. >> they don't need overwhelmingly. >> like chris van hollen.

>> this is the way that john boehner has gotten legislation passed. he's had to rely on democrats. be interesting to watch mitch mcconnell the minority leader because he's in kentucky campaigning against the tea party challenger, one of the thing he's proud of is the sequester deal. i don't know if you can filibuster this, but if you can -- >> i'm sure you saw it today. congressman steve stockman, a very conservative tea party type congressman is now saying he's going to run and primary against senator john cornyn, the number two guy in the leadership. cornyn was the money guy. cornyn mopped the tea party republican. so there are splits and i think that's emblematic. i don't know about mitch mcconnell's race but there are splits and this deal may create more splits. how do you see it? >> you're right. probably will definitely pass by 51 or 52 votes of the senate.

>> filibuster is the question. 51 votes won't be enough. if mitch mcconnell really believes this is a signature achievement and it will keep him from getting defeated in a primary against the tea party nut job then it might get filibustered. >> steve, come on, there's no doubt about it he probably will let this pass. >> well, i think he's going to have a tough time because he has to choose between shelling out the government and passing this thing. >> how about what i'm calling unfairly but the red state democrats and i'm not just saying mary landrieu in louisiana, if i favorite is gene shaheen in new hampshire. she's running for her life up there. does she vote for this deal? they didn't get the $25 billion extension for unemployment compensation. in fact, it sounds to me they didn't get anything although we don't know the details. no unemployment assistance. does that matter?

>> i think she will vote for it because she's moderate democrat in a swing state. being somebody who is against shutting down the government for fiscal sanity and supporting a thing that paul ryan is behind and republicans in the house makes it safe for her. i do think there's a vote on unemployment extension a separate vote. >> unemployment rate is very high in new hampshire. she will vote against it. she has to create a wedge issue between her and scott brown. >> did you see that mr. boehner re-enrolled as a candidate. they had a picture up there in ohio. there was talk that he was going to retire. and that some of his senior staff had already left and gone to so-called greener pastures. it doesn't look like that. looks like john boehner will be around. >> at least two to four more years. if nancy pelosi is not speak. >> i know. i used to interview her. thanks to robert and steve.

pretty pithy stuff. now, big event in washington today also a major story on wall street. government regulators approve the volcker rule. cnbc has more. stay with us. we're "the kudlow report". across the country has brought me to the lovely city of boston. cheers. and seeing as it's such a historic city, i'm sure they'll appreciate that geico's been saving people money for over 75 years.

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that it's in effect will prohibit banks for trading investments for their own accounts. the rule was named after former federal reserve chairman paul volcker and designed to protect banks by limiting the risk they can take on their portfolios. all right. there you have it. very important piece of regulation. not scheduled to begin until 2015. many thanks for reporting on that one. now more on fed stuff and regulatory stuff. our own cnbc steve liesman out on a limb. he's reporting that the fed will taper down its bond purchases and come up this month in december at the december 17th to 18th meeting. he's going to explain his position just ahead and also next the debate we've all been waiting for, former treasury undersecretary john taylor. he says alan greenspan and the federal policies were responsible for the housing bubble that led to the financial and economic crisis.

mr. green span completely disagrees. they will both join me and have it out. i'll be completely fair, balanced and moderate, next up on "the kudlow report".

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we are moments away from our historic debate on the financial crisis.

alan greenspan and john taylor are with me here right on set. they will go face to face and see who should be blamed for the housing bubble and the financial crisis. but first we want to go to cnbc steve liesman for some news on the fed's next meeting which is december 17th to 18th. steve, good evening. what you got? >> reporter: good evening. a taper by the french at its meeting next week looking more likely than not. the economic data, market reaction to it and statements by fed officials point that the fed could reduce the amount of stimulus it provides the economy through quantitative easing. the fed offered three tests for tapering and they look to have been met. first is confidence in the outlook. now 193,000 back in september when they said tapering was a close call it was 44,000 less. unemployment rate down to 7%. .2 down from where it was in september. they cited fiscal uncertainty as a reason not to taper now.

looks to be a pretty solid budget deal in the works. interest rates short term rates have behaved. a sign that markets believe the fed that even if it tapers it will keep the fed fund rates low. of course predicting the fed has been tough of late. they didn't taper in september when the market thought it would and announced a schedule to taper in june when the market didn't expect it. they could wait another month to be sure the economy is on better footing but fed officials don't think it matters a whole lot if they start now or next month. what the fed is trying to do now is pivot from quantitative easing as the main tool to forward guidance and to interest rates. next week, larry, could be the beginning of that process. back to you. >> all right. many thanks, steve liesman, very interesting call actually for what it's worth. i support that call. but more importantly, here now we have former federal reserve chairman alan greenspan and we have stanford economist and

former treasury official john taylor. before we get into who gets the blame for the 2000, should the fed stop buying bond? >> they should slow down. they've been talking about it for a while. good opportunity. i don't think it's been much good. time to get back to as quickly as possible to normal policy. >> mr. chairman do you agree reiterates time to slow down and he snuck in a second clause it hasn't done much good. >> i agree with both sides. >> it hasn't done much good. >> well, it's done some good in the sense that it's had a significant effect on lowering long term interest rates which has moved the stock market up and that's spilled over into the economy and created some bu

buoyancy but whether this innovative procedure has worked. >> they should begin now ununited the position. >> it's about time. >> gentlemen, let's talk about the main chants. go back to december 30, 2008, kay schiller home price index reported the largest price top. home values were on a tear through most of the 2000s, peaked in 2006 but by 2008 had completely burst. the credit crisis that followed the worst american had seen since the great depression. who is to blame for the bubble that caused the crash. john, john taylor you have long pointed to monetary policy under alan greenspan's fed for exacerbating the bubble. your critique of mr. green span and the federal reserve between 2002 and 2005 the fed kept late too low for too long and that

created the bubble which in turn led to the massive problems in the economy. that's your basic point? >> it exacerbated the bubble. you can see the bubble started to increase at a more rapid rate around that time. there were other factors. i think lax regulation was another factor. but that monetary impulse was a big factor. >> specifically, you've said -- you said to it me on numerous radio shows and on interviews on this show between 2002 and 2005 fed kept rates too low for too long and that released the forces that created the housing bubble which, in turn, when bubbles burst then the economy collapses. that's your basic point of view, you've spoken about it, you've given lecture, you cited academic evidence. is that still your view >> absolutely. >> mr. greenspan, the floor is yours. i take it you disagree. >> doi do.

i do for a number of reasons. first it's important to recognize as i told my good associate of many years standing, i agree with 80% of the taylor rule. i mean it captures what essentially goes on with, for example, the federal market community and how we come to market designates. it's the to er% that ha -- the . your particular rule, for example, would say that what i think has been the most extraordinary monetary policy action in the history of the fed, paul volcker's rule eliminating recession at a

critical time. it doesn't fit the taylor rule. >> the taylor rule didn't fit in the bad days of the late '60s and '70s when inflation came in. volcker came in. >> his actions if you plot them are very far removed from what the taylor rule taken literally would recommend doe. >> he was coming off a place where you're way off and he got us back. >> that's not part of your rule. >> you have to get to the rule. >> let's come back to it. your rule, i'm just reading from your work, and conversations you and i have had down through the years, your rule said the federal reserve should not have lowered the fed funds rate to 1% in the middle of 2003, the spring or summer of 2003. >> that's the key. >> that was the most prominent mistake of the federal open market committee which mr. greenspan chaired.

what would your rule have said? what should they have done? >> they should have had rates moving up earlier and bay larger amount then they wouldn't have to come up so high, wouldn't have had as much of a bust as we had. there's other things. you don't have to look at a particular taylor rule or other rule. the fund rate was 1% when the inflation rate was 2%. it is much lower in that period by any way you want to calculate it. you don't have to have a taylor rule to see it was too low by that time. >> alan, your response. >> first of all, what the data shows is that sometime in the early part of this decade, largely because international events meaning essentially the end of the cold war we had a dramatic shift from essentially third world socialism to capitalism on the part of a

remarkably broad section of the third world what we now call the developing world. they moved extraordinarily rapidly towards markets especially china and india and the consequence was a very large build up in the savings of those societies which they could not spend on investment and that spilled over and lowered long term interest rates across the board and its long term rates which effectively determined the price of homes. it is not the short term overnight rate. all of the data very clearly show that what moves the home price level higher is the long term mortgage rate. there's a small part involved in adjustable rate mortgages, but federal reserve research in some

detail indicates it's really small. >> a quick response. >> both rates are important. long rate mortgage rate a short rate. the fed has influence on both of them. the short rate -- >> my adjustable rate mortgage is tied to the short rate. >> there were an explosion of adjustable rate mortgages. >> there was a disconnect starting in about 2001 if not earlier between the fed's ability to move the long term rate and the short term rate. up until that period there had been a very close tie between the federal funds rate and say the ten year note and mortgage. >> let's stop there. we're going to come back. we have lots more to do. i'll give everybody more than equal time. we'll take a quick break. mr. taylor will be back. mr. greenspan is back. as you can see there's a substantial number of

disagreements. i'm working hard to understand. please stay with us, we're "the kudlow report". (announcer) at scottrade, our clients trade and invest exactly how they want. with scottrade's online banking, i get one view of my bank and brokerage accounts with one login... to easily move my money when i need to. plus, when i call my local scottrade office, i can talk to someone who knows how i trade. because i don't trade like everybody. i trade like me. i'm with scottrade. (announcer) scottrade-proud to be ranked "best overall client experience."

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alan greenspan, former chairman of the federal reserve board, john taylor former undersecretary of the treasury. is this a historic debate among two brilliant people. question who is to blame for the housing bubble gone bust? one of the seminal economic events this country has ever experienced. we bring back mr. greenspan and mr. taylor. alan greenspan i want you to pick up where you left off regarding mortgage rates and the difference influence of short rates and long rates but i want to raise two points, easy points. there were signs by 2004, there were signs, the gold price had jumped substantially and i know that down through the years you have watched gold. the dollar had fallen substantially. the nominal gdp total spending in the economy had picked up substantially. were those not warning signs to you that the 1% drop in the funds rate in the middle of 2003

was causing trouble and we were on our way to a bubble? >> it would if it affected the long term rates. and it didn't. there's a very specific reason why we lowered the rates and that's a special issue which i'll get to if you want me to. but the main issue here is something fundamental and structural has happened over the last decade. sometime in 2002 or 2001, there was a disconnect between the short and the long end of the financial markets. from 1983 to 2003 the relationship between the short term rate and the long term rate was very tight. consequently when it was the long term rate pushing the economy in one form or another and mortgage rates were pushing the house price it also seemed to reflect the fact that the

short term rate was actually doing it. however, when the disconnect occurred ten years ago, the long term rate shows no signs of going down and the are short term rate went down significantly, the long term rate didn't, the mortgage rate didn't and as a consequence there's no evidence that the actual price levels of homes was significantly affected by the action which we took which actually was insurance. >> that is a key point. i want to get your reaction to that because after all the fed controls the short term fed funds that's the target rate. they do it by adding or subtracting reserves in the banking system. you say that doesn't have an effect on the mortgage markets. do you agree with that? >> no. that's what they base it on. they hold the rates lower to get the rates down. >> they didn't do it.

>> they have forward guidance. forward guidance. there's really no evidence that if the fed had higher short term rates, long term rates wouldn't have increased. i think the reason -- if there was any disconnect it was because of the policy of these very low rates so unusual, so different than the policy that worked well in the '80s and '90s. if there's a difference that's what it is. ultimately we have these low short term rates which encouraged adjustable rate mortgages, teaser rates, they have an influence. you can't blame the world economy. the world economy had a savings rate which was, if anything, lower than normal at that point and that's, you know, interest rates are influenced by world conditions. but just to say because it's freedom around the world -- >> you don't buy the scenario that chairman greenspan -- >> let me point out one important thing.

there was a very high correlation between short term rates and long term rates including mortgage rates prior to 2003. the correlation since then zero, and there's been a complete disconnect between what the federal reserve is doing and monetary policy and the long and short term rates. >> there's evidence that short term are lowering long rates. >> essentially what the fed is doing that we didn't do back in those years is going out and purchase long term assets in a way that is suppressing the market. that's not what was being done back then. the long term rate continued to move pretty much -- if you take a look -- >> that's beside the question. >> it's not. >> we're talking about the influence of low long term rates. low short term rates on the long rate. that's part of the reason the fed does forward guidance now.

to the extent there was a disconnect it was because of your very unusual low interest rate policy in '03, '04, '05. what are markets to think you'll do next when it's so different. >> you were unconventional. alan, you were, in my humble opinion a great fed chairman, preserving the work that volcker did to vanquish inflation, you brought the inflation rate down even more during your at the entrepreneur the economy prospered, actually prospered. after september 11th and after that mild recession, you really had an unconventional policy by bringing the fed funds rate down to 1%. i started by career at the fed in the mid-1970s and had been watching the fed all those years and never imagined we would get there and what troubles me not only have we got there once we have even gone further zero this time. this whole thing being repeated? >> there's a real concern --

>> let me just make a very important issue here. we're all very respectful of milton freeman. >> yes. >> milton friedman in 2006 commented on federal reserve policy from 1987 through 2005 said it had never been -- there had been no comparable experience with the federal reserve which had been that good and couldn't be more laudatory. he would not agree with you. in fact he didn't agree with you. >> de. we're colleagues. and i agree with larry and milton. your term as fed chairman was terrific. we're just talking about the end, this period of '03, '04, '05 objective evidence said rates were two low. many economists have said look

those rates were too low whether you use the taylor rule or look at it in other ways and that's what we're concerned about. we'll look at the evidence and what happened. >> i'm looking at the evidence and i'm just saying that the evidence, as i presented, for example, in the brookings panel very detailed paper for 2010 and repeated essentially in the book that i just published says that you're wrong that essentially the fact, for example -- let me go back interestingly and look at this thing. there is just no relationship between the short and the long term market. we lowered rates because price inflation was flowing dramatically at that time. we had been through the japanese experience. we took out fire insurance. we very specifically said that we did not expect that it would be necessary. >> we're running out of time. >> inflation was rising in this period of time. during this period when rates were too low it was beginning to rise.

it went from 1.7 to 3.4. you may not think that's much but that's the kind of thing that gets these things going. housing prices were going through the roof. you don't have to rely on the taylor rule. >> i just want to add to that. my humble way, gold commodities rising alan big time and the dollar was falling big time. gold going up, dollar going down. it steamed me it was a classic sign. i just want to ask you this with the greatest respect. we've been friends for all these year. you're one of the most important figures in the american economy for, i don't know, at least four decades. well into the 1970s. if you had to do it over again, in 2002 and 2003 and 2004 and 2005 would you have taken the fund rate down 1% and slowly raised? do you feel that, in retrospect was exactly the right decision? >> yes. >> okay. >> and the reason i say that is

what you're not commenting on is the dot-com boom. we, according to john's particular rule were doing the right thing there and we ended up with the dot-com boom. the roeeason as i expressed in e book i just published, human nature being what it is, that if you have very successful policy of stabilizing the economy, you are invariably rewarded with a bubble. >> i got to go. i got to go. i appreciate that. i wish we had more time. john taylor, alan greenspan, two economic giants. we'll be right back. ♪

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many thanks again to alan greenspan and john taylor for that historic debate. it will be posted immediately on cnbc.com. that's it for tonight's show. i'm larry kudlow. we'll see you tomorrow evening. at farmers, we make you smarter about insurance. because what you don't know, can hurt you.

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