Creation Now

It's been nearly a month since I last blogged!

Yolanda had to go back to Louisiana and I've been missing her.  I felt like I had acquired a daughter.  It has been bitter cold here, and I was amazed Yolanda was willing to come at this time of year, when she had never been in such cold climate before.  Not only that, she talked much with me how she was going against the grain of her culture coming out here to meet me.  Now, she said, African Americans feel they have a world of opportunity in front of them, with examples like Oprah Winfrey, Barack Obama, Condoleezza Rice, Colin Powel, and Tiger Woods to follow.  But Yolanda sees a greater success and a freedom that the world doesn't see. 

I've been camping out again.  The weather looked like it was finally getting warmer, but decided to revert to crazy cold again.  I've been sleeping way well, much better than when I'm indoors.  I double up 2 sleeping bags (when I'm at the near-town camp) and feel cozy warm.  But I only need blankets up the canyon in the cave.  I've been spending a lot of time near town these days, having a lot of projects going on here.

Creation Now

At the suggestion of Al (the commenter on the last blog entry) I checked out and read the book, "The Survival of the Sickest", by Sharon Moalem.  I couldn't put it down.  It is a science book that reads like a mystery novel, and Moalem has a deeper understanding of the principles of science than most anybody I've read.  It reads to me like a spiritual treatise, and it made my spirit soar.  One of its main themes is how what we consider "disease" in our culture is actually an adaptation to help us survive.  What may be beneficial in one environment and culture may be disease in another.  Since reading it, I hope to revise my ideas in the website on evolution and natural selection.

The concept that creation is happening now intrigues me to no end.  We are in the midst of miracle, but we become so blind we look for miracles some place else & in some other time.  Perhaps literalist "fundamentalists" are not literal enough!  Genesis is literally in the present tense, forever and ever and ever.  Hmm, this sounds strangely Hindu, huh?  What if we said, "Let light Be,"  or "Let animals Be," or "let the heavenly bodies Be".  What if we accepted everything in nature As It Is, in full and complete submission.  What if I accepted you as You Are and what if I accepted myself as I Am:  I Am Who I Am.  If we accepted what is as It Is, I have the deepest hunch we would no longer be controlled by nature, we would no longer serve nature, but Nature would serve us!

Isn't it common sense that if you accept your lover as She Is, as He Is, she or he will then want to serve you automatically, without your coercion?

And I have a hunch that we would become We, the participants of creation!  "Is it not written in your law, 'Ye are Elohim?" (John 10:34 quoting Psalm 82:6)    "In the Beginning, Elohim is creating the Heavens and the Earth. (Genesis 1:1)"  Hmm, am I taking scripture too literally?  :-)

Frankenstein Monster

I'm still questioning what the role of technology is in our lives.  I feel deep down that our technology is part of human nature, part of all of nature.  But we end up doing technology for profit, not from instinct.  It has become our Frankenstein Monster.  I usually think we would be better off with no technology than the technology we now have.  I'm still mulling over this dilemma.

Yes, funny how we modern people, with all our wealth and "labor- and time-saving" gadgets, think we are masters of creation.  But we have less time and we slave more than ever.  Why?   

A Culture Living Gift Economy Today

I just read about one of the few remaining Hunting and Gathering tribes in the world in the December, 2009 issue of National Geographic, called The Hadza, by Michael Finkel.  They live near the Rift Valley in Tanzania.  I'll quote from the article (emphasis mine):

They have no crops, no livestock, no permanent shelters. . . .

Food production marched in lockstep with greater population densities, which allowed farm-based societies to displace or destroy hunter gatherer groups. . . .
Agriculture's sudden rise, however, came with a price.  It introduced infectious-disease epidemics, social stratification, intermittent famines, and large-scale war.  Jared Diamond, the UCLA professor and writer, has called the adoption of agriculture nothing less than "the worst mistake in human history"--a mistake, he suggests, from which we have never recovered.

The Hadza do not engage in warfare.  they've never lived densely enough to be seriously threatened by an infectious outbreak.  They have no known history of famine; rather, there is evidence of people from a farming group coming to live with them during a time of crop failure.  The Hadza diet remains even today more stable and varied than that of most of the world's citizens.  They enjoy an extraordinary amount of leisure time.  Anthropologists have estimated that they "work'--actively pursue food--four to six hours a day.  And over all these thousands of years, they've left hardly more than a footprint on the land.

Traditional Hadza...live almost entirely free of possessions.  The things they own--a cooking pot, a water container, and ax--can be wrapped in a blanket and carried over a shoulder. . . .

Individual autonomy is the hallmark of the Hadza.  No Hadza adult has authority over any other.  None has more wealth;  or, rather, they all have no wealth. . . .

Gender roles are distinct, but for women there is none of the forced subservience knit into many other cultures. A significant number of Hadza women who marry out of the group soon return, unwilling to accept bullying treatment. . . .

The chief reason the Hadza have been able to maintain their lifestyle so long is that their homeland has never been an inviting place.  The soil is briny; fresh water is scarce; the bugs can be intolerable.  For tens of thousands of years, it seems, no one else wanted to live here. . . .

None of the other ethnic groups living in the area... are hunter-gatherers. . . . Many of them look down on the Hadza and view them with a mix of pity and disgust: the untouchables of Tanzania. . . .

No Hadza I met... seemed prone to worry.  It was a mind-set that astounded me, for the Hadza, to my way of thinking, have very legitimate worries.  'Will I eat tomorrow?  Will something eat me tomorrow?'  Yet they live a remarkably present-tense existence.

This may be one reason farming has never appealed to the Hadza--growing crops requires planning;  seeds are sown now for plants that won't be edible for months. . . . To a Hadza, this makes no sense.  Why grow food or rear animals when it's being done for you, naturally, in the bush?  When they want berries, they walk to a berry shrub.  When they desire baobab fruit, they visit a baobab tree.  Honey waits for them in wild hives.  And they keep their meat in the biggest storehouse in the world--their land. . . . 

Tanzania is a future-oriented nation, anxious to merge into the slipstream of the global economy.  Baboon-hunting is not an image many of the country's leaders wish to project.  one minister has referred to the Hadza as backward.  Tanzania's president, Jakaya Kikwete, has said that the Hadza "have to be transformed."   The government wants them schooled and housed and set to work at proper jobs. . . .

The school-age kids I spoke with... said they had no interest in sitting in a classroom.  If they went to school, many told me, they'd never master the skills needed for survival.  They'd be outcasts among their own people.  And if they tried their luck in the modern world--what then?  The women, perhaps, would become maids; the men, menial laborers. It's far better, they said, to be free and fed in the bush than destitute and hungry in the city.


More Hadza have moved... to Mangola... in exchange for money, they demonstrate their hunting skills to tourists. . . .  Yet among the Hadza of Mangola there has been a surge in alcoholism, an outbreak of tuberculosis, and a distressing rise in domestic violence, including at least one report of a Hadza man who beat his wife to death. . . .


There are things I envy about the Hadza--mostly, how free they appear to be.  Free from possessions.  Free of most social duties.  Free from religious strictures.  Free of many family responsibilities.  Free from schedules, jobs, bosses, bills, traffic, taxes, laws, news, and money.  Free from worry. . . .


The days I spent with the Hadza altered my perception of the world.  They instilled in me something I call the "Hadza effect"--they made me feel calmer, more attuned to the moment, more self-sufficient, a little braver, and in less of a constant rush. . . . My time with the Hadza made me happier.  It made me wish there was some way to prolong the reign of hunter-gatherers, though I know it's almost certainly too late. . . .

However, then Finkel explains why Hadza life isn't for him, mentioning negative aspects of Hadza life he sees:



But I could never live like the Hadza.  Their entire life, it appears to me, is one insanely committed camping trip.  It's incredibly risky. . . . About a fifth of all babies die within their first year, and nearly half of all children do not make it to age 15.


But he, like most of us in modern civilization, don't know how to handle death.  We think we have it conquered when we experience just as much death as the Hadza or anybody ever did or ever will.  We don't get it.  We are people of possession.  Loss of possession is death.  Finkel brings up the solution to the problem right before his eyes:


So, after two weeks, I told everyone in camp I had to go.  There was little reaction. The Hadza are not sentimental like that. They don't do extended goodbyes. Even when one of their own dies, there is not a lot of fuss. They dig a hole and place the body inside. A generation ago, they didn't even do that—they simply left a body out on the ground to be eaten by hyenas. There is still no Hadza grave marker. There is no funeral. There's no service at all, of any sort. This could be a person they had lived with their entire life. Yet they just toss a few dry twigs on top of the grave. And they walk away. 

Who is the real Serpent in Eden?

It is intriguing how the attitudes and ways of the Hadza, described above, are what all the religions and psychologies and politics aspire to.  And their balance is what all our economists and environmentalists aspire to.

Once in a while, a religious leader renounces everything and discovers what the Hadza have known for eons, and all of civilization swoons around him/her and makes an icon of him/her, and claims him/her as civization's foundation!  How tragically, ironically comical!  

When I visited missionaries of my own Christian denomination in the jungle in Ecuador, all the sudden my eyes were open: missionaries were doing exactly the opposite of what Jesus taught.  When you do the opposite of somebody, you are anti-that-somebody.  Anti-Christ.  This revelation astonished me, sent a chill through me in that hot jungle.

Most governments the world over love missionaries.  Missionaries tame wild people, teach them to possess, teach them money, sedate people so they can be cogs in commercial civilization's machinery.  Ironically, anybody who has read the Gospels of the Bible knows that Jesus clearly taught giving up possessions, and taught that we must give and do, expecting nothing in return, that we must act not for the sake of self-credit (money).  {See Here's the One Point We Know the World's Religions Agree Upon in the website}

According to the Gospel of Matthew, Jesus himself says:

Woe to you, scribes and Pharisees,* hypocrites! For you travel land and sea to win one convert, and when he is won, you make him twice as much a son of hell as yourselves.
(Matthew 23:15)

*[Pharisee, by the way, is a term meaning and sharing the same root as separitist, also sharing the same root as Puritan.  Such separatists are the zealous holders of the letter of scripture of every age, called "the people of the Book" in Islam.] 
..................................................................................
Added February 6, 2010:

 If you want to explore these subjects more deeply, check out these essays in the website:

 Our Fall From Grace: Our Departure From Gratis: The Beginning of Money

The Seven-Headed Dragon: World Commerce  (this is hard-core Bible theology, showing who the Serpent in Eden really is)

Outrage

This $100 million AIG bonus story is truly outrageous. Here’s a company that remains TARPed and bailed-out to the staggering tune of $124 billion, courtesy of the taxpayers. AIG already has received $230 million in prior bonuses from the taxpayers. Let me state unequivocally: This is not free-market capitalism.

I’m making this case against AIG bonuses as a market-based conservative, not as a left-wing populist. As I have argued before regarding commercial-bank bonuses, TARPed firms on the taxpayer dole should forego bonus payments.

You know, if AIG had been put into bankruptcy, as they should have been, all these bonus contracts would have been nullified, as would shareholders, creditors, and all the rest. I don’t understand why we’re sitting by and allowing these bonus payments to be made.

That said, once banks get off of TARP, and once they have paid back taxpayers in full, I say let free-market capitalism roll. But not when you’re on the taxpayer dole.

Backroom deals like this are sparking a political revolution across the country. I can’t wait to hear what Senator-elect Brown says about all this when he is formally sworn in later today.

Another outrage is this $2 trillion tax hike in the Obama budget. This thing is a job destroyer. Let me narrow it down: Why in the world would we raise corporate and capital-gains taxes on the very people who are most likely to invest in the new businesses, or new ventures, that create new jobs?

Instead of raising the capital-gains tax rate to 20 percent, we should be cutting it to 10 percent. We should be slashing business tax rates for large and small corporations, not increasing them. Supply-side incentives have worked before, and they will work again.

This should be a major rallying cry for the new Scott Brown Republicans and the sensible Democrats who are willing to follow John F. Kennedy’s lead that lower tax rates ultimately produce more economic growth, higher revenues, and smaller budget deficits.

We get a jobs report tomorrow. It doesn’t seem likely that the 10 percent unemployment rate will fall. This economy needs more torque, not drag. It needs incentives, not obstacles to risk and reward and expansion.

Everybody ought to quit the class-warfare tax-hike message for the “rich” and instead refocus on a tax-cutting spending-limitation message that will grow our economy and create jobs through free-market private enterprise.

Stimulus II: A Sequel America Can't Afford

Here's a terrific new mini-documentary from my old friend Dan Mitchell definitely worth watching.

According to Dan:

Labor Department numbers show that the Obama Administrations $787 billion stimulus was a flop. Instead of holding the unemployment rate at 8 percent or below, the jobless rate soared to 10 percent. Now there is discussion of second so-called stimulus, which politicians are calling a jobs bill. But making government bigger, this CF&P Foundation video explains, is a recipe for long-run stagnation and lower living standards, regardless of what the policy is named.

$2 Trillion in Tax Hikes is Good for the Economy?

How in the world can Team Obama say they’re focused laser-like on jobs and economic growth and at the same time propose $2 trillion in tax hikes on successful investors, entrepreneurs, businesses, banks, and almost anything else that moves?

Why in the world would you jack up the top rate for the 1 percent of small-business owners who actually create 45 percent of small-business incomes? I don’t get it. And why would you then turn around and use $30 billion of TARP money to give them loans?

Huh? Tax them and then lend to them? Again, I just don’t get it.

Besides the anti-incentive effect of taxing our most successful earners, the Obama budget reduces their deductions, and then limits those available for deductions all the way down to the 28 percent bracket. It comes to about $700 billion over the next decade — straight out of private pockets and into an already bloated government.

Why can’t we keep our own money?

Why not put more money into private pockets to spur growth — the free-market capitalist way? Why slam businesses, banks, and hedge funds to the tune of nearly $500 billion?

Once again, it takes liquidity from the private sector, reduces economic growth and the incentive effect, and gives money to the government.

Here’s the key point. All of these fat-cat, class-warfare, soak-the-(alleged)-rich tax-hike proposals actually reduce investment and capital formation so much so that jobs and wages will ultimately falter on Main Street. That’s what Team Obama is missing.

Taxing businesses and so-called “rich” people hurts ordinary working folks. That’s a fact. And that’s why this is a misbegotten policy. We’re not talking class warfare here; we’re talking growth. My way is the growth way. So far, the Team Obama way is a social policy on the left that has nothing to do with spurring jobs and economic growth.

But here’s some better news: In the new Scott Brown Congress, many of these tax-hike proposals may never see the legislative light of day. And if Sen. Scott Brown can rally Republicans and moderate Democrats to extend the Bush tax cuts, and then move toward across-the-board flat-tax reform, the GOP will be setting a real pro-growth agenda.

Interestingly, stocks rallied Tuesday by over 100 points, as they did on Monday. The stock market may be betting on the Scott Brown scenario.

On CNBC's Kudlow Report Tonight

This evening at 7pm ET:

THE BALLOONING BUDGET
Plus, Geithner in the hot seat…

CNBC’s Hampton Pearson reports from Washington.

BALLOONING BUDGET TAX ATTACK

Rep. Paul Ryan (R-WI) will be aboard with his perspective.

OBAMA’S TOWN HALL: TAXES & JOBS IN THE SPOTLIGHT
NBC’s Steve Handelsman reports.

FAT CAT TAX - WHAT CONSTITUTES RICH?

- Michael Linden, Center for American Progress Associate Director for Tax and Budget Policy
- Arthur Laffer, Chief Investment Officer, Laffer Investments; Fmr. Reagan Economic Advisor

BANK TAX ATTACK
Hudson City Bank Corp president & CEO Ron Hermance will join us with his take.

THE VOLCKER RULE: GOOD IDEA OR BAD?

- Mark Calabria; CATO Director of Financial Regulation Studies; Fmr. Banking Committee Official
- Peter Morici, University of Maryland Robert H. Smith School of Business Prof; U.S. International Trade Commission Fmr. Chief Economist

MARKETS - BULL OR BEAR?

- Mike Ozanian, Forbes National Editor
- James Paulsen, Wells Capital Management Chief Investment Strategist

Please join us. The Kudlow Report. 7pm ET. CNBC.

An Interview with Former Treasury Secretary Henry Paulson

LARRY KUDLOW, host:

Tonight, on a special edition of THE KUDLOW REPORT live from Washington, DC,
former Treasury Secretary Henry Paulson talks to us about his new book, "On
the Brink: Inside the Race to Stop the Collapse of the Global Financial
System." We will talk to a free market man who engaged in perhaps the most
systemic government intervention in US financial history. Did it work? Were
there other options? Why is there a populist political backlash against the
bailouts? And is the long-term American economic future better or worse? Mr.
Paulson will give us some straight talk on what he was thinking and how it all
turned out. This is a first government source account, inside account,
straight from the horse's mouth. Fasten your seat belts, everybody, THE
KUDLOW REPORT begins right now.

Good evening, everyone. I'm Larry Kudlow. Welcome to a special edition of
THE KUDLOW REPORT. We are live from Washington, DC. And, yes, we still
believe free market capitalism is the best path to prosperity.

Tonight, we're going to have some great fun. We talk to the man who was at
the center of the worst worldwide financial crisis since the Great Depression.
That man is, of course, former Treasury Secretary and former Goldman Sachs
chairman Henry Paulson. His much awaited memoir, "On The Brink: Inside the
Race to Stop the Collapse of the Global Financial System," just hit bookstores
today, and it is climbing the Amazon list very rapidly. It is a first-person
account of what Mr. Paulson and others thought was impending financial
Armageddon, peering into the abyss with major financial companies failing left
and right. All that in the autumn of 2008, a little more than year ago.

KUDLOW: But today as the system is healing, populist anger from the left and
the right rails against the rescue mission and the bailouts. The Republican
Party has turned against its former Treasury secretary. My question is, why
is this? And finally, can the free market system survive all of this.
Tonight, we learn about Mr. Paulson's thinking behind all those decisions,
taken in response to the financial crisis, and, ultimately, in the pursuit of
long-run American prosperity. Here with me now in Washington, DC, the former
Treasury man Henry Paulson.

Hank, thank you very much for doing this.

Mr. HENRY PAULSON: Larry, great to be here.

KUDLOW: First of all, let me say just as someone who read the manuscripts,
they were Xeroxed for me, it was one hell of a book. I just want to say that.
I loved it, I couldn't put it down. I read it in the course of three or four
days.

Now, let me ask you this. You were here in this very spot in the spring of
2007. We interviewed.

Mr. PAULSON: Yeah.

KUDLOW: And the first stirrings of the crisis began more from reports about
subprime mortgage failures and some bank issues. A month or two later, you
had the BNP Paribas crisis, which triggered in France. OK. Then you take
this narrative down to 2008. Let me ask you this: In '07, you said it was
containable.

Mr. PAULSON: Right.

KUDLOW: You were still an optimist on the economy. You were still an
optimist on the financial system's health. Why wasn't it containable?

Mr. PAULSON: Larry, you know, one of the things that I recount in the book
is, you know, the very first major meeting I had with President Bush, I asked
for the topic to be about what I thought was the likelihood of having a credit
crisis. And he asked me, he said, `Hank, what would--well, what would cause
it,' and I said, `I don't know, and we--it's almost impossible to guess. Who
would have guessed that the Russians would default and that would cause a
crisis in '98? But after the fact, it will be obvious. There's just a lot of
dry tinder out there and I'm not sure what's going to light the spark.' Now,
why did we say it's contained? And I think...

KUDLOW: You said it, Mr. Bernanke said it, a lot of people said it.

Mr. PAULSON: Yeah. And I think...

KUDLOW: And then I said it after you said it.

Mr. PAULSON: I know it. I know it. And you're an optimist.

KUDLOW: I am an optimist.

Mr. PAULSON: Now, in terms of why I thought it was contained was, first of
all, I was talking about subprime and we made the mistake of just simply
saying the subprime was not big in relation to, you know, a $13-, $14 trillion
US economy. And what was really going on is we were talking about housing
overall, and, you know, since World War II, housing, residential home prices
had generally gone up. And mortgages were just considered to be very safe
investments. And so the kind of decline we saw was something that was not
envisioned in any kind of model. It wasn't anything that many people that
were close to it--you know, after the fact, it all seems obvious to all of us.
But the--and so when you had the kind of decline we saw in housing prices,
that changed the behavior of those who, you know, of homeowners. And also the
other thing you and I were talking about before the show is just this--all of
this complexity.

KUDLOW: Mm-hmm.

Mr. PAULSON: And so when...

KUDLOW: These crazy bonds, collateralized debt obligations, credit defaults,
what--mortgage-backed securities that were rated triple-A by a bunch of goofy
raters that didn't know what they were talking about.

Mr. PAULSON: Yeah. And the level of complexity, OK, made--so when housing
the prices declined, all kinds of complex products became suspect because
people said, `Who understands them.'

KUDLOW: All right. So look, let's shift the narrative now. You maybe saw
the first sparks of problems back in 2007. Let's call it midyear, to the
argument's sake.

Mr. PAULSON: Right.

KUDLOW: Switch it to six or nine months later. March of 2008, Bear Stearns
faces a run on the bank. You got to close, them and you sell them to
JPMorgan. And as you note in your book, March to September 2008, probably the
most extraordinary thing in the history of American finance, eight major
financial firms failed, and that doesn't include putting Merrill Lynch inside
the Bank of America. In a sense, Merrill would have been nine. And I think
we may have a full screen on what the eight were, if we put those things up.
But leaving that aside, here, Bear Stearns, IndyMac, Fannie, Freddie, Merrill
Lynch acquired by Bank of America. Let's switch to page two on this. We've
got to get--AIG's got to come up on there. There's Lehman, AIG. And let's
not forget, by the way, Washington Mutual--WaMu--Wachovia and somewheres in
there, did I mention IndyMac. That was in there as well. Now...

Mr. PAULSON: And now what you had also happening was...

KUDLOW: That was an incredible jump shift. Incredible in the space of nine
months to a year we had a total collapse of all these huge institutions. And
yet it seems to come as a great surprise.

Mr. PAULSON: And that's--and that's the US alone because you had--if you
look from September through the first part of October, we had six European
nations have to come in and rescue a whole series of banks.

KUDLOW: But why? What happened? You had this, in effect, a rolling run on
the bank. That's really what you had.

Mr. PAULSON: Right. Yeah.

KUDLOW: You can define it and make it complex...

Mr. PAULSON: Yeah.

KUDLOW: ...but basically you had a run on the bank--investors,
depositors--for liabilities that were insured. Open market trading funds and
all the rest of it...

Mr. PAULSON: Yeah.

KUDLOW: ...just took off. And all of a sudden you're in this incredible
crisis. The credit markets freeze. You couldn't even have bank-to-bank,
interbank trading. Money market fund went down, let's not forget that,
whatever it was called, the reserve primary fund, that was another.

Mr. PAULSON: Right.

KUDLOW: What happened? Some--there's got to be some rational explanation to
get from the middle of those seven into the autumn of '08.

Mr. PAULSON: Well, what you need to understand is what had happened before
even the middle of '07, which is you'd had these excesses had been building up
for some times. You'd had a--we had been overstimulating housing. So if you
look at the combined weight of all of our policies in the US government...

KUDLOW: Wait. It's HUD-backed, unaffordable mortgage loans, Fannie and
Freddie?

Mr. PAULSON: What you have--yeah, yeah, Fannie and Freddie, the FHA, various
state programs.

KUDLOW: Community Reinvestment Act.

Mr. PAULSON: You know, mortgage interest deduction. I'm not saying of them
were...

KUDLOW: Zero capital gains tax on home sales.

Mr. PAULSON: That's right. And so you had--so you had all of this going on,
and then you had even more basic than this, you had these big global economic
imbalances, structural imbalances, which stem from the fact that we, as a
country, save not enough, both as a government and individually. Overreliant
on debt. And so this--so you had these big structural imbalances. We have a
tax system that penalizes savings and it really rewards consumption.

KUDLOW: Right.

Mr. PAULSON: And so you had these huge capital flows, global capital flows
raining down through the banks. And so it was something--economists would
talk about this, and they would talk about it, and I remember someone even
using this term that was, you know, "stable disequalibrium," you know...

KUDLOW: Yeah.

Mr. PAULSON: ...the oxymoron, almost. But--so you had these excesses and
then you have, in 2007...

KUDLOW: Right. Before we get to those, though, I want to say...

Mr. PAULSON: Yeah.

KUDLOW: ...Hank, you were effusive in your praise of Ben Bernanke.

Mr. PAULSON: That's right.

KUDLOW: Effusive.

Mr. PAULSON: Right.

KUDLOW: In a number of pages. You call him the most brilliant guy, he's a
nice man.

Mr. PAULSON: Yeah.

KUDLOW: He shows up on time for meetings. As I recall, you like that, too.
But so many of us believe that the Fed's ultra-easy money, with Greenspan
running the Fed in the early part of the decade, and Bernanke as intellectual
co-pilot, ultra-easy money, ultra-low interest rates, negative real interest
rates helped the housing bubble, the commodity bubble. And you know, as a
former Wall Street veteran, you throw negative real interest rates at Wall
Street traders looking for yield to please customers and whatever, that's like
throwing blood into the water for sharks. And so they just took those--and
then I want to ask you, that it comes around--what goes around, comes around.
After the Fed finally figures out that they were too easy and the inflation
rate started rising to 5 or 6 percent, then they tightened the screws from
pillar to post. And if you look at a chart, real interest rates were 4 or 5,
6 percent by the time we got to '07, '08. So they pumped the money in, they
bubbled out the asset prices, then they clamped down on them with a huge
liquidity squeeze. Why aren't you more critical of the rock 'n' roll monetary
policy?

Mr. PAULSON: Because what I looked at, and this was--this was my view of the
world, my view of the world was inflation was very low globally, there
was--the world was awash in excess liquidity, and you saw--so, in this world,
investors were reaching for risk and mispricing it. But to get to your basic
question...

KUDLOW: How easy to misprice when the Fed has mispriced its own monetary
policy?

Mr. PAULSON: Well, when the world's lost--but if you--but to get to your
basic question, because--which I think is critical when you say why did you
get this chain of bank failures suddenly, you had--remember, the crisis hit in
the late July-August period of 2007. So before we got to Bear Stearns, this
had been going on for some time. And the--it was taking its toll. And I
think that given some of that accounting conventions and so on, the losses
weren't realized.

KUDLOW: Something happened, Hank. Here's the thing that I'm--I don't want to
dwell on this. I mean, your book, your narrative is...

Mr. PAULSON: Yeah.

KUDLOW: ...this was financial Armageddon, peering into the abyss.

Mr. PAULSON: Right.

KUDLOW: And you know what, I don't--I don't disagree. I think you're right.
I'm not sure we need to talk about why the rest of the public today doesn't
understand that. But I'll come back to that. But it seems like when these
big banks, brokers, mortgage lenders, let's not forget Countrywide went
down...

Mr. PAULSON: Yeah.

KUDLOW: ...something happened between Bear Stearns and, I don't know, Merrill
Lynch, something happened so the system turned off. What was the event that
happened?

Mr. PAULSON: Well, I would say that, but first of all...

KUDLOW: Turned a downturn into a catastrophe?

Mr. PAULSON: Well, first of all, again, this had been building up for a long
time. These institutions were--there was a--I think they didn't adequately
understand the need for liquidity cushions. There was a lot of focus on
capital, which is important, but I think they didn't have adequate liquidity.
I think it was a complexity of products. But again, they were--I was aware
from August of 2007 right up through that period, how severe the problem was.

KUDLOW: Well, I'm not blaming you.

Mr. PAULSON: No, no.

KUDLOW: There's no perfect foresight in this game. I'm not blaming you.

Mr. PAULSON: No. But I was just saying...

KUDLOW: Nobody blames you.

Mr. PAULSON: No, I wasn't...

KUDLOW: The question is, though, in terms of how this thing hit...

Mr. PAULSON: No, I was--I was saying...

KUDLOW: ...what was it? We wake up in the fall of '08, Hank, and it's a
total catastrophe.

Mr. PAULSON: See, I was--well, here's the point, I think.

KUDLOW: Something must have happened.

Mr. PAULSON: But here's the point I'm trying to make, which is I think--see,
I saw it hitting in August of 2007, and it was beneath the surface. So it was
building and building and the system was becoming more and more fragile.

KUDLOW: And you're still going to defend the Fed during this period?

Mr. PAULSON: And it was hard. We were working, yeah, with the Fed, during
that period, we were working jointly with the Fed trying to get institutions
to raise capital and trying to get them to raise capital while they still
could raise some. And I was calling up bankers and saying, I don't know of a
single CEO of a major bank or any bank who's ever got in trouble by having too
much capital, raising capital. But they viewed it as a sign of weakness.

KUDLOW: All right. We're going to take a break here.

Mr. PAULSON: Yeah.

KUDLOW: I understand that. And I agree with, by the way, the capital issue,
and I think that's a key part of this solution. All I'll say is this:
Wouldn't it be nice to have a steadier monetary policy that didn't go on,
let's take real interest rates. I mean, the inflation rate went to 5 percent
for awhile, then it went back down, then it went to 6 percent for awhile in
2006 to 2008. They blew their targets. Wouldn't it be nice to have a central
bank and policy that didn't fluctuate from a negative 4 percent real rate to a
positive 4 or 5 percent real rate? Because I submit that that was an ocean
that drowned--first it created the waters and then took the water out. This
was a liquidity squeeze of the first magnitude. First, they pumped it up,
then they deflated it. That's got to be part of the issue here.

Mr. PAULSON: Well, I have looked--I'm not trying to debate it. I just
looked at, from my perspective and from a banker's perspective, I saw huge
complexity, much of it unwarranted. I saw--and I saw big capital flows
stemming from imbalances, and with the world awash in that kind of liquidity
from the capital flows, and low inflation around the world. So that was, you
got it from me, not an economist, not a monetary economist but a banker. And
when we were working to put out the fire, you know, I could not have had
better partners.

KUDLOW: Well, we'll get to the putting out the fire part. We're going to
take a full break. We have Mr. Paulson here for the entire hour. We're
going to talk about mark to market accounting, where he's totally going to
disagree with me. We're going to talk about the role of the dollar. We're
going to talk about Lehman, we're going to talk about AIG. We're going to ask
the former secretary whether he, in fact, put a gun to Ken Lewis' head to buy
Merrill Lynch. Of course, this is a dramatic book. Somebody's got to figure
out the causes of this thing so we can somehow try to prevent it in the
future. Coming up, we'll even talk about some of the individual players. I'm
Larry Kudlow. Treasury man Henry Paulson. It's a great honor and a pleasure.
It's a great read, folks, by the way. You got to go online, buy it, Amazon,
bookstores, whatever. Hell of a read. You're watching CNBC, first in
business worldwide.

Announcer: You're watching THE KUDLOW REPORT on CNBC. First in business
worldwide.

(Announcements)

Announcer: Live from Washington with former Treasury Secretary Henry Paulson,
a special edition of THE KUDLOW REPORT.

KUDLOW: All right. We are live with Hank Paulson, talking about his
brand-new book. It really is the first inside government account, what I call
straight from the horse's mouth.

Hank, thank you. You honor us by this, and it was a terrific book. We're
talking about what it was that changed from '07 to '08, the end of '08, when
the absolute crisis really started to crash in around us.

I want to ask you about one, and you can disagree with me on this, mark to
market accounting. A lot of people, in fact Steve Forbes, the editor-in-chief
and publisher of Forbes magazine, he's got another editorial about the subject
in this week's Forbes. And he said when the Financial Accounting Standards
Board reinstituted mark to market accounting, that these banks had to mark to
a nonexistent market, that they moved away from cash flow accounting, that the
FASB changes, it hadn't been changed since the 1930s. This happened in the
middle of 2007. And it just seems a peculiar coincidence that by 2008, as
banks had to report terrible earnings because they were marking down their
assets as much as 80 percent, this helps trigger the lack of confidence, the
run on the banks, and the credit freeze-up.

Mr. PAULSON: Yeah, Larry, I disagree very strongly, and I know that
reasonable people disagree on this. But having run an investment bank, I
don't know how to do it if we didn't have the discipline of knowing that every
asset had to be marked because I wouldn't know how to do it if you had a
different book in terms of what the security is worth from what you would
actually--actually paid for it originally. If you had it--the way I think
about it is that there is a marvelous discipline about having to say every day
what is this...

KUDLOW: Even if there is no real market bid?

Mr. PAULSON: Well, I've got to say...

KUDLOW: Because the opposite is cash flow accounting, right?

Mr. PAULSON: Well...

KUDLOW: They were servicing 70 percent of these bad, toxic loans.

Mr. PAULSON: You can have cash flow accounting, but if something is worth--I
would say there's no perfect accounting system. None.

KUDLOW: Hm.

Mr. PAULSON: But to be able to--I just spent too much time in the financial
services industry, worked with banks all around the world, looked at what it's
like when accounting goes awry and you use historical accounting, and you use
that to hide and cover up losses. And the thing that I knew for certain in
this--and actually I believe that if there had been more rigid adherence to
mark to market accounting, maybe the excesses wouldn't have built up to the
point that they built up to, and at least the problem--the problem that I was
dealing with in the first part of the crisis was to get banks to recognize
losses and raise capital.

KUDLOW: But with respect, at the time--now I'm going to switch to early March
of 2009.

Mr. PAULSON: Right.

KUDLOW: And Democratic Congressman Paul Kanjorski and Barney Frank--and you
speak very well of Barney Frank in the book.

Mr. PAULSON: Yeah.

KUDLOW: Those two guys really pushed FASB to change mark to market and go
back to cash flow accounting.

Mr. PAULSON: Yeah.

KUDLOW: And that was the almost to the day the absolute bottom in the stock
market.

Mr. PAULSON: I...

KUDLOW: Is that just a coincidence?

Mr. PAULSON: You know, it is a coincidence.

KUDLOW: It is a coincidence?

Mr. PAULSON: It is a coincidence. If it were--if it were 72 degrees...

KUDLOW: To the day.

Mr. PAULSON: If it was 72 degrees that day, that would--that would have as
much to do with it.

KUDLOW: All right. A coincidence.

Mr. PAULSON: I've got to tell you, though, one thing I feel strongly is that
politicians should not interfere with accounting. I mean, that is, to me...

KUDLOW: Well, maybe, maybe, you know what? Maybe war is too important to be
left to the generals.

Mr. PAULSON: I think...

KUDLOW: Maybe...

Mr. PAULSON: But...

KUDLOW: Maybe this is too important to be left to the accountants.

Mr. PAULSON: Account...

KUDLOW: Because they took a long-run view. The banks are going to get out of
this in the long run.

Mr. PAULSON: Yeah, the long...

KUDLOW: Maybe.

Mr. PAULSON: I still remember going up to the Hill and having meetings where
I would say--where I had a number of congressmen say, `The banks in my
district don't have a problem, they don't have losses, they've just got
problems with this mark to market accounting.' And--or--and I felt like
saying, `Do you know what you've just said to me? You've just said they've
got losses, but they want to hide them.' And you know...

KUDLOW: Well, some people think there are different ways--look...

Mr. PAULSON: Yeah.

KUDLOW: ...if you're servicing the loan, even though it's temporary value,
you know, you have the--if its temporary value comes down, but you're
servicing the loan, why is that a bad loan?

Mr. PAULSON: Well...

KUDLOW: And by the way, it works in reverse. During the bubble, those loans
were overvalued because of mark to marketing accounting and...

Mr. PAULSON: Can I just say...

KUDLOW: ...everybody got fat and happy.

Mr. PAULSON: I'll just say one other thing. I would look at things where a
bank would have it on its balance sheet in one place and, you know, a
historical value, and they'd be trading the same loans, you know, in the
broker deal...

KUDLOW: Well, I agree with that.

Mr. PAULSON: ...for...

KUDLOW: That's a--yes.

Mr. PAULSON: ...60, 70 cents on the dollar.

KUDLOW: No, no, that part I agree with.

Mr. PAULSON: OK.

KUDLOW: It's got to be consistent and transparent.

Mr. PAULSON: Now, I do agree that, in the middle of a crisis, where there is
no liquidity...

KUDLOW: Right.

Mr. PAULSON: ...OK, where there is no liquidity, that mark to market
accounting could be an accelerator.

KUDLOW: Ah. It's a small concession.

Mr. PAULSON: But...

KUDLOW: My first concession from you this evening.

Mr. PAULSON: But there is no system that is perfect.

KUDLOW: Yeah.

Mr. PAULSON: And I believe that with mark to market accounting, we would
not--we would've been less likely to get to the problem to begin with.

KUDLOW: Right.

Mr. PAULSON: Recognize losses or...

KUDLOW: One other one, before the break. One--I don't mean to be abrupt, but
so many things to talk about.

Mr. PAULSON: Yeah, yeah.

KUDLOW: I need you for three hours, but only have you for this hour. Fannie
and Freddie taken over by the government into so-called "conservatorships."

Mr. PAULSON: Right.

KUDLOW: Then, bang, Lehman Brothers goes down into bankruptcy.

Mr. PAULSON: Right.

KUDLOW: Then, bang, AIG is essentially rescued or bailed out...

Mr. PAULSON: Right, right.

KUDLOW: ...whatever we're going to call it. A lot of people think that those
conflicting signals of policy helped create the credit freeze-up. A lot
of--you--with this, with this, with this.

Mr. PAULSON: Yeah.

KUDLOW: I'm going to wait till the next segment to talk to you about TARP and
going from toxic asset buys to capital buys.

Mr. PAULSON: Right, right.

KUDLOW: But on this point, you saved Fannie and Freddie, "saved" is a
relative term, but they didn't go under.

Mr. PAULSON: Right.

KUDLOW: Lehman went under, AIG was saved, and people said, `Huh? We don't
know who's next.'

Mr. PAULSON: Well, let me explain. First of all, I haven't heard the sane
argument yet how stabilizing Fannie and Freddie led to the crisis. In other
words, when the thing that I...

KUDLOW: Well, only in relation to letting Lehman go down, sir.

Mr. PAULSON: Well...

KUDLOW: That's what I'm saying.

Mr. PAULSON: Without...

KUDLOW: Mix--this is what you call mixed signals.

Mr. PAULSON: OK. I would--I would say this, with Fannie and Freddie, I
viewed that as the most important step. There were $5.4 trillion of
securities out there.

KUDLOW: Mm-hmm.

Mr. PAULSON: That is huge. If those organizations had become really
unstable or done down, we would've had an absolute disaster. So part of the
story in the book is I tell--is a race to get that done.

KUDLOW: Mm-hmm.

Mr. PAULSON: Which was not easy before Lehman was announcing his earnings.
Now, I was naively hopeful for a short time that maybe that would be such a
positive--it--for the world to know those were stable, it would've staved off
the Lehman. Now, in terms of the mixed signals...

KUDLOW: You say--great. You think if the world knew that Fannie and Freddie
were stable, that would've stopped the run on Lehman?

Mr. PAULSON: Yeah. I was hopeful.

KUDLOW: Work me through that.

Mr. PAULSON: Well, I was hopeful...

KUDLOW: I'm not sure I understand that one.

Mr. PAULSON: ...because what would...(unintelligible)...if you saw, when you
look at $5.4 trillion in securities held all over the world, if you find
they're stable and the credit spreads shrink, that creates a value on
everyone's balance sheet. They're no longer worried about will mortgage
financing be available. I mean, that was a--that was--it's not stabilizing to
know that Fannie and Freddie have come unglued.

KUDLOW: Right.

Mr. PAULSON: OK, but...

KUDLOW: May not be so stabilizing to know they're permanent wards of the
state.

Mr. PAULSON: No, but I don't like--and they shouldn't be. The step we took
was to be a time out and to show everyone the current structure wouldn't work,
is greatly flawed, and needs to be changed.

KUDLOW: Well, nobody disagrees with you there. What I'm saying is there is
this sort of...

Mr. PAULSON: Now, but listen, but now let's get to your...

KUDLOW: ...up and down policy thing.

Mr. PAULSON: Now let's get to your basic question. There was not--we did
not have all the authorities we needed. So we raced--we worked with Congress
and it got just in the nick of time, the authorities we need Fannie and
Freddie from going down, OK? We had--Bear Stearns was quite interesting for
us because with Bear Stearns, we had a buyer.

KUDLOW: Right.

Mr. PAULSON: The best buyer in the world because you had a...

KUDLOW: JP.

Mr. PAULSON: You had JPMorgan, strong credit, a CEO that was decisive and
had the confidence of his board and so was able to do a deal. But going into
that weekend, we knew that Bear Stearns had already started to unravel, the
run had begun, and that if we didn't leave that first weekend with a deal with
JPMorgan where they agreed to guarantee the trading book, during dependency of
the shareholder vote, this company was going to disintegrate. So what we
learned that weekend, we knew it theoretically beforehand, but what we learned
the weekend was when you have someone that's an investment bank with a capital
and a liquidity issue, that we didn't have the authorities to deal with it in
government. And so, at that time, we didn't--and...

KUDLOW: But to the rest of the world watching this, including all these big
financial institutions and hedge funds and private equity funds we're putting
liquidity in and taking liquidity out of the market...

Mr. PAULSON: Yeah.

KUDLOW: ...would it have been better after you completed the Bear Stearns
action, which was March of 2008, to lay down a clear policy line about who's
going to win and who's going to lose and how?

Mr. PAULSON: Well...

KUDLOW: Would that have been better to do that?

Mr. PAULSON: ...I don't know...

KUDLOW: Because it got very ad hoc in September, October.

Mr. PAULSON: Well, we were doing--let me say this. I look at it--we were
doing this until we got there with TARP, we were--we were--we were late all
the way along, as we tried to put out the fire, but the policy line, we didn't
change policies. The facts changed. So, for instance, we did everything we
could to save Bear Stearns. We stabilized Fannie and Freddie, put them into
conservatorship, and with Lehman, we would have loved to have done--been able
to present--prevent that failure. But in Lehman, you didn't have a buyer to
fill the capital hole.

KUDLOW: I understand.

Mr. PAULSON: ...OK.

KUDLOW: I'm not criticizing the Lehman decision.

Mr. PAULSON: So I'm...

KUDLOW: I'm just saying it was like some were up, some won and some lost.

Mr. PAULSON: See, the perception, there was only one that--where we were
unable to save and that was Lehman.

KUDLOW: All right.

Mr. PAULSON: And what--so the inconsistency and what people miss, there
were--there were two issues with Lehman, OK? We didn't have a buyer to fill
the capital hole and guarantee the trading book during...

KUDLOW: I understand.

Mr. PAULSON: ...which--and the Fed didn't have the power to do that.

KUDLOW: And the British regulators wouldn't sign off on it.

Mr. PAULSON: And we--and--yeah. So we didn't have that, number one. And
then number two, if there had been someone, there still would've been a
challenge, given the size of the capital hole, for the Fed to make the same
loan it made for Bear Stearns, that would be secure to the satisfaction.

KUDLOW: I understand.

Mr. PAULSON: Because--but that's--but that's one of the things that worked
with the private sector.

KUDLOW: All right. We can take break. We're going to come back. I want to
talk about the AIG bailout. I want to talk about trading partners with AIG
such as Goldman Sachs. I want to talk about the populist revolt against TARP
and bailout nation. And we're going to talk about some of the individuals
that Mr. Paulson dealt with, including Barack Obama and John McCain and, of
course, President George W. Bush during this fateful period. Staring down
the abyss, I agree with that. The question is, did we get it right? Stay
with us. We'll be right back. I'm Larry Kudlow.

(Announcements)

Announcer: Live from Washington with former Treasury Secretary Henry Paulson,
a special edition of THE KUDLOW REPORT.

KUDLOW: All right, welcome back, everybody. I'm live with former Treasury
man Hank Paulson. He was at the very center of the financial crisis, writes
about it in great detail in his brand-new excellent book called "On the
Brink." Out today, rising up the Amazon.com list.

All right. TARP is a hated word politically. Bailouts, hated politically.
Populism from the left and the right. And AIG, a three letter dirty word,
hated politically. I'd like to zero in on that. First of all, what can you
tell us?

Mr. PAULSON: Well, let me start with TARP being hated; and, in some ways, I
think it's good because we, as a country, don't like bailouts.

KUDLOW: Ah.

Mr. PAULSON: And the president said it in the State of the Union.

KUDLOW: Right.

Mr. PAULSON: He said Republicans, Democrats, all of us. And you know, I
hate it. I hated the things I had to do. It was just much better than the
alternative, which was Armageddon, as you said. And the--I remember looking
at a poll once and--which put it all in perspective for me. I said--it said
93 percent of the people in the US were against the bailouts. I was trying to
figure out who the other 7 percent were. And it said--but 60 percent were
against torture.

KUDLOW: Ah.

Mr. PAULSON: So that put it--that put it all in perspective. And the...

KUDLOW: But Rasmussen says, if you pay down your TARP bill, Rasmussen's poll
show, then people say you're OK as a bank.

Mr. PAULSON: Well, I would say this, I believe that we're going to get--you
know, we designed these programs so--to maximize the likelihood we get it all
back. We're going to get everything we put back in the banks with a nice
profit. And I think--although we've got to look at it over a five-year
horizon, I think people are going to be surprised on the upside...

KUDLOW: Mm-hmm.

Mr. PAULSON: ...in terms of getting the--getting either all of it back or
most of it back and--if you look at everything, and that includes some of the
money for the--for actual spending programs as opposed to investment programs.

KUDLOW: Were you aware of this AIG brouhaha--it's like the story that refuses
to die. All right, we bailed out AIG, but then comes the second wave of the
story, that the AIG trading partners were bailed out 100 cents on the dollar,
including your old firm Goldman Sachs. And this has created another furor,
and it's created a furor around Tim Geithner. Were you aware that the New
York Fed was trying to prevent full disclosure on the amount that the Goldman
Sachs type trading partners got in the AIG bailout? Had you heard anything
about that?

Mr. PAULSON: Larry, I had heard absolutely nothing about it, but--well, when
I say that, which is I had heard nothing about it, the--I want to...

KUDLOW: On the secrecy, the nondisclosure.

Mr. PAULSON: Oh, absolutely. And I had had not only had I heard nothing
about disclosure, but I had no involvement in the decisions related to how to
deal with the counterparties and how to pay them.

KUDLOW: The 100 cents on the dollar payout.

Mr. PAULSON: Right.

KUDLOW: You were not--that was not--you were not part of that decision?

Mr. PAULSON: Not at all.

KUDLOW: You were in the center of every decision at the time.

Mr. PAULSON: But I want to come back, first of all, because I want to just
say how strongly how much I support the Fed's action, how necessary it was
and...

KUDLOW: For secrecy over this...

Mr. PAULSON: No.

KUDLOW: ..for this cover-up?

Mr. PAULSON: In terms of bailing--in terms of the rescue of AIG.

KUDLOW: Oh.

Mr. PAULSON: And that loan, and I'll tell you the thing that I--the other
thing I just feel very strongly about is having worked with the people I
worked with there and knowing what their motives were.

KUDLOW: At the New York Fed.

Mr. PAULSON: At the New York Fed.

KUDLOW: But they made a huge blunder, Hank.

Mr. PAULSON: Well, I...

KUDLOW: They never should've allowed this secrecy cover-up thing to get out
of the bag.

Mr. PAULSON: I will say this. I'm for transparency.

KUDLOW: Right.

Mr. PAULSON: But I will say this, I know these people, I know what their
motives are, I know how hard they are working to save the system. I know
their professionalism, I know their integrity, so I am not going to second
guess. I will be the last person to second guess what they did.

KUDLOW: All right. But you are second guessing the decision to pay Goldman
Sachs and others 100 cents on the dollar.

Mr. PAULSON: Of course. I'm not...

KUDLOW: And then what kind of trouble would Goldman had been in if they
hadn't received that?

Mr. PAULSON: Look...

KUDLOW: This is one of the key issues here. Have we--did we rescue Goldman
through the back door?

Mr. PAULSON: I would say very clearly that when we--when we--when AIG was
rescued, that AIG was rescued to prevent a meltdown of the system, that this
company, if it had gone down, would've taken everyone down. And as I look at
it and when I've said I can just tell you what I'm--I believe in the very
strongest way that was the Fed's motive, that was all of our motives at the
time the loan was made, that the last thing on my mind was any counterparty's
exposure or claim.

KUDLOW: All right.

Mr. PAULSON: I knew--counterparties...

KUDLOW: Who the heck did then? Who did that?

Mr. PAULSON: I do. It was--the--once the loan was made, OK, once the loan
was made, it was the Fed's job to...

KUDLOW: Mm.

Mr. PAULSON: ...to administer the loan. We were--we were all very busy. I
was very busy doing other things.

KUDLOW: I understand that. The world was going to hell in a handbasket.

Mr. PAULSON: And I--but I mean, I got to...

KUDLOW: But this stuff comes back at you down the road.

Mr. PAULSON: But I got to tell you something, there was an awful lot going
on; and, again, what the Fed did, I will never second guess. And, in terms of
the decisions they made, I'm totally confident, knowing them, they made--any
decision they made in the best interest of this--of this system and the
country.

KUDLOW: All right, strong support. I still think the Fed made a big mistake
on this, but whatever.

We're going to come back with Hank Paulson. I want to talk about President
George W. Bush's role. I want to talk about John McCain and Barack Obama,
two people that Mr. Paulson had a lot to do with in the late fall of 2008.
And then, yeah, we're going to talk about Tim Geithner. He's the Treasury man
everyone loves to hate, but maybe Geithner has better stuff than we know
about. We'll be right back. I'm Larry Kudlow.

(Announcements)

Announcer: Live from Washington with former Treasury Secretary Henry Paulson,
a special edition of THE KUDLOW REPORT.

KUDLOW: All right, welcome back. We're talking about Hank Paulson's new
book, "On the Brink." It's a terrific read. Really the first and only inside
government account; I call it straight from the horse's mouth. During this
fateful period, the Armageddon period--by the way, I agree with you, we were
looking into the abyss. I don't doubt that. That's your basic narrative. I
think you're right. On the other hand, you spent a lot of time with--on the
phone with Barack Obama and John McCain. My reading of these, you felt that
Obama was much more measured and helpful, and you did not think that way about
Mr. McCain.

Mr. PAULSON: Larry, there was no doubt that I had easier conversations with,
you know, Senator Obama at the time than with Senator McCain. But both men
supported the TARP legislation ultimately.

KUDLOW: In the end.

Mr. PAULSON: And both supported the--neither came out against the rescues;
and, as I look back on that, and as I looked at it in the time, I've always
been very grateful for John McCain for taking that position. Because, as he
fell behind in the polls, it would've been very easy to play the populist
card, and if he had we would've been defenseless and we'd have 25 percent...

KUDLOW: But reading...

Mr. PAULSON: ...unemployment.

KUDLOW: I...

Mr. PAULSON: And so as I look at it, it was a--you know, it was--we were
very fortunate, and--because the crisis came at the very worst time, because
it came six weeks before an election.

KUDLOW: Right.

Mr. PAULSON: And so everyone, at the Hill, both candidates, they've got to
go through this with one eye on the polls, and, of course, anything that even
looked--would've smacked of a bailout is--was going to be very unpopular
because, you know, in our system, if a--risk takers are supposed to bear the
responsibility for their losses, no one--the idea of having public assistance
for any institution, let alone a bank with private profit is, and it should
be, an anathema.

KUDLOW: I understand. I understand.

Mr. PAULSON: And so this was going on.

KUDLOW: I got to go to lightning. I got to go lightning. You're too good.
No, you're too good for--you're just too good.

Mr. PAULSON: OK.

KUDLOW: I got to go to George W. Bush.

Mr. PAULSON: Right.

KUDLOW: You speak highly of Bush. Now, one of Bush's speechwriters wrote a
book and said he was completely disengaged in the financial bailout, that you
made all the decisions. In your book, you repeatedly are briefing him on the
phone or in person, and he has to sign off on your major decisions, half of
which, on the bailout stuff, he didn't want to sign off on, but he did because
he felt it was for the good of the country. Am I giving an accurate reading?

Mr. PAULSON: You're giving an accurate reading, and I'll tell you, it's a
very accurate reading, because we had--I didn't keep notes--I've got a good
memory--and a lot of people do. There were--there were--there were good
nites--notes in the White House, and good records. And the--and I would say
that it was--from day one...

KUDLOW: Mm-hmm.

Mr. PAULSON: ...this is a man who was very engaged. We spoke frequently.
Every major decision was reviewed with him. He understood the politics and
the markets when this collision--in the book, as I said, is a collision
between markets and politics.

KUDLOW: Mm-hmm.

Mr. PAULSON: And he was the one that always said, `This may not always look
good. This is going to be ugly.'

KUDLOW: Right.

Mr. PAULSON: `We're going to have to hold our nose,' or what have you, `but
we are not going to let a lack of doing the right thing here hurt the American
people and the economy.'

KUDLOW: I got to hard out. He said, real quick, real quick, one word answer.
He said, `In order to save the free market system we have to suspend it.' Do
you agree with that?

Mr. PAULSON: Yeah.

KUDLOW: All right, we're going to leave it there.

Mr. PAULSON: Yeah. Yeah.

KUDLOW: Hang on. Much more coming with Secretary Hank Paulson. I'm going to
talk about some more political figures--Nancy Pelosi, Tim Geithner--and also
spiritual guidance during the darkest period of the night.

(Announcements)

Announcer: Live from Washington with former Treasury Secretary Henry Paulson,
a special edition of THE KUDLOW REPORT.

KUDLOW: All right, we've got a brief lightning round left with Hank Paulson,
former Treasury man, on his book, "On the Brink," a very good read. Just one
thing I want to get out of the way. A lot of people took umbrage when you,
quote, "bowed down" to House Speaker Nancy Pelosi. In your book, you do
suggest she wasn't all that helpful to your process of getting TARP through,
but can you give us a quick comment?

Mr. PAULSON: Well, no, I thought she was helpful, and I thought it was
pretty clear she was. You know, the--I needed to work with the--with the
leaders on the Hill, and if Nancy hadn't been as supportive as she was, we
never would've got it through. And I tell the story in the book of that
night, September 27th, a Saturday, when we negotiated it. And I think she
just all the way along, but there she played a key role in bringing people
together and getting it done and said the American people expect this.

KUDLOW: Was it because you kissed her hand, or just she wanted to do it for
the good of America?

Mr. PAULSON: Well, she wanted to do it for the good of America.

KUDLOW: No, I--say no more.

Mr. PAULSON: She--the leaders do...

KUDLOW: Say no more.

Mr. PAULSON: The leadership. But I'll tell you, it's...

KUDLOW: No! Say no more. I got to ask you this.

Mr. PAULSON: OK.

KUDLOW: I don't want to get out.

Mr. PAULSON: OK.

KUDLOW: Because I'm a spiritual person and so are you, and so are our wives.
You sought spiritual guidance during the worst part of this.

Mr. PAULSON: Yes.

KUDLOW: Tell me about that.

Mr. PAULSON: Well, I--prayer is an important part of my life, and I
continually prayed for humility and, you know, strength, stamina, wisdom...

KUDLOW: We don't know everything, do we? We just, as humans, we don't...

Mr. PAULSON: ...judge...

KUDLOW: ...we don't know everything.

Mr. PAULSON: ...judgment. Yes. And it was--it was--it was very important.

KUDLOW: And your wife read scripture to you at one point on the phone?

Mr. PAULSON: Oh, yes, yes, that was--one day--she read scripture to me at
more than one point.

KUDLOW: Did it work? Did it work for you in the next meeting?

Mr. PAULSON: It sure helped, because it was--I--it was a verse that was very
meaningful to both of us in dealing with fear.

KUDLOW: Boy, there's a lesson. There is a lesson for all of us in and out of
government, a little scripture will help.

That's it. We're going to run out of time. Many thanks to former Secretary
Treasury Hank Paulson. It's a hell of a book. I want everybody to go and
join us, "On the Brink." And there was a brink, folks, and he has written a
brilliant account.

Coming up, my last thought.

(Announcements)

KUDLOW: There can be little doubt that Hank Paulson's basic narrative that we
were totally on the edge, on the brink, on the abyss was the key point.
That's why you should all buy the book, "On the Brink."

I'm Larry Kudlow. See you tomorrow night.

Special Edition of the Kudlow Report Tonight

Please join us for a special edition of "The Kudlow Report" live from Washington, DC this evening where we'll speak one-on-one with former Treasury Secretary Henry Paulson for the full hour.

We'll discuss all the major events, players and decisions detailed in Mr. Paulson's new book, "On the Brink," which offers the ultimate insider's account of the key events surrounding 2008's near global meltdown of the financial system.

CNBC. Kudlow Report. 7pm ET.