>> charlie: welcome to our program. the price of gold reached a new high, today, and we'll tell you why. >> the americans, for first time, probably, since the depression, lost confidence, first, in their country's economy, then in their country's institutions, and finally, now, in the country's currency. and so americans started to buy gold. but way before the americans started to buy gold, in the last six or seven years, the americans, who never had any trust in their printed currency, the turks, the afghans, always bought gold. >> basically, gold maintains its value. it will fluctuate at a time like this when you have a loss of confidence in conventional institutions, but over history,

basically, gold is stable, and it's the currencies that lose value so the apparent rise in the gold price is an illusion. it's really the fall in value of either the euro, or the dollar, or any currency you can name. >> central banking the world over is in uncharted territory. never before in the history of the world have all of our governments been on a pure faith-based monetary system -- faith-based meaning that the value of these currencies has to do with nothing like the backing of gold and silver, rather, with the world's perception of the analytical acuity and judgment of the likes of ben bernanke who heads our federal reserve system. >> charlie: also david einhorn, a leading hedge fund manager. >> i think what you are dealing with here is incomplete information. you've got little bits of things. you have facts. you have analysis. you have numbers. you have people's motivations. and you try to put this together

into a puzzle -- or decode the puzzle in a way that allows you to have a way better than average opportunity to do well if you solve the puzzle correctly. and that's the best part of the business. >> charlie: gold and money. coming up. >> funding for "charlie rose" was provided by the following. ♪ >> maybe you wtchool kids to haveore exposure to the arts. maybe you want to provide meals for the needy. or maybe you want to help when the unexpected happens. whatever you want to do, members project from american express can help you take the first step.

vote, volunteer, or donat for the causes you believe in at membersproject.com. take charge of making a difference. >> charlie: additional funding provided by these funders. >> and by bloomberg. a provider of multimedia news and information services worldwide. ♪ >> from our studios in new york city, this is "charlie rose." ♪ >> charlie: gold is back. the precious metal long called the currency of fear used to be the refuge of doomsdayers and gold bugs. today, in an uncertain global economy awash with u.s. dollars it has become a mainstream investment and a hedge against inflation. exchange-traded funds are an easy way to invest in the metal.

top hedge funds hold gold and gold backed funds in their portfolios. it is believed it could reach $2,000 an ounce in the near term. so far this year the price is up almost 25% and today settled at a record high of 1 an ounce in the united states. this following federal reserve chairman bernanke's comments last night on cbs news's "60 minutes." >> do you anticipate a scenario in which you would commit to more than $600 billion? >> it's certainly possible. it depends on the efficacy of the program. it depends on inflation. and finally, it depends on how the economy looks. >> charlie: joining me now is peter munk. he is founder and chairman of barrick gold. the toronto-based firm is the world's biggest gold mining company. john hathaway of tocqueville asset management. he manages the gold fund.

and jim grant of the widely respected gold's interest rate observer. i am pleaseded to have them all at this table so i can simply listen. they really do know what this whole phenomena of gold is, and i am with you in a sense as students in this, so let me just start with you, jim. what is gold that makes it this extraordinary metal? >> gold is money, and no one has to tell you it is. it is as famous as muhammad ali, as intuitive of economists who haven't spoken english in 100 years want to tell you other things, they tell you that special drawing rights by the i.m.f., they talk about dollars which can be conjured out of nothing on a screen, they too consist of money, the defining comment of this turbulence to me was a letter to the editor of "the times of london" a year ago and the correspondent wre, "now i do understand what quantitative easing is. what i find i don't understand

is the meaning of the word money." >> charlie: so gold is another word for money. >> it's historically been the case and as jim says, it's a social convention. you don't need a government to tell you that it's money. it's just widely accepted. it has been throughout history. >> charlie: why is the price of gold rising? >> because what most people think of as money, which is cash or paper money, is falling in value and the fellow we just saw on the monitor has announceded his plans to debase it. >> charlie: so the more that he does that, the higher the price of gold will go? >> just the mention of what he said. vuforeign governments that own trillions of u.s. dollars that could own something different than dollars, and i suspect the chinese may not be selling at this moment but there are people front-loading that trade. >> charlie: so what are they doing? >> they are buying gold. what we're seeing is reflected in -- >> charlie: with gold dollars? >> it could be dollars, it could be euros, basically gold is

going up in every currency. >> charlie: is that going to continue? or -- and what does it depend on? does it depend on inflation? does it depend on what happens to other currencies? does it depend on something i don't know? >> from our viewpoint, we are producers, we are neither fund managers nor economists. to us, it's a product. and from my perspective, gold is nothing more than the reciprocal investment opportunity to any other asset class. as long as you believe in the main currency of your country like the americans did for 110 years, gold is nothing. gold was lingering, and it built our company entirely by hedging 15 years. every year, gold went down. those were the optimistic, after-the-berlin-wall years when

fukuyama wrote the book about the end of history, there is only one power, american power, only one currency, the u.s. dollar, so whoever wanted to buy gold? you buy real estate, stocks, bonds. today, in the last decade, the question changed. the americans, for first time, probably, since the depression, lost confidence, first, in their country's economy, then in their country's institutions, and finally, now, in the country's currency. and so americans started to buy gold. but way before the americans started to buy gold, in the last six or seven years, the arabs, who never had any trust in the printed currency, the turks, the afghans, always bought gold. so you only buy gold as substitute. >> charlie: when you lose confidence in something else. >> exactly. and right now, what we're seeing in the world is that there is a universal global loss of confidence in absolutely every alternate asset category

including -- including the sovereign currencies. >> i wouldn't say it's a loss of confidence, peter. i would say it's an increase in perception. central banking, the world over, is in uncharted territory. never before in the history of the world has all of our governments been on a pure faith-based monetary system -- faith-based meaning that the value of these currencies has to do with nothing like the backing of gold or silver, rather with the world's perception of the analytical acuity and judgment of the likes of ben bernanke, who heads our federal reserve system. so i would say that the value of gold is not the reciprocal of other investment opportunities, it is the reciprocal of the world's faith in the institution of paper currencies, so you imagine the number one divided by faith, and as faith shrivels, the resulting fraction -- >> charlie: where do you stand

with robert zoellick? >> robert zoellick wrote a piece for -- as you know, a newspaper, "the financial times" and in it, he definitely, almost coughing into his sleeve, mentioned perhaps that we might think about gold as a monetary unit. this was the fifth point of five points. the first four which we don't remember but we do remember that he had the temerity, the audacity to mention gold. robert zoellick is an establishmentarrian. >> charlie: deputy secretary of state. >> he certainly should be -- >> charlie: worked with jim baker. >> yet he mentioned this, so the mention of it by a man of his caliber, or his station in the establishment, is extraordinary. "the financial times" published this essay one day, the next day it devoted most of the paper to trashing it. >> charlie: where do you stand on that? >> i am with the fifth point in zoellick's essay. >> charlie: you're with him? >> yeah. >> i would agree with that. >> charlie: he's right, and you

agree? >> to come from a man with that background is an interesting shift in the establishment view. that was a leak in the dike, let's say, of the otherwise impervious view that gold is something not to be -- that should not play an official role. >> it is so -- the establishment cannot abide it. i say this sou as if it were a conspiracy. the people who are schooled in economics, by and large, the professors, the scholars, regard this as hopelessly antedelouvian, it's as if the gold standard would be they say like going back to before penicillin. >> charlie: nixon took us off the gold standard. >> the gold standard is not one institution, it is variations on a theme, 1971 the united states still nominally had a dollar exchangeable into gold. $35 got you an ounce. i would say the price of gold has not increased, the value of

the dollar has decreased. the dollar was 1/35th an ounce of gold. has the gold price gone up or has the currency depreciated? >> charlie: you say the currency depreciated. >> yeah, i do. >> gold maintains its value. it will fluctuate at a time like this when you have a loss of confidence in conventional institutions, but over history, basically, gold is stable and it's the currencies that lose value, so the apparent rise in the gold price is an illusion. it's really the fall in value of either the euro or the dollar or any currency you can name. >> charlie: let me get this straight in terms of -- you take gold out of the ground, yes? that's your business. >> yes, we do. >> charlie: you bet on the price of that. >> we like to invest in that. >> charlie: i did say invest, didn't i? i meant to say invest, of course

i did. is there a limited supply of gold? >> it's very limited in supply. which probably is one of the reasons why -- and easy to take out of the ground. if you've got the most primitive methods like they had under the pharaohs, you could take out gold. you couldn't refine copper, you couldn't do many things. gold, as long as it was on the surface, you can take it out and as gold increased in value you had the financial means and the reason to dig deeper which costs much more money, so gold's supply has been quite limited, but with increased prices, the opportunities to mine gold profitably increases because the value is 1,400 and not $250 like it was 15 years ago or 10 years ago. >> charlie: explain to me why the stock market is going up and gold is going up at the same time. >> the stock market may go up relative to where it was a year ago. it's still way below where it was and less and less people own stock and they don't have the

same confidence. certainly it hasn't gone up in europe. certainly it hasn't gone up in many countries. but many asset classes can go up but gold is nothing more in my mind -- or gold prices are nothing more in my mind -- there are a million theories. every economist had theories, always did and they were more often wrong than they were right. so were the analysts. gold price is like a thermometer. if i put it inside your body and you have a fever, gold goes up because you are sick. if i check the gold price and globally it goes up against hong kong dollars, euro, u.s. there is nothing more than an indication that the world at large believes no more in alternate investments, either the currency, more and more people believe in gold and the more and more people lose confidence in the currency, be that the euro, be that sovereign debt, be that municipal bonds, be that corporate bonds, the

more people buy gold. >> charlie: that's the economic reality today. people have lost confidence in everything from the euro to -- from the euro to the dollar to sovereign debt -- >> a key asset. >> consider what a peculiar investment is gold. it yields nothing. it burns nothing. there is no conference call. there is no shiny annual report. >> charlie: you can't do anything with it. >> bank accounts have nothing but when i pay my taxes -- >> charlie: it's nothing. >> but the thing that's really, i think, revolutionized the gold market is that it now exists in the form of an exchange-traded fund, an e.t.f., which has made gold user friendly. before you had that, in 2004, it would be very difficult for most investors to have exposure to gold, but now, with the e.t.f. -- >> charlie: other than buying it in a mining company. >> you could buy mining stocks and you could buy gold koinz and you could -- you could do it -- gold coins, and you could do it but it wasn't easy.

now it's quite easy, and that's what money flows into physical gold in a way that has never happened before, and you know, it's not the only reason that gold has gone up but it's certainly facilitated capital market flows into gold. >> charlie: when did e.t.f. come into being? >> the main one launched in 2004, november 2004 and today has a market cap of $60 billion and in my view, as long as these macro trends continue, as long as we have central bankers the likes of whom we have today, we'll see that go up by tenfold and that will increase the gold price. >> charlie: suppose this scenario. economic growth comes back to europe and the united states. two, three percent, say. china, india and asia continue at nine or 10%. unemployment declines in the united states. things look all of a sudden much better. sovereign debt problems are handled. all right? >> optimistic scenario.

>> charlie: yes, indeed. >> i can't find that in any forecast that i -- >> charlie: euphoric, not optimistic. suppose that happens, the price of gold goes -- >> i would think the price -- >> charlie: because there is no fear. >> listen to me, charlie, one point. price of gold will go down without a doubt if everything improves -- currency, stock markets, industrial production, peace breaks out, no more terrorists, even then, let me tell you, what happened over the past five years, in frightening rich people, in the fortunes that have been lost, from bank stocks to european real estate to any asset class, i know many of these people, from arab sheiks to latin-american billionaires who poured hundreds of millions in the past few years into gold and they doubled their money. even if the economy becomes euphoric globally, which i don't think is a likely scenario,

these guys have been so frightened and they have been so traumatized by all the other things that i think it will take years and years of that euphoric scenario for those people to give up gold. >> charlie: could you, with the kind of sensitivity all of you have, could you have seen where smart money and smart people were going even before we had the subprime collapse? simply because people were beginning to worry -- no? >> he did. >> we launched our gold fund in 1998. >> he did. >> when it was basically a joke. it was the rodney dangerfield of investment ideas. someone actually wrote about it and wrote about us and he actually misspelled our name. >> charlie: did he say what you were doing was a joke? >> the second time through, i spelled the name properly. >> charlie: was that your mea culpa? >> in those days, all you could say was -- in those days, all you could say was that it was completely out of favor.

>> charlie: yeah. >> never a good place -- which is a good place to start in almost every investment but could never have imagined -- i certainly didn't -- all the things that have happened since then. the subprime crisis. the dot-com bust. all of those things have taken place and they have cumulatively undermined confidence in the financial markets. >> we have been talking about the shattering of confidence and the rise of fear. i would say that these events have also sharpened perceptions. it's not only technology that has given us this exchange-traded fund that owns gold, it's the process that bends bernanke's thoughts 24/7. he won't stop talking. what he's saying is "i am going to print more money." he wouldn't say "print," what he does is conjure credits on a computer screen but the very facility with which they can be conjured now has been impressed upon all of mankind. ben bernanke announced that he was going to materialize $600 billion over the course of seven months. how do you do that?

well, you do that effortlessly, and i think it is the almost subliminal recognition by the world that dollars can be materialized, that has caused a flight into something not nothing -- something tangible. >> the europeans are doing it into a different way. >> the laura ingalls-wilder books, "little house on the prairie" in one of these it is said "money is distilled work." what if money were nothing? what if it were a vapor? what if it were a cloud? which is what mr. bernanke says. what then? people want to know that their money has value. that is not merely imputed to be value by a government. >> charlie: if mr. bernanke wants to print money, you're against that. >> i'm very much in favor of the price of gold going up if he does that. >> charlie: is that a dilemma? it's economically wrong to do that but if he does it, you can make --

>> respond with the investment view and the response from the investment view to what bernanke and other central bankers are doing is to protect yourself by having -- >> charlie: raising your investment in gold. >> having exposure to gold. >> t answer your question, no, i don't think it's right. >> charlie: the policy that the fed is under bernanke is wrong in terms of the economic well being of the united states. >> well being. >> i emphatically believe that, and central banking has almost invisibly morphed from a very limited doctrine of supplying money during times of need to a form of central planning. so central bankers are now -- central banking has expanded wondrously. now not a sparrow falls to earth without the central bankers taking account of it. what mr. bernanke says is he wanteds to lift stock prices, he wants to suppress interest rates, he wants to engineer

economic recovery. and how? through conjuring of money. people hear it, and they react. they react sensibly. not out of fear, they react calculatingly by buying your stuff. >> charlie: are you at one with what jim just said? >> how about half of it. half of it. >> please, he is a well known, famous economist. i am just a gold producer. >> charlie: a miner. just a miner with a famous daughter. >> famous daughter, exactly. >> exactly. but these economists -- i don't mean jim, but i mean generally have been predicting and theoretizing and debating this now for 20 years. let's face it. we could print, and the central bank did, print gold and conjure gold out of nothing for the past 30 years. >> for the gold bull market today, which is really, again, as we've established, i think, a

decline in the value of paper money, for that to end today you would have to see a similar scenario where you would prove, hopefully through an eshth electoral process see a -- through an electoral leadershi that would have a carte blanche to do what volcker did in 1980. >> charlie: you don't think that political will exists in washington today? >> personally, i don't see it. or even the understanding to do it. at some point it will happen, but right now i don't see it, and i think that -- >> charlie: the debt commission and everything else? >> yeah, i think that -- that just to me is hot air. let's see what they actually do. >> the funny thing, you say the value of these currencies have gone down yet people shopping in wal-mart don't see the dollar losing much value, they don't see much inflation. the world is seeking out gold, it seems to me, not because there is visible inflation of things at the check-out counter, it's because of what the central

bankers doorg and what they promise to do -- what the central bankers are doing and what they promise to do. this is not 1978. people are not leaving the supermarket with their head in well their hands saying "i can't eat as well as dia week ago." -- "i can't eat as well as i did a week ago." it's something else. >> charlie: you disagree because you're a miner? >> that's not the reason, but hold on. we keep theoretizing about gold. in the meantime, the price of soya beans, the price of corn, the price of copper, the price of tin, the price of rubber, the price of oil has tenfolded, gone up faster than gold and nobody is worried about somebody conjuring up fake rubber. it has -- >> charlie: that all seems to be a straight factor of supply and demand. >> exactly. >> charlie: isn't gold the same way? >> identically, and the demand comes from insecurity. there is no other reason. all of the reason jim talks

about -- >> charlie: demand comes from fear? fear? >> fear. >> charlie: demand comes from where, jim? >> from logic. >> charlie: what's the logic that the demand comes from? >> the logic is listening to mr. bernanke say that he will materialize $600 billion in seven months and that he might do more if he sees fit. that's the logic. >> that he wants to trash the dollar. >> charlie: logic or analysis, either one. >> he wants to trash the dollar. >> charlie: what? >> that he wants to trash the dollar. he's not saying it in quite those words but he did say, i believe in september, that he would like to see higher inflation. >> charlie: he wants to trash the dollar because of inflation and also because he wants to change the -- he wants to make american products easy to sell overseas. is that it? >> he thinks if inflation goes up, the dollar will lose a little value which will help exports. >> charlie: right. >> it will lead to higher interest rates so then, the fed -- according to their playbook -- they will will come in at the right moment and stop inflation exactly at 2% and then they will

be able to raise interest rates to some number which they can then use as a policy tool which they can't do now because interest rates are zero. >> this is the fed which -- >> how would you feel if you're the chinese government -- >> charlie: that's exactly what i wanted to ask. >> the japanese government, the united arab republic government that owns between them $6 to $6.25 trillion dollars. >> charlie: say what this >> did you see "60 minutes" last night? >> charlie: stay with this idea. the chinese government -- >> the chinese government, the russian government, all are interested in one currency, the dollar, and there the guy in charge says, "i want to trash it because it's in our national interest." >> charlie: he didn't say that, did he? >> didn't he imply it? you guys are all saying it. what do you do? you go home and buy gold. >> charlie: yeah. i want to come back to that

point. >> dollar is the worldy's currency, it's the coca-cola of monetary brands but the fed is america's central bank and only america's and the fed's remit is to attend to the democracy economy, so mr. bernanke having that interest, and unemployment worries him as terribly as it might, isn't worried about how the saudis feel or the japanese or the taiwanese, what he wants is a little more inflation which he is persuaded that he can control. as for the rest of the world, they say, "wait, are these the same guys who saw exactly none of the credit crisis of 2008 coming? none of it? these are the people who are going to protect us?" they don't believe it. it's not fearful, it is hard reasoning. >> charlie: yes. >> you would be a russian central banker, you would be afraid of being shot if you lose more dollars. >> that's another kind of reasoning. >> charlie: you would be afraid of being shot if -- >> you would be afraid. >> that's called a margin call

in russia. >> charlie: explain to me what he meant. >> i think different economies deal with failed economic policies in different ways. >> charlie: i know that, yes. >> i think that's what he meant. >> charlie: i know it. so a failed economic policy would be to have are too many dollars. >> bernanke doesn't have to worry about that because he's only charged with -- in his mind, employment, g.d.p. growth in this country. >> charlie: before we just trash mr. bernanke, mr. bernanke and mr. pahlsson and mr. geithner are credited with saving and stopping an economic collapse in 2008, and the world economy. >> and they did. and they did. no doubt about that. everybody agrees. >> charlie: exactly. >> touche. >> everybody agrees. >> charlie: did they all of a sudden become stupid? >> i would like to enter a demurrer on that point. >> nobody is perfect. >> right 50% of the time. >> to save the world once, what

do you want to do? >> charlie: you think this is more -- >> why did -- a question for all of us is is why did the world need saving? the g.d.p. in this country, that is our national output, was down about 3%, 3.5%, from best to worst, peak to trough, and in response, or in combination with this perturbation in our national outpu the financial system of this country virtually collapsed. why is that? it seems to me that the astounding and scandalous financial precariousness of this country is a direct consequence of our monetary arrangements. when there were a finite number of dollars tied to a finite stock of gold, the federal reserve couldn't conjure dollars because the world would get its gold from fort knox. since the liberation of the dollar from this collateral, the sky's been the limit. everyone knows that come the crisis, the fed will be there

with printing presses humming. >> charlie: where do we go for the next year? >> going back to what you were saying, geithner and -- >> charlie: pahlsson and bernanke. >> but what did they do to save it? they did -- basically the build-up to the meltdown in 2008 took 30 or 40 years since we went off the gold standard. more and more credit creation, the fed had this implied put so any high-risk enterprise was bailed out. you could say that under alan greenspan the fed was on pot, under bernanke it is on crack. and it's very hard to undo this. how do you undo it? basically, q.e. 2 is going to lead to q.e. 3, and unless that very hopeful scenario that you talked about, which is robust economic growth for many years -- and i'm kind of with jim and i believe the economy is getting better -- >> charlie: right. >> but sustainable, five years

of, say, 3 or 4% growth it's very hard to see how we're going to get away from thisspendency on paper printing. >> charlie: you think the global economy is getting better? >> it got so bad, it's rebounding and slowly but surely the private sector is creating jobs. >> charlie: why don't they create more? why are they sitting on all that money? >> i defer to other economists on that, but basic basically there are leadership issues in washington, rules that aren't known, tax policy -- some of these things will get resolved in time but basically as peter was saying, once you have been through this scare that we had in 2008, you don't bounce back right away. people have memories, and they don't just change overnight. >> also, can i say one more thing. the fear -- you call it fear, jim, i call it security, whatever we degree isumently

creating the demand for gold doesn't only come -- we agree is ultimately creating the demand for gold, today's fear comes from a much deeper, much more fundamental issue as well. we don't feel as secure as human beings. iran, north korea, terrorists -- all those things did not exist in the decade when gold did not move. just remember, 20 years ago, gold did not move a dollar because we felt secure, we felt america won, the fwree enterprise system won, our system had -- the free enterprise system won, our system had become accepted. america has lost power. terrorism, 9/11 happened, 9/11 was followed with bombing in britain. there are many, many more factors that work on rich people's consciousness beyond just the dollar. the there is one of them, and probably the main dollar, but as every day goes by there are more and more new factors entering

into this and that is what supports gold and that is why gold is a really, really good investment right now. >> charlie: last word to you, mr. grant. >> gold is not an investment. gold is money. mankind will contrive to restore the monetary system to something like orderliness and logic. i want to close by saying how confident i am in the human race to get over there. >> charlie: i'm with you on that. thank you. thank you. thank you. we'll be back in a moment. stay with us. >> charlie: david einhorn is here. he's cofounder and president of hedge fund greenlight capital. he established the firm in 1996 with just under a million dollar, half of which his parents gave him. today the company has nearly $7 billion under management. he's also one of the many top-flight hedge funds today with significant holdings in gold. in 2008 he published "the new york times" best seller "fooling some of the people all of the

time." it was about green light's effort to shortsell a firm which had misled investors about the balance sheet. this book is now in paperback and i am pleased to have david einhorn at this table for the first time. welcome. >> thank you, pleased to be here. >> charlie: what does the global economy look like? >> the global economy, as i see it is sort of in a period between two crises. we had a crisis in 2007-2008. call it the private-sector banking crisis, or the real estate bubble popping and so forth. and now we have had a period of sort -- a period approximate of sort of clean-up and respite but i think it's laid the stage for what will eventually turn out to be another crisis and we're sort of in a respite period where things for the moment seem relatively stable but i think there is a lot of unfinished business that will come from the last crisis. >> charlie: ok.

explain that. >> i think what we did in the last crisis, in resolving it, is rather than go to the root of the crisis, tally up the damage, allot the losses, clean up, fix things and move on, i feel like a lot of what we did was sort of sweep things under the rug and put short-term bandage fixes on things, and i think we managed to transfer a lot of the problems sort of from the private sector to the public sector, and the problem is that it's such a large problem that eventually, i'm concerned that will eventually threaten the public sector as well. >> charlie: i want to make this more and more specific, though. do you see a bubble out there? and what kind of bubble is it? >> i don't see a bubble, no. not right now, no. >> charlie: so -- >> it's more a question of when you look at what went through with the crisis, we had an opportunity, there were a lot of bad loans that were made and we

had an opportunity to sort of recognize those loss, clean up the mess that had gone on, set a base for future growth. >> charlie: clean out the system. >> clean out the system, so to speak and instead of what we decided to do was sort of paper over the problems. we bailed out a lot of institutions. we bailed out a lot of people that had positioned themselves incorrectly -- ostensibly incorrectly in the crisis, whether it was individuals, whether it was institutions, whether it was investors and so forth and because we weren't willing to go through that, we haven't been able to effectively clean up that mess and it's created a very, very large budget deficit. and it's created a monetary policy that is exemely easy, and it seems to be perpetuating itself into a way that i think is going tontually come to a tough spot. >> charlie: what do you think of the federal reserve, and what do you think of qualitative easing? >> i think it's the wrong thing to do. i think it will be

counterproductive -- if it's successful, i think it will be counterproductive in the short run, by which i mean the goal of the quantitative easing right now is to raise the inflation rate that's what they say. >> charlie: the goal is not only to raise inflation, the goal is also to increase unemployment. >> fair enough, fair enough, but let's take it into the two pieces. let's talk about the goal of raising the inflation because they think the -- the inflation is unacceptably low and there is a great deal of concern about deflation. let's talk about deflation for a moment. so apple. let's just say they make an iphone and let's say they fix the components in the iphone so that the battery lasts twice as long as it did before. the way -- and then apple sells you that same phone with the same components with twice as good a battery for the same price. the way the economists look at that, they'll say that iphone is 15% better than the old iphone that you could have got at the same price.

that is deflation. what i don't understand is why do we need to have a policy response to fight that behavior? who is harmed by the fact that apple can make an iphone with twice the battery and sell it to you at the same price? and what we've essentially said is we want to fight this inflation so we're going to print a lot of money and create inflation. where are we going to create the inflation? it's not going to be in these sort of quality improvements in life. it has to be in the necessities of life. so that's things like energy prices, food prices, sometimes they even exclude those from some of the inflation calculations. perhaps it's cotton prices that go into your clothing. what i don't understand why if you have a better iphone you need to raise the price of clothing. that doesn't seem to me to be a very sensible policy, and if you do raise the price of clothing, it's sort of effectively lowers everybody's standard of living and gives them less money to buy other things when the necessities of life go up in

price. >> charlie: to pick your subject matter, apple, you do like apple. >> very much so. apple is a very interesting company, because it has arguably one of the best brands that we have in the country and it's growing at an enormous rate. and the growth effectively feeds on itself because when you buy one apple product, eventually, you want to buy another apple product, because they're so nicely compatible, so you buy an ipod. then you buy an iphone. then you buy an ipad. before you know it you have a laptop. what happens is effectively, these things become integrated very well and the transition that apple is having right now is they are moving from just having kids and having certain graphics designers and artists. it's becoming a very mainstream product, and the result is that businesses, which, for a

generation essentially avoided apple products, are adopting apple products right now and it's because of the demand from the employees. they come in with their iphone and they say, "i want you to support this with my email," and before you know it the opportunity for apple, because they have one successful product allows them to have additional successful products which then allows them to expand their market share not just with their consumer but also with the companies where their consumers work, and i think that's a very powerful growth story, that it's not at the beginning stage. apple has been doing this for a while. but i think with the introduction of something like the ipad, it's sort of reaching a critical mass right now, where i think there is going to be a significant incremental step function in growth. >> charlie: what is it you like about what you do? because you didn't set out to do this. >> no. what i like is solving the puzzles. i think that what you are dealing with here is incomplete information. you've got little bits of things. you have facts.

you have analysis. you have numbers. you have people's motivations. and you try to put this together into a puzzle -- or decode the puzzle in a way that allows you to have a way better than average opportunity to do well if you solve on the puzzle correctly, and that's the best part of the business. >> charlie: and how did you come to this? >> almost by happenstance. there is no strategy to do this growing up. i went to cornell. i was a government major. i wanted to go get a ph.d. in economics, but i didn't have, maybe, the right core curriculum or whatnot and i didn't get into the graduate schools i applied to so i went to theon-campus recruiting and got a job at d.l.j. as an analyst in their two-year program. >> charlie: you weren't thrilled by the job. >> i was not thrilled by the job and what i realized by the job was i didn't want to go to business school because the path was to work for two years, go to business school and come back and i knew i didn't want to come

back so i had to get another job. i got head hunted. a head hunter called me up and said "would you like to interview at a hedge fund?" i said "what's a hedge fund?" i they told me and i said "let's do that," i got an interview and i got a job and i got very good training there for a couple of years and left with a colleague, almost five years out of college and started greenlight. >> charlie: the financial regulatory reform. will it make a difference? did they take the right steps? >> i see it that way. i think what essentially happened was washington essentially said we will let sort of wall street off the hook. if wall street allows washington off the hook. so i think that the reform -- it doesn't go after any of the obvious issues that were identified in the crisis. >> charlie: are you still a strong believer in short selling and that short selling is a

positive device for the market? >> i do. yes. >> charlie: why do you believe that? >> look, i think that it's important to have different opinions in the market, and i think it's also important for inveto be able to -- >> charlie: this is an opinion. >> yes, it is. >> charlie: what do you think of derivatives? >> i am not a huge fan of derivatives from a social perspective, in some cases. in other cases, they're relatively harmless. >> charlie: as long as there is transparency and clearing house and all that? >> well, it depends. i think one of the things we saw in this last crisis was a lot of people, i think, sold derivatives, basically open-ended options on the view that they had no plans to pay off if their bets were losers. becausthey figured f sure, their bets were winners and if their bets weren't winners, then the world would have gone so badly that they would lose their job and that's how it would go, so essentially -- this is, i

think, essentially what happened at a.i.g., for example -- i think that they took on lots of bets where they were essentially collecting one penny but promising to pay one dollar or 10 dollars without any serious ability or willingness to pay off those bets. >> charlie: when it came time to pay off, they weren't -- >> that's right. >> charlie: so you have also come to a position in which you simply don't like -- you think credit default swaps should be banned. >> i think that's the type of derivative that we're talking about. i think some of these derivatives -- i understand why they make sense to purchase but i don't understand why anybody would fairly sell them. i think if they actually had to allocate enough capital to pay off those bets when they went against them, they would choose not to enter them and i think that the regulations would benefit by requiring so much more capital that people wouldn't choose to sell cheap options. >> charlie: what should happen to the rating companies?

>> oh, the rating companies. i don't think we need rating companies. >> charlie: do your own research? >> it's not just that. i think if you want to hire a consultant. hire a consultant. if you want to hire an advisor, hire an advisor. i don't have any problem -- i don't think each person has to go do their own credit analysis, but i think having a centralized arbiter of credit is far moree damaging than even what you just asked me, for example, about short selling, because credit-rating agencies, when they're centralized, when there is only a couple of them, where it's very official and everybody is looking at them, they create a pro-cyclical dynamic, by which i mean when something is doing well, when it appears to be fine, the credit-rating agencies say it's fine so people have confidence in it and they allow the counter party to take more and more risks on, and then eventually, the party that's being rated at a very high level takes on too much risk and then the credit rating agency has a period of denial where there is

too much risk and they don't really want to sort of rock the boat, but once eventually it starts tipping, then the rating agency is the one that comes in and says, "oops, this thing isn't so good anymore" and that often becomes a very triggering event that causes a much bigger problem, and i think that's what we saw in the 2007 crisis, and my concern is that we may see that with even larger entities like government type of entities in a future crisis. >> charlie: should lehman brothers have been saved? >> that's too complicated a question to answer straight up in the sense of "what would you do in the last weekend?" because i don't think that dealing with lehman was something that should have come down to the last weekend. >> charlie: they should have recognized much earlier. >> there was plenty of opportunity to see there were significant problems, there was plenty of opportunity for regulators to come in and intervene, and i also think the regulators needed to figure out

what they were doing as opposed to sort of solving each crisis as it came, and so what we wound up with, with lehman brothers in a sense was almost the worst policy response in thatirst it was perceived that it would be protected and bailed out when bear stearns was sort of saved. then, they allowed it to fail. when they allowed it to fail, it seemed like, all right, fine, so they're not going to have any of these government bailouts and they're going to fight the moral hazard that comes from that. so the day they let lehman fail, you thought this one is going to fail and the fog one is is going to fail and the following one is going to fail, then they decided this couldn't be allowed to persist so they stopped the damage of the other ones but the damage had already been done -- we wound up with a global economic recession as a result of lehman failing -- or being allowed to fail, and we reinforced the moral hazard by bailing out all the subsequent dominos that would have fallen had lehman been toppled.

so you didn't get the benefit of effectively -- whatever you're trying to accomplish by allowing lehman to fail, we didn't get the benefit. >> charlie: back to short selling for a second since you mentioned 2008. did you see people abusing that short-selling process by using rumors in order to profit themselves? >> people say things in the market that they don't believe to be true, both in promoting stocks and rejecting stocks. >> charlie: this book is called "fooling some of the people all of the time." a long, short and now completed story along with the new epilogue. the epilogue is what? >> the epilogue is the completed story, interesting in terms of the first edition is that i came out with this in may 2008, and at that point allied stock was still $20 and this was still an open question as to what was going on. so it was the story, but it was an incomplete story, and subsequent to that, we got a

conclusion to both the allied investment, to the government investigation, the government essentially went in and looked at all the stuff afterwards and concluded that the government had done a very bad job, the sec in particular and in terms of how they handled the situation, and the book also talks about lehman brothers in terms of the epilogue and how that essentially was a repeat of the allied story at least from my perspective, just in a much larger scale but over a much shorter period of time. >> charlie: should lehman brothers if it had recognized its problems early enough been able to put together a merger that would have saved it? >> the answer to that is yes. there is a joke i tell in the epilogue. it's about a guy who is caught in a flood, and he gets on the roof of his house, and somebody comes by in a boat and says, "come in, i will bring you to safety."

and the man says, "no. the lord will will save me." and then 20 minutes later, the water is coming up and a helicopter comes, and says, "drop down a rope. come on up. we will save you." and the man says, "no, the lord will save me." then he drowns and he goes to heaven, and he sees god, and god says, "i'm very surprised to see you here." and the man says, "i thought that you were going to save me." and god says, "well, i sent you a boat and a helicopter. what did you wan" and i think it's really the same story -- >> charlie: has it challenged your belief in the market? >> i was never a believer that the markets are efficient. >> charlie: right. >> i'm not an efficient-market person. i think that there is a lot of misunderstood information. i think investors don't absorb all of the information. i don't think the market solves things. i actually saw a lot of the problems that led to the crisis -- and essentially, they're told

through a small story of allied capital, where essentially, you saw that the regulators weren't doing their job in enforcing the rules and leveling the playing field. you saw that the credit-rating agencies weren't doing their job in evaluating the economy. you saw the auditors weren't doing their job. you saw that the wall street analysts weren't doing their job. and you saw that the media wasn't doing its job. >> charlie: the market failed in part because a lot of people who were supposed to correct the imperfections in the market didn't do their job. >> that's correct, and essentially, that's what the failure is. it's a failure of the gate-keepers and the police to do what they are doing and then it turned out, as you saw through the crisis -- and it was much bigger and worse than i imagined it to be -- that essentially what was going on with allied capital was going on, on a global scale, and that allied was simply a symptom of a much larger problem. >> charlie: the political judgment is that -- not only that they needed tougher svrment enforcement on the part of -- tougher enforcement on the part of those regulators, it is also

that regulators needed more teeth. that's why you have the consumer agency and it's why the changes -- the so-called volcker rules and things like that. there was a judgment made by the legislature that they did not have enough of the tools necessary. >> i would actually disagree with that. i think that the problem was that the laws were not enforced. after enron, you had sarbanes oxley. and there have been hardly any prosecutions under sarbanes oxley. the c.e.o. has to sign there is no fraud, the c.f.o. has to sign there is, if not there are criminal consequences and the result was that effectively you passed a law but then they didn't enforce the law and once the bad guys figured out that the law waint wasn't being enforced it effectively provided cover because everybody said "we have the tough antifraud law. the fraud must have gone away." >> charlie: did anything that

happened in 2008 specifically change your attitude about anything? >> well, i think the government is much more involved in the markets. i think the government interferes much more in the markets and is much more concerned with the markets than i would have anticipated. i think there is less sort of free market in the market and much more sort of centralized control. one of the things that i have noticed through the crisis, at least my own personal perception, is it sometimes feels that the federal reserve is more concerned about which way the next 50 points in the s&p go than your average hedge fund manager is, and i would not have expected that before the crisis. but i want to talk about the concentration on the market and when i figured out that the fed was principally concerned with the market. >> charlie: when did you figure that out? >> it was on the martin luther king holiday in 2008, which no

one will remember but the markets in the united states were closed and the markets in europe were open, and over that holiday weekend, on monday, the european markets fell an enormous percentage, and the u.s. futures market was indicating that the market would be down a lot, and it looked like there must be some huge problem going on in the world, and the federal reserve called an emergency meeting and they lowered the interest rates by 3/4% before the market opened tuesday morning so the u.s. market never even opened at the lower level because they saw the support -- >> charl: : theederal reserve was concerned about what the market reaction may be in the united states. >> the question is, what was going on that caused a need to provide this help to the system? and it later emerged that the fed didn't really know what the problem was, they simply saw that the markets were down a lot and within a week it came out that there had been a rogue trader at a large french bank

that had taken on some enormous position, and the french bank, when they discovered this, decided they weren't going to unwind this in some orderly fashion but they were going to dump a huge amount of equities to unwind this fellow's positions on a monday of a holiday weekend which had a disproportionate effect and it seemed to me if the federal reserve was willing to cut interest rates 3/4% because somebody was unwinding a propietary position when nobody was arod, tt was what tir primarfocus wasnd as i have watched, nothing has taken me off this belief. >> charlie: the book is called "fooling all of the people some of the time" david einhorn, founder of greenlight capital. thank you. >> thank you. ♪

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