all right good evening and welcome to capital account here in washington d.c. i'm more in leicester and tonight european union crisis summits in brussels ended this weekend with the final solution proposed to the eurozone debt crisis to be continued this week a lot of possible outcomes here and with the threat of contagion just grew larger average u.s. investors at risk if european banks fail and did they have the federal reserve to thank for being exposed in the first place also switzerland the biggest haven for offshore wells or is it swiss banks are reportedly likely to pay billions of dollars and hand over the names of thousands of americans who have secret accounts there it's to settle a u.s. probe of overseas tax evasion is the u.s. getting desperate to fill its dwindling coffers just what's going on here and is the u.s. even going after the right people what about the huge corporations that pay zero

taxes and you as president barack obama is expected to announce new terms for a program aiming to help struggling homeowners refinance past president though casting doubt on just how well it will work and how many americans it would reportedly help is uncertain mind you up to thirty percent close to that of homeowners who are underwater on their mortgages and while millions face foreclosure across the country some american alit are shelling out up to two hundred thousand dollars for play houses for their kids we're not kidding we'll show you later in the show let's get to the capital account.

all right so after meetings over the weekend the eurozone debt crisis continues to hinge on a political solution that is still largely to be determined e.u. leaders are supposed to release more details midweek meanwhile how does this affect average americans how does this affect you and what role does the federal reserve have in the risk that average americans may be exposed to and speaking of what might the federal reserve have in store coming up is three looking more likely as that officials are out talking about more stimulus well joining us from our new york studio to talk about all of this is james grant he's editor and founder of grant's interest rate observer which is widely read by investment professionals all over the world he is also author of this book mr speaker the life and times of thomas be read the man who broke the filibuster and we're certainly so happy to

have him on the show thanks for being here mr grant. where you're entirely welcome right well ok so of course this is a big weekend for the euro zone and actually in your recent interest rate observer you quote the c.e.o. of deutsche bank saying i have to say that a lot of people have lost confidence and whether europe is going to make it i'm wondering mr grant if you fall into this camp have you lost spades that europe is going to make it. i have little faith in the institution of paper money of course the euro was a. prime example of the currencies that we currently produce in the world monetary system. i think it's important to realize that the euro is a piece of paper of no intrinsic value to those commanders that drugs from political institutions and from the confidence of the people in the institutions of the european central bank. so i think. it's not so surprising

that people would lose faith in this thing called the euro what is perhaps more surprising is that they imbued it with such faith as they had at the start so you think that this show is this kind of a broader failure and think. i do. the trouble with the currencies is not merely that they are undefined or as they say on wall street on collateralized that is there's nothing behind them except the problem as it is in the good intentions of the politicians who see to the printing of the paper. perhaps a more fundamental difficulty with these currencies is that. is is the tendency of the privileged issuers i'm thinking principally of the united states to print lots and lots of the paper they alone may lawfully print and to live high on

the hog because they are that privileged issue where the united states as you know what is the is the owner of the great money printing franchise in the world called the dollar franchise the dollar is the reserve currency it's that form of money that the people are so for banks willingly take in exchange for. american program should repay eventually. but will the money there in war and what is a good question and also and what is a good question for how investors will be paid if the faith in the euro does disappear figure his own crisis does unfold in a way in which banks go bankrupt there's the threat of contagion to u.s. banks and this isn't just big investment banks because reportedly money market funds are exposed to european banks now money market funds are traditionally supposed to be low risk safe investment so my question to you is why are they invested in these risky european banks in the first place. well but let me preface

this by observing that the people who manage money market funds read the papers as closely as your eye and i dare say they have reduced substantially their exposure to the european banks over the past five six months. press the underlying difficulty though is these money market funds yield almost literally nothing they yield one you know or one one hundredth of a percentage points of the the really really aggressive wouldn't yield four and five one hundred s. of a percentage point before tax needless to say. nothing you can do with money justifies that small return the whole purpose of investing is to is to earn a return based upon some tolerable level of risk our friends at the fed have knock interest rates down to levels approximately zero and therefore the fed has through

this action as has. has. completely confused. traditional relationships between risk and reward in the money markets when you are earning nothing. any risk is too great to bear and that's the situation we face today it's it's what they call in the trade an unintended consequence of the ultra easy policy of the federal reserve and just to be perfectly clear so you're saying that some of this u.s. exposure to bad sovereign debt of europe whether it's the country's debt or three european banks is the result of federal reserve policy. yeah i mean. one to be paid for whatever risk one bear is in the credit markets or in the money markets and when interest rates are at zero and when the rate of pay on money market instruments is at work near zero by definition you are taking a recorded risks you are doing something you shouldn't do and that happens to be

the state of affairs in the american money market i daresay that at a price some european sovereign nations would be worth the risk speculators are in the business of weighing risk and rewards not the so you shouldn't ever compromise paper or paper that the the prevailing. a union of the market says it's no good to people that have done very well by doing exactly that or by being by speculating in stuff that is certifiably risky but which they can see through superior analysis is in fact value laden. but point is that the federal reserve through its policies of suppression of interest rates. has thrown these calculations of risk and reward up in the air and they have fluttered down to ground that of the earth in a great big scramble and the incoherence of risk reward i lay at the feet of our fit and it's a really interesting connection that not many people would draw and last they were

an expert i like you which we're so glad to have i want to actually bring our producer and had me take a phone at ten because he wants to ask you a question and dimitri by mr brown i had a question so when we talk about the federal reserve and talk about how the fed manipulates controls interest rates what would that look like if we didn't have a central bank how would interest rates be determined by the market and what sort of a of a check would that put on credit expansion and the allocation of resources and goods and services in an economy. as you know the federal reserve is a relatively recent institution in. erica i say i mean it's the past hundred years in between friends and between what is a hundred years it was founded in one thousand nine hundred eighteen having been inaccurate in one thousand and thirteen so from the dawn of the constitutional history of america seventeen eighty nine to nineteen thirteen with some exceptions having to do with the earlier. variants on central banking in this country it was

without a central bank and so what how do we fix interest rates where there was a supply of credit or savings and the demand for credit and savings. and the marketplace tended to the setting of interest rates rather well the period one thousand nine hundred to one hundred thirteen for example in the authority of the terrific and universally esteemed financial economist charles good heart was perhaps the most successful and one of the most successful periods in american finance interest rates were stable bank failures few. i think the earnings strong nothing like the systemic collapse that we saw on your collapse we saw in two thousand and eight and nine so in the absence of a federal reserve this country did rather well it did rather well under the institution of the gold standard which we are far from today mr grant there is so much more that we want to talk to you about we want to ask you to sit there first

hold tight for just one minute and we will come back to you after a short break. that was general james back at her and founder of france interest rate observer stick around for more. all right we get back to mr grant time now for a real quick word of the day we're break down a financial term or concept for our very smart viewer but maybe not the financial expert so where is sabras with word of the day is the bearer of the good news or it's going well it's nice to see you all right thank you word of the day today is interest rate which is handy because of course we're talking to james grant of grant's interest rate observer and maybe you think you know what an interest rate is that would maybe be your first reaction that was our editorial director's first

reaction but how many people really know what an interest rate is first let's look at the definition it is the amount charged expressed as a percentage of principle by a lender to a borrower for the use of money or assets ok fine fair enough so what exactly does texas congressman ron paul mean when he says this. interest rates are fixed by the for reserve price fixing and should have. free market economy pretty low price fixing what does that have to do with interest rates that was a part of the definition well let's look at our word of the day definition translation of interest rate so interest is the price that someone pays to borrow money so one can think of that as interest rate as simply the price of money or the cost of capital so it's literally the price of money and the u.s. federal reserve plays a big part in dictating the price of money it's the key interest rate known as the fed funds rate which affects all sorts of other interest rates through monetary

policy and look what has happened to it yes to show you so through fed policies you can see there was a peak here in the late seventy's early eighty's and look at where the fed funds rate is now you can barely see where it's at because it's near zero that's where the interest rate is so when the band sets the price of money and right now it's near zero it's essentially price fixing and when money is happening every transaction if i buy a coke i'm trading money for that coke it means that the fed is manipulating prices across the entire economy and that is really what interest rates are. stick around stay right here on the capital cal we will have more with james grant we'll talk about everything that the that which we talked about may have to do with the occupy wall street protests and first carrier closing numbers.

for you to. point.

to the police the repetition of. what a fantastic nobody seems to know. that never a pepper sprayed the face but hardly argument that they're being overly dramatic. all right welcome back to capital count we are back with jim grant editor and founder of grant's interest rate observer now before the break we're talking about the federal reserve i want to follow the little bit because i want to get his take on quantitative easing before we get to some other topics so mr grant just

following up on one thing with the money market funds you mentioned that this fund managers are reading the same papers that we are and that they're pulling money back from europe which is something that has been reported as well which may reduce risk but at the same time does that threaten then to destabilize the european banks and actually add fuel to the fire of the european zone debt crisis. so the european banks do need dollar funding and i expect they'll get some place perhaps the markets and the federal reserve system itself through cultural trends and actions with its its counterpart in europe. so our. kids tell you where the european good things are for themselves and dollars i have a feeling that the powers that be will make dollars available to them and speaking of the federal reserve back in june you said that a week stock market might be the situation and that would lead the fed to start thinking about q.e. again now we've seen some volatility we've heard federal reserve officials out

talking about more stimulus and mortgage backed securities perhaps do you see this is setting the stage for another round of q.e. . i do believe that the fed will continue it i think we should first define quantitative easing you're so good at defining terms quantitative easing is in late parlance money printing. the fed can materialize where a conjuror money at the stroke of a computer keep it imperative that literally materialize and stones from nothing. these dollars go into circulation or let a fellow but in the case they are newly minted. and they. you know they they facilitate transactions they affect the prices of goods and services and certainly the prices of financial assets namely stocks and bonds so

the question for the house is whether they'll be more of this and i think there will be. the fed has no compunctions against money putting for years and indeed generations and perhaps centuries the conjuring of money from nothing was regarded as either a form of alchemy or an act of counterfeiting. under contemporary monetary theory it is no more than a necessary expediency of the authority and soon the experts will know if there is a deficiency in economic growth say they the fed can make it whole make it right by printing more money and sending it off into circulation this theory is relatively new and i think significantly has never been shown to be successful in that great laboratory we call human history and certainly there are many critics of quantitative easing and there are also many people that argue that it hasn't helped the middle class or hurt the middle class and now we see

a lot of outrage on the streets with protests and the occupy wall street movement that have really spread across the country now in your last branch you actually mentioned them and i'm curious if you sympathize with some of the protesters complaints. well i don't know exactly what they are complaining about i can't. i can't. hear i hear a great deal of them from my window we have an office at two wall street at the corner of broadway and wall so i hear many much rumbling and much shouting and much chanting i don't know i haven't got a coherent picture of what they want here's what i want here's me i give you my pet peeve you can i would like let's hear what i would like is a is a financial system in which the owners. are held accountable for their own solve and seek up until the mid one nine hundred thirty s. in this country the stockholders of a national chartered bank got

a capital call that is the demand for more funds if the institution in which they invested became insolvent or capital impaired it was their bank not the states therefore they not the government were required to put up more capital to make the deposits whole that was my idea of capitalism the capitalists get the upside and the capitalist equally with the downside insofar as occupy wall street is protesting against the inequities of the capitalist getting the upside that we the people get in the downside i am with them but i think that they are not that's not exactly what they are protesting i think they are not after a proper capitalist revolution something very different though they do say they complain about bailouts really quickly we're almost out of time but you've cited the stuff bank of boston as an example of opposite today were directors were personally responsible for mistakes is this a model breaker everyone should be moving towards and should government regulation be aimed towards that. yeah we need less government regulation and we need more

ownership thanks no need more capitalism we need more capitalism there's this constant demand more capital the banking system what is banking system desperately needs is more capitalism and less regulation and we're out of time for now i would love to hear your ideas about how to get there we'll have to have you on again if you'll come that was james grant editor and founder of grant's interest rate observer thanks so much for being on the show you are welcome to be here. we've gone over some of the most major headlines that you cannot miss that are so important in the world of finance in the economy today now we go over some that you

just shouldn't mess because they're just good and joining me is the nature of our fans again our producer and contributor and i'm really curious his take there is a spa in tuscany that has always had a reputation as a place where precious natural materials are used for the most luxurious of treatments and of course their latest is a twenty four carat gold they have a round it's twenty four carat gold it's extravagant. treatment there is gold pays and i think we have an idea of who would be just like the perfect person to get this gold treatment if we could bring it up. yeah apparently he was sighted at the spa and i mean i don't know if he was far sighted but i would be surprised if he were there he has done some. kind of thing some work it has had some work on but this could be really the future of cosmetic care in my opinion because as we like

to cover in the show gold is in a bull market and this is just another indicator we like to pick out those points where we're gold is shining and i think it's shining right here on but it's going to book my question well first of all his country is in serious trouble so if he's getting a gold i think that he's in serious trouble not that that's discourage him in the past however how are they affording to do this i noticed the article and if natural times didn't say the price of any of these treatments and gold is at sixteen hundred something announced what is this gold i mean i don't know it's not fickle but i don't know if you can walk i mean if you if you were so inclined maybe you could run out naked covered in gold and kind of gold and kind of put it together and probably be worth more than the treatment might be i wonder if it would get stolen because there is all of these tests that occur because the price of gold are going meanwhile someone that doesn't need to be stealing gold is someone with a customer for these play houses that are very expensive their four thousand dollars to two hundred thousand dollars and there is a market for them in the u.s.

so they take a lesson. you know families who just enjoy the creativity imagination of the place. we have some related hardwood floors we sometimes electricity the air conditioning we have lighting naturally assumed we waited for places. i mean come on we know inequality in this country is bad but every time i see something like this as millions of people are being foreclosed on it's just like maybe they could go live in them there's so many angles to this story i just thought of just now i mean like for example i mean we are in a mortgage crisis and yet it appears that five year olds can get loans easier than subprime borrowers i think there's i mean it's just it's remarkable to me that this you know that this kind of thing can exist i thought that's what we're going to

this story really fun and it again speaks the whole point that we've got to remember we don't have a we don't live in a you know in a world where you can you can be a saver you can have middle class and it's new feudalism this is the future either you know. in the tent or you're going to have your kids living in a house with wood floors fireplace and. yeah these are tomorrow's big bank c.e.o.'s i think with no concept of what main street is dealing with which is a political in this situation because goldman sachs has withdrawn its sponsorship and funding of a credit union because it is honoring occupy wall street so is this now actual class warfare wall street has been alleging now but now is wall street firing back fighting back but apparently lloyd blankfein in goldman sachs pulled their support of a credit union a particular credit union out from their twenty fifth anniversary because they were honoring the occupy wall street protesters so i think this might be kind of this could be internets and conflict here war in the banking system and lloyd blankfein

who's kind of a. him and jamie were kind of enforcing the law saying listen you know you're not going to support these these guys out there because they're going to be in our lunch so while they're putting their money where their mouth is and now it's up to occupy wall street because they have a day coming up where they're pulling money out of banks i believe it's november fifth so we'll see if they put their money where their mouth is in what is now escalating into financial warfare but that's what it seems that they come out with a reality check. all right real quick before we go we want to give you a reality check because we're ports are out today but swiss banks are likely to settle a probe of offshore tax evasion according to bloomberg they are likely to pay billions

of dollars and hand over the names of americans who have secret accounts according to people familiar with the matter of thousands of americans now switzerland of course is known as one of the biggest offshore tax havens but the big question for us is is the u.s. and the i.r.s. going after the right people or is this government overreach into foreign financial institutions that misses the point what about american companies reportedly that continue to find new overseas tax havens to protect some of their profits from the u.s. corporate tax rate of thirty five percent some of them paying zero taxes as a result that's just one of the questions that comes out for us with this story so we'll have more will delve into an upcoming shows but we didn't want to miss a chance for this reality check and that is going to do it for tonight that's all we have thank you so much for tuning in please follow me on twitter out lauren lyster and give us feedback on the show at youtube dot com slash capital account and lauren let's turn until tomorrow good night.

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