good afternoon good evening for me and welcome to capital account i'm lauren lyster here in davos switzerland at day two of the world economic forum if you're watching our show you've already seen the barrage of headlines coming out of davos but here find out what's really going on on an off day gerri davos all have that report for you but first here's dmitri of venus in washington holding down the fort. thanks lauren and back in washington former fed chairman alan greenspan is out with an article in the financial times today titled meddle with the markets at your peril a direct warning to the world's policymakers and government officials that when he was fed chairman many argue the pedal was already floored to the market metal that sounds like a punk was a don't worry we're a former fed governor alan blinder in studio with us who was under chairman

greenspan to help us on tires and why we're busy on time the mystery of the temple man in europe a busy time in the congo the closer together billionaire investor george soros had his own op ed in the financial times today where he proposed a plan that would allow the bond market to keep governments on a quote short leash lest they risk losing precious u.c.b. facility access warren with a buzz on this other special interest from davos in a moment so let's say that there is capital account. well it's day two of davos and the eurozone crisis remains a main focus george soros was recently out with an editorial advocating for more europe as a solution all david cameron who also is in attendance at davos has been portrayed

as a foreigner in the side of bureaucrats who want to use a crisis as an opportunity to make the dream of ever closer union a full fledged reality joining me now to discuss this from davos is the host of capital counter self a lovely lauren lyster. so lauren i want to start off with with your because i assume this is top on the agenda in davos george soros is out with an op ed in the financial times today calling for more integration as a solution to the crisis i know is there in davos with you what does it say to the folks down there. yeah he's here in davos and after reading that financial times headline that is very much the identical rhetoric that he is pushing davos very pervasively he's spoken to participants he spoke at a press lunch to reporters on the sideline about many of the things outlined in that plan in that article that you cited in the financial times which is also he

evidently also the book new book this is all part of that but you say you know a lot of some of things we've been talking about on the show specifically when it comes to the l.t.r. o. which is something we've talked about the lending facility which has gotten cheap money out to banks they were supposed to use it to buy the debt of these indebted nations and as we've talked about dimitri a lot of that has presumably ended up at the fed or excuse me where am i what country man at the e.c.b. where we've seen at the deposit facility reach records while george soros is take is that the l t r o has worked as far as getting funding to banks helping the liquidity issue with banks relieving that but it hasn't helped in the issue of these indebted nations turning some of these into what he calls developing nations at the mercy of a foreign currency that they are indebted to so he of course has his own plan it's for italy and spain to refinance with some kind of treasury bills at one percent he says it's a complicated plan it's got a lot of parts but he promises that all of the t.'s are crossed and i's are dotted i'm sure you could read about it on his book of course he's writing about it as you

said authorities reject it and consequently he thinks that's a wrong thing and that the eurozone is going down a bad path he's not trying to but trying to obviously but kind of undercutting angela merkel and kind of jabbing at germany saying that journey's acting as taskmaster of fiscal discipline he has a very different solution and doesn't think that this is the right one is worried about it deflation spiral in europe brought on by austerity has been a big proponent of the euro zone of integration for as long as i can remember so he's a big proponent of europe but someone who hasn't exactly been european lets loose amongst the crowd as you can prime minister david cameron how has he been received infringers a good in a kind of icy cold stare down there. yeah i don't think he's making friends in brussels or in germany when it comes to angela merkel or whereas some of these technocrats or bureaucrats that are trying to push push for further integration as

the solution to the euro zone crisis without more money in the terms of been a form of bailouts because david cameron basically just hammered the euro zone and said that the eurozone needs to do a lot more an order to preserve the single currency that they need a central bank they need way more economic integration they need to be able to have some kind of way what sounds like euro bonds in order to address the imbalances he said it's not that the euro zone doesn't have all of these that it doesn't have any of these so hammer of a hammer and angela merkel and germany's saying that basically this is a trade deficit problem and that surplus countries have to bear more of the weight i'm pretty sure is talking about germany there in the case of the eurozone so i guess is to be expected from david cameron because we have heard some of these. ideas from him in the past but he very much made those statements heard on the stage in davos today and a very packed auditorium a long line to get in everybody hammering angela merkel whether it's david cameron or a george soros they've got their own plans but both of them say that the eurozone crisis is not headed in the right direction that

a lot more needs to be done in their views well so it's pretty brutal of this on the official front but what about about networking we hear though a lot about people going out to the network it's one of the best place on earth for top c.e.o.'s fund managers politicians to strike business deals do business what are you seeing. yeah you know up until now i've been reading more about the unofficial and official davos but now that i've spoken to more people at the forum you really do see that today i spoke to actually a governor from the states this is what happened the davos you sit down and you think you're just sitting next to a random person any of these a governor so he's their first year at davos talking about how basically he's been in business meetings the entire time that are very beneficial in terms of networking and business for him getting them in the same room with c.e.o.'s he never would ordinarily me or around a table with c.e.o.'s they could possibly invest in his state and so he can make his sales pitch but they get to be at a single session saying i spoke to some delegates that are diplomats saying that

this is all about bilateral meetings and that that's really beneficial for them so they have their own agenda and that's very separate from the roubini that you see quoted and the klaus schwab that you see it quoted and kind of all of these newsmakers there making news for the official agenda kind of these big economic stories but there really is to use two different devices and yesterday i was a little bit saying you know i don't really see all of the kind of star power davos today a little bit of a different thing today you did see you know jamie diamond running by with his running shoes in his hand don't know i knew. anybody can guess plenty of people on twitter did and you know nobel laureates getting a drink at the bar sitting with their wives in the case of two that i saw michael spence and joseph stiglitz so you do see more of that they won't talk to me to the press but they're here also so what is there with a running shoe or should we be worried i mean what are we going to make of it as you're running from you what is in the running shoes. i don't know why has the

running shoes but i'm sure by approaching me probably use them to run from me because none of these guys want to talk about. the none of them want to talk on the sidelines really as far as what i'm seeing more of thanks for the report obviously we're going to keep checking in from you our follow your tweets as usual i hope everyone else does that was host of capital account the lovely laura lister who is most. profusely here a couple workhouse. yes. earlier i spoke with formal former federal reserve vice chairman and professor of economics at princeton university dr alan blinder about the federal reserve system and what he thinks the role of the central bank should begin setting interest rates i start

the question by playing a short clip of him speaking at the woodrow wilson astute about just that. the end of the criticisms of the greenspan said it was after they let it be not only interest rates to one percent creating a strongly negative real interest rate in two thousand and three they held it there too long that's probably right i consider the forgivable error but it's probably. so the the point i want to make with that is i i agree with you i think was probably the right idea to have the rate that low but isn't that really a problem the fact that neither i nor you nor anyone really knows what the interest rate should be and i say that because we have we have that with prices and talking a lot about that it's a huge problem i mean it would be a better world if the people at the federal reserve had perfect foresight and had a perfect model of how the economy works so they knew exactly what to do at exactly

what moment that's a fantasy now what it means is they should try to keep learning and learn from experience try to improve their forecasting methods they're. the models by which they understand how monetary policy works they've got to keep working and getting better of that but perfection will never be achieved and so it will always be the case as you just said that they don't know exactly where the interest rate so the this is my question why should the fed be in the in the business of setting the interest rate before with the federal reserve we had free floating interest rates right to some degree or another what is it that why is it that we should have a federal reserve and open market committee this determining what the rate should be going into the market buying and selling securities in order to effect that rate as opposed to what as opposed to what you had said before you had a federal reserve which would be before the federal reserve ok markets are in the rate independent right now we're joined me as making a trade i'm a saver and i lend you money you borrow and what happens. before we had a federal reserve we had national banking system who decided how much money and

credit there would be in the whole economy a bunch of banks making individual. decisions there is a clear history that comes out of the national banking system that we lurched from one boom to one panic after another historian's the lay em out by date it was just a whole succession of them until we got the big one in one thousand nine hundred seven the panic of one thousand that led to the national monetary commission which did a lot of studies of what was wrong with the u.s. system and that in turn led to the federal reserve the conclusion which i think was a correct one was that the national banking system was inherently unstable and we needed a central bank well that again of the national bank system was some level of centralization and understand that those banks had to keep them out of treasuries but before the national bank act there was more i get what you called the wild wild card back and what it was what about a period like that period where where it's determined again by private issuers

well i'd say maybe the best way to answer this is that we didn't call it the wildcat banking era for nothing wildcats or wild had and they sometimes produced very dysfunctional results and they did. this debate over whether the united states should have a central bank went from the convention in philadelphia all the way to the establishment of the federal reserve act in one thousand thirteen you could argue it still exists today i mean ron paul if we could imagine president ron paul he'd want to abolish the sort of reserve i think is a terrible idea well the thing about the abolishing the federal reserve has a lot of functions right so i can understand the argument for a lender of last resort although there is a lot of moral hazard related to that as we've seen with that question but i can understand that in terms of you've gotten the critique crises and ideally there if you could identify what banks are solvent what banks are insolvent then it makes sense to step in and help bridge the gap for a solvent institutions but again sticking with the market the market rate for

a second even when we had free banking when you you know when you had banks determining interest rates between them so. did we have a period as bad as the the pression and i think thirty three or even the depression of eighty seven or eighty ninety three that was with the the national ranking right will be eight hundred seventy three and it lasted a long time was horrible the one nine hundred thirty s. it was the worst that we've had in terms of the economy there isn't any doubt about that but you know the historians of that period prominently milton friedman by the way. blamed that in large measure on the passivity of the federal reserve but the fed did not step up to the plate and prevent the private banking system from collapsing but could have what should have done. still had i continue my conversation with the former vice chairman about federal reserve policy and what options are left for the central bank given the already precedent amount of stimulus that the central bank has provided the first your closing markets on.

the. technology innovation all the latest developments around russia we've. heard. wealthy british scientists saying it's time to. go. to. market why not. find out what's really happening to the global economy cars a report on. before

the break i played the first part of my interview with former vice chairman of the federal reserve alan blinder in the second segment i asked him what if anything the fed can really do at this point given that it's already created so much new money and that pulling that money back into the central bank would create the exact type of depression that the fed has been so desperately trying to avoid basically is this type of thing a rock and a hard place was in the fed's role in creating the bubble in the first place in other words creating help helping to create massive amounts of credit to the bigger issue before instead of stepping in to fill the gap think so i think it's much as i was saying before you can you can look back and you know you can look back to ninety nine as we were just doing and say well the federal reserve should have been a little tighter than probably have showed a bit you could look back to one nine hundred twenty nine and probably make the same case of the federal reserve wasn't doing much of anything then. but it's

a question of magnitudes what the fed did or did not do was dwarfed completely dwarfed by runaway expectations. excessive optimism followed by excessive pessimism. central banks are not going to stop that look the first big episode of this was the tulip bulb craze in holland but again they didn't have a central bank they didn't but they didn't have the excesses that we have now but it was still it was a gigantic boom and bust right well i mean and not to belabor the point but i guess my argument is that what we've seen now is a huge credit then lose we've seen a massive amount of credit and each time there was a recession the great moderation was smooth and other business cycles by wrapping credit into the economy and it just feels like we're at a position now where we've created so much and we're kind of potentially where we're japan was where again we're interest rates are zero there is zero for the indefinite future right and we're at a point where we need to continue to monetize assets in order to try to get credit

out of the economy but the savings don't seem to be there and and the capital that needs to have the economy go forward but in your view the central bank should still be there so then let's let's let's talk then about. i have a graphic that shows the central bank's balance sheet if we could bring that up. all right that is actually a chart i mean a graphic it's about a year old the federal reserve's balance sheet has actually. grown a little bit since then it's about two point nine billion now and that shows really what happened after the crisis it bought up a lot of securities traditionally when the fed conducts monetary policy it buys and sells assets from its portfolio in order to manipulate the interest rate that inspired so many assets now and one of the things we heard during this crisis was don't worry ben bernanke he said when the time comes we'll be able to sell as folio draw this liquidity is that really possible short of a be able to sell those answers without causing the pressure yes absolutely so the

key thing is when the time comes what will the find when the time comes when the economy is growing nicely and or when inflation looks worrisome we're not close to either of those how will they do it basically you do the reverse of what you did as you just said it's that you wouldn't buying up a lot of us. it's you start selling a lot of assets now you don't try to sell all those in a day or a week you saw them out gradually sell them out gradually the on your graphic you saw an incredible spike at the lehman brothers on the downside to resuming going to see nothing like that much more gradual wearing down of the of the balance sheet and we really like let them expire let some of it you get from run off but eventually they're going to have to do beyond run off and start actively selling things wouldn't that be would not put punishingly high interest rates in an economy that will not punishingly i but higher than they otherwise would have been i thought i was going to say so what's going to be the first reaction to that if you start selling treasuries or especially if they start selling m.b.'s one of those

big hunks of roadwork m.b.'s the prices of those assets are going to fall which means the eels are going to rise so you will see higher interest rates that is the way central banks the interest rate part. is the way central banks modulator commies when they need to be calmed down a little bit and that's what the fed will eventually do but they're nowhere near that now. all right so then let me actually pull back a little bit and stay on the issue of japan because i brought that up and they've been income people say a liquidity trap how do you stimulate an economy when it is essentially on a drip or in a certain way it's been an i.c.u. for a while if people aren't willing to take on more credit you can lower interest rates much as you want you could start buying assets i mean i suppose theoretically the fed and i don't know it's according to charter but let's say theoretically if it were allowed to go out and buy indices you could go out and buy stocks. at the end how does that change the fundamentals in the economy and doesn't this create

dislocation the structural dislocation and changes that then take a long time to fix it does create this location at those create abnormal interest rates it might create an abnormal structure of interest rates for example the fed is now trying to flatten the yield curve more than. a normal market outcome. would have it the fed is intervene in b.s. which lowers the rates on m.b.'s and mortgages relative to other things these are things in normal times the fed doesn't want to do. and they will eventually be unwound the problem for the fed was this came to be a fateful day in december two thousand and eight when it basically put the federal funds rate to essentially zero that's what it had always used as this instrument before that it's now use that instrument up. and it it came to what is proverbial forks in the road so either we're going to just fold up the tent and say there's nothing more we can do the economy is on it's own or we leave it to congress good

luck or you could start doing more creative things so we went for the more creative things and they do have these because these dislocations this impact on resource allocation and a whole variety of other things but to me as to been bernanke and his colleagues the other fork in the road would have been much worse. but then with me ask you because the fed and obvious you know so you can only create credit they don't actually create capital eventually don't you it's kind of like flushing water through a pipe each time you flushing your can on jar a little bit less a little bit less but eventually it got nothing but metal that well it's one of the reasons that all of us say you just said and i've said it many times before the feds getting down to pretty weak weaponry. powerful weaponry now it's only got weak weaponry another way to look at that is your you know your graphic showed. if it had continued the other year that you said that the fed added almost two trillion

dollars to its balance sheet that had some support of effect on the economy but not a gigantic effect on the economy in the old way of thinking where you weren't up against a liquidity trap in a zero balance the way i used to teach my students if we ever if i ever imagine with them in a classroom exercise i never did let's think about what would happen if the fed added one point seven trillion dollars the bank reserves the right exam and sort of back then would have been a hyper boom huge inflation gigantic expansions of money and credit in the kind of economy we're actually living in none of that has happened i think it's probably because there are certain there are limits to what policymakers can do i mean at the end of day it's the economy has to generate the wealth and the individuals and we have to wrap it up i do. one more question are you. are you concerned at all with the amount of debt that has accumulated in this country and in general in the

west over the last thirty forty years and what the implications are for the next ten to twenty year given where we are sure you mean government that are private no i mean total credit market i mean private i mean total government and private and public debt but let's take them separately because a lot of the profit the private debt problem has been substantially whittled away i wouldn't say it's all gone by a more conservative behavior given the catastrophic we still have a huge drop out of this is right and some defaults mortgage that has partly that's not the way you like to get rid of it but partly we've got rid of it through the fall so they're going to be more of those the government debt of course keeps mounting. and eventually we need to take care of that now eventually to me if i had a magic wand which i don't and neither does anyone else in washington i would like to see the congress. lock in today as soon as possible very

substantial deficit reduction down the road not now we don't need a fiscal contraction now with the economy still on its knees but we need it some time later because ron explosive that path it's not it's not sustainable and eventually we need to get off of that path so in a well ordered world congress would be legislating now things that happen in the future of course they're not doing that i guess i just don't see how we can get there without either defaults which should be depressionary obviously if you have the kind of defaults you mean that i'm thinking about on the public debt i mean write downs on private right but if but if it's right but it still would be a problem but even even the government that i mean you can expand up to a certain point and japan but had done that obviously they took on a lot of liabilities they tried the problem their economy now they've got a huge national debt and now they run their first trade deficit in the last thirty . so there's a lot of problems with that when you're paying really low rates but nobody is warning about japan faulting on its public debt right but they have little ways

that we do right but they could inflated away which would be the other side of that right so in both those cases you would have a depression what could be a hyper inflationary depression what could be a deflationary depression but in both cases do you still have these this location that have been caused over time as a result of these these interest rates i would say and then i just think that's that's that's that's a concern that i mean i personally have it's one of the things we talk about on the show but thank you very much for coming on i really appreciate your your input that was dr alan blinder university professor of economics at princeton. and that's our show it was really great having dr blinder on because we had an opportunity to talk to someone who actually works the fed and he may have different views but it's always good to have someone with different views the come on and try to have a friendly bit about it so thanks for tuning in and feel free to follow me as always on twitter at covering delta and lauren lyster more a lister and you can give us feedback on our show at youtube dot com slash capital account nice comments

and constructive criticism this is appreciated either but you can find us and from everyone here at capital cow have a good night. headlines

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kevin owen in moscow back with you in sixty minutes for the news in full but so now to next in our new look to the ten pm hour we hand you over to the low to show from washington d.c. just a few moments. ago she was that so much given to you to be sitting on the mark with libyan intervention like in the specter of civil war libya's transitional way from the gadhafi regime is proving far more problematic. but going to the law michel we'll get the real headlines with none of them or see me live out of washington d.c. now tonight really catch back up with host of artes capital account lauren lyster who's in davos and she's going to bring us all of the latest then you thought sopa and pipa are bad over the.