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good afternoon and welcome to capital account on more and lister here in washington d.c. these are your headlines for may third two thousand and twelve a big announcement from the european central bank. you sorry to keep the key e.c.b. interest rates unchanged. so no news there keeping it one percent and that is the announcement that merited heavily stepped up security in the spanish city of barcelona these are strange times when a country imposes border controls suspends a tree allowing unrestricted travel with its neighbors and deployed thousands of extra police for a regular monthly policy setting meeting we'll talk about it and greek elections

could get ugly for those in favor of the european status quo this reportedly close to a year and a half after the first major attack of a politician after austerity measures were implemented we'll look at the big picture and goldman sachs's c.e.o. says this has cost the company. all more and blankfein chairman and c.e.o. of goldman sachs and i support marriage equality this will soon so it couldn't have been the barrage of bad press around in the greg smith op ed alleging you don't put clients ahead of the firm goldman is be our department is really outdone itself this time we will discuss it let's get to today's capital account.

ok with the second and final round of french elections scheduled this weekend along with the ones for the politically unstable republic all eyes return to the eurozone will policymakers and technocrats survive yet another round of elections or will the people reject the medicine of brussels and go their own way that's the key question right we've often made mention on this show of the resurgence of nationalist right wing politics in some of europe's most afflicted countries both within the core and in the periphery europe resembles at times what you could think of as a pressure cooker without a regulator to let some of this the most popular discontent skate through the normal aleck toral process when things get rough the steam as we've seen building for the past few years in countries like greece in spain in italy and so on and all

of those protests you see on your screen there it seems that europe's elite its bankers and its technocrats its self appointed guardians are determined to save the euro project at all costs even if this means abandoning the very principles of western liberal democracy in the process government is hard enough when the population is culturally and ethnically homogenous europe's people are culturally ethnically diverse with diverse histories and diverse economies the european union was the continent's first attempt really to unify its warring tribes and nations by diplomatic non imperial means and the project appears right now to be failing but instead of adjusting and evolving to meet reality europe's wise men has decided to ignore the voice of the people it seems and muddle through the crisis with stubborn and decision but that's just us sitting here saying this in washington d.c. to give us a true perspective from the e.u.

is konstantin. economist and coeditor of the book what if ireland defaults so he can really give us a perspective way way more authentically than we ever could so first thank you so much for being on the show welcome back to capital account professor thank you delighted to be here now let's start with the spanish banking sector because one of the reporters at the press conference today asked druggy why the s. and p. isn't being used more aggressively to buy spanish bonds what do you think the e.c.b. is waiting for and do you think they'll really allow spanish borrowing costs to rise much further without intervening. well we can understand this in his position if he has been very significantly exposed to the spanish government that it has been very significantly exposed to the london to the spanish banks the spanish banks are some of the largest boards from the e.c.b. both under the longer term the finance and operations there altera was the three year abrasions and also under the shorter term borrowing as well so as

a result of that this he is trying to look forward and says to itself we're holding so much of that stuff and there is no market for how we're going to unwind so e.c.b. as i was reluctant to engage in further more s. and p. that whopper ations that said if the bond shields continue trance so far and if the term year government bond yields reach the six percent and stay above the six percent there's most likely that the city will be forced to intervene what really we're seeing right now is as you pointed out in the most opulent today we're facing the pressure cooker which is about to blow in effect and this is a pressure cooker of europe as you pointed out correctly and it's a pressure cooker which is has now lost all of the safety valves which are traditional all the same mechanisms would allow the economy to use during the crisis and in particular we have lost a few school because we're so much in the now they're not on the way and that that by the government but we're also holding huge levels of significant exposures of

the across the corporations and across the households so. pressure valve is not available to us more than the pressure valve is not the will to us by design of these so you don't get growth it cannot target on employment that has started conflation inflation is that i'm in the book that star get ready for a very long time isn't there so you see starting to run out of this well doesn't have to will for the control of medicine and we have no longer the political pressure both available to us because you have does not have leadership neither the national level nor at the general level of the european union itself you got into a lot of really interesting points and i want to dive into more of them more with a fine tooth comb so first with as you're saying no pressure valve available no safety valves left how do you deal with something like unemployment which new numbers have come out showing that euro zone unemployment has risen to ten point nine percent the highest since one nine hundred ninety nine when the eurozone was

formed was launched unemployment in spain where the e.c.b. made this announcement today twenty four point one percent it rose in march from the prior month spanish youth unemployment fifty one per cent you have calls for some kind of a growth pact which drug dorst today people critics say hey that's never going to work what about labor market reforms is that an option that would do anything. well labor market reforms have been pursued by european authorities national governments for a very long period of time now they haven't been fully successful and many countries that have been successful in the past in the case of germany for example they have been successful in other countries as much plus on top of everything labor market reforms will address the issue over a long period of time and have very much necessary in order to correct for the structural if you want component of the current crisis but in addition to it we have to deal with in the media pressure or if you want the numbers that you have

mentioned but also the fact that most of our unemployment across the eurozone is now kind of burden from the traditional cyclical unemployment something that might last for say three five six months at a time and then people will gain the job into a very long term structural unemployment one year and dog when you are at the same time if you are dealing with this crisis of the long term unemployment simply through the structural reforms such as the labor market reforms what in the fact you are doing is that you are in fact sumant the existence population of the un employed in a permanent truck of continuous lose and skills continue to lose an aptitude for war and as a result of that you are in effect them and population and you hope that the next generation of workers will pick up somehow and the growth will pick them up and they will get the jobs now you mentioned unemployment in addition to unemployment i mean the unemployment car stands in the euro zone and as you measure that point nine percent which is the highest it's actually the records which is ninety ninety five and if i go back and i look at the misery index which is

a combination of inflation plus unemployment that stands currently thirteen point six percent that is the highest on record period throughout from the nine hundred ninety one words that the eurozone countries have of experience and this is really where i'm saying we're running out of the road very rapidly in terms of the tools that we have available to us in dealing with this crisis is speaking of the tools that are available let's dive more into one that you are you mentioned which is the e.c.b. strong. of the l.t.r. oh the three are l.t.r. a three year cheap cash is maybe you could more colloquially call it now i want to mention something that mario draghi said about what the point of this was and what the transmission of this has been to the real economy to households and to firms he said last week in his speech that this is indeed a crucial point that ensuring the e.c.b. these monetary policy continues to be transmitted effectively to the real economy was a key motivation of the governing council decision now after that news came out this

week that lending has declined to furry to consumers and banks of spent that money on buying government bonds so has the l.t.r. oh met its goals what word schools really in your view. well the goals of the l.t.r. are one not the goals of stabilizing the european economy at least the european central bank can't really say so because it's not in its mandate to do so now the out arrow has achieved some of the bill is ation in the interbank funded markets unfortunately well now seen some pressure emerging there as well so it seems that they are heroes were not sufficient to really resolve the problem l.t.r. was helped a little bit the underwrite the balance sheets of the week a bit thanks especially the banks in need that in particular and also in spain buying them some time however when the classic liquidity drop in other words every liquidity that the e.c.b. produces doesn't really translate into credit creation into the economy it doesn't

translate the operating capital let alone investment capital for the firms if you look for example since l.t.r. or announcement what has happened to the metal long short circuit the net long short positions in the equity markets in the european futures markets and what happened now is that we're actually at the same crisis if not the level of the crisis in terms of the shorts prevail and over the long positions then we have been we have been during the greek crisis so in other words the old heroes haven't corrected the latest in the neck with the markets if you look at the global equity markets effect of the l.t.r. as they have been much weaker then the associated effects for example of the. creation of the equity under the one stated is so it's very clear that the e.c.b. terrors have been significant in size especially by historic standards for the european monetary system but at the same time they have not been significant in

terms of releasing liquidity into the real economy so that once again there is no credit creation as you mention there is no transmission of credit there is no support on operational capital for the firms the estimates continue to go into the walls the structural imbalances on the balance sheets of the european banks especially italian banks by. banks banks i just banks or to give banks all of those imbalances have not been addressed in any way shape or form by oh and just a little more specifically why do you think banks aren't lending you said that this credit isn't getting out the key question why. well banks are not great not lending for two reasons one of the reasons is that banks in the health economies are anticipating possibility of the new contagion from the secret condoms and from the banking system of the world so what what's called the referral countries in the very focused on just the banks are not lending because they have not yet realized the full extent of the potential losses if you take for example the country like ireland where the process obviously is

a show of losses has been pretty aggressive compared to say greece or spain with them or portugal the banking system here is continues the release of the data which is showing the year on year the losses are accumulating outside of those losses which were imposed under the regulatory for example the u.s. so when you look at mortgage markets those markets are now under severe strain and severe pressure those losses are going to materialize in the next couple of years and the banks are holding these provisions because they cannot simply lend the other reason is that during the crisis during the buildup to the crisis across europe there has been a huge imbalance built on the on the front and side of the banking sector operations in particular the short term interbank funding create a very significant maturity mismatch risks accumulations banks' balance sheets across the entire euro zone sector but also in particularly in weak economies and once again the banks are scared that interbank lending markets will start drying up and as a result of that they will have to face their priest face on once again thank you

says the story liquidity called the community and of course interesting professor i just need to hold you right there we do need to go to break we're going to continue this conversation in just a moment though after the break so hold tight there for a few minutes and we'll have more with constantine economist and coeditor. of what if ireland default still had to cinco de milo happens to be another day today of berkshire hathaway's annual shareholders meeting this year we'll give you our three cents on the new activity warren buffett has added to the agenda but first your closing market numbers. wealthy british soil some time to go to the next one.

market why not. find out what's really happening to the global economy with mike stronger for a no holds barred look at the global financial headlines tune in to conjure reports .

before the break we were talking about why the three year cheap money program l t r o hasn't meant that credit has reached the real economy in europe i want to point out something else that mario draghi head of the e.c.b. said last week he said we're confident that central bank liquidity house come very close to the real economy of course this doesn't mean that this will by itself boost lending to firms and households first the central bank cannot interfere with the bank's use of the liquidity since that's their business decision but we trust

that they will use it to refinance the real economy because that is the role of a banking system so nice theory it is the role of the banking system but as our guest to paraphrase said before the break banks are scared that's just one reason why that money is not getting out to the real economy so what's left we're talking about europe as a pressure cooker which is run out a safety valve well there is a political one coming up there are elections in france and in greece they have the potential to really change the political landscape and therefore the economic one again in theory so let's bring our guest back in to talk about what the fallout could be from these elections is constantine economist and coeditor of what if ireland defaults so professor there are two important elections this weekend you have the presidential elections a second round in france the final ones you also have elections in greece now greece it's interesting because there is the potential for ten political parties

that could gain seats that could change the makeup of parliament so i guess the question for me there was so much potential of volatility in greece and potential to change the relationship between greece and the e.u. or at least change maybe some of the memorandums that they have committed to what do you think could be the political fallout from elections this weekend and greece and also in france. i think the political fall of fall out can be a very significant regardless of which way the vote is going to happen in greece in particular what we're seeing this weekend is that if you want a quantum of the two systems political systems one is a presidential system which is relatively stable and as a result of that house long term capability to provide alternatives in france the presidential system means that there are alternative candidates those candidates are not necessarily you know we are implicated in their own growing crisis and desire as a result of that they offer a viable alternative for the voters the voters can seek leadership opportunity in

the people like holland for example even there there has been significant fragmentation of political spectrum that have been the rise in the extremes on both sides of political spectrum both left and right but in fact actually it's very difficult to distinguish between left and right in most of the european countries because both left and right are usually in favor of larger government higher levels of taxation more involvement by the government more stimulus and things like that when we go to greece as what we see in greece is what this playing out in other european economies the parliamentary democracies of europe in the likes of paul and for example on a slightly less dramatic scale but still quite pronounced what has happened in finland before and what is happening in ireland today as well behind the scene without the elections and this is a very stream partition in the political spectrum because both sides the center right and center left parties have been one way or another implicated in the crisis even creation of the crisis during the boom period or in the actual fallout during

the crisis dealing with the crisis measures so as that is out of the there is a vacuum of leadership across the board there are huge compared for example the rhetoric of francois hollande in france you know france's face and five point four percent deficit this year this is a very high level deficit it is the country which is also has significant debts you know in the. as a result of that you wouldn't expect france to have a bit stronger out there about the increased stimulus increased boring. i'm an adult and the other hand is able to project that he was able to project that because he has a leadership position and he has leadership capability in greece there is no that should position in traditional parties so the same exactly true in portugal the same is true in spain the same is true across the entire problem and three democracies spectrum in europe itself and it's a crisis of leadership pressure google as i said before has lost the political safety because there are no leaders in the national level who can stand up or for

their turn to which are visible alternatives and they actually need through those alternative and just they and they have to follow up just to clarify when you say there's a vacuum of leadership you're saying that people don't support these maybe other political parties as alternatives because of their platform they support them because they feel they literally have no other choice and there's just nowhere else to turn it by default. exactly it's almost by default a strong leader during the crisis emerges precisely that by default it's not because people support exactly what they and what they've been sold in terms of the policies but they actually see no alternative because they see the center and if you want to focus all type of parties in a fact line through their teeth and you lose the trust of the voters. as i was suggesting there is an example you can look at the example in the most recent elections in ireland where the new government was elected a just over

a year ago that government came into power with a huge amount that popular mandate to do exactly the things that people wanted them to do such as impose losses on bank on calder's use the burden of the public debt onto the taxpayers who then reforms across the different sectors of the economy and things like that was a huge money and the government was not able for different many different reasons it was not able to implement this and the trust is now lost so if we're out to go in the next elections in our i would fear that we would see exactly the same partition of fractionalization balkanization of political spectrum across the across the whole stage and there is going it's interesting professor at a time but it's such an interesting and side it's also doesn't sound that dissimilar to criticisms of the us two party system that they were dealing with here running up in an election year and the united states great to get the end sight appreciate you being on the show that was caused him to have a contest in coeditor of what if ireland defaults.

all right let's wrap up with loose change because we've covered europe thoroughly today let's bring us back to the u.s. and to banks one of our favorite topics with dimitri and shannon. goldman sachs the c.e.o. lloyd blankfein was tapped in february maybe you sought to be a spokesman for same sex marriage by the human rights campaign take a look. boyd blankfein the c.e.o. of goldman sachs and i support marriage. america's corporations long ago that all use just good business and is the right thing to do. well in

a meeting with the waltz with wall street gay activists on wednesday blankfein blamed the stance you took for losing at least one client so the natural question really this is what caused goldman sachs to lose a client if not more and not the fact that they've had all of this bad press over the greg smith op ed saying that goldman doesn't put clients first it's the firm first i mean come on he wants to turn aside he wants to into a gay rights issue because he knows that might give him some you might have some political allies there but he has he has his you know because the camera is on there we just this is a joke ok i had to do one hundred zero or this is what i did by someone to get poor you know there's apparently ok but anyway obvious it's all real but the point of this is that blankfein knows that he's going to he's going to be much better off in terms of the a gay rights issue than if it's really mitigate which is what it was really about

which is that they treat they rob their their clients ok that's going to be a surprise i don't want to. i don't know this man i don't know blankfein i don't know his true intentions but we have seen banks in their lobbying efforts lobby for something that they actually you know don't want so that then they can have someone else attack and we saw that with a banks and the volcker role and getting foreign governments are sure it was them what if he said hey you know what we'll do this it will be controversy old then we have something to blame fall out on if we need it these guys are geniuses when it comes to this stuff we've got to start a business model ok we've got to move on and i'm just speculating just pie in the sky berkshire hathaway's shareholder meeting is coming up this weekend some call it the woodstock of capitalism evidently that was new for me take a look. the annual shareholder meeting for berkshire hathaway is held at the quest center in omaha nebraska it's been called the with. the shareholder myself i've attended and unlike any other shareholders meeting i've ever been to

a weekend full of party barbecues and q. and a time with warren buffet and the partner charlie monger so what's new this year is that analysts will be able to ask warren buffett questions reportedly for the first time ever i guess in the past shareholders and a few journalists have been able to so the big question what would be the good questions to ask janet you got anything for me just to see his response to ask boxers or briefs. come on. all right dimitri will do we're going to do around the rest of you you know i did tweet this out today and i did my favorite response was from a man at many many i don't know if i pronounce that right he said i'd ask warren which room he prefers to sleep in when he's at the white house regardless of who is president when i go to i'm going to the one that's the lincoln bedroom. and he would be he would be holding obama in his arms talked about the before of all of

the willing of warren buffett warren buffett into the bedroom that would be the lincoln bedroom i don't know all of that and all i have to say is maybe he wants what warren buffett wants and good p.r. because the s. and p. five hundred berkshire hathaway has been trailing for the third year in a row and i don't know what you think but my experience when i was an analyst i was i was not a sell side analysts are the reputation of sell side analysts were that they parrot whatever management says and they just go around and you know spin that so maybe he's just trying to get them on his side just been good p.r. for berkshire hathaway's a spirit he's a spin machine machine he's a spin machine so that's nothing that's why you know. there's a political the printer is no longer a businessman ok he's in the business of politics there you go there you go so we'll leave. you with that and that's all we have time for thanks so much for tuning in don't forget to follow me on twitter as more and lester and you can also give us feedback on the show at youtube dot com slash capital account i will read

some of the best tomorrow on viewer feedback until then from everyone here at their so thank you so much for watching come back tomorrow and have a great night. mission . critical you should treat. your chargers. arrangement three. three. two three. three broke your wallet and video for your media projects a free meal gogarty dot com. is we've.