good afternoon welcome to capital account i'm lauren lyster here in washington d.c. these are your headlines for monday july sixteenth two thousand and twelve well it is monday so let's survey the wall street high jinks from potential big bank criminal wrongdoing in the library scandal that the justice department is reporting to regulators answering for the money laundering probe at h.s.b.c. to a former citi group bank girl whose case is reportedly in court accused of misleading clients and as c.d.o. deal we will put together all of the pieces for you and sticking to libel or one way the story goes big picture is that the banks benefited from borrowing at low rates through the interest rate propaganda of live or rigging but paul craig

roberts and nomi prins argue this is simplistic and a diversion from the deeper darker scandal dr roberts will be here to explain what that is plus local dutch officials have said they're weather forecasters should be fired for being wrong excuse me that was fined for audience led by guess we'll talk about when we may hear the same for who knows central bankers and influential economic policy makers when their forecasts not to mention the per script that they've made have gone wrong let's get to today's capital account.

so you heard a bit but in the world of wall street wall street scandal let's just bring everybody up to speed there's so much more i could list off but here are a few the d.o.j. is reportedly identified criminal wrongdoing by big banks and individuals at the center of the live war scandal and is building cases this was reported in the new york times there could be charges for barclays traders by september according to these reports meanwhile bank regulators are set to face a senate panel this week to answer questions over the h.s.b.c. money laundering scandal according to c.m.d. see the senate probe is just one of the number of investigations into the decade long effort by regulators to rein in illegal money flows at the firm you can decide if you buy the premise that regulators are truly trying to rein them in but that's for you to decide and the f.t. reports a former citigroup director accused of misleading buyers of a mortgage related product a c.d.o. at the start of the financial crisis is facing trial today or is in court possibly

facing trial now the financial scandals we have all seen the criminal convictions of senior executives we have not and this is something that inside job filmmaker charles ferguson famously talked about in his oscar speech when he said that very fact that no senior level executives in the three years since the financial crisis have gone to jail he wrote about it in the huffington post today too and an article i spoke to him earlier and it was really interesting it stuck out to all of us here on set in the control room what he said about the reaction to his work it turns out it isn't without consequence just listen to a bit of what he told me. i've lost a few friends. you know some of these people were personal friends of mine your sequences for for a long period of time. and also you know city

so much money surprise and certainly grow. people newborn administration and people close to you bob intrusion. will no longer speak with me which is so last pretty candid pretty interesting makes you wonder the price that you pay first seeking truth to power or questioning the establishment but that's just my perspective you can draw your own because you'll hear my entire interview with dr ferguson on thursday including his thoughts on if we're beginning to see the political will for criminal prosecutions of wall street crimes with for example these possible charges and some others that we talk about so for now let's put that aside let's delve further into one of these episodes of malfeasance i want to talk about. why would banks try to rycote we have heard plenty of explanations floating around both having to do with the big picture of the health of banks that they wanted to have perceived during the financial crisis also benefiting the derivatives traders positions either maximizing profits or minimizing losses and i

should mention that although a number of banks are being investigated only barclays has settled and has admitted to these charges so i do want to make sure that's clear sometimes it may get muddled but let's talk to paul craig roberts because he has the real scandal he says he's economist and former assistant secretary of the u.s. treasury under ronald reagan he's saying hey these press reports are too simple it's missin the real picture he wrote a piece about this with nomi prins also a guest of this show author and former goldman sachs managing director so first of all. thanks for being on the show ok we are going to have this conversation with dr roberts as soon as we get him back but as i said he wrote a piece with nomi prins who has also taken up these issues and did work on wall street and has written books now exposing their behavior and they essentially make the argument that fixing the library hoped to perpetuate an environment of low

interest rates and that this really is what the true scandal is and that this speaks to the issue of what is on bank balance sheets and how they want those assets to be elevated for the prices to rise now as i mentioned there have been a lot of different takes on the library or scandal there is the official take from for example this settlement is that derivatives you derivatives traders use live or and and attempted to manipulate it in order to impact derivatives there is the big picture issue too but we're going to get more into this idea of what impact this had on interest rates and bank balance sheets and what this says about the banking sector we're going to try and get dr roberts back up for you in just a moment we'll have more but first let's take a break. what drives the world the fear mongering used by politicians who

makes decisions to break through it's already been made who can you trust no one who is you to be you who with the global machinery see where are we heading state controlled capitalism is called sessions when nobody dares to ask we do our t.v. question more. you know sometimes you see a story and it seems so you think you understand it and then you glimpse something else you sure see some other part of it and realize that everything is ok. i'm sorry there's a big issue. here with you. but in the alona so we'll get the real headlines with none of the most of

the problem with the mainstream media today is that they're completely disconnected from the viewers and are what actually matters to those viewers and so that's why young people just don't watch t.v. anymore if they want news they go online and read it but we're trying to take those stories that people actually care about and transfer them back to t.v. . all right welcome back i gave a pretty lengthy explanation of what dr roberts is going to be talking talking about so let's get right to this paul craig roberts joins us he's economist former treasury official and dr roberts please do tell us what is your thesis on the libel or rigging and how it would help improve bank balance sheets. well a lot more relates to almost all of the debt instruments or loans and the

collateral debt obligations and a lot of the things that are on the books of the banks whose values is questionable are linked to live or so when the library or rate goes down lower it goes it pushes up the price of those instruments and therefore it improves you see the price of a debt instrument and the interest rate on it move in opposite directions so the lower the interest rate the higher the price so by fixing the right low their way will do boost the prices of the instruments on their books and make them look healthier than they actually are aha so that that is how they really gain they gain much more from that than from lending to one another at lower interest rates and of course the bond market in general benefits including the prices of. british treasury debt and american treasury debt so in

a way the bailed out banks or helping the bank of england and the federal reserve to keep the bond prices high despite the continual outpouring of massive amounts of debt so the central banks and these big banks are working together and they've got to sustain rigged before i want to touch upon wired what you're saying in terms of government debt but first i want to go back to what you're saying about what this does to the assets on banks' balance sheet and what we can infer that or possibly you do in your view does this mean that some of the too big to fail banks aren't healthy enough to engage in traditional lending really and they're more worried about their own borrowing costs because their balance sheets are still so impaired that they need to continue repairing the holes in their hole before they can worry about building armaments and expanding the fleet. well you know yes to yes that what you're saying is true but the point the point the most important point is that

when interest rates fall the prices of the assets on their books rise. and as those as those asset prices rise it makes their balance sheets look better and makes the banks look healthier so if you can manipulate interest rates. so they get smaller and smaller and lower and lower then the prices of the instruments runs and that's really what it is is what's behind this manipulation of live or in your view into banks then you do you think have a constant liquidity bias they want more water in the tank at all times so that the garbage floats to the top and that's what you're getting out with with what the effect of manipulating library is. well known the liquidity is is a problem they have but the central banks of providing liquidity with the problem

i'm talking about is their balance sheet what is the bank worth what are the assets worth on his books or those assets equal to its liabilities so this is the solvent see problem not the liquidity problem the banks have both products they have the one you described correctly and then they have the one that i'm talking about which is there's some wincey and so if the price is on the books or their assets at the assets on the books those prices rise when they can push down the interest rates because they're the relationship between interest rates and the price of the bond his inverse and just just to be clear in your view any attempts at rigging libel or to keep interest rates low directly affect government bond prices why.

all right we will try to get more with dr paul craig roberts but first we are going to go to a quick break still ahead there is a dutch city. officials want to fine the weather forecasters for getting it wrong we will talk about who this may apply to more broadly if you want to loose change but first your closing market numbers. what drives the world the fear mongering used by politicians who makes decisions to break through it's already been made can you trust no one who is you know view with the global machinery see where are we heading state controlled capitalism is called sessions when nobody dares to ask we do our tea question more. you know sometimes you see

a story and it seems so you think you understand it and then you glimpse something else and you sure see some other part of it and realize that everything. i'm trying hard to do is a big issue. here which is. bucking the alona so they'll get the real headlines with none of them are so the problem with the mainstream media today is that they're completely disconnected from the viewers and what actually matters to those viewers and so that's why young people just don't watch t.v. anymore if they want news they go online and read it but we're trying to take those stories that people actually care about and transfer them back to t.v. .

all right welcome back we're having some problems with dr paul craig roberts connection so we are going to switch gears because ben bernanke he is on the hill tomorrow and that means that the fed will be on everybody's mind and on all the headlines and since we had the opportunity to sit down with jim grant recently to hear his current thoughts let's let's look back and hear what he's had to say about the fed looking a little further back let's play you some of our interview one of our past interviews with jim graham founder and editor of grant's interest rate observer. welcome back we've been talking with jim grant about the fed's manipulation of the future so let's talk about what the excuse me of the present so let's talk about what this means for the future because another speaker at his recent conference was the deflation where hugh hendry and he laid out a case that what will likely preceded the event you while itty of inflation is

actually the polar opposite a severe deep lation and the collapse of mercantilism asia style now this is been one of the more popular debates raging in the financial blogosphere going on at least five years now we talk about this a lot so let's hear our guests are you on that let's bring back jim grant founder and editor of grant's interest rate observer so mr brown where do you stand in your view on this inflation deflation debate. i think it might be a good idea to briefly define terms it seems to me that the deflation is is a drain joint of debt if there's a debt crisis you can't finance you can't borrow you can't hold him in tory's therefore you sell stuff you can't hire therefore you discharge employees the sum total of these actions leads to falls and wages and prices that to me is deflation what. is not seems to me is the reduction in the price the cost of producing things

in a time of spreading digital technology and the opening up of new areas to enterprises and to production that i would call progress now the symptom of both is falling prices but the fed refuses to distinguish between the problem of debt and progress they seems to be that seems to be resisting the latter which leads to intervention which leads to money printing which leads to the suppression of interest rates which finally adds to the to inflation so the fed by reacting to the thing it calls deflation but refuse to define him is actually instigating the final thing inflation now that's by way of preface you ask him which comes first and i'm glad i had so much time to search for an answer because i'm not sure i know one. i think that in asia there is a terrific debt crisis brewing it seems to me that the chinese financial structure

is both corrupt and corrupting the banks are propped up by the stage prices are set by the state interest rates to zero this immense exercises in what the academics call mal investment and we ordinary people might refer to as the production of white elephants great buildings without people in them shopping centers that shopping with shopping railroads that run off the rails so in asia it seems to me there is the same. it up for a great collapse in prices i don't know i'm not sure anyone does know what comes first but i can see i can certainly see that monetary authorities the world over are doing their best to bring about inflation that's interesting where do you think this goes as far as the way it plays out i'm curious if you have any ideas about alternative currency is that come about that are either determined by the market or are determined by some kind of international institution like the i.m.f.

with s d r's. i think that whatever happens in a monetary future it will not involve the special drawing rights or s.t.r. which is a currency only an economist could love indeed only a couple could understand or recognize as money in the monetary substance that is in front of us that is and is in our language apparently in our bloodstream is of course gold it's the thing that the people recognise it's a universal and image i suppose is gold as a bubble home but all the people the world over know what it is. the central banks of the world mainly resist the idea of gold as money although interesting the central banks have been accumulating gold collectively the past year or two as they haven't in a generation. it seems to me that the institution in place that it's a worldwide paper money the world wide manipulation of interest rates by europe

grabs this monetary set up is not for the jews it is destined to fail in deed it is failing something will supplant it it seems to me that something is very likely to involve gold whether it's going to involve a new gold standard that's my preference or whether it's going to have all involved say the. ron paul approach which is the dean nationalization of money through the abrogation of the excision of the whiting out of the fee it currency system through the legal tender was so as it is now. says on a dollar bill that you have to accept it in payments of debt that's the law well if the legal tender laws were no longer in place people could choose they could decide what is money as they view it it seems to me a much better system would be an international arrangement whereby we establish this universal system of weights and measures called money and we define it in that thing which seemingly is meant to be money namely gold that's my preference well

and that's interesting i know that you are and you've kind of laid out your support in your admiration for a classical gold standard whatever the faults that some people may perceive in a global banking system that where there is so much debt it is so awash in debt it doesn't mean it doesn't seem that this kind of monetary discipline would be what any finance year would go for so do you think that it actually is possible that there actually could be a movement towards a gold standard in reality. i think it is entirely possible and i think that. the people have just about had enough of our overfed needy and only sickly solvent finance years and the voice the collective voice of these fanciers in the councils of state i think is is properly. being marginalized. i'm not sure if the people are going to rise up in the next election i'm not sure

what the voice of the people in this respect is exactly going to sound like or when it might be heard but i have to believe that people have had enough of zero percent interest rates for the savers for artificially supported prosperity for the undeserving finance years. i can i can see every political drive piece of dry tinder in place ready for the match i'm not sure when the match will be dropped and that's an interesting point all along the lines of those finance years what do you see as far as accountability because of course we've seen actions like dodd frank which have plenty of problems they haven't added too big to fail or and start i know you do i was going to get to that but i think law back plan tell us about this and how it makes up for what dodd frank misses. so i'm going to give you two alternatives lauren and you can pick one you must pick one you must pick the second one ok the first alternative to. promoting accountability

with the banking system is the two thousand five hundred and odd page don frank bill which micromanages the actions of our bankers by the way i submit to you that the only population in america knows less about banking then bankers today is the u.s. congress so that's a choice a choice be the correct choice or is the eyes of clawback plan which i've named after my panel paul isaac a wall street investor who drafted up. this plan would require that anyone in a regulated financial institution making ten times the average manufacturing wage or more it's about four hundred thousand dollars and up that you were making four hundred thousand and up would surrender that increment above four thousand dollars for seven years preceding the insolvency of the institution for which he or she worked so the problem now as i see it is that bankers take risks they don't bear

risks what is wanted in a capitalist society is the the union of risk taking and and responsibility for actions taken what is wanted is capitalism on the upside but no less capitalism in the downside and it seems to me that that one could opt for the unworkable bureaucratic morass that is our current regulatory regime or one could could harness the venality of our bankers to the public good and say alright you know about banking or you should the bank for which you work in an executive position will be solve it if it's not you will not have the money you so seemingly desperately must have i love that whole idea i mean it personal responsibility personal accountability how you want to take these risks by paying your skin is on the line instead of the taxpayers you know i want to keep this going i'm sorry god yes. oh i was going to go for the carriage of that oh you go for. well you know we have a few minutes left i want to keep you on through this last segment that i'm going

to just scratch because it's such a great pleasure to have you on the show so i do want to ask you about this because it has been roughly five years since the fed began what one could argue has been the most reckless experiment and money printing since that paper was digitized after world war two because assets must be bought in order for money to be created what exactly do you imagine the fed and other central banks have done the same thing plan to do with all the debt they've accumulated on their balance sheet since the crisis in two thousand and. fairness to monetary mandarins they do have a plan they do have a place in the plan for example the fed's plan. is to gradually raise the rate of interest it pays banks for keeping. about two trillion dollars. lying fallow as it were doing no harm on the balance sheet of the fed this takes just a moment of explanation so you mentioned in your question that in order to purchase these treasury bills bonds and mortgages the fed must print the money to do so

that's central banking one hundred one it does that it prints it materializes money that didn't exist before and order to buy the securities with which which through which purchases it manipulates our financial system so the question you ask is a very good one namely what happens to these bills bonds and mortgages that the fed and other central banks have accumulated in such unimaginable volume what where do they go and do they have to have to sell them so that the fed's idea is that it will it will immobilise the dollars it created to buy these things by dexterously raising more manipulating the interest rate on the dollars that the central the commercial banks have a deposit at the fed now that is perhaps partially intelligible but the central point is that the central banks believe that they have the the nimbleness and the judgment in the foresight to kind of manipulate the way these vast

quantities of currency they have created to fight these wars against free interest rates. my suspicion in fact my contention is that the problem is not their lack of technical means to do something to forestall the day of of reckoning but rather the question of is one of judgment the central bankers had no clue that our sorrows were upon us in two thousand and seven and i think they will likewise be late to the party when time comes to do the thing they promised to do to prevent the new inflation the ph d. standard that you referred to we're going to have to leave it there for today we're out of time i really appreciate you being here thanks for being on the show that was jim graham founder and editor of thank you lawrence interest rate observer. and you can catch our recent sit down with jim grant on our website you may be interested to hear is bull case for black walnut trees but that's it for today make sure to come back wednesday tomorrow due to maintenance our show will not be on and

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the official t. application to you on the phone called touch from the choose up still. life on the go. video on demand tease and line comes an r.s.s. feeds now in the palm of your. questions on the dot com you know how sometimes you see a story and it seems so for lengthly you think you understand it and then you glimpse something else you hear or see some other part of it and realize everything you thought you knew you don't know i'm tom harvey.