good afternoon and welcome to capital account i'm laurin lister here in washington d.c. these are your headlines for tuesday september fourth two thousand and twelve looking for hints about upcoming e.c.v. policies some of jumped on the central bank president mario druggies leave comments suggesting the central bank could directly buy government bonds maturing in three years or less meanwhile moody's changes its outlook look too negative based on concerns about the core triple a country's who fund the e.u. so europe and back in the hot seat its leaders are back from vacation so we will talk about it plus in the wake of ben bernanke he is jackson hole speech there is

a debate raging amongst economists about whether the u.s. is unemployment problems are structural or cyclical meaning this. the problem is not that jobs aren't growing the problem is not that the labor market is stuck the problem is that the economy is good. so some of those in that latter camp argue inflation is low so the fed should do more to help with the john situation but we'll look at this assumption about inflation with bob english who is in studio and he'll tell us how to factor in the role played by shadow banking plus the political establishment buys first of four with the d.n.c. getting underway today after the r n c wrapped up last week at a time when distrust in political institutions though has been eroded by malfeasance corruption dysfunction are students at harvard preparing for their entry into the ruling class with cheating in their intro to congress clowes we'll tell you about it let's get to today's capital account.

all right so seemingly the latest in the debate over if and when q e three will happen and how and if ben bernanke you will justify it seems to center on the issue of unemployment with unemployment stuck above eight percent and achieving maximum employment being one of the fed's official mandates whatever you may think of the fed's true mission the debate is whether u.s. unemployment woes are cyclical so the fed could in theory do something to affect the situation or if there are structural meaning the fed is really just a bystander folks now this was reportedly a debate at the jackson hole central banking conference over the weekend and i couldn't help but have

a bit of deja vu when ben bernanke he was quoted as saying this i see little evidence of substantial structural change in recent years following every previous u.s. recession since world war two the unemployment rate has returned close to its pre-recession level now this took me back to what dr bernanke you was saying before the housing crisis when asked about the idea that housing prices could decline nationwide or that the mortgage market was in a bubble take a listen to what is the worst case scenario if in fact we were to see prices come down substantially across the country well i guess i don't buy your premise it's a pretty unlikely possibility we've never had a decline in house prices without a nationwide nationwide basis. and the rest is history well known history and the past it turns out isn't a perfect roadmap for the future so with talk of expanding the fed's balance sheet even more with the assumption that inflation is low so the fed has room to print

how tenable is that assumption and how do things like shadow banking liabilities factor into the question and i'll point out we do not have a roadmap for what happens when the fed unwinds a balance sheet that's balloon from eight hundred sixty nine billion to more than two trillion dollars but here is maybe help us with his roadmap is bob english he is a guest contributing editor at zero hedge and economic policy journal dot com and he has taken a break from the beach in miami to join us in d.c. which is a little left glamorous and tell us all about it so first of all i'm so happy to have you in studio thank you for being here on q. it is great to be here in d.c. with do so so let's talk. do you want to just take over now there's you know i'm just kind of given i'm just giving you a hard time let's start with this assumption about inflation we're hearing these arguments from economists saying this is cyclical inflation is low so the fed should do more there is an argument that whatever the measure of inflation right

now really what's lurking below this monetary service is the condition upon which we could either see massive inflation triggered or massive deflation it's what you know people like the folks at pimco call the buy modal that tale outcomes in this paranormal world so what is your view on this assumption that inflation is low so the fed could safely act to do more and i know you're not you know you're not going to think the fed to do anything but i'm i really want to get to this assumption about a relation sure theoretically speaking i suppose where the fed can always act and do more until it can't so what point can't they do anymore and that's when we get to the point of a crisis of currency and that the. as a currency going to be worth less in the marginal mind of somebody who's holding these dollars than it is today and we haven't reached that point yet we didn't reach that point in two thousand and eight so we haven't reached that moment where we've really had the test of the federal reserve's q.e.

system where they have these one point five trillion dollars in liabilities and at the same time we've we've had kind of fodder for both the inflation is an deflation this and maybe i'd like to point out that there are also various types of inflation deflation and the terms tend to get muddled a little bit now that's a really good point so when they're talking about inflation being low now are they talking about the right kind of inflation in your view to justify more room for the fed to act well i think most people when they say inflation they're talking about price inflation and those are the goods that you and i buy in the store you also have the. asset price inflation or deflation you can have monetary inflation or deflation which gets to the actual monetary base but in general i think that the c.p.i. for instance remaining at a normal level i'm not a big believer in c.p.i. as an accurate measure but if i did yes i could say the fed could act more but i think it ignores the larger term problems that the fed is going to have and we have

short term interest rates rise substantially which we've talked several times about in the past that's right and it also ignores a factor in this debate is shadow banking and not something that often gets overlooked as something you and i have talked about we delved into it heavily with the m.f. global case where we saw a real hypothecation playing a major role there you hit the streets bob english because what before we delved into this in studio you wanted to see if people even knew what this was so let's take a listen to what you found. we're talking about the shadow banking system in particular have you ever heard of the shadow banking. it's kind of like an ultra side like a bad man side of the banking system the shadow banking market have you ever heard of it yes what do you really don't know much. i've heard it on the news reading the newspaper once but i'm not too sure it doesn't sound as scary as it is yes the japanese ok have you ever heard of the shadow banking system ok good for you i haven't heard of it either so i'm kind of in trouble no it's kind of like

a compliment to the traditional banking system where you go to j.p. morgan or bank of america you have like a mortgage or a credit card or anything like that you have a credit card ok do you know where the debt on your credit card ends up where does it end up the norwegian pension system would you like to know how tell me now here's how it would happen first you'd have all these pies and then you'd sell the rights to these pies to other people and those those rights would become notes those notes would become tradeable entities and then j.p. morgan would take those notes they'd securitize and they'd bunch of all together they'd tranche them into various credit groups and then they'd sell them off to different people and you'd have a liquid market for your high notes and that would create the incentive for the norwegian pension system to buy your pies. ok do you have any hopes or aspirations for the chattel banking system other than its ultimate demise well financial transparency is really what we need and you know i think the occupy movement right when they really advocating that and so very very name shadow is probably not about

transparency without be fair i think that's a fair thing to say that's an interesting it does interesting all right like you said earlier sounds like is evil. nicely done bob inglis to and that last fellow says he doesn't know much about shadow banking but it sounds like it's evil what should these people know about shadow banking and why should they know why is important and well i think education in terms of the financial system we have is very important the first place but the shadow banking system makes up such a substantial part of our financial system in terms of all the assets the stuff that you and i do in our everyday lives ends up in the balance sheets of all these other entities and it's kind of ignored by most people and even in the mainstream a lot of the mainstream media it's ignored. and this is through things like cation and what are some other examples well the shadow banking system is composed of the assets of for instance the mortgage of fannie mae freddie mac. . you have a corporate paper and these things are all traded against each other by hedge funds

and bank like entities and at the end of the day you have this incredibly large market that used to be a lot bigger but it shrunk in recent years that's right we can show our viewers what that looks like because as it has.

liabilities which are now by people to go buy things and drive up prices that essentially in a crisis those would be converted to cash right piece of the the central banks so are these a liability really should we be looking at them as a liability of the central banks and not of the shadow banking system we might as well make that assumption no all right so then let's follow this through because this gets back to the kind of the corps of bait that's been going on post two thousand and eight which is the inflation vs deflation debate how the shadow banking liabilities factor in. the ok i want bigger conversation the big conversation let's get into it for a minute and then we'll come back after a break and talk more about it ok so let's hear a little bit so this shadow banking system you have the potential for all these assets to be swapped into cash and

a lot of the deflation this will look at the at all the cash in the system already in terms of the monetary base and how it hasn't been converted into price inflation yet but i think the critical point is we haven't reached what i was talking about earlier that psychological moment when you have a crisis in the currency and the crisis of confidence in the currency and as much as that has yet to be seen here or even in japan after twenty years. we can't necessarily say that it will never happen something have to factor in one of those that tails perhaps we're going to talk more about it with bob english contributing i guess contributing editor is the economic policy journal still ahead we will get more insight from today's guest on shadow banking and more on the role it plays in the inflation versus deflation debate and more on who is dealing burning thunder from jackson hole but first your closing market numbers.

had a family i lived in a failing nice community wasn't which was an upscale it was just like you know archie bunker society ok then they started showing up here what happened was my company decided i could get cheap labor and they got rid of us. rosa eaglets love legally we have to get up every morning we have to go to work and you know we have to pay our bills and we have to do it and that's just the american dream and if you want the american dream you have to go by the law so i figure this here's one of the trails in the united states on. my watch and they run run down my

property and something about this noise. was a little mean that cockroaches from coming over the wire is protecting the country i'm the kind of guy who doesn't mind it is pants dirty so i come out here you know we're all immigrants as well that we all hear something else.

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. all right before the break we got into shadow banking the lurking often overlooked aspect of the banking system which affects inflation deflation and everything that we're talking about when we're thinking about what the federal reserve is going to do in the effects of it so bob english gets contributing editor at zero hedge is here in studio and he is in a lightening us and doing a great job at that now before the break we got a little bit into a little bit we had a lot into shadow banking but are people missing the bigger picture when they focus on government debts and central banks are prepared to monetize private debt as well is that part of the picture because you were talking about shadow banking essentially being a liability of central bank a lot of the a lot of the components of the shadow banking market part private but there's also some government stuff in there like the fannie and freddie corporate paper would be considered private but i think you have to look at the totalitarian the totality of all that in the system based on the premise of what the fed has done be in the past

and what they would probably be willing to do in the future ok that's it is an interesting point and another argument about the shadow banking system is that it essentially is a revenue producing machine for the financial system in bad times it works and in good times it's on steroids and the global certainly comes to mind again when we're talking about it being a revenue producing machine even though the firm was in trouble so what do you mean by this ok well let's look at m.f. global because they got caught up in the near is there a trap where interest rates short term interest rates were so low that they weren't used they were unable to produce the revenue that they were before because they didn't have the interest rate structure to support them and they john corazon recognize this opportunity in the european dead and through a financial accounting gimmick he was able to book profits with this debt that he bought and sold to another entity and it was a kind of a way for him to boost his own revenues that of m.f.

global well the come. he was really sinking and eventually the mark to market losses caught up with him as did a number of other you know a lot of other things but so in the neurosurgeon environment that we have firms can use the shadow banking market with accounting gimmicks to kind of produce revenue for them right right and sometimes profits leak out from the shadow banking system to the real economy right out of that work ok well let's consider how let's say you have a hedge fund how do investors get their money back you can have maybe dividends but that's not common but you have shareholder redemptions and so all the money that the hedge fund has booked and they have a lot of stuff that's probably maybe accounted for in dubious ways not all hedge funds but some investors can withdraw their money and use that money in the real economy and you have employee bonuses and pay at the firms that are taking place in the shadow banking market so their pay is real and it's getting into the economy so

there are many ways that the profits can leak out and why is this important because it's fuel for the boom times it's additional fuel for the boom times and as i pointed out with the m.f. global case it's also a way for forums to sustain themselves in bad times additional fuel created off of essentially nothing because when something like react on vacation you're pledging the same collateral over no span leverage right and it gets back to you know you have everybody taking a small piece of these of these instruments as they come out and commissions and everything and so there is a ratcheting effect and there's a cumulative effect there and it's extraction ass right it is the extraction as i would say so and then if you if you get a big enough hole they become this huge vacuum that you say hey central banks if you don't step in and fill that's ok fine but it's going to wreck the economy right right and that gets back to the too big to fail and moral hazard of course on the global it's not too big to fail exactly right now is searching your slightly but

staying on i guess central banks stealing the show a little bit. he has been another paper that came out of jackson hole of that central banking conference and it comes from michael wood for he's a columbia economist and he's considered an authority on monetary policy and interest rates and so his paper essentially rebukes burning q.e. and what he recommends or eventually supports is for the fed to target nominal g.d.p. what do you think of this and what effect would it have you and i were talking before and you mention the slingshot sure. my back up a little bit before that because when the fed decides to arbitrarily target a metric and this was the original operate in twist in the fifty's or sixty's there surrendering control of their balance sheet they're saying we're going to put a yield ceiling on long term rates in other words we're going to buy as much paper is necessary to keep those yield ceilings in place but that means that they don't have control over their balance sheet anymore and it's the same thing with nominal g.d.p. targeting although it's really not pointed out in the speech or the text of the

that that's what's going on but what i think is interesting is if you read some of the analyses of that it sounded like he was coming out against q.e. but what he could be coming out with is kind of an unlimited q.e. entail it reaches certain targets right right because q.e. is all about stating we're going to do x. amount of dollars and so you might not get your policy goal of eight percent unemployment or whatever it might be or seven but with these other nominal g.d.p. targeting yes you're surrendering control of your balance sheet and if you imagine a slingshot you're pulling it back in as the economy weakens it weakens it weakens the central bank is pumping in more money and then you get to this inflection point and that's when the slingshot is released and you have this super kensi an explosion of monetary policy and getting back to the credibility argument that he's using. he's relying on the credibility of the fed to be able to broadcast its intentions to the public to make this thing work but it never addressed that i could see as a credibility that the fed will need to rein in all this potential price inflation

that results. from its own actions so there's credibility on one side but not on the other and there's a big disconnect there that people have to think about the importance of the power of perception real quick before we go what is the impact when that sling shot releases and that monetary policy whatever you called it that was more eloquent than i just said what happens when that's really i don't want to be around. i think it leads to the the big price inflation that we're going to see eventually but maybe maybe not. every central bank action is is a ratcheting effect it's building on the last one until you have this eventual likely explosion unless you believe that the fed in fifteen minutes is bernanke has said can write it all that i don't know about that some wishful thinking and that never seems to work i appreciate you for not giving us wishful thinking given as a dose of some reality thanks bob english.

all right let's wrap up with loose change dimitri it's nice to see you again it's been a while so you are right we'll see if we can be as witty as we were before the break just getting out kind of setting standards high but that said harvard let's talk about it it's home to a lot like romney and obama and is the d.n.c. an r. and c. are underway and the two thousand and twelve election is really gearing up with both of those men at center stage is it also home to cheaters. the one. that's your better me you know what i got the burning building. all right

so harvard is conducting a huge cheating probe involves one hundred twenty five students in the class the introduction to congress ironically the questions over whether or not they were cheating on the take home exam students are fighting back they're using the media to do so they claim their professor condone the action saying that collaboration essentially is ok what i find interesting is at a time when when we just hear so much about malfeasance corruption dysfunction among all of the political institutions that people are supposed to be able to count on and a lot of them come from the most elite universities are these harvard students really get you know in the trenches of what they're going to need to succeed as the next members of the ruling class these guys are front i mean this is this is a bidding war on wall street to get these guys are going to. go it was reportedly going to pan to the table to list the names when i don't cooperate or collaboration . so these guys are perfectly made to understand wall street the way it works fraud

all that stuff it's great because part of the wall street businessman then say that hey this was this was always the deal we were allowed to do this i'm assuming this is there was a wink and a nod in this is supposed to go on so i think these guys are these guys are and this is you want to use the media i mean these guys are i know they're going out to me i was like they shouldn't fail into congress they should get an a plus and they fight back through the media and they launched their own kind of p.r. campaign to fire back over these cheating allegations i think that there. is no the how to operate the real world that's the real world especially if you work on wall street. that's what they should be teaching everyone not just these harvard students why should you lead students get this is that i know everybody wants to be able to get to know what it really takes this is a meritocracy let's move on because san b c has done a story on on these banks central bankers that are ranked some of the worst on earth according i believe to global finance magazine some of the worst include south africa. lebannon ethiopia south korea who's missing

though dimitri i didn't list a few countries on my list that maybe come to mind for us well i think it was being mr ben bernanke you ok he was not on the list he was known was guess who he was on the list he was missing and i think that the reason is they didn't see the equation that they used to derive the names on this list did not give enough weight to the balance sheet or a central bank so if you're if you're a disaster if you're managing the bank of guy you know you. can't be ok or you know maybe only at ben bernanke you know the two trillion dollar balance sheet that can do a lot more damage if you have nuclear weapons ok and you're certainly slightly the range you're far more dangerous than a fool with a range tyrant. forty seven. but these guys are you know these guys like ben bernanke he's of the sr yeah and we argue with zero percent in his arsenal dimitry that affects the entire globe. interest rates and rates affect the entire globe.

absolutely death are you kidding me the u.s. dollar is been the reserve currency since world war two yes so this guy is a global banking money because i'm going to go there are going to lose control my give me all fired up because i was relaxed. apparently evidently in no north american or western european central bankers made it on to this list what a shocker i mean what you can only do wrong if you're not part of the western cartel. i mean that's you know you can only do wrong if you're here and there was a part of the saying i don't want papers thinks that there are those absolutely one thousand nine hundred eighty four means the opposite of what what it's supposed to do we will leave it there that's all we have time for though thank you so much for watching hope you enjoy the show be sure to come back tomorrow and in the meantime you can follow me on twitter at lauren lyster you know you can give us feedback on the show catch any you missed. also subscribe you should go subscribe now at

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