well t.v. is not required to watch our team all you need is your mobile device to watch r.t. any time. if you just joined this very welcome aarti live here in moscow top stories now half past the hour in the russian capital one person is killed and another injured in quebec by a government who opened fire during the victory speech of the newly elected separatist crimea i suspect is being held by the. un accuses foreign nations of escalating the syrian conflict by supplying arms to all sides as fighting in the main cities forces thousands to flee violence has displaced more than a million inside the country with two hundred thousand refugees now in neighboring states. and with barack obama pitching for reelection his government is trying to

mend strained ties with china beijing has criticized washington for backing regional allies you trying to see over asia pacific territorial disputes. that with more stories for in half an hour from now in the meantime lauren lyster brings her insight on the global financial news headlines with capital account from washington. good afternoon and welcome to capital account i'm lauren lyster 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 by 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's 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 the 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 and their intro to congress klaus will 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 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 city prices come down substantially across the country but 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 ballooned 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 i'm just 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 tail 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 relationship or theoretically speaking i suppose well 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 and 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. i 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 to tell me how 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 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 interesting all right i guess it really is sounds like is evil. nicely done bob 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 vacation 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 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 that has expanded to surpass the size of the traditional banking system as you can see by liabilities here that happened in the mid ninety's now what we're seeing is it starting to come down and there's one argument that it has with this explosion it's really provided a buffer against inflation and that now that this is getting smaller and smaller the liabilities are coming down there essentially if i have this right the traditional banking sector will pick up the slack and this will become less and less of a buffer against inflation in the u.s. now you don't completely agree with that but i but can you break down what is this

argument shadow banking liabilities as a as an inflation but for sure and this is just my understanding of the argument as it's been presented to me but take the premise that we have this this debt ponzi in the us and that to keep the ponzi going we have to keep it afloat at least the total liabilities at a flat level so as we had the shadow banking system climb climb climb. no decline something had to take over in the traditional banking liabilities which would be demanded posits of banks as kind of taken over a piece of the actions of the fed and all its quantitative easing so how does how does that make inflation for less of an inflation buffer where people can take their money out of their checking accounts and request cash for it you have the or the liabilities of the shadow banking system and they're kind of tied up in these financial assets that are necessary like liquid but i think the key point. tyr is that two thousand and eight was a blueprint for what we could have in the future and then two thousand and eight we

saw the federal reserve swapping out all of these these shadow banking assets and liabilities for cash and that was part of the q.e. program wasn't it wasn't as big as what could happen in the future but it's definitely a blueprint so i think in the future we need to look at the total liabilities as though they're going to be swapped out as cash or they already are cash because you're saying in a crisis essentially these shadow banking liabilities which are seen to be tied up so they're not taken out 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 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 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 think 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 fat tails perhaps we're going to talk more about it with bob inglis contributing i guess contributing editor is there a hedge an economic policy journal still ahead we will get more insight from today's guest on shadow banking and more. and the role it plays in the inflation vs deflation debate and more on who's stealing burning q.'s thunder from jackson hole

but first your closing market numbers.

thank. 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 got 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 bunny 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 and 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 to they were unable to produce the revenue that they were before because they didn't have the interest rate structure to support them and john corazon recognize this opportunity in 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 the global well the company was. really stinking and eventually the mark to market losses caught up with them as did a number of other you know a lot of other things but so in the near is urban 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. you have employed 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 expand 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 asked 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 from bernie. has been another paper that came out at 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 huey 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 sling shot sure. my back up a little bit before that because when the fed decides to arbitrarily target a metric 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 a 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 to 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 sling shot you're pulling it back and 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. it's own actions so there's 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 eventual 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 has bernanke he has said can write it all that i don't know about that some wishful thinking 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 ron need and obama and as the d.n.c. and 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 also home to cheers. the one.

that's your liberty you know what i got. burned down. 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 and 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 that get these guys are going to. go it was reportedly going to pan to the table to list the names when i cooperate or collaboration i

think 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 and this is supposed to go on so i think these guys are these guys are and this is if you want to use the media i mean these guys are i know they're going to me i was like they didn't fail into congress they should get an a plus 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. was no the how to operate the real world that's the real world especially if you work on wall street lie cheat and steal that's what they should be teaching everyone not just these harvard students why should you lead students get the i know everybody wants to be able to get to know what it really takes this is a meritocracy let's move on because sandy 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. mr ben bernanke you ok he was not on the list he was known was guess who he was on a list he was missing and i think that the reason is they didn't do 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 but you're managing the bank of. the only at ben bernanke you have 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 who always and k forty seven. but these guys are you know these guys like ben bernanke he's a disaster yeah and we argue with zero percent in his arsenal dimitry that affects

the entire globe we're going to scare the new interest rates and raise affect the entire globe it scares it scares me absolutely this 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 about my kitchen was relaxed and i saw a bird i can guess who. 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. and 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 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 years ago subscribe now at youtube dot com slash capital account you can see as an h d on hulu at hulu dot com we have a packed lineup for you this week you will not want to miss a lot of first time gas big names this is just in the getting from everyone here at capital account have a great night.