it was wrong to leave any toy. good afternoon welcome to capital account i'm more in the store here in washington d.c. these are your headlines for thursday november eighth two thousand and twelve more than a couple dozen companies over the last five years did not tell investors they were getting ready to file for chapter eleven bankruptcy code and is included american airlines that's just to name a few this is according to a wall street journal analysis and this is arguably material information investors would want to know so what's the hind a decision like this we talk to professor of behavioral economics and author dan ariely ellie and j.p. morgan chase has reached an agreement in principle with regulators at the s.e.z. to resolve claims related to mortgage backed bonds handled by j.p. morgan and bear's terms of the firm j.p.

morgan of course the choir now it doesn't seem settlements deter wall street wrongdoing as we seem to see it continue so what would will discuss and greek lawmakers passed an austerity bill mario draghi announces he's keeping interest rates where they are but what's causing a real stir is the e.c.b. putting a princess from greek mythology europa on the euro up with their planning at least we'll talk about it in loose change and catch up with the special guest economist steve keen to see what he's up to let's get to today's capital account. when it comes to cheating or potential criminality on wall street and in washington we've heard explanations like these over the years you sold

a customer something i don't recall selling hundreds of millions of that deal after that all right let's just take a look exhibit one sixty six mistakes i made in preparing my tax returns these were careless mistakes they were avoidable mistakes but they were unintentional simply do not know where the money is or why the accounts have not been reconciled today. i didn't know i didn't mean to as to whether people knew they were doing wrong in business pacifically wall street or not on the issue of legality we continue to hear this narrative can be what you were involved in where there was real wrongdoing stephanie you know you know the irony of all of this the reason no one has gone to jail than szell crisis is this stuff is all legal assuming it is all legal which by the way is a huge assumption what is the best way then to deteriorate bad behavior starting

with the latest questionable example more than two dozen companies didn't tell investors they were preparing to file for bankruptcy turns out the letter of the law is murky in this area and it's on their side so earlier i spoke to dan ariely professor of behavioral economics at duke university and author of the book the honest truth about dishonesty i asked if we're to assume companies will opt not to do the right thing as long as they can get away with it legally. it's kind of the mixture of good news and bad way i've been tempting people to cheat and steal money from me not companies but individuals and what we find these days with in a certain range people can actually be dishonest and still think of themselves as honest people and i think the same thing goes for companies so would companies do things that are maybe officially still murky but completely outs rights lying we do with this c.e.o. come on their earnings calls and say you know what we're not even thinking about

bankruptcy would cross our mind when they're actually preparing for it i don't think they would go that far but will they be able to rationalize what they're doing and basically internally said well you know we're preparing for it but we're not so sure oh you're going to do it or we're not your door is still open let's not confuse people. in one of the things we find in these next floor we need to think about this all this do you need three elements you need a motivation you need a desire consume reality in a different way you need flexible rules that could be interpreted in many ways and you need the ability to rationalize your actions if you're actually good for the people that you do with and i think you can imagine how with this particular case all of those three things will happen i want to bring up in what you say are a kind of is the common view of why people cheat i'm just so people can see that and then we can talk about how it's messed guided people that think that this cost benefit the it what do we stand to gain probability of being caught size of punishment you're saying this is not exactly right but i just want to make sure i

connect it is this what typically informs policymakers when they're when they're making a financial regulations and laws to deter this kind of wrongdoing exactly ok so is the extreme case think about the death penalty right and says long as there's something bigger than death penalty nobody would commit a crime but guess what when we look at states of have the death penalty and you look at states it going to get penalty we can't see any difference in crime or read bribery that justifies that so it's basically tells us that even when the punishment is incredibly severe and it's very hard to think about the worst punishment then the death penalty people just don't think about it so our policy is aimed at the cost benefit analysis local saying just create the high cost and everybody will behave well this is not the reason nobody else talked to one of the criminals and stop you ever thought about what they're doing instead it's usually a slippery slope. people take the first step they rationalize it and once they took

the first step to become slightly different people and then they did the next step and the next step and the next step and then it gets worse and worse from their perspective and they see other people around and it's easy to rationalize an awful silence the pressure of the market and it's the right thing to do and multiple steps removed from wiley and also. it's easier to rationalize and the behavior gets worse and worse but i think the role of relations is not so much to punish people but to make it clear what's appropriate and you know i don't know they still seem to find plenty of ways around it more on that in a minute there because you mentioned distance from money being removed from it and you actually did an experiment where you put cokes in a dorm fridge and you put dollars in a dorm fridge and after seventy two hours or some all of the cokes were gone instead and said now have any problem taking the cokes but they didn't take the money so why are people ok taken a thing but not dull so what happened is that the moment you think that what you're

doing has direct negative consequences it's really hard for you to act this honestly and think good about yourself i'll give you an example from growth we did a study we got close and we said imagine your ball fell on the russe and you really wished it was four inches to the left would you pick it up and move with both oranges and people so heaven forbid i can't imagine doing nobody i've ever played with it just the illegal immoral would do it and then we should both kicking it with you sure a little bit oh yes no problem there are good clubs that's even easier now the outcome is the same. but the moment you do something directly you think very differently about it or think about another example how would you feel if you took fifty cents for the cashbox compare taking a pencil from work home if you took a pencil to work you'd probably not feel like a crook if you took a few cents you would feel like

a crook even if you took it and went straight ahead to buy a pencil so there is something about the immediacy of our consequence. and this is everywhere it's about relationship to money cash credit cards electronic wallets financial markets cash stock stock options the river tubes and also good direction we have with other people we see somebody in there are our multiple steps removed in a different country is it kind of something the fuse and you know we usually have a tendency to say all these are just bad people but that's what happens if you put to good people in situation of conflicts of interest and multiple steps to move money all the sudden lots and lots of people can misbehave ok so then we are in a situation where that's the case financial instruments have become more and more and more detached from what they really represent and even central bankers they can type zeros into a computer and increase the money supply and this is citing that we live in is

becoming more and more cashless so there are just so many pet cause here and that it doesn't seem like there's any way around it. so you know i don't like this so negatively approach in life in general i think it's true that we can't reverse the wheel completely and we always have to deal with this complexity but the idea that we can't do anything is also not correct so i think that we need to recognize the complexity and then we need to do something about it so you know if you have multiple steps removed from money and it's easy to misbehave maybe you should worry more about. maybe you should worry more about regulation you know and . actually kind of optimistic because recently i've met with lots of companies who are worrying about their code of conduct internally it's doing is they're saying that it used to be that they were called of course that was very general and fuzzy and the ill defined and now they're starting to specify it much more precisely and

i think that as we move to declare more specifically what the bank wants for its employees it will actually be very very helpful if we keep exposing. we can and we can basically help people behave badly with no problem ok and what about the enforcers what about the people policing that you told a very interesting story that you kick off your book with where you're sent down to someone who was a consultant to enron and he was just in retrospect i can't believe i didn't feel all of these signs to what extent is that wishful thinking because you're talking to these people you're drinking the kool aid their bodies their compelling their convincing and to what extent is that impact regulators and auditors i think i think it's incredibly well it's incredibly tough to be objective as an auditor you know one of the best investments in the u.s. is lobbying and the reason it lobbying is such a good investment is that people are really cheap i mean you could buy a somebody you know which an officer to start seeing life from your perspective and

by the way this is not just bad it's also wonderful right it means it's easy to start a friendship it's easy to get people to like you to care about you it's a part of a wonderful part of human human nature is world but once you have this relationship all of a sudden it's very hard to people with syria latina correct way and you know this is something that any sports friend knows any sports friend knows if they care about team a and they're playing against their biggest rival and the referee calls a quality team they can't help but think of. evil blind stupid something you can't see reality in objective way a lot of things change or you see reality liking it game is one of no one is one of their liking people is another one and i'll tell you i talked to one of the guys who was inch it was part of the m.c.i. carlton for many years ago. and he told me that when he started a counting fraud. his part of it wasn't the whole thing but his part of it it had

nothing to do with his personal benefit for the company now the company is a big entity but he felt that this was he was under tremendous pressure to improve benefits accounting software was very fuzzy he didn't really realize what the rules are and what the regulation where something can stop and when can you just book some income for the future and know then say you're going to get it and so on and all of a sudden he basically used this flexibility to hide law to lots of money with out any personal benefit because he was part of the company he was working for the company so our ability for wishful thinking wishful blindness being part of a team is incredibly strong and because of their dictating the rules externally it's very important we can't expect. people who are inside the system like all that goes to be able to overcome all their biases. so you can

expect auditors to overcome their biases but not regulators then what are they what their excuse lawyer more about it from dan ariely author and professor at duke in just a moment also still ahead we talk to council account guest steve keen about his latest project you won't want to miss it in a special loose change but first the closing market numbers.

here is mitt romney trying to figure out the name of that thing that the americans call a dollar. i'm sorry i'm just a guy who cares an awful lot of money for you sir are you know what that is minor terror cells that want you to listen to futurism be on the ball and the president. constructively sort of. you know support you to distract us from what you and i should care about because they're profit driven industries that sells a sensationalistic garbage because of breaking news i'm having martin and we're going. break the set.

welcome back to our guest told as auditors can't be objective they are just too subject to buy it so let's take another step out how to explain regulators and policymakers that seem to have so much bias to here's one example. alan greenspan it's been talked about so much how he was this free market guy in terms of his views and he was advocating for deregulation of wall street he back when derivatives after he had kind of advocated for their deregulation he said derivatives market participants seem can lay aware of the counter party credit

risks associated with derivatives and take various measures to mitigate those for us that's just one example of course later famously he went on to say the following let's play a clip. i made a mistake in presuming that the social interests of organizations specifically banks from others are such is that they were best capable of protecting their own credit holders. so corsi was former federal reserve chairman the fed is a major regulator of banks of the industry so what do you do about you know the wishful thinking or the conflicts of interest or the ideological biases of someone like a regulator. you know i think in the greenspan quote i think what's really important there used to think about long term incentives so i think people in really good caring about that short of uncertainty it's really hard to think about the long term being so we get we just not good and think about the long term and the stock

market is in principle supposed to be about the long term into. the short of it. so look i don't think this is an easy system to fix but i think that we have got to a situation where we have. to call blocks for us to right now on this. and you know in the same way that i think about medicine so the f.d.a. regulates medication and every time we want to introduce a new medication we have to spend i mean not me but medical companies have to spend a tremendous amount of money surely and the people of better off with this medication when we don't use medications and i think we need to send. of burden of proof financial instruments. before high frequency trading with the river to get all kinds of credit default swaps of being introduced to the market i want actual proof he is actually helping your financial market. though it's not easy to do but i think in medicine we have lots of ideas about things that will be helpful some

people but by theory by biological theory they seem to be making sense but that if you try to go you discover they actually create more damage than benefit and we know much more about biology and we know about the government's so not all of these financial people but they're like medications we think by slowdowns of theory that they're going to be beneficial but there's no evidence for that so you know in biology we kill people not really but you know read the cations emerge the cube people yeah so don't kill people just make lots of people poor and take money away from the economy but i think we need a lot of. burden of proof experimental instruments and make them commonplace i hear you want that i advocate that i totally hear you're saying one thing i want to i want to follow through on that we haven't touched on yet is this kind of social norms and i'm going to give an example that maybe ties into conflict of interest

too so everyone now is talking about who president obama is going to appoint to the treasury timothy geitner won't won't stay as treasury secretary and one name that's been thrown out is erskine bowles and he is a former wall street guy he was a board member of morgan stanley his wife is on the board at j.p. morgan i'm obviously not any assuming that he will be treasury secretary or or how these relationships will impact him if he is but just hypothetically what is the set up in terms of not just conflicts of interest but what you think is is ok and appropriate given the people that you're surrounded by your wall street friends your wife who works on the board it the big bank. so. so the example you gave for my history with enron with my friend it was very interesting because this was john kerry barlow who used to you know manage and write lyrics for the grateful dead and then at some point he started working with enron and what he told me was that not only that he jinxed the cooling but he created the laid it all g.

for himself that protected him from seeing anything it was going wrong and i think from my experience people in the financial industry are basically doing the creating of the nearer of theory around it presents them to do so and their close friends as the hero of the colony called them right from their perspective everything that they're doing is in the service of the world the world would not have been such a good wonderful place without we would have been in the dark ages we should be thankful for wall street derivative trading high frequency trading without death there more than society would just not exist in its current form and people need it right they need this just if it can be justified in salary their position especially in the last few years with all these attacks. so i think that they king somebody from the in-group somebody who basically for years have trained i'm so pissed to believe in the your logical way that we got is going to be devastating

dan ariely we hear you on that thought there a professor at duke university. all right let's wrap up with loose change of various special loose change do you notice something different here boy the one else is in the car you know popular column is steve keen you know well he's a guest of the show author of debugging economics he's wrapping up a campaign to continue debunking economics neoclassical economists with his minsky model and program and he's going to be on our show in a few weeks november nineteenth in the flesh in the studio but for a little teaser we wanted to talk to him about it a little now just so we can be

a little ahead of the current with the other media we've heard is in the pipeline so dr keen thank you so much for being on the show and it's nice to see you tell it tell us what's new with minsky what you're working on now. yeah well the program is something i've thought of developing with a grant from mine it was just about. about six hundred hours of programming time has gone into it and it's now i think of working prototype to contrive what we can do to model the economy as a monetary unstable system which is what if they obviously use your last years with grilling on. and it's now downloadable really usable by using the economy is fundamentally stock mccoll you can build bank models in about five minutes it sits running but we are actually now about to launch a kickstarter campaign to try to get some serious money going are good enough to really produce a top not shop but program the world so finally stop coddling economy as it banks money and then exist now why is that important why is it important to factor in

banks the factory and money credit and debt into models and how is that different than the kind of new classical models that students use today in university. all of the classical model stick that if you live in a bottle system you can actually leave money out of it thanks by now a central role and again i thank you my deah my full program for my comment and he's blasted five million he's bought a few months ago i'm all for increasing criticism over including banks for that matter but why that is so important to a story about debt and leverage i mean give me a break if you look at the real dog that anybody has not followed by big nomics nearby school economics the great can still run a financial crisis caused by the banks creating too much data and creating too much money generated speculative bubbles so you have to be able to model and have a model of capitalism if you leave banks money and then our modeling capitalism and that's unfortunately what students are learning and possibly comment at universities today misty is a very live in an easy strike for quite a show them a positive alternative probably just a good shake and as far as the models that students are using across the world in

their neoclassical classical training classes d s d e models can you just quickly tell us what they are for anybody that's not an economist or an armchair economist . well this is i'll have to say there are some people who do good work with those models because if you have a brilliant mind people like michael kumar from the i.m.f. and i've got to admit volcker it was brilliant so you can produce almost any answer you want out of them so they can be used to make you know sometimes interesting arguments but fundamentally that is to continue ocean of the old comparative statics approach than it must include this one in around run with and i want to make a couple change is that a different equilibrium and here that show they call it dynamics and it because they have one time period and the next time you're it written and really it's only comparative statics before and after some change round of values so you look span than see that it makes all sorts of of a science about believing that you can trade on a me as

a single actually and in very best ever the number of different arguments none of them actually use any commodities or use any hour or so i did they don't look sophisticated because they are difficult but fundamentally then i'm all the same all of them are genetic. my mid century economists didn't want to be in stock in prague while the real world is made of the wrong c do you think the because i've noticed that you are you specifically have gotten a lot more attention obviously on this show on other shows you've been on the b.b.c. and other programs. and other economic modes of thinking besides a kind of traditional no classical thought that's dominated the spectrum has been coming out of the woodwork since it has made even the biggest driving force has been the financial crisis to awaken people or people. yeah absolutely mike i mean you would never have got the attention of the people who got so far i'm listed in an enormous economic process which you can probably attribute to people believing

this conventional it possible collide like alan alan greenspan we just have a lot of money to go because they believe that bailout is as your psychologist it appears that a while ago they allowed all these social kinds is that could they vote them. cells avoiding the beneficial and actually lives of the biggest economic process since the great depression so without that i would be getting in a litle. and we hear you're getting some real notable attention by some maybe publications that wouldn't typically very into the alternative space and economics as i write can you say anything about that one you might not be able to. upload a room of is one of the one of the biggest magazines in the world maybe in the near future coming out and saying watch using these models not looking at other ones and i've been inside central bank some of it's really that have been bought a bit of speak so far and one of them i have to say in your officials really want to develop my methods and model their economy that wired and they all blogs by the

junior news of possible stop it couldn't imagine any other why they think about the global bodily the media langbehn the want to hold the site is getting exasperated with the government saying listen guys think outside this new possible box so i was going along why when you can expect major journals of major public media outlets that are normally conservative in the economic space bound to say we're exasperated your dog will charge here i think it's really because the value can actually use these these models remotely to now with the network and everything else people can actually play around with these models of students anyone else that's interested not just central bankers so i think that's a really cool part of it too and they can check on your project get started on your website yes democratising modeling for all so steve king thanks for giving us the update can't wait to get you in person in a couple of weeks we can put some information on the kickstarter campaign on our facebook because that's all we have time for that's our show a lot of day thank you for watching be sure to come back tomorrow and in the meantime you know you can follow me on twitter you can like us at our facebook page

catch any show you missed it leave us a comment on you soon or in a stede on lou and from everyone here thanks so much for watching come back tomorrow and have a great night. wealthy british stock. markets. find out what's really happening to the global economy. cars are no holds barred look at the global financial headlines. is a report. on

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