good afternoon welcome to capital account i'm lauren lyster 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 kodak 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 behind 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 that the s.e.z. to resolve claims related to mortgage backed bonds handled by j.p. morgan and bear's terms the firm j.p. morgan of course of 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 to row 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 actual nations 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 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 tell me what you were involved in where there was real wrongdoing well 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 dick to or 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 thing mixture of good news and bad way ive 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 almost people and i think the same thing goes for companies so with companies doing things that are maybe officially still murky but completely outright lying we do with the c.e.o. on their earnings calls and so you know what we are local 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 only going to do it or we're not your door is still open let's not confuse people. and one of the things we find these notes or we need to think about this all this do you need three elements you need a motivation you need a desire to see 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 they're actually good for the people that you do 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 on just how people can say that and then we can talk about how it's less guided by people that think that there's cost benefit view what do we stand to gain probability of being caught size of punishment here 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 if the extreme case think about the death penalty right now says long as there's something bigger than death penalty nobody would commit a crime but guess what when we look at states have the death penalty and they look at those who don't have a good penalty we can't see any difference in crime or it right. justifies that so it 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 law 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 i think the next step and the next step or the next step and then it gets worse and worse from their perspective and they see other people around them and it's easy to rationalize it all to silence the pressure of the market and it's the right thing to do and multiple steps removed from money and of a sudden it's easier to rationalize and the behavior gets worse and worse and i think the role of relations is not so much to punish people but to make it clear what's appropriate and inappropriate i don't know they still think a fine player ways around it more on that in a minute there because you mentioned distance from money guest and being removed from it and you actually did an experiment where you put cokes in a dorm fred and you put dollars in a dorm fridge and now after seventy two hours or some all of the cokes were gone instead instead nav any problem taking the cokes but they didn't take the money so why are people ok taken a thing but not dull here 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 with twelve thousand block players and we said imagine your ball fell on the rights and you really wished it was four inches to the left would you pick it up and move it by four inches and people said heaven forbid i can't imagine doing nobody i've ever played with it just illegal immoral wouldn't do it and then we said by our kicking it with you sure a little bit oh yeah that's not a problem that there are 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 a petty cash box compare taking a pencil from work home if you took a pencil from work you would probably not feel like a crook if you took fifty 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 ridiculous 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 diffuse 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 situations of conflicts of interest and multiple structure for 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 falls here and that

it doesn't seem like there's any way around it. so you know i don't like this negative approach to 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 they're good that we can't do anything it's 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 called. maybe you should worry more about regulation you know i'm actually kind of optimistic because recently i've met with lots of companies who are worrying about code of conduct internally if it's doing is they're saying that it used to be that they were called of color that was very general and fuzzy and 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

was for its employees it will actually be very very helpful. if we keep which fuzzy . we can 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 sitting down with someone who was a consultant to enron and he was just in retrospect i can't believe i didn't see 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 in all these. you know one of the best investments in the u.s. is lobbying and the reason that global you such a good investment is that people are really cheap i mean you could buy 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 which is you can 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 the sports friend knows any sports friend knows if they care about team 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 them one is one of their liking people is another one and i'll tell you i talked to one of the guys who was in which 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 business that it was for the company now the company is a big entity but he's. well but 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 an officer that he basically used this looks ability to hide lots and 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. the people who are inside the system 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 they are you will hear more about it from dan ariely author and professor at duke in just a moment also still ahead we talk to counselor count guest steve keen about his latest project you won't want to miss it in a special live exchange but first the closing market number of. the song license. plate shoot despond lead.

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you for your media project c.d.o. dardar t. dot com. 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 seemed cammy aware of the counterparty credit risks associated with derivatives and take various measures to mitigate those respects 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 and others were sourced is that they were best capable of protecting their own credit holders. so corsi was former federal reserve chairman and 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 it's going to green space it's big what's really holding do. so i think people in banks are really good and caring about their short term incentives it's really hard to think about the long term incentive we get we're just not good and think about the long term and the stock market is in principle supposed to be about the long term incentives not about the short term it's. 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 financial instruments that are too complex for us to right now understand 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 a lot to me but medical companies have to spend a tremendous amount of money showing that people are better off with this medication when we don't use me to cater and i think we need the same kind of burden of proof for financial instrument buy they want to be for high frequency trading in the river trading in all kinds of credit default swaps are being introduced in the market i want actual proof that these are is actually helping the 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 for people in there but by theory by

biological theory they seem to be making sense but that if you try to tell you discover they actually create more damage than benefit and we know much more about biology and we know about economics so now all of these financial instrument think about them like medications we think by financial theory that they're going to be beneficial but there's no evidence for that it's only now in biology we kill people not we but you know better the cations emerge they kill people yeah so i don't kill people just make lots of people poor and take money away from the economy but i think we need a much stronger burden of proof before exponential instruments and make them commonplace i hear you on that. i advocate that i totally hear your 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 want to 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 are 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 france your wife who works on the board it the big bank. so. the example you gave your 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 did he drink the cooling but he created the laid it all just for himself it protected him from seeing anything it was going wrong in

a think from my experience people in the financial industry are basically doing the creating of the new year of the syria rug the presents they have to do so and get their close friends is the hero of the call and the call of rights and 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 the dark ages we should be thankful for wall street derivative trading high frequency trading without that the more that society would just not exist in its current form and people need to ride they need these just this occasion to justify those salaries your position especially in the last few years with all these attacks. so i think the taking somebody in group somebody who basically for years have trained them soaps to believe in the regular logical way that we go out is going to be devastating. dan ariely we hear you on that author and professor at duke university.

all right let's wrap up with loose change of various special loose change do you notice something different here voicing one else's in the dying of popular column is steve keen you know while he's a guest of the show author of debugging economics at he's ramping 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 kean 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 for 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've obviously as your last guess with grilling on their shares and it's now downloadable really usable by using what the economy is fundamentally stock mccoll you can build bank models in about five minutes it's running but we are actually now about to launch a kickstarter campaign to try to get some serious money on it and not to really produce a top not shop but program the world so finally stop bottling economy as it banks money and then exist now steve why is that important why is it important to factor in banks the. money credit and the models and how is that different than the kind of new classical models that students use today in university. vulovic russell

models that will be presumably going to bother system you can actually leave money out of it thanks by now a central role and again i thank you my deah my for programs for my comment and he's blasted five million he's bought a few months ago i'm all for him facing criticism over including banks for that matter but why that is so important a story about debt and leverage i mean give me a break you look at the real thought that anybody has not followed by big nomics they're probably coming into great can still run the 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 citizen if you like banks money and that our modeling capitalism and that's unfortunately what students are learning and possibly comment at universities today minsky is a very live in an easy strike followed by to show them a positive alternative problem just to take and as far as the models that students are using across the world in their neo classical classical training classes vs

g.e. models can you just quickly tell us what they are for anybody that's not an economist or an armchair economist. this is i'll have to say there are some people who do good work with those models because you have a brilliant mind people like michael kumar from the i.m.f. and i've got to admit paul krugman is 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 the need must include this one in around run with and i want to make a couple change does get 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 in ram and values so you look stand than see if it makes all sorts of of a science about believing that you can treat the entire economy as a single engine or you can actually very best have a number of different arguments none of them actually any commodities reduce any

out or so i did they don't look sophisticated because they are difficult but fundamentally deny multan the same all of them are to static. not in century thinking that economists have been stuck in prague while the real world has been the wrong see if you think the because i've noticed that you are you specifically have gotten a lot more attention obviously on this show and other shows even on the b.b.c. and other programmes. 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 size are listed in an enormous economic process which you can probably attribute to people believing this conventional if possible collide like alan alan greenspan we just had a lot of money to go because they believe that bailout is as your psychologist if

you said a while ago they allowed all these social trying to. vote themselves into believing the beneficial and actually good at the biggest economic process since the great depression so without that i wouldn't be getting any apply at all. and we are hearing they're getting really 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 and you might not be able to jumping ahead a room of that is one of the one of the biggest magazines in the world maybe in the near future coming out and saying wash intra bank still using these models not looking at other ones and i've been inside central banks and had three that have invited me to 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 wire and blogs by the junior name of possible stop equipment imagine any other why they think about the global bodily the media langbehn want to move all the state 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 quite conservative in the economics they respond to say where exasperated you god's change will change here and i think it's really because the you 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 they're mocker ties ing modeling for all so steve king thanks for giving us that they 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 today 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 and dad catch any show you missed it leave us comments are new to or in h.d. on hulu and from everyone here thanks so much for watching come back tomorrow and

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