good afternoon welcome to prime interest i'm bob english here in washington d.c. and here is a story worth telling today is it two thousand and eight redux that is the question on everybody's mind are we in store for another financial crisis but handicapping the ultimate that tail risk which would be well the end of us dollar hegemony has been the death knell of many trend forecasters over the last few years so let's look at the evidence keeping in mind that clever line from mark twain about history rhyming not necessarily repeating you know when the fed stopped buying bonds and instead sold them in the summer of two thousand eight hundred markets seized up there was a mad dash for cash which precipitated the lehman disaster now we have talk of tapering another wind down of bond buying but so far it's just talk the fed announced it's requiring banks to hold more capital and reduce leverage all part of

basel banking regulations and the word from our fred chairman above is that banks need to lower leverage later period and boring will break down hypothecation and explain where all this leverage comes from now we know the banks are borrowing on the cheap and so is uncle sam banks to them so what happens when the thirty year downtrend in interest rate reverses we'll be talking to karl denninger about this in just a bit heading east we see chinese short term money markets are under incredible stress there yield curve is flashing recession if not depression just in underhill will dig into the nuts and bolts of this two thousand and eight ish development finally we'd be remiss here a prime interest if we didn't mention the winklevoss or is that winkle by twins but they're creating a bit quaint for us so that yes it means a bit coins i.p.o. soon you'll be able to short the coins side of the apocalypse probably not but we're sure this has j.p. morgan's attention so without further ado here's what's in your prime interest.

i. in june interest rates on ten year treasury bonds and mortgages rose to the highest level in fifteen months despite this we have been in a thirty year downturn in long term interest rates earlier i spoke with karl denninger a blogger at market tenant ticker dot org and author of the book leverage so i asked him first about what lies ahead for the fed's near zero interest rate policy . here's what he had to say i certainly can't go below zero no ok we're going to mario draghi wants to. well even that only buys your version heard it time because

you can't go very far below zero point zero where there is a revolt among the people who have capital so certainly you could try to extend that like mario has suggested i don't think it's going to work out very well but the general problem with the declining interest rate environment over time is that people get very accustomed to the idea that they can turn a leverage crank and by doing it they essentially print money. people talk about central banks printing money but in point of fact it is the commercial banks that are the ones that are issuing the unbacked credit into that kind of environment. doing though i'm sorry that gets to the money multiplier and everything people talk about the fact that money velocity itself is not a factor what is your view on this. i think that people are looking at the wrong thing you have to look at the sum total of money in credit in circulation not just currency everyone wants to talk about things like m one malta no you know the other multiplier factors but those are based upon for example in one or m two and they

don't take into account all the credits lying around in the economy but the b.'s a card in your wallet spends exactly the same way as does the twenty dollars bill so anybody that gives a bit of thought to this should come to the conclusion that you have to some those two things together and nobody does the the problem with continuing to increase leverage into a declining rate environment is that essentially you're robbing peter to pay paul you're taking a forward liability in handing it to somebody and pocketing the assets side of that in your own pocket so you haven't actually changed the outcome other than the fact that you've deferred it it's the it's the wimpy paradox from the popeye cartoons where he says i will gladly pay you next thursday for a hamburger that i wish to eat today then thursday comes and you turn the crank and get into an all over well it is a change that sooner or later you must pay for the hamburgers you certainly do have to pay for those hamburgers let's talk about the money supply there's m one m2 but

there's also m. free which is the broadest money supply aggregate in the fed no longer computes that and that includes elements of the shadow banking market so what are we seeing with these money aggregates that are not being computed by the fed now. three is meaningless i actually support them not reporting it because doesn't mean anything all you have to do is take a look at the feds see one and some up all liabilities all the debt it's in the system and that tells you what's really going on because every asset every dollar that is in your wallet whether it exists in credit or physical form is in fact somebody else's debt just a lot of what he's piece of paper audio wallet says federal reserve no right on the face what is a note a note is an evidence of indebtedness so it's not very hard to figure out what's going on the fed publishes all the information you need every three months and unfortunately most people don't pay attention to it let's pay attention to bernanke you right now he's not going to jackson hole this august he might be out of

a job next january because he doesn't want to renew his term what do we have in store for the fed is going to be janet yellen geithner who to be. i don't know andy camping now it is somewhat difficult if yellen is elevated it would be the first time i believe that that's ever happened yes for a vice. right so it would be a very rare thing indeed i don't think geithner has any chance of being elevated i'd be very concerned about somebody like larry summers the job all boy we also have only fisher i mean the head of the bank of israel what about stanley fischer. well there are a number of people that i think would be very interesting picks but it's my position that the fed is essentially boxed themselves into a corner and the bank of international settlements has made this rather clear they've said look you guys turn this crank you maintain discredit issuance by essentially absorbing all of the net debt issuance of the federal government over this four five year time period so you've allowed that to happen in you continued

to deceleration towards zero of the interest rate curve but now you're at zero zero which is what it is what are you going to do it zero and we've seen it is possible to break the bank i mean george soros did it so there is a precedent i mean can you talk about that. you know that's the problem is that the fed as it continues to take the leverage on to its own balance sheet becomes more and more at risk that's not to say that the fed would outright cease to exist like a commercial bank but i don't think it will either. help with the disruptive effect that would calm the recognition of insolvency would be rather large you could see interest rates spike in four or five hundred basis points in the space of a few days we've certainly seen that kind of thing happen over greece and other places in the past it can happen here in the united states and once the margin clerk is on the phone and he wants more capital you either poke it up or else c.e.o. liquidates whatever you have now live and let's talk about interest rates by king

by for a five hundred basis points which is a full four or five percent i mean it's incredible to think about and at that point the fed basically still has to pay banks to keep all these excess reserves in the system is a possible that the fed could go cash flow negative that it could actually have to realize capital losses on its investments. sure but dad you know they'll just defer those and what will end up happening is that they will remit anything to the treasury for the next hundred years. and in terms of functional insolvency it's different than being in a position to be capital negative the problem is the credibility loss that happens in the fact that once you're on able to continue to manipulate the market in that sort of fashion rates go to where they're going to go and everybody else in the market doesn't have the luxury that the federal reserve has of not meeting margin calls because the federal reserve was the margin call come from a comes from treasury and treasury just declines to issue it but when you have

a margin call coming from your broker you can't turn around refuse to answer the phone doesn't work that way no it's really doesn't work for most of us like that let's talk about fannie and freddie there's a lot of talk about them being wound down and there might be somebody new who's coming in to turn things around there might even be a new mortgage security giant that is sponsored by the federal government are we going to see anything different. i don't think so the the real problem here is that we have had a thirty year history of driving asset prices higher not by productivity not by improving the technology that we have in our you know in our economy you of course some of it has come from the new personal computers over the last thirty years and things like those yes but the largest quality quantity that is driven asset prices higher has come from credit expansion and that requires a continually declining interest rate environment so yes rates start to reset asset prices come down and the last place you want to be is leveraged when that kind of

thing happens. you know it's it's like anything else when you use will average you gain a percentage for each time you turn the crank but when it will moves against you that multiplier works in reverse exactly the same way it works to your benefit on the other side so let me ask you this question where would you be in terms of assets where can people protect themselves against what you see as this rising interest rate environment which is crippling in terms of the treasury debt. tangible things that you can either use to produce in our difficult attacks and that's that's a tough call ok because remember as the government gets in trouble one of the things that it has a history of doing is trying to tax its way out of problem capital controls. so you watch enjoyable things of course intangibles such as what you have in your head and what you're able to produce with are very useful and believe it or not so is cash because at the time that people have to puke up assets to meet margin calls you

have opportunities to step in and buy things that are productive people during the depression that had capital who became very wealthy not immediately but over the space of ten or twenty years because they were able to buy things like manufacturing facilities and you know in hard goods at five cents on the dollar we saw that in two thousand and seven and two thousand and two i mean there were a lot of deals to be had at the time we have about a minute left so let me just get your take on apple and this whole deal with you know offshore taxes what what can apple do to regain the faith of the people. i don't think apple can do anything to begin to face the people in evangelical head that they had that much of their adoption of the last five years is around anymore . frankly i haven't seen any course way of true innovation out of the company and in the last three products cycles so ok we have thirty seconds left we have

bernanke he might be leaving the fed we have somebody else who's going to come in what is the future of the banking system of the u.s. are we going to see real change is it possible. that we have to it's mathematical certainty you're going to see a rising rate environment over the next ten to twenty years and it won't be all at once it will be a straight line just like it was in a straight line on the way but this is the changing dynamic and there is nobody in the business world that is younger than sixty who has lived in that world at this time. that was karl denninger host of the market took a blog and author of the book leverage stay tuned because parian is breaking down really hypothecation how leverage begets leverage and then just steam will charge china and explain why their interest rates fracture is flashing warning signs and i will for the first time ever dual abby martin of breaking the set about student loans and money in politics.

i would grab as questions to people in positions of power instead of speak on their behalf and that's why you can find my fellow larry king now right here on our t.v. question more.

looking pretty down the field that you won't find it here if you're looking for relevant stories unique perspectives on top my stands start. to follow up with our conversation with carl denham sure about that do you celebration of the yield curve toward zero we turn to prime interest producer justin underhill so justin what insights can we glean from today's interest rates

well the yield curve can give us a lot of information even though it is heavily shaped and create crafted by central banks and the fed has been conducting purchases of long dated treasuries which have been pushing these rates down and with the amount of intervention it's hard to know exactly what the yield curve would look like with market forces driving the prices and currently it looks a little something like this so this is as of yesterday with three months one year five year ten year twenty year one snapshot in time and it makes sense that the three month olds are lower than let's say ten year yield because lending your money out. short period of time is usually less risky but when the yield curve doesn't follow the shape there's usually a problem and this is called an inverted yield curve where short term rates are above long term rates and this is actually a snapshot of the yield curve from march twenty second two thousand and seven and this could mean that investors are more concerned about short term risks and

they're looking for a safe storage of money and so they're putting their money into oil longer dated treasuries and historically longer these inverted yield curves have meant a sign of signaled a looming economic recession so when we take a look at the yield curve in china right now there's some cause for concern we do see an inverted yield curve here we can see that short term yields are actually about one hundred basis points above the year one year rates and this leveled out a little funds last week when the three month yield was above five percent but it's certainly a stark contrast to just a few weeks ago when the three month yield was around two point seven eight appear two point seven percent and the current inversion of the yield curve is most likely due to concerns in china right now over bank liquidity in the system well guess what we had a flattening and actually an inversion of the yield curve here in the u.s. in two thousand and six two thousand and seven was it taken seriously well actually i do have

a quote from ben bernanke gave and he said that i would not interpret the current flat yield curve as indicating a significant economic slowdown to come well this is kind of crazy right because he is an economist for sure meaning that he was at mit he believes in economic models and suddenly he's saying this time it's different yes what he actually was saying was that there was a global savings glut and so foreign investors were actually investing in the long long dated treasuries pushing those rates down and that's why we saw short term results above long term yields exactly justin thank you so much this isn't just a numbers underhook prime interest producer thank you.

as estimated that shadow banking accounts for somewhere between sixty two hundred trillion dollars following up with previous discussions around shadow banking i wanted to take a minute to explain one of the major practices within the system it's really hypothecation which accounted for half of the shadow banking sector in two thousand and seven so let's break down. which is the technical term for a borrower pledging collateral here is the definition of population is the practice where a bank or broker pledges collateral to secure a debt or a borrower as a condition precedent to a loan and has a third party plods collateral for the borrower to explain further let's look at example of. a homeowner who enters a mortgage agreement posting their home as collateral while they're paying off the mortgage loan now the homeowner retains ownership and continues to live in house

but is hypothetically controlled by the bank and the bank of course has the right to foreclose on the house if the borrower defaults now. is when the bank then reuses or coast that same collateral back and to back it's own it trades and borrowing and in this example that would be a mortgage backed security and then the next bank can take that same collateral and post the security and it can be re hypothecated again and again and you can see where this is go weighing the risk associated with the cation as that is essentially a house of cards so if one bank within the daisy chain it goes under multiple entities are counting on owning the same source of collateral and because the collateral is not. it can be off balance sheet or incognito bridge here's how david stockman explains it. cards this. layer upon layer of creative.

borrow money against it by some. higher use that is called. the creation it is the same thing as fractional reserve banking. no problem once you get the string going. similarly to how banks use reserve banking to expand the money supply prime brokers and leverage collateral the rules on every hypothecation very on the jurisdiction of the institutions and according to an i.m.f. working paper in the united states a broker dealer may hypothecate up to one hundred forty percent of the customer's debit balance but in the united kingdom and unlimited amount of customers assets can be read the key to it and there are no customer protection rules this is a major factor into why we see more hedge funds for funding in europe and the u.k.

and in many times the u.s. institutions assets are transferred to their subsidiaries that will allow for greater bridge member lehman brothers they hold the record for the largest bankruptcy in u.s. history with over six hundred billion dollars and has set the firm internationally hypothecated twenty two billion dollars worth of assets from their hedge fund clients and when lehman brothers international europe filed for insolvency there were little protections for their european customers now with respect to the m.f. global case that we've been discussing here where you hypothecation could pose an explanation and where the missing customer funds it and that global was involved in a complex repo to maturity trades as confidence in m.f. global declined as likely that the counter party started demanding higher collateral and what m.f. global did that was illegal as they dipped into customers. fines that were supposed

to be and segregate accounts so when m.f. global went under multiple counter parties all went after the same leverage securities obviously not everyone concedes the same security at night magic these hypothecated trades disappeared like a game of musical chairs and the saddos of the financial industry this is the breakdown every hypothesis and. joining me now for the dual is the host of breaking the martin thank you for joining me here on the one sided right now first door of recovery according to mr n.b.c. the republican party has thrown its weight behind

a lawsuit aimed at demolishing a key remaining component of campaign campaign finance regulation and this is the limits on political can contributions a supreme court ruling could result in an unlimited amount of money pouring into politics i think we're on the same page here but we might it arrive at a conclusion by two different paths so what's your take i mean my take is that this is the last bastion of some sort of semblance of reform on this this absurd bill that basically decide that corporations are people will pave the way for these super pacs they can just have unlimited amounts of money channeled through these entities really the only thing they have left is are these limitations that now they're saying that they can be taken away so now it can just be millions and millions of dollars to an unlimited amount of candidates and why shouldn't corporations be people because they're not exactly and that's why we don't have any that's why we don't have people in jail right now because in the financial industry which is what we cover here i mean we have all these bankers that are run amok and john corazon is just facing civil charges i mean it's really ridiculous the extent to which a lot of these rulings. i've gotten so is there any is there any hope for this you

know i think that we're going to get worse and worse really the issue here is money and politics and i'm sure that you you probably have a different opinion than i do but i think that elections should be publicly financed that's pretty interesting so we take money from the taxpayers and then we just use that to finance the people who actually get into office and they get into office and then what do they do with the money they're going to give it to their cronies all the time or we rather have over fifty percent of our tax dollars going to fund the military industrial complex i mean. well i'd rather have a small percentage and this could be a limitation to it is a very small percentage of taxpayer dollars to go and fund just a normal election set up debates where every candidate are heard and that is absurd dog and pony pony show not production where you're seeing it like the oscars and glared glitz that we don't need that we certainly don't unless ok unfortunately we're i think we're in a little bit of agreement there so i'm going to move to the next story student loans we have student loans and the rates doubled on monday according to a washington post op ed this is not a disaster president obama made the expiration of

a three point four percent student loan rate a big campaign issue last year and he traveled across the country warning of dire financial crisis first started struggling students congress extended the rate for a year but now it's expired student loans what's your take my take i mean take this little bit outside the box and i say that education should be free. absolutely like our european car when it's you know little bit better once again you know the fifty percent take it out to kill people and for death and destruction i'd rather it be educating people and helping society well here's here's the thing is that the government is subsidizing student loan rates and one of the reasons that people are going into debt eighty thousand one hundred thousand dollars at a time and coming out of school with no prospect of jobs is because there is too much money pouring into the university system and that all happens from government subsidies so how does it work that public education should be free over here well done first of all all these elite institutions are not paying taxes i mean there's all these loopholes that prove. i'm actually giving back i don't i don't agree with

subsidizing or at that you're doing this i'm not going to talk about that no but i mean universities to pay taxes but i think that overall i mean this trillion dollar student debt bubble that we're seeing at the bout to burst is just showing how horrible the education system has been in this country well and certainly we have people that are problem probably shouldn't be going to college in the first place who are coming out of school they can't find jobs and maybe we should pour more money into some other socialized program that you would be in in favor of but you'd still like to tell me how the european as of just a little bit better than the u.s. what bob look at the quality of life i mean we have to look at this the state is country where thirty two an education i mean would say your solution is to actually i would have balazs the government getting in the student loan and you just get all privatized education and that would be better exactly really so how come we're seeing the rates of private education actually worse i mean the learning is not so black and white bobbie learning is very i have very catered and you just got a last word on the table ok i'm going to have to wrap this but this has been

wonderful now if you want to weigh in on today's show be sure to like us on facebook at facebook dot com slash prime interest and don't forget you can follow abby on twitter at abby martin you can follow me at anguish p.-i abbi thank you so much and when you. i. i. it was a whirlwind tour today of prime interest so we're going to have to keep this a little bit shorter than usual we took a trip to the city of london to look at re hypothecation and we just said it to china to look at some disturbing interest rate charts then we made a round trip to the u.s. to break the set with abby martin and peer into the bubbly student loan interest rate thank you for watching. sure to come back tomorrow and from everyone here at

prime interest have a great night. and . more news today ball and says once again fled the. scene these are the images cold world has been seeing from the streets of canada. showing corporations are on the day.

coming up on r t edward snowden's travel plans are still on hold the former n.s.a. contractor remains in russia up he's now seeing al mysti from more than a dozen countries and it looks like venezuela may be snowden's number one defender a deeper look at that up ahead. and it's now day fourteen of the bradley manning trial it's the defense's team's turn to call on witnesses and a bit to help the whistleblowers case we'll get the latest from fort meade coming up. the streets of egypt are still packed with protesters demanding for the removal of president mohamed morsy and now the nation's army has offered morsy and ultimatum to resolve the crisis.