good afternoon and welcome to prime interest i'm perry i'm going wish let's get through today's headline. i don't understand gold yes that's what our beloved fed chairman actually told congress today maybe that's why germany wants three hundred tons of it back that would be the goal of the fed is holding on its behalf we have just one word for you finance minister. but don't worry chairman bernanke he assured the s. and p. five hundred now it all time highs that the monetary q.e. stimulus will continue until the economy can stand on its own feet. position is quite poignant for an economy isn't it we. talk about the mortgage jubilee with economist steve king later in the show and jamie diamond can't seem to find its

share of that isms of the hot seat j.p. morgan is about to shell out a few hundred million and a settlement with the federal energy regulatory commission that would be for allegedly manipulating energy markets in california enron style barclays already battle for four hundred thirty five million dollars and a similar settlement for j.p. morgan in what amounts to well just one sixtieth of its twenty six billion dollars and revenues reported last friday no word yet on how much of it actually profited from allegedly bilking american oil with the subprime is back the consumer financial protection bureau just strengthen mortgage underwriting standards which we don't fund fall under the new rules don't worry that's because the guy who helped write the rules that the c.e.o. to be just went private and he started a company that will service the very old regulatory body you know excludes. or even provide. interest only financing because it worked out so well in two thousand and

eight you can't make this stuff up breaks down the boom bust cycle later in the show. and here is what then your ryan interest. when it comes to economic textbooks and economic schools of thought we hear a lot about keynesianism but there are actually many more flavors available in the economic marketplace earlier i spoke with professor steve king author of the bunking economics and i started out by asking him what he describes as the different economic religions. all start with the dominant one which is called neo

classical and that school of thought includes people who in the media would be called kinds and want to paul krugman and at the other extreme would be called what is termed freshwater economists. as opposed to salt water law crude and they are also now classical by start from the same basic idea of how the economy operates and how people behave in the economy simply have different nuances of want to call the other when they call themselves kinds of people have been told kinds as he was interpreted by paul samuelson and there was such a reaction by. lots of kinds to what they saw as complete distortions of kinds that another group broke away completely and call themselves opposed kinds again and they buy some souls much more in the original works the kinds of good and they have to see how to plan uncertainty so as neoclassical which is the i thought the largest group. which is a protest group that goes back to the kinds talking about on the. in the end being

out of equilibrium and then is an austrian school of thought which comes out of people. mazas and so on. and right and wrong and they're actually close in since the theory of value to the new classical zz but they're closer in terms of how they talk about instability and capitalism and disequilibrium and the behavior of finance to the post so there's a quite a quite a mess there and a very very hard to get reconciliation across that the austrians they they talk a lot about the ordinal value of various things ordinal value preferences and the marginal in the marginal person how does that fit into the keynesian world or the post keynesian will go well that's quite consistent because the neo classical zone and the austrians both believe that people are out there is utility maxim oslo's and the firms are out there as profit maximizes and we have to work from the individual level up to understand the economy and that's how they think about it the post kinds against don't really have a coherent theory of value like that but in fundamentally that is objective factors

in the economy cost of production determine processes profit you take the whole idea that you can maximise the saying is being naive you which are which doesn't take account of uncertainty about the future and you you can't maximise what you've done and therefore you have to behave in the face of uncertainty and therefore you'll take rules of thumb and you'll extrapolate current conditions and so on and you'll go with the hood so that is much more an idea of being able to follow i'm sure in your how you slot into society in the classical and the austrian view we're supposed kinds of much more lock it aside it's an uncertain world out there and you know people go in group behavior much more socially class all right in how they think they will behave and people behave in the face of fundamental uncertainty about the future so they able to extrapolate they want they won't be behaving behave sensibly given what they know but what matters most is. what they've done

let's talk about the role of banks it seems that they are excluded in a lot of these models and this is something that you talk a lot of yeah this of a little bit if they did the point which would you would think the crazy people would be the ones who say you can analyze capitalism without including banks state money well you're right and they're the classical they dominate the professions so the standard theory of the bank is to the crude ones to crimes and so on and why back in samuelson as well said you can model capitalism as if there are no banks no dead and no money and we all do bottom and we're saying that i capitalized on you know what if you're analyzing interesting little fictional world but it's not the real world so you must include banks state money in the way a model of the economy and when you do that of course the blood banks too has dramatic effect upon how the economy help writes and that's what i fundamentally analyze what we actually have a chart here of yours and it is a u.s. private debt to g.d.p. ratio that has five years in private debt reached record highs starting with this graph in one thousand twenty days so are you still expecting to see a private debt deal leveraging what would trigger this. i'm just working with

richard by going the in the governor woods foundation right now to reveal all of those figures because we found them actually including some bank that i shouldn't include in the profit it is going to be changing that child has some point but yes there is we have got to a level of debt in terms of the private sector which are probably three times the level which i think is sustainable in the long run so we're going to see de lay bridging which is roughly equivalent to one huge issue a pay driven out of the economy but there can be periods where it will go back into borrowing money again and one reason we're actually seeing a bit of a boost to the economy right now is people to relate particularly businesses are borrowing money again so does this have anything to do with fed policy i think the fed policy is encourage people back into debt again i mean for fundamentally don't realize this but a major reason why the economy's recovered to some it's very very monitor great growth is that by all the stimulus that the gov the states pumped in it slowed down the write a private sector deal a bridging and then and courage to hold back. and

a bit debt to buy shares in bought property and so on and that's actually giving a debt finance boost the economy that is making things better than i would be without the debt finance boost but of course we're getting back into the assignments territory again yes and what do you think the trigger event will be if any that causes this actually to leverage is that a crisis of cons for confidence in the us dollar is it in europe is a china it could be because the real goal of the whole of external things but can also be the internal one that. because when you're borrowing money and you are spending additional borrowed money is stimulating the economy but at some point people stop to worry about the difference between their income and the level of that they've got and so if you get over locked in so people to take on more debt then that can cause a downturn and that itself can happen simply out of things like that as it did during the property bubble people borrowing money to buy houses and lots of people losing money on that tried they only managed to get out of there because they could refinance as a camera to give a vehicle to arizona i said once once you get a full training that right of growth and have

a process that can trigger people to stop losing money and then the borrowing the acceleration of borrowing which is necessary to keep it going on slows down and so simple slow down the right of growth of the change and it can be enough to trigger a downturn and that's what happened back in two thousand and again in two thousand and six with the housing market it took to two thousand and eight before the right of change of debt went from rausing to folding and then when that happened that's when the downturn could write and specially we saw with the fed in two thousand and four two thousand and five keeping interest rates really low record almost record low at the time one percent for over a year and now we're almost five years into zero interest rate policy what of where can we go from here is the fed stuck in a perpetual cycle well because the fed want to which i think they should have done should have actually got in there and rescued the debt is not the creditors try to keep the banks alive the lousy dead rather than getting the debt is out of it i should never have been tossed to in the first place. so just thinking i can do it

by increasing the reserves of the of the banks and by not directing money to main street rather than wall street we're going to continue falling back into this crossers and they don't only whether they're proles she has work has been flooding us that process that was a deliberate policy yes and they have them and we see rising stock market prices we actually have a graph here it's the ratio of margin debt on the new york stock in to g.d.p. as well as the dow jones industrial average and you might recognize this. one. because you can do in the back to the one hundred twenty s. and it was a similar story this will go bad i think this goes back to my forty's or fifty's but it's the same story exact the margin debt drops the level of stock prices and it's a positive feedback loop if you if you see the stock market willing tack on modern day it to gamble on it because you tack up the modern day to leverage up the asset process but the positive feedback loops just like a sound concept where somebody puts the mark too close to the speaker and what

happens is goes when and then a bright and that's what we see happening in the roses in the folds there are the positive feedback between the level of leverage in the level of asset process it's all about the liquidity it's all about leverage and unfortunately we have let the banks get away with the dramatic lee excessive levels of leverage which works for a while and then causes a collapse and that's why why the amount of capital of society what is the right way to run a capitalist so i didn't strike the banks and how do we do that from a regulatory perspective i think regulators can do what i think regulate is a. way to get seduced by the banks of it's homicide may happen with the regulators and since the great depression what i prefer to do is to set up rules that a quarter of them about the maximum out of leverage that a bank for a particular topic purchase so i have got a call one thing a cold pill stands for property income limited leverage over. and that is that right. with the banks being lending supposedly on the income of the bodies for

a property the maximum they can lend is also control. between the income of the property itself and the amount of money dick and lynne so i give you and if you are right now you're not competing over some property insurer in washington somewhere and the property and fifty thousand dollars a year and ranch that's irrelevant to us and the e.u. and i will fight over it by getting trying to get high leverage with the same income and the one of us would win with want to get the hadal of a little leverage from a bank which makes us want. what i want to do is change of the side the banks can only end up to a maximum of sight ten times the rental income of the property so that property on fifty thousand dollars a year most either of us could borrow is fos million dollars and then if you want to get them all the knowledge of what you've got to do a sizeable money. so that's that's what i want to do all i want to stop the positive feedback between the leverage and asset process and you can do a similar thing on share markets as well steve king this has been fascinating thank

you so much for joining me you're welcome. coming up area and breaks down the boom bust cycle so pour yourself a tall glass of animal spirits then i do will steve keen on an ancient tradition with a new twist called the mortgage jubilee. i would rather as questions for people in positions of power instead of speaking on their behalf and that's why you can find go larry king now right here on our t.v. question more.

pretty much the feel good luck you won't find it here if you're looking for relevant stories unique perspectives in time plus stands guard.

senators warren mccain they can well in king recently introduced the twenty first century glass steagall act to rebuild at the wall between commercial and investment banking this bill would reinstate regulations that were repealed in one thousand nine hundred ninety that some have finger as the cause of the great recession so there are warren was recently interviewed about this legislation and feel strongly that these regulations need to be put back in place. since they're going to have you know i feel insurance you're going to have savings accounts and checking accounts they really do have to be walled off remember we have these three years following the passage of one stiegel in which we had. a number of bank failures the whole boom and bust cycle from seven hundred ninety seven to one nine hundred thirty three went away and. so let's break down the boom bust cycle that senator warren of reference. the boom bust cycle is

a time period characterized by sustained increases and several economic indicators followed by a sharp rapid contraction some schools also call the business cycle theory and there is debate among what spurs these peaks and troughs in the economy the austrian school of economics says the boom a stimulated by the federal reserve a stunning blow interest rates and is perpetuated by federal reserve fractional reserve banking which allows banks to expand credit be on their own assets and customer funds this additional creation of cheap money encourages investments that would not look profitable otherwise these mal investments grow stimulating the bubble as prices and inflation rise eventually this expansion of credit over reaches the capacity of capital and labor in the economy and the bubble pops leading us into a recession economist dr mark four and wrote that during the housing bubble interest rates on thirty year conventional mortgages were at their lowest levels

ever during the post gold standard era when interest rates fall asset prices and real estate prices tend to rise and vice versa in other words the fed's low interest rate policy stimulated borrowing that was steered towards the housing market coupled with other government policies such as tax breaks and government sponsored credit corporations a bubble was created eventually the high prices couldn't be sustained and the bubble popped in two thousand and eight another side of the story is told by economists who believe that the boom bust cycle is mostly attributed to psychological factor is a subset of neoclassical economist claim that the boom is driven by overconfidence in the market as investor confidence increase is they take on riskier investments this leads to a collective consciousness among investors the fueling speculative behaviors and the bubble grows in a critical event turns investors confidence sparking an economic downturn exaggerated by negative economic reports and media cover. the economy enters

recession or depression the argument is that the housing bubble was driven by increased confidence in housing and the media brought speculative attention which encourages real estate to rise in the bubble started to inflate as investor confidence grew spurring asset price inflation and the housing markets with this rise cannot go on forever investor confidence eventually dropped contagion caught on and brought the economy into a recession to get historical perspective let's take a look at a graph of u.s. g.d.p. the shaded areas represent economic recession and as you can see each recession is preceded by an area. a period of growth these are the business cycles the boom and bust periods and the economy this graph only goes back to the one nine hundred seventy and fed responses to economic downturn since then have been to spur the expansion of money and credit in the economy but it has had marginally diminish

. facts we can see that each recovery never reaches the of what was before. the fed is currently injecting eighty five billion dollars a month into the economy but economic indicators portray an economy that is simply limping along. so getting back to the glass steagall bill some believe there should be a divide between investment banks and commercial banks when this law was repealed in one thousand nine hundred nine and then they will holding companies to on both securities firms and herschel banks senator warren herself has stated that the repeal of glass steagall was not the proximate cause of the financial collapse leading to the bailouts however we might agree that it was the icing on the cake and that's how we break down the boom bust cycle now let's get to today's daily tool.

joining me for the duel is steve keen author of debunking economics thank you for joining me here welcome our first topic you were in a little bit of a duel yourself with paul krugman would you care to enlighten us with you know what is this all about all of began last year when i was speaking at the institute for new economic thinking conference and christmas supposed to be there as well so we had to exchange papers and my pipe said that christmas publish a paper originally called the i mean ski couth theory of debt and i said we don't mean well then minsky was the guy gave us the first sure thing fischer talk about it called that is what caused the great depression he said it was too much debt and fall in process at the same time so people reducing their debt levels process fell even faster and it got out of control because income fell faster than debt and the huge process and that was the. the decide that capitalism has an inherent

instability with its financial system and i build a mathematical model of that but we also saw in the twenty's the federal reserve which kept interest rates pretty low and we saw some would argue especially the austrian camp that it was the federal reserve that blew the bubble does minsky have a place outside in a non fed yeah i mean they're not in center and working on those sets right now with the with the governors what foundation and what's called the dead economics program and we. could in the i mean hundreds every ten twenty years so this is a description of capitalism with or without a government sector. and if you what the government does is provide did provide spending when there's a downturn that wouldn't corporations to pay their debts so it actually minimize the damage it's worse in the i'd in century without the government spending because then when you will fall into debt all there's nobody to pump you out of that again what we saw in the especially during the civil war we had the national banking acts and we saw a cause i federal reserve system or at least the prototypical central bank started

and it was based on the buying of treasury debt and that was exchanged between banks is apostle and we also had moral hazard the government also build out a number of banks during these financial panic i would say what the federal reserve does it's simply institutionalize moral hazard in fractional reserve which already existed so it only that i think the fed reserve has done a lot of that not to greenspan right now it's gone astronomical on on the institutional moral hazard the moral hazard it was just in banking because banks profit by creating debt and if i can persuade us to borrow borrow money. into the mississippi scheme or anything like that long before you can talk about clearing houses for the banks right i'll do it and that's what the naive view is of people you know the austrians at one extreme you yeah that the other side it's all the fault of the government sector without the government everybody gets that and also the section of supply and demand and nothing goes wrong with that. works with that

vision it's got some sort of sense not a lot but some sense in a production world banks and have surprise constraints of supply and demand banks create money by double entry bookkeeping so when they double book entry keeping. they double the books. ok let's move on to another topic and i have ok you're talking about the jubilee here can you explain what this is for our viewers historically and michael hudson is the expert on this of course as you interviewed earlier if you go back. that they had a. they realize that debt tended to grow as exponentially a compound whereas agricultural productivity rose and then flattened out and what they have they're basically is there's a market as i could call this the right to think of a graph showing exponential rise of bit. more draws of productivity and then bang they cut the date back to zero again so every fifty is notable schol day it was institutionalized in those societies we can't do that now because rather the money

lent is lending money to peasants which was the problem back then we now have banks which is not only lent money to borrow was they've also sold that debt to people who thought that was cyprus scramble the whole thing together so i want to unscramble that egg and reduce the level of profit dead but you can't do it just bob all of the dead how do you do you securitize the entire market and what you have to do is buy the debt back off the public using the federal reserve capacity to create money and they certainly have the capacity to look at the capacity so what they could do is transfer out that giving money to the banks which is what's going on the quantitative easing they could do what i know a whole scheme is now calling quantitative easing for the public that i first called aaa and was a kind of that was what tarp was supposed to be for in the yeah place yeah it was howard more good news because if you if you bought if you could get the money to the public i would give it on the condition that if you have debt you must pay your debt down no choice so if you're in debt you've got to pay your debt down but if you're not in did you get a cash injection comp and sightsavers for the fact the need to have bought off the banks gets reduced in value. so cite is don't lose what you actually basically

doing is re setting the system to have more money and listed it created money because we a lot of thought to much debt created money to be made by the banks but doesn't this just in the in general more moral hazard in other words people understand that there's going to be this true believe in they'll just be and they'll just be more likely to take on more debt in the future will hold that it will be explicit out of control how much banks can lend how do you that's again. the property income limited leverage for real estate. is that the share market or controlling margin debt to make dividends rather than by some share prices you have to force the banks to limit their lending to the income earning capacity of whatever spain went for who gets to be in charge of forcing these banks and this is they're not just part enough to do this the judge is the best because a simple little rule says you can't lend will intent on the rental income of property any more than that you bought spend six months in the klang up ok but something like that

a little bit arbitrary in other words these are thresholds that you're saying are important but why not go to eleven or twelve times or eight times ultimately being not a bad idea you have to have to make it sustainable the some level and i'm afraid. it's at some point bankers have to be told no deal and they've been far too good at saying deal or no deal let's push it further and push it further some point saying look we know what you guys are on about you might think it's a very subtle way ok i'm going to quote you on that arbitrary is not bad thank you steve clean for joining me if you want to wait until they show be sure to like us on facebook at facebook dot com slash prime interest you can follow steve king that profile steve kane and you can follow me at english p.r.i. thank you for joining me for today's daily duel you're welcome.

and there was a revision as to day here of prime interest but we began with the great abandon of great ally of congress the goal yorks chairman himself couldn't wrap have beer in around the gold bricks the fed holds out ever and don't tell fannie and freddie sometimes back what it is and this time the leverage will be televised speaking of the leverage of a special thanks to its stephen king for helping us the vulcan decades of suspect economic taxonomy well thanks for joining us today and make sure you come back tomorrow from everyone at prime interest i'm terry i'm boring i have a great time. actually

what happened that day i don't know but a woman killed. piers later is when i got arrested for a. crime i did not do. we have numerous cases where police officers lie. people to confront the police officers don't beat people anymore i mean it just doesn't happen really you know in the course of interrogation why because there's been this is like many known. because a psychological techniques are more effective in obtaining confessions than physical abuse and they were taken they could get what they wanted they could say what they wanted and there was no evidence of what they did or what they said.

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coming up on r t a judge makes a major ruling in the bradley manning trial will the wiki leak or face the aiding the enemy charge we'll have a report from for me just ahead and a lawsuit against a key provision in the india a has been thrown out there are fears that the provision allows that attainment of anyone anywhere suspected of helping terrorist organizations more on this court decision coming up and the first week of ramadan in iraq has been deadly insurgency and sectarian violence have created a sky rocketing death toll more on the chaos engulfing the country later in today's show.