good afternoon and welcome to capital account i'm lauren lyster here in washington d.c. and here are your headlines for february twenty eighth two thousand and twelve ireland were for the lead hold a referendum on europe's new fiscal treaty first stricter budget discipline the former prime minister is coming out against it say hey hold on a no vote could course ireland out of the euro now we've seen referendums called for before in this euro zone crisis and didn't seem to end well last time for democratic self-determination so will this be yet another case of this economic crisis is just too much for democracy name a story of we need technocrats to navigate this world.

cup. or is it your ole and are zombie banks feeding on governments turning them into zombies to block that question and talk about a low quiddity crisis in europe look at that wait for it beer all over angela merkel now is all that cheap liquidity generated by the e.c.b. for euro zone banks going right back to germany as the weaker ones like italy need to keep going back to the bar just to keep their glasses from draining so will german banks be the prime candidate to engage in the upcoming l t r carry trade will break down carry trade in the back by popular demand word of the day and what can we learn for a while e. coyote here.

well in economic terms he just had a minsky moment and today will have a few war moments talking minsky and what he can teach us about this new upside down world that we are living in with our favorite economists from down under steve let's get to today's capital account. so now dublin reportedly hold a referendum on the eurozone fiscal compact so now according to the financial times this is plunging europe into months of uncertainty and potentially placing a question mark over ireland's membership of the euro now the former prime minister of ireland is out saying this is a bad idea a no vote could have too big

a consequence could mean ireland's out of the euro we can't be rattling those markets got to worry about the markets can't shake the bond markets we know how powerful they are and let's remember the last time we saw this in the euro zone crisis in greece when athens called for a referendum it was pretty much the last time we heard from the country's democratically elected prime minister pap and draw a zero as he was quickly replaced with an appointed technocrat not to mention former central banker lucas papademos to administer the markets tough medicine so is this another example where democracy is just you know a little too inconvenient for european politicians and policymakers and as your keep trying to prop zombie banks is what we're really seeing just the spread of this is gone be a mentality from free market capitalism to democratic governance that's the big question we want to ask and to answer it steve cain associate professor at the

university of western sydney and author of this book debugging economics the naked emperor dethrone and as always it is just such a pleasure to talk to you and to see you dr king. yes so you know this is actually very fortuitous a little bit of trivia the last time we had you on steve was the day before the first l.t.r. operation by the e.c.b. in europe and now fast forward and again it is the day before the next operation of the e.c.b. in europe so you're actually the perfect person to talk about these kind of liquidity transfusions and to answer this question dr king is this just another way to prop up zombie banks and allow them to roll over their debt. absolutely and the whole solution is saying here we have a problem or a country company enough money competitions currently go out let's lend it more money and so long as money which the government gets if the country itself conjoin or right through its central bank which of course no european country has then is

just perpetuating the problem and is this an inevitable outgrowth of the banking system because as you point out ponzi financier is always had debt servicing costs that are higher than their cash flows because the assets they purchased with borrowed money so they have to expand their debts or sell off assets and if in europe we've seen banks do anything to avoid selling off assets yeah well europeans with their own peculiar problem of pricing on top of what america is going through and will continue going through some use if not to its and that's the of course it ponzi lending where you have banks lending money to finance people gambling on rising asset process and whereas lending and finances investment innovation technology expansion of markets can actually generate income to service of the delight of borrowing to gamble on rising asset process doesn't generate the capacity to pay that debt so you simply have to take out more dead to continue servicing it and you also may get the brick wall as we did back in two thousand and seven now the europeans added to that by believing that process was impossible

being by then erecting a set of limitations of what the government could do in the belief that only government who caused the problems see setting up a system which meant that the european periphery countries couldn't possibly compete with germany and then going to ready to penalize them when they when they failed to be able to do what was impossible anyway and then. the financial process from the land speculation to the same bubble behavior and many of the peripheral countries didn't particularly but also they say some told france as well speculation rising and rising to lend their house crosses all comes across and what says solution just move to that problem without changing the system that doesn't allow the countries to generate their own currency yeah. ok dastardly and i want to talk a little bit later about what you're talking about and you've been writing about about some of the solutions to this speculation that so problematic no matter where you are but let's stick to europe because when we look at something like the l.t.r.

in some of these quote unquote solutions that their leaders are coming up with in europe what about the imbalances because if all of this money for example just ends up in germany and flees from the periphery where people are more worried about weekend banks don't we then get imbalances perpetuated and have a situation where the corps has a lot of money and can just go you know buying up all of the assets of greece and essentially turning it into something like a colony. well that's just what's happening because of course they're talking about giving the money to greece for this and they say you know money to greece agrees to pay the banks they owe money share so it's a transfer from german the german central bank down to the greek government back to german and french banks and it's really maintaining liquidity of the banking sectors and northern europe to finance this problem that the supplies. rather than financing the greeks themselves and of course the reaction anybody with money and response to get out of greece now and so what you there is well is it in doing that

and giving them i'm told by one correspondent one twitter recently i interest bill is three hundred thirty dollars for the month the great person to the banks. you didn't drain by the interest payments that are also going to be drained by capital slot and this money is not going not going in not staying in greece when it goes down it is so you split it's almost like putting leaches on the patient we're going to the nineteenth century medicine becomes twenty first century economics and yet you have definitely very much twenty first century speculation that's creating these problems to sticking on europe though we have a little theory on this show because one of the things we've seen is that as central bank's balance sheets have expanded and we've seen governments. put into place some very severe reforms and order to prop up zombie banks democracy hasn't been the most convenient thing to pass some of these reforms and we've seen technocrats put in place we've seen the democratic process in some of these countries suspended so we're wondering if we're saying zombie banks and that's

gonna that mentality go into zombie governments and is this something that we're going to see a continuing trend of. we're getting is only democracy it's going to expression this really is just a continuation of conventionally in classical thinking but now it's the impassible thinking in a position of economic sell you rather than economic strength because new classical theory always hearing that democracy was an impediment to doing good in omics so this thing risen you had things like central banks getting independence from the government's interest rights because they didn't trust the politicians to get it right the bankers have instead and the banks take of that responsibility then of course the mastery of trade he was there pretty much asking european governments to sign a straitjacket saying you won't do anything to try to change the economy will you and write it again to drop the body there's only control is in the in the earth things commission to believe in a classical economics so they said you cannot i would not believe that you have

exchange rate policy because you will get one currency when i'm going to let you have monetary policy because the european central bank now controls the setting of interest rights and wanted to let you have fiscal policy into because whoever went last year on a deficit of more than three percent of it they know it will let you have more than sixty percent accumulated government debt to pay now all eyes basically saying we're putting democracy in a strike jacket you guys can go and talk about your vision so i'm contests and and international diplomacy and stuff like that if you contest the economy that was a specimen the economy best hat rack i write in this catastrophe but now that has led to a catastrophe that i think oh hell out of bounds let's not make a call to get that we're going to cop it democracy get in the way that's to think up a point and it's your opinion and only bureaucrats run the race and run italy so we make sure that the austerity programs are imposed and let's not let the market see get in the way of the referendum with the with the archers is saying right now so

it's a classic case economic theory said democracy was the stallion let's play go over and to get away from it now the economic theory itself is being a complete failure the the saying. to democracy get in the way is when trying to kill stuff in the air without admitting we thought oh i love it dr king you can always bring it back to him the problem with economics that's so perfectly fitting sticking to this though riddle me this are we going to see a minsky moment then with tech knockers see where zombie governments become so over leverage that they crumble the pyramids create a scheme just crumbles under the weight of popular uprisings like we've begun to see in greece this is this is exactly what i'm expecting are gambling that is some states are likely to see the military junta back in control in greece because greece has a good story of having military governments were locked in a suit popular uprisings in parts of sign which had a history of popular out revolt revolt as well in portuguese it had a lift wing coup against this. leadership to it's

a guy that goes that ending news team rocky foundation for example so we have all these potential political shifts from the outside because you mention the military in greece sitting back watching what's happening on the streets of greece what you must thing done to national pride and one thing about leading military for sure that it's a degree of national pride at some point going to settle this if you play kind of get rid of the if the if the part of the politicians are going to be ball into the foreign banks when knowledge so at some stage i do expect to see huge political shifts and here and then you might see something sensible coming out of the remaining europe thing and democratic governments ok so that might be the tipping point that way except zombie democracy and brings it back to life let's broaden this though because you you spoke about the problem with speculation this is a problem very much for that we have dealt with in the united states problem in europe problem for the global economies so how do we on why this very dangerous vicious cycle the banks taking all of this risk and speculating and then

governments propping them up because after all banks love speculation dr king this is how they make money. that's right they make money by gambling on rising asset process and ironically the fact that they're lending the money as if yes a process rose in the first place what engine is cold calls it it's a back what the trouble is positive feedback loop like this they go up and then they go down because you get to a point where. levels of processes generate excel or adding levels of debt and you get to the point where people get so much that they simply slow down slightly and that in the us and process start to fall and exactly the same process with some reverse falling asset crosses main rapidly do so the writing did which was as a process to fulfill that so it goes it is sold to the process in capitalism over that period of debt if the banks are allowed to sign on gambling on asset process and that includes lending money to gamble on rising house ross's mountain lions fall buying shares of cetera et cetera all that sort of behavior ultimately ends in

in chesterfield so we have to we construct the banks wanting to do that because banks have an inherent desire to create it because the more did they create the more profits they can make and it said that's that sort of volume side of that process on volume acquire we have to make less attractive to borrowers and we have to redefine shares so that it's no longer attractive to borrow money to buy us years off and on the speculator just work is assessing ourselves in shares and redefine a housing so banks lend more than it's fixed amount a maximum amount of money to secure against property no matter who the borrower is so it's so it made it less so make it less attractive to borrow but but real quickly before we go an article that i saw you tweeted showed another side of this which says that even if you do that one in seven americans are being stopped by a debt collector right now showing just how much debt is still out there in the system so without some kind of i don't know huge debt do you believe like you've

called for are we just going to see a perpetuated problem of people being debt. slaves you know they are with you we're going to see issues one is how we stop this happening again and today how to get out of the catastrophe we're in right now and we have to do it in such a way that we drastically reduced and the income levels of the financial sector that's wrong political and. where we have quantitative easing for the public rather than for the banks and that money is then used to reduce debt levels but also give cash to those people who bought the zot that the toxic assets off the banks for living there are days and source of income of its own you them a cash front of the spend out of instead reduce the debt level and squeeze the profit and the income levels of the financial sector and then finally right the politicians from being beholden to the financial sector because this is a classic case with his own views on the blood bank there you go that the zombies in the blood bank and until we do something about those blood transfusions this is gonna continue dr king it's always

a pleasure to see you i appreciate your insight so much that was dave cain economist and author. and still ahead here don't go away because back by popular demand word of the day will break down a financial term or concept for our very smart but just maybe not a financial expert our word today shows how banks profit and keep governments propped up there what some call europe's aversion of quantitative easing can you guess what it is we'll tell you when we come back but first your closing market numbers. we just put a picture of me when i was like nine years old she told the truth. i have a confession i am a total get a friend that i love rap and hip hop music and. he

was kind of a yesterday. i'm very proud of the world with its place. you know sometimes you see a story and it seems so. you think you understand it and then you glimpse something else here sees some other part of it and realize everything you thought you knew you don't know i'm sorry welcome to the big picture. what drives the world the fear mongering used by politicians who makes decisions to break through it's already been made who can you trust no one who is you know of

you with a global machinery to see where we had a state controlled. capitol school sessions when nobody dares to ask we do our t.v. question more. right it's time now for word of the day back by popular demand you guys asked for it we're given it to you this is where we break down a financial term or concept for our very smart viewer but just maybe not the financial expert today it is carry trade why does this matter well let's talk about the e.c.b. the easy money program some of called it europe's version of quantitative easing it's the three year longer term refinancing operation better known as l.t.r. oh so relevant in fact that f.t.

alphaville has turned it into its own word take a look at this headline what they are calling it is the l. tro and they also talk about the credit crunch and the carry trade because they are all related now this peace talks about if there was a large enough demand for l.t.r. a loans a suspicion would be that banks were tapping funds primarily for lucrative carry trades baria one percent from the e.c.b. to invest in higher yielding instruments so what exactly is a carry trade it is a transaction where someone borrows at a lower interest rate and invests in assets that yield a higher rate making money on that spread but let's look at what this exactly looks like let's look at a carry trade in the case of the l.t.r. row which is going again this week tomorrow to be exact as when the next hero is plans now in this operation the european central bank loans money at one percent to european banks for three years and exchange for some overvalued pretty shoddy collateral some critics would argue so i'm going to show you exactly how this works

you have the e.c.b. the central bank which prinsloo. just say in this hypothetical case ten billion bucks and they loan this to european banks a one percent pay pretty low interest rate banks take that money and they lend it at say four percent this is hypothetical in the case of l t r o a lot of that money is going to go to european sovereign debt where they can make a higher yield on that in the interest rate is higher and so where they make money in that carry trade is on the spread because say you have you know a five percent or a four percent interest rate you borrowed at one percent you make money on the difference now we often see carry trades talked about in terms of currency you have examples where people borrow in one currency and then they take that and they invest in another currency and you hear carry trades and that used a lot and there's a lot of risk in that but in this case this is pretty much risk free ok because say

you're you know an italian bank and you're already in it and if this ship sinks you're going to go down so hey look you can make a little money on the spread and this money is coming from the e.c.b. cheap money bad collateral some would argue and a lot of money potentially to be made and that is a carry trade. before we round out the show let's bring in dimitri and shannon dano to talk about a couple stories that caught our eye that we could not let go because yesterday we were talking about the f.b.i. recruiting michael douglas for a p.s.a. against insider trading here's a clip of the actual p.s.a. . we're moving with. the problem. our economy.

our own film are. looking through probably. so go report those insider trading schemes that you're suspecting because i used to be gordon gekko in the eighty's in a movie where i was saying greed is good now they have enlisted me to say that greed is bad and we have a number to go with those threats the f.b.i. is currently building cases on reportedly one hundred twenty people for alleged insider trading since two thousand and nine they have fifty seven convictions or guilty plays please out of about sixty six charge individuals the big question here for me is how come the f.b.i. has been successful and busting people for insider trading all these fifty seven of them since two thousand and nine but they can't build a single case against somebody for the financial crisis and any kind of allegations of corruption that went on there i think the answer what is it will be. so

widespread these people rob for a living so that's where they're putting michael douglas is a comical farce obviously this is a joke on i was going to call douglas was wall street's gordon gecko call corporator mr insider trader and now he's telling us greed is bad is obviously a joke on you and me there's obviously no interest whatsoever in actually doing anything affect the once over because the banks actually run the government spies on the very thing is now a zombie government's role the under a feudal so i would respond and i saw some kind of quote in the wall street journal article which by the way is front page saying that you know the bad seeds in these insider trading cases are about one percent so you know it's just a small percentage of it so maybe that's getting to something they can go after these hedge fund insider trading guys because it's a small proportion of wall street whereas going after it kind of the big guys in this is stomach corruption that maybe perhaps was going on in the financial crisis

that's a lot. are important to the hedge fund is owned by goldman sachs if the hotel was owned by goldman sachs or j.p. morgan they wouldn't do anything to them so if it's like me starting about fun because i got a million they're going down going to get a wiretap they're going down but if if i'm. going to fine point a front runner it's shannon anything to add on that it's not really i kind of agree with floor and i don't understand why there are zero cases for the financial crisis as opposed to oh yeah it's for insider trading really that i think dimitri's got a good explanation for it now this is court has turned down an urgent appeal from the great lakes states to close chicago area shipping channels so that these fish you're not going to believe it can't make it to lake michigan michigan look at these fish take a look. the direct approach book people are actually being hit. hard flying out of the water rover boating. so those are asian carp they can grow up to four feet in length and weigh all hundred pounds reproduce

rapidly outcompete less aggressive native fish and people are very worried that this is going to impede the economies of the great lakes region because to give you some figures the commercial fisheries and the sport fisheries are valued at four point five billion dollars annually now what do you think this story is really about dimitry or are these asian carp the problem or does oh i don't know the us has always won a brit blame asia for their problems i mean is minus obama and mitt romney is clearly an asian invasion i mean these guys are being swarmed by these asian carp and obviously the asian corp's are much more. they're much more industrious so they're just being overwhelmed i mean this is a this is this is literally a replica for the american it is in the floor yeah the entire industrial waste land that has become america there's just there's brewer the fish man that's it it's finished they're fiercer they're more aggressive they're more aggressive they work

harder they're going look at that they're so determined to get in the boat these guys have no chance they're finished the media just quits go home i wouldn't what do you fish you're ok as well to start shooting these things in the air before we do i wouldn't try to use before we devolve to complete and utter early inappropriate stereotyping let's go to shannon because i'm sure we have a good chicago angle because i don't know maybe she knows what's worse the corruption or the threat of the fish i just don't understand and to me she's argument what i don't understand is yes these us navy invasion but why are we protecting what's left. there your god oh it's survival of the fittest if you're if you can't code it you know that you can't deal with these kind of solution we can't cut it it's that chicago needs to lock up its little water. way is and then we could all be fine protectionism janet is making the argument for going on and protectionism saying if the asian fish are better let them come because these guys are clearly amateurs they can do nothing terrible get better it's that they take

the entire environment of the great lakes and they got a little up in your mouth you're going to be laughed you're making a very rational reasonable argument and i'm not going to tell them buy it and at our rhino their ranch and the problem here turn a rational discussion of me and i would want to wear one of their ranch and to this metaphorical discussion these fish don't behave like this and their native environment it's only when they are a fish out of their native water because they see the the pretty these lowly midwesterners who don't know who are just all they have is a pole and some bait some tackle these fish this is lose nothing to these fish they see the potential opportunity maybe and there it is. ok i don't think we have time for the last story it's a good one basically virgin is training its employees to whisper to the people that paid a lot of money for tickets i fully endorse it and i get the final say on that because that's all we have time for thank you so much for tuning into our show please feel free to follow me on twitter at lauren lyster and to give us feedback on the show at youtube dot com slash capital account you know we read it you know we respond to it you just have to wait till friday which is just

a few days away i am more in leicester and for now from everyone here at capital account myself and the whole team thank you so much for watching and have a great night. yellow gold the full force world even though we have a little. groups of the colts with. balls are using. my mouth it was like when you had that knowledge it wasn't forced marriage was just my view when i was fifteen years so you can liberate. there when they certainly can't do it through the barrel of a gun salute effective social change yours will be the afghans themselves ask again men and women we believe. enough to across. the

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