If it’s wrong for Barclays et al to ‘manipulate’ interest rates, then why is it ‘ok’ for central bank to do it?
People haven’t seemed to grasped the sheer scale of the most recent admitted criminal activity by the banks. Barclays seems to be the main focus of the attention for now, however we’re quite sure that over the coming weeks it will become clear that in the words of ex-Barclays head himself that ‘everyone was doing it’. But just what was the ‘it’ that everyone was doing?
LIBOR is the London Interbank Offered Rate – now, many people have have just tried to say this is very complex and basically implying that the general public is too stupid to understand, so they simply shouldn’t try.
But it really isn’t that complicated. Essentially it’s pretty simply and you don’t really need to get bogged down with the technicals to understand the importance of what has been going on.
LIBOR is simply the average interest rate that the big banks lend to each other. At 11am every day by the British Banking Association (headed up since 2010 by Marcus Agius who was also Group Chairman of Barclays no less) publish the LIBOR rate. The member banks all submit the rates to the BAA at which they could borrow funds from other banks.
To keep it simple a high rate of interest charged by the other banks to borrow may imply that the other banks are concerned about the solvency of that bank – so by keeping the number low it is a way of gaming the system to show that you are in better shape financially than you really are.
But LIBOR is used globally to price just about every and all financial products on the planet – effecting some $500tn (yes, with a ‘T’) of other financial products around the world. So get the price of LIBOR wrong and the price of just about everything else on the planet is also wrong – when put like that you can see why the following claims have been made about the importance of this scandal:
Professor of economics and law Bill Black notes:
It is the largest rigging of prices in the history of the world by many orders of magnitude.
Matt Taibbi explains that this is the “mega scandal of all mega scandals”, because Libor is the “sun at the center of the financial universe”, and manipulating Libor means that “the whole Earth is built on quicksand.”
In fact it was one of Barclay’s submitters himself that recognised what was going on in a email to his superior:
“I will reluctantly, gradually and artificially get my libors in line with the rest of the contributors as requested… I will be contributing rates which are nowhere near the clearing rates for unsecured cash and therefore will not be posting honest prices,”
And that is the real scandal here – if we don’t have honest prices then we essentially have false prices – and all prices are are bits of information or data that people and businesses use to allocate recourses and make decisions – and if people are using bad data to make decisions they must be making bad decisions. And seeing that LIBOR effects just about every price on the planet then the entire globe has been using faulty data to make decisions. In short, because of this mass manipulation the world has for years been making the wrong decisions – this might go along way to explain the global financial malaise it finds itself in.
But there is much more to this scandal – Barclays claim that its submitters were giving LIBOR numbers that “were not honest” because they thought they were under instruction from the BoE – something that the BoE denies.
Bloomberg have provided this chart which seems to be pretty damning against Paul Tucker of the BoE and at the very least show his ‘influence’ in the whole scandal:
(click for sharper image)
Who know’s what will come out and what will be covered up in the coming weeks and months – but what it has done is pose a fundamental question to the public. If it is wrong for Barclays and others to manipulate the rate of interest they are charged to borrow – presumably because we understand the need for ‘real’ prices to make correct decisions – then why is it perfectly ‘ok’ for central banks to do exactly that – after all are not the central banks everyday ‘manipulating’ the price of money. In fact is it not their job to manipulate the price of money (interest rates)? What if the BoE is getting this price ‘wrong’ what if the information we’re getting from the BoE and other central banks about the ‘real’ price of money is wrong – then EVERY business and personal finical decision made by just about every human on the planet has been made with ‘bad data’ – now can you see just why this scandal is so massive?
Clearly it is time for an open debate about the role of central banks in all this and why it is ok for them to manipulate the price of money but somehow wrong/criminal if anyone else does it. The idea that we give the monopoly privilege to a small group of bureaucrats sitting around the table at the central bank carte blanch to manipulate prices each and every day simply must come to end before any more damage is done to the economic health of the world.
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Link to this article: : http://www.goldmadesimplenews.com/gold/if-its-wrong-for-barclays-et-al-to-manipulate-interest-rates-then-why-is-it-ok-for-central-bank-to-do-it-7236/