LIBOR Scandel

You can’t not be aware of the Libor scandel that has been dominating the media in Europe over the last few days. So what is the LIBOR?

The London Interbank Offered Rate is the average interest rate charged by leading banks in London when lending to other banks. It is a benchmark, along with the *Euribor for interest rates all around the world. This includes more than £300 trillion (NZ$600 trillion) of financial products such as credit cards, mortgages, financial derivatives like CDO’s etc. In the run-up to the financial crisis, traders are said to have attempted to have attempted to manipulate the rates to boost their bonuses or protect their jobs. At the peak of the financial crisis, they artificially lowered rates to hide the stress on the banks’ balance sheets.

Dan Davies described the LIBOR as similar to credit ratings – started as a market tool, then had a huge structure built on it, & never grew regulatory structure. However it is ironic that without the LIBOR scandel the borrowing public would have had to pay higher interest on loans. But the lower interest rates increased the amount of borrowing which increased house prices and started a speculative bubble. The cartoon is by Pugh of The Times in London.

* rate at which Eurozone Banks offer to lend unsecured funds to other banks in the euro wholesale money market.

3 thoughts on “LIBOR Scandel

  1. Simon July 5, 2012 / 9:14 pm

    Worth a look. Basically just as Max says the biggest fraud of all is carried out by the central banks who lower interest rates in order to stop lenders failing due to them having made too many bad loans. The world was awash with bad loans in 2008. That caused the financial crisis. Central banks lowered interest rates so that there would be less bad loans. NOW the world is even more awash with even worse loans. Europe is one big bad loan bath tub. So is China. The place where loans may not be quite so bad in USA. But the few very big banks left now that Bear Sterns, Meryl Lynch and Lehman Brothers have gone are still making big bad bets underwritten by Uncle Sam.

    All this is called financial repression because savers end up paying off the banks bad loans. Not only that but the most desirable outcome is some inflation. Hopefully not too much. There is nothing like inflation to rob the poor in favor of the rich. I’ve explained the mechanism for that before. Central banks are actively pursuing inflation.

    Trouble is if you make A LOT of bad loans there is always a chance the forced asset sales brought about by defaulted loans will cause prices to fall. This means deflation. Deflation is very bad economically. Banks can not avoid going bust. All bets are off. It is 2008 all over again except that this time there is the risk of complete loss of confidence in paper money and there will be nowhere to hide. Well almost, there are always winners and losers in this game of musical chairs.


  2. Mark July 7, 2012 / 3:50 am

    Thanks Simon – will have a look when I have a better internet connection.


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