Who gets to fix interest rates? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 31 July 2012
Who gets to fix interest rates? A  A  A

Baltimore, Maryland

News from London is that they are going to throw the book at the LIBOR rate fixers. The insiders are facing jail time.

The Telegraph has the story:

Bankers found to have rigged Libor could face jail after the SFO said it will look to bring criminal charges against those who attempted to manipulate the world's key borrowing rate.

David Green QC, director of the SFO, said existing legislation could be used to bring criminal actions against banks implicated in the Libor rigging scandal.

Mr Green did not specify the precise charges that could be brought but it is possible bankers found guilty of manipulation could receive prison sentences of up to 10 years.

This doesn't seem fair. After all, the bankers were only replacing one artificial rate with another. What's the harm in that? Some people gained. Some lost. Net, the financial damage was probably offset by the financial benefit. The winners were happy. Losers are always unhappy.

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Besides, isn't it all a game? Isn't it all in good fun? Why make a federal case out of it?

But the authorities are indignant. If there's any interest rate manipulation to be done, they say to each other, we'll do it ourselves. They were justifiably upset, in other words. Rigging the market - like police protection, gambling, drugs and alcohol - is something over which the federales claim a monopoly. And they are not above using force...even lethal force, if necessary...to protect their turf.

That is what 4 bankers in Iran discovered yesterday. The New York Times reports:

In the first sentences to be handed down...an Iranian court ordered the death penalty for four people in the fraud that was uncovered in a network of Iranian banks last year, Iranian state media reported on Monday.

This is clearly a case of over-reaction. If leading bankers can't fiddle their customers...and the public...the whole system will come to a screeching stop. After all, the world's leading bankers are those who work for the Fed and the ECB, both of whom are engaged in a bamboozle of Biblical proportions.

In Europe, Mario Draghi, formerly with Goldman Sachs and the World Bank, and now head of the European Central Bank, is determined to fix the rate at which European nations and their banks can borrow. Last week he said he would do "whatever it takes" to save the euro. We know what that means; he will print as much as necessary to protect the banks' and the sovereign borrowers from getting what they deserve. And that means keeping their borrowing costs down.

The borrowers' real problem is that they are insolvent. They cannot pay their debts. Draghi treats the matter as a liquidity problem; he knows he cannot make them solvent. So, he lends them more money - on easy terms. Perhaps if he lends them enough for a long enough time, they will recover. Never explained is how making them even less solvent will help them to their feet. Nor has much thought been given to how they will ever get up, with all this new debt weight added to their burdens...nor to what will happen when investors realize that the system is cockeyed and doomed.

Meanwhile, in the USA, the price of borrowing - the interest rate - is no more freely determined than it is in Europe, in London, or in Iran. In fact, we know no interest rate scales in the financial world that give an honest reading. Instead, they give the measure that has been given to them by the fixers, with some latitude for mistakes and imprecision.

The LIBOR rate is supposed to be a simple average of 10 rates proposed by London banks for uncollateralized loans. Until recently, the fixers pushed it one way or the other according to their desires. But the Fed shoves interest rates around too. It tells the banks how much they can lend and how much cash they must keep in their vaults. It sets the rate - by simple declaration -- on the short-end of the yield curve. Farther out, it has more work to do, including buying long-dated bonds itself, if necessary, in order to lower mortgage rates. Whether the shove is direct and blunt, or glancing...or with a knock-on effect...the result is the same: rates are pushed in the direction Mr. Central Banker wants, not the direction Mr. Market had in mind.

Not that there's anything wrong with this, in principle. The market gods seem to be aiming for entertainment. And the comic climax of all this is bound to be a side-splitter.

But when the end comes, again as a matter of principle, we hope all the fixers will get fixed in the same way. Put them all in front of firing squads...or let them all go free. It's all the same to us. As long as it's fair.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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2 Responses to "Who gets to fix interest rates?"


Jul 31, 2012

Irreverent, incisive and intelligent. Your daily take on the subject is like a breath of fresh air.


R S Das

Jul 31, 2012

awesome...carry on Mr Bonner

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