The Dark Heart of the Libor Scandal
by Mark Vorpahl
Monday, Aug. 06, 2012 at 12:04 PM
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Though, for most, the London Inter-Bank Offer Rate (Libor) interest rate fixing scandal appears to be distant and far too complex to understand, its potential consequences may be as economically devastating as a world war.
The Libor is used to set payments on $800 trillion worth of financial instruments. It sets the prices that people and corporations pay for loans and receive for savings. Given that the fraud impacted $10 trillion in consumer loans, the Libor scandal will likely leave a long list of previous financial scandals that contributed to the Great Recession look like child's play.
It also pulls back the curtain on the mechanisms behind the world economy, its anti-social priorities, its willingness to gamble away the future of billions of people, and the government's collusion in these operations. The Libor scandal reveals that the "invisible hand" Adam Smith spoke of in explaining how a capitalist economy regulates itself has been transformed into the trained hand of a swindler.
The Libor and its Problems
The Libor sets interest rates that banks charge one another to borrow on a daily basis. Sixteen (now eighteen) large banks submit their assessment of what they anticipate credit would cost them. The four lowest and four highest calculations are thrown out, and the interest rate is determined as the middle figure among the remaining assessments.
While the method that the banks use to determine the figure they report to Libor is largely arbitrary, it is, nevertheless, assumed that they won't take advantage of the process to game the system. This is a rather remarkable leap of faith since there are billions of dollars of profit if the banks can find a clever way to sidestep the rules. In contrast to popular knowledge, the Libor expects honor among thieves.
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