Gary North on current economic affairs and investment marketsGary North -- Specific Answers
HomeContact MeTell a FriendText SizeSearchMember Area
Gain immediate access to all of our current articles, the question-and-answer forums, dozens of free books, and article archives. Click here for details on how to join.

About This Site
Academic Gaps
Articles
Capitalism and the Bible
Clichés of Protectionism
College Finances
Debt Management
Ellen Brown: Critique
Federal Reserve Charts
Gary North's Free Books
Get Published Here!
Gold Price & My Report
Keynes Project
Price Index (U.S.A.)
Questions for Jim Wallis
Remnant Review
Social Security/Medicare
Sustained Revival
Tea Party Economist
U.S. Debt Clock
Yield Curve
Your YouTube Channel
Gary North's Miscellany
Advertising
Blogging
Budgeting for Wealth
Business Start-Up
Career Advancement
Digital Tools
Education That Works
Evernote: Free Notes
Federal Reserve Policy
Fireproof Your Job
Goal-Setting for Success
Great Default
Inheritance Strategies
Insurance
International Investing
Investment Basics
Job and Calling
Keynesian Economics
Leadership
Marketing Case Studies
Obamanomics
Precious Metals
Real Estate
Retirement
Safe Places
State of the Economy
Stocks and Bonds
Study Habits
Video Channel Profits
War With Iran
Members' Free Manuals
Our Products
Contact Me
Help
Tell a Friend
Text Size
Your Account
My 100% Guarantee
Privacy Policy
Terms of Use


This site powered by MemberGate

The Central Fact of the LIBOR Rate Scandal

Gary North
Printer-Friendly Format

July 19, 2012

I begin with two charts.

First, the 1-month LIBOR rate.



http://www.moneycafe.com/library/1monthlibor.htm

Second, the 1-year LIBOR rate.



http://www.moneycafe.com/library/libor.htm

What do we see? First, they loosely parallel each other. Second, the move up began in late 2004.

What happened in 2004? The bubble in housing, all over the West. What caused this? Years of subsidized rates by central banks.

Why were rates low in 2002-4? Inflationary policies, led by Greenspan's Federal Reserve.

None of this should surprise anyone.

Then rates climbed. Why? The boom. There was greater demand for loans, because businesses were prospering. The real estate bubble grew.

Notice that the 1-month rate was slightly lower than the 1-year rate in late 2006. The yield curve was close to inverted. This is a warning sign of recession.

Let us look at American Treasury bill rates in this period. First, the 90-day rate.



It was a little over 5% in late 2006.

Look at the 1-year rate.



It was a little over 5% in late 2006.

In other words, rates were less than one percentage point higher in the LIBOR market for both short-term and 1-year debt. But these were privately issued IOUs, so the risk premium was higher. This is a normal spread.

Rates fell in 2008 in both markets. That was because of the recession. They kept falling through 2009. People sought safety. They went into short-term debt. This took place in all credit instruments.

Beginning in 2009, rates bottomed in both markets. They have stayed low. Why? Not QE2. Fear among bankers. They are keeping excess reserves in Europe and the USA. They do not lend to each other, because there is no demand for funds. Banks do not need to cover overnight. They have plenty of reserves at the central banks.

There is no sign that these two gigantic and interlinked credit markets were different in any significant sense over the entire decade. In other words, Barclays bank had no influence over rates. The banks that were involved rigged the system from 2005 to 2009.

Then what is the scandal all about? Ignorance of basic economics. What about the banks that manipulated the LIBOR rate? They made money on the margin, but they did not have any significant effect on these rates. You can see this in the LIBOR charts.

The scandal is a tempest in a teapot. No one lost much money. The banks did not keep rates lower than the market for more than a few hours -- maybe days, but I want to see proof.

The rates were governed by market forces.

The idea that Barclays kept rates down for years is ludicrous. No commercial bank can keep rates down if investors are willing to pay for a different allocation of capital than what the banks want. The bankers can make money at the margin, paying a little less for loans. But after 2008, none of this mattered. Bankers did not want to borrow from each other.

The appalling ignorance of basic economic theory is why we see the headlines about Barclays and the manipulation of rates. Bankers probably made many millions of pounds extra, but this had no measurable effect on the direction of interest rates. We are not talking about hundreds of billions. We are not talking about the Bank of England.

Columnists like to get attention. There is nothing like a scandal to get attention. But to say that the commercial banks manipulated inter-bank rates is saying that (1) central banks and reserve requirements don't count for much; (2) market rates can be held down by a few commercial banks, thereby overcoming the market for capital: lenders and borrowers.

The people who cry "scandal" do not think through the implications of what they are saying. Making a lot of money is one thing. It is possible. Re-structuring the derivatives market totaling about a quadrillion dollars in assets/promises is something else.

The problem has little to do with rate-tinkering by Barclays and the others. The problem, then as now, is the misguided Keynesianism that undergirds the policy decisions of the West's central bankers.

Keep Barclays. End the FED, the Bank of England, and the European Central Bank.


Printer-Friendly Format

 Tip of the Week
Sign up for my free
Tip of the Week
Verification Characters:    Type     C  2  D  R  P     here   


Tip of the week archives
On what this icon
means, and how it
can help you,
click here
 Q & A Forums
General Q&A Forum
Advertising and Resumés
Affiliates
American History Topics
Backyard Food Gardening
Banking and Politics
Blog Sites and Web Sites
Books Worth Reading
Bumper Sticker Slogans
Business Forum
Buying Smart
Christian Service Forum
College -- The Cheap Way
Copywriting
Education Alternatives
Food Storage
For Women Only
Fukushima
GNC Benefits
GNC Testimonials
Gold and Silver
Great Default Forum
Health and Diet
Health Insurance
Homeschooling
Investments Forum
Iran War
Job, Calling, and Career
Leadership Development
Legacy Building
Less Dependent Living
Local Political Action
Non-Retirement Forum
One Good Idea
Police State
Privacy
Public Speaking
Real Estate Forum
Remnant Review Forum
Safe Places Forum
Taxation Policy
Typographical Errors
Video Production Basics

 Archives
Reality Check
 Discussion Forum
Search Discussion


Recent Forum Posts
• investing for the beginner
• PIMCO
• Alibaba IPO
• Two Questions: 401k and Pension
• Investment advice - for a family
• Where To Safely Park A Large Amount Of Cash
• How do you invest in this system.
• Retirement Fund: Advertising budget
• Kotlikoff says SIPC insurance is a fraud
• How to Evaluate A Country's Economic Condition
• Eugene Fama's Dimension Funds
• Financial Management Sites
• Don't Touch Principle Follow Up
• FOREX (I use OANDA.com) - trading ideas -
• Funding Retirement vs. Paying Off Mortgage
• housing bubble in australia?
• New rent control law in small NJ town.
• Selling House with a Real Estate Agent
• Student loan debt is drag on real estate market
• Housing Costs
• I inherited a house in SF CA, rent it or sell it?
• Any advice on how to deal with city council
• RE investment dinner and seminar
• Goodbye California, Hello Texas
• Would you consider selling using an auction?
• First debt free rental done
• Plaster wall repair and paint
• No-recourse loan in an IRA
• Buying duplex for my 72 yo sis to run from afar
• Depreciation versus maintenance expenses
• No City for Old People
• Will you die getting to your bug out location?
• teaching English overseas - some questions
• The state with the most Liberty
• Switzerland and Firearms
• On "Zip Code Searching On The Web"
• Crash Course in becoming an Expat
• Anyone tried Puerto Rico?
• Chattanooga, Tennessee
• Middle Class squeezed out of Chicago
• An Article on Chile
• 5 Amazing, Cheap Places to Live as an Expat
• Oil Field Job Security
• Moving to TriCities Area
• PJ ORourke on the Baby Boom
• advice on how do I interact with my older parents?
• Do You Sincerely Want to Be Rich? Why?
• Req. For No 401(k)/Other Pensions via Relocatio
• Cashing out 401K to pay student debt?
• SS @ 62 and still working
• Desolation or Prosperity?
• I take it Retirement Armageddon is not available
• Post Retirement Career
• Social Security - when to start collecting
• 401K Risk
• Detroit Retirees Fight 83% Health Care Cut
• Lump Sum Early DROP
• Underfunded pensions
• 401k strategy
• Can I Avoid Medicare Entirely?
• Cost Of Federal Regs? 2 TRILLION - Per Year!
• Ebola diagnosed in the US
• Inside a Bureaucracy
• David Stockman - the next crash is nigh.
• Oregon/Washington Taxes...
• Commodities mining in perspective
• WaPo Employees Get Smacked
• A step in the right direction?
• Feedback, Please
• yes-state universities are forever-humor
• Mystery cell sites resolved
• Homeschooler enters Catholic High School: The Saga
• U-Haul's Movinghelp.com
• We save at least $1000 a year on electric bills
• In politics, nothing happens by accident
• Print on demand book
• The UPS Store Expands 3D Printing Across the U.S.
• Good Marketing Book
• Day Care in Cary
• RE: If This Is Your Boss
• Entrepreneuring in a socialist nation
• Undoing the Walmart model?
• Quickbooks Alternatives for Small Family Business
• Make a few bucks selling books
• Retail vs Online - a personal experience
• freeman workbook on entrepreneurism
• Selling ad space in my newsletter
• Angel's Game
• aweber list and marketing
• Paid counseling web site