LIBOR Scandal? Just the Magic of the Market.

            If there is one lesson to be gleaned from the British banking scandal, it is this:  If the LIBOR can be rigged, then anything can be rigged—and probably is.  The LIBOR (which stands for London Interbank Offered Rate) is the benchmark rate that affects interest rates all over the world.  It is computed daily according to the rates which the 16 largest banks in London offer to each other.   Every day, the 16 banks report the rates which they are currently offering.  The highest four and the lowest four are ignored, and the eight in the middle are averaged. Since the highest and lowest are thrown out, it seems like it would be hard from anyone to manipulate this rate. But it seems that Barclays' Bank, possibly in collusion with several other banks, has found a way to do this.

             So, who are the victims of this chicanery?   There is an old saying about playing poker with strangers: As you look around the table, if you can’t spot the sucker, it’s probably you.  And since I’m not sure who got fleeced in this game with the LIBOR, then it was probably me.  Not directly, of course.  I have never borrowed or lent money in any contract which was linked to the LIBOR.  But I probably lost indirectly.  Nearly every company in the world borrows money on contracts that have some link to the LIBOR.  And if these companies get fleeced, then we can assume that all of the goods and services which we buy from them must be very slightly over priced to offset this loss.  So any person who has ever purchased anything--has been affected by the LIBOR.

            The greater lesson to be learned here is this:  We should have a realistic view of all of the so called “market forces.” We continually hear conservatives extolling the virtues of markets.  We are told we should replace any kind of government regulation with “market regulation.”  Yes, just leave it to the market.   After all, why would a free people choose to have the most important economic decisions in their lives made by representatives whom they themselves are allowed to choose?  No, better leave it to the market.  Governments are made of people, and people might be corruptible.

            They would have us believe that “the market” is some mathematical entity with the wisdom of Solomon, the impartiality of Blind Justice, and the inevitability of fate.  But, it turns out that “the market” is a bunch of old, rich white guys cutting secret deals in back rooms. 

            I have always been given to suspicion of anyone who seems to have more wealth or more power than I do.  I tend to wonder just how they got it.  I look for malevolent bankers under every woodpile. I have such suspicions that I check under my bed every night to see if there might be a hedge fund manager lurking there.  But as suspicious as I am, if anyone had told me that the LIBOR could be rigged, I would have dismissed him as a lunatic conspiracy theorist.  But I would have been wrong.  And if the LIBOR can be rigged—anything can be rigged.  Think about it.