- Written by Bill Bonner, Founder and President, Agora Inc.
- Hits: 295
Rigging the market -- like police protection, gambling, drugs and alcohol -- is something over which the federales claim a monopoly.
News from London is they are going to throw the book at the Libor rate fixers. The insiders are facing jail time.
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 from the new artificial rates. Some lost. Net, the financial damage was probably offset by the financial benefit. The winners were happy. The losers are always unhappy.
Besides, isn't it all a game? Isn't it all in good fun? Why make a legal 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. 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 four 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 overreaction. If leading bankers can't fiddle their customers... and the public... the entire system will come to a screeching stop. After all, the world's leading bankers are those who work for the Fed and the European Central Bank -- both engaged in a bamboozle of Biblical proportions.
In Europe, Mario Draghi -- formerly with Goldman Sachs and the World Bank and now head of the ECB -- 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 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 has much thought been given to what will happen when investors realize the system is cockeyed and doomed.
Meanwhile in the U.S., the price of borrowing -- the federal funds target 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.
Libor 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 also sets the target rate -- the rate charged by one bank to another for an overnight loan -- by simple declaration.
Farther out the yield curve the Fed has more work to do -- including buying long-dated bonds to lower borrowing costs. 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.