There's nothing like pulling back the curtain on the fraud that's center stage in the Libor manipulation scandal and finding the levers are really being pulled by central banks.
It's not about the banks doing what they did. The revelation is this: Central banks are the biggest impediment to free markets and the reason capital markets have become casinos.
And until the tyranny of their grip is broken, the majority of public investors are going to rightfully sit on the sidelines and long-term economic growth will be impossible.
The Libor scandal is just a sideshow. There's nothing new there.
Banks manipulated Libor (the London Interbank Offered Rate), the benchmark for over 800 trillion dollars in interest rate-sensitive loans and financial instruments, to jack up profits on trading positions they held.
Bankers scheming, lying and cheating for bigger bonuses at the expense of anyone in their way...that's news?
No, but here's the real inside scoop...
It's not about the banks doing what they did. The revelation is this: Central banks are the biggest impediment to free markets and the reason capital markets have become casinos.
And until the tyranny of their grip is broken, the majority of public investors are going to rightfully sit on the sidelines and long-term economic growth will be impossible.
The Libor scandal is just a sideshow. There's nothing new there.
Banks manipulated Libor (the London Interbank Offered Rate), the benchmark for over 800 trillion dollars in interest rate-sensitive loans and financial instruments, to jack up profits on trading positions they held.
Bankers scheming, lying and cheating for bigger bonuses at the expense of anyone in their way...that's news?
No, but here's the real inside scoop...
They were told to do it -- both implicitly and explicitly -- by the central banks that are supposed to regulate them (as is the case with the U.S. Federal Reserve Bank) and provide a safety net that facilitates capital formation and commerce on a global scale.
Suffice it to say that global credit expansion due to artificially low interest rates caused the build up of leverage in a yield-starved investment environment and led to the housing bubbles that burst from sea to shining sea.
Who orchestrated the low interest rate environment? That would be the Federal Reserve Bank and central banks across the globe.
If there was no manipulation by central banks, the free market for credit would have walled off a lot of speculators from access to credit they didn't deserve.
Central banks, especially the Federal Reserve Bank as a regulator, knew the health of the banks, knew they were leveraging themselves, knew they were piling up under-collateralized, securitized "assets" in off-balance sheet special-purpose vehicles.
They also knew they were forcing banks to lend at low rates. They themselves manipulated the rates to be that low and wanted the banks to extend their articulated policy throughout the economy, like a pox on the population.
And when we ended up in a financial crisis and found out the banks were all insolvent, what did the central banks do?...
They winked and nodded to the banks to manipulate Libor to prove to the world that there was no crisis and the system was still functioning as reflected in the low cost of interbank lending.
In fact, central banks were lying to the public and more than tacitly acknowledging that bank CEOs were also lying to the public's face, saying they were in good shape when in fact they were borrowing hundreds of billions (trillions globally) from central banks.
Because the truth is if Libor wasn't manipulated it would have gone through the roof and the whole world would have come to a standstill, which it did anyway.
And now to fix the mess they created by manipulating banks to keep interest rates low, central banks are adding "stimulus" (which is nothing more than giving banks more money) to keep interest rates low.
It never ends.
There's only one way to do it. Dismantle all the big banks and limit the size of banking institutions so that any one or two or five or six that fail won't implode the global financial system. Let them fail and resolve ring-fenced fiascoes under existing bankruptcy laws.
If we get banks down to a sensible size, we won't need central banks. Sure, we can still have them, but they should be run by academics (not bankers) with a singular mandate, price stability, that's articulated in advance and achieved with total transparency.
The truth is that central banks are shills for the banking behemoths.
They manipulate politicians, overrun fiscal discipline at times (not that there's much of that anywhere in the world these days) and use their limitless powers to feed profitability pools at banks.
The Libor scandal is a window into the workings of central banks and how they've aided and abetted the casino capital markets that serve the banks at the expense of long-term capital investment and sustainable economic growth.
It has to stop.
Related Articles and News:
The Birth of the Housing Bubble
Let's not get overly technical here.Suffice it to say that global credit expansion due to artificially low interest rates caused the build up of leverage in a yield-starved investment environment and led to the housing bubbles that burst from sea to shining sea.
Who orchestrated the low interest rate environment? That would be the Federal Reserve Bank and central banks across the globe.
If there was no manipulation by central banks, the free market for credit would have walled off a lot of speculators from access to credit they didn't deserve.
Central banks, especially the Federal Reserve Bank as a regulator, knew the health of the banks, knew they were leveraging themselves, knew they were piling up under-collateralized, securitized "assets" in off-balance sheet special-purpose vehicles.
They also knew they were forcing banks to lend at low rates. They themselves manipulated the rates to be that low and wanted the banks to extend their articulated policy throughout the economy, like a pox on the population.
And when we ended up in a financial crisis and found out the banks were all insolvent, what did the central banks do?...
They winked and nodded to the banks to manipulate Libor to prove to the world that there was no crisis and the system was still functioning as reflected in the low cost of interbank lending.
In fact, central banks were lying to the public and more than tacitly acknowledging that bank CEOs were also lying to the public's face, saying they were in good shape when in fact they were borrowing hundreds of billions (trillions globally) from central banks.
Because the truth is if Libor wasn't manipulated it would have gone through the roof and the whole world would have come to a standstill, which it did anyway.
And now to fix the mess they created by manipulating banks to keep interest rates low, central banks are adding "stimulus" (which is nothing more than giving banks more money) to keep interest rates low.
It never ends.
Breaking the Grip of Central Banks
The tyranny of central bank manipulation and the suffocation of free markets has to stop.There's only one way to do it. Dismantle all the big banks and limit the size of banking institutions so that any one or two or five or six that fail won't implode the global financial system. Let them fail and resolve ring-fenced fiascoes under existing bankruptcy laws.
If we get banks down to a sensible size, we won't need central banks. Sure, we can still have them, but they should be run by academics (not bankers) with a singular mandate, price stability, that's articulated in advance and achieved with total transparency.
The truth is that central banks are shills for the banking behemoths.
They manipulate politicians, overrun fiscal discipline at times (not that there's much of that anywhere in the world these days) and use their limitless powers to feed profitability pools at banks.
The Libor scandal is a window into the workings of central banks and how they've aided and abetted the casino capital markets that serve the banks at the expense of long-term capital investment and sustainable economic growth.
It has to stop.
Related Articles and News:
-
Money Morning:
Central Banks are the Problem
-
Money Morning:
LIBOR Manipulating Banksters Get a Slap on the Wrist
-
Money Morning:
This is the Ultimate Liar's Club
Hear, hear Shah! I heartily agree…from your mouth (er, pen) to the ears (and hearts) of American voters of all stripes…If only most voters weren't voting for their next handout (and unfortunately here is where I am most skeptical and disheartened). Thanks for your assessment and voice in these dark days of the "American" experiment.
A good explaination of the problem, audit the Fed bill comes up on July 24th, next week. Which will expose the FED, and become the start of ending the Federal Reserve Bank in the U.S. and start toppling Central Banks around the globe, this of course they will do anything to anyone who threatens their financial empires. Make no mistake these are dangerous times financially, and these Banksters will and are after anyone who would topple their empires, and like any dangerous animal they will fight tooth and nail to survive. Bernanke WILL pull another rabbit out of the hat regardless of what he said this week about no more quanitative easing, or operation twist, no matter what he WILL do it, and before the November elections, count on it, it's already in the plans. Anyone with a brain can see that.
It's the central banks that must be the focus. It's they and their ownership which should be brought to light. The attack on large banks and libor is deserved but in the end it will result in more powerful central banks and more and greater corruption.
We are now in a misdirection phase. Look at central banks and you'll see their sly grin as banks are found guilty and brought under greater control of the central banks that have orchestrated the planet wide financial mess we are in now.
Hi Shah, great insight, as usual. Nowhere else can we read this type of insight. I would like to make a suggestion though. How about if the heads of the central banks were elected by the general public. I am the first one to admit that I don't have a lot of faith in the general intelligence of the general public. But if you elect the head of the central bank, and make several rules with regard to election campaign contributions, allowing only individuals to contribute, and limit that amount for each person, similar to the laws for Canadian elected officials, then when the public see the consequences of certain central bank policies, they can either turf the incumbant or keep him/her on. Man, I like this idea even more now that I put it in writing.
Mr. Gilani,
You shouldn't forget to mention that bank regulation needs to be completely overhauled. The rules must be simplified in a manner that allows competition to once again flourish. As things are today, the onerous burden of existing regulation is only affordable for the largest institutions that have the resources to comply with it.
In many ways, bankers have used regulation that they've helped craft through lobbying efforts with politicians to entrench their power by squelching nimbler, smaller, potential competitors. By raising the bar of regulation so high, their monopolies have now become guaranteed.
The entire too-big-to-fail paradigm was actually made possible by increased banking regulation; not the deregulation that the public is being led to believe caused the problem. It's the perverse incentives and moral hazards of a few deregulatory initiatives that have made the news and caused the 2008 collapse, but the burden of regulatory compliance on financial institutions is worse today than ever. Smaller banks simply can't compete.
If we continue on our current trajectory, the largest banks will become even bigger and more systemically important. This, of course, will lead us to a much worse collapse down the road, as the system will have been made so brittle and fragile due to its lack of depth, the next disaster will bring down the sovereigns and the banks at the same time. In fact, the groundwork for that is being laid as I type this comment.
I've been arguing since 2008 that the banks should have been allowed to fail in order to facilitate creative destruction, but this has fallen on deaf ears. Fortunately, it appears that the tide may be starting to turn. Breaking the banks up is the next best solution. But I once again find it extremely dubious to allow any entity to pick winners and losers in the financial sector.
The organic nature of economics would have culled the herd much more efficiently and naturally in 2008. Are we now going to give this responsibility to bureaucrats and financial specialists instead of the free market?
PHIL<
It was really good that you added your voice,… so clearly put, that it is obvious YOU've read and absorbed the problems with this situation and have grasped the problems clearly. I hope many out there will read and also understand.
jp
Shah, I really enjoy your articles.
I say a business can't get a loan fixed for fifteen years below 6%. To me that is not low interest. A 4% rate for business would jump start this recovery . I personally would sell my business to my daughters and a lot of people would make money , i.e. lawyers , appraisers , etc. All I hear about is low mortgage rates for families living in homes they can't afford. Give them A job and they wouldn't mind paying a higher rate. Thanks , Fred
Thomas Jefferson warned us, didn't he, about allowing a central bank? Good article, Shah, I shall share it on FB.
Heidi
If you still bank with the big three the only thing you are doing is ripping your self off. The are not customer service banks anymore. They are for the Movement of large quantities of cash. (ie) Drug money, Govt money, corporate money. The common worker is much better off with a local bank that takes the time to know you, the customer. They are the ones that don't charge you for credit card transactions have free checking and such. You can still remember them can't you? Seems to be a no brainer to me. But if you want to be bought off with frequent flyer miles that cost you and arm and a leg by all means use em. The love the extra income off the small accounts as well as foreclosing on your assets buy a clerk so overwhelmed with numbers they make mistakes, but only in favor of the bank.
I'm not so certain that mandating anything to bankers is wise other than GAAP and obeying contract law!
Specifying price stability automatically implies price-fixing.
Just saying.
Shah.
I think you are accurate in your continually exposing the cause and the cure for this catastrophe. But, I also get the nagging sensation that the marching/manipulation orders/fiddling are coming from even higher up than the Fed/Central Banks etc.. I think the combined political interests of the wealthiest/wiliest money and political functionaries on the planet have sometime ago taken an untenable position on a very long slippery slope to save their own backsides/asses…and now they have, for at least a few years, been forced even further up that ever steeper, more slippery slope. The final cost so far being the gradual rape and destruction of the free-market, the decimation of the middle-classes wealth, and the total annihilation of the possibility of a future free-market, based again on the sound capital principles of risk and value etc.
There is no way back from this without the combination of political courage an real fearlessness,(and I don't say this lightly) that type of stuff no longer exists in our elected/electable officials. There is simply too many extremely powerful bad-guys out there going about their everyday tinkering/manipulation under the very potent misapprehension that their deeds are not only righteous but positively in effect. The cleaning-up would expose just too much dirty laundry (and therefore its owners) for what they are and what they have done thus far. Very risky, very dangerous, very not possible!
we won't need central banks. Sure, we can still have them, but they should be run by academics (not bankers)…
I disagree. You are right, WE WON'T NEED CENTRAL BANKS. It is the 'we can still have them' part I disagree with, especially if they are run by academics. Any one group of people will eventually be corrupted. All we need is a Treasury Dept. at the federal level (to print the money)and state banks (to dispurse the money). And we need jobs, here in the US, to keep the money here. It would also help if the filthy rich would trickle some of their wealth down to the bottom 50% thru higher taxes.