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Central Banks are the Problem

The Libor scandal is about to get a whole lot worse.

And that's the good news…

Not only are at least 20 more big banks under investigation as part of a massive fraud to manipulate interbank lending rates that affect some $800 trillion in loans and derivatives, but the Bank of England is about to take center stage in the scandal.

And that's bad news for central banks around the world.

Well, actually, it could be good news, as in really good news, if it's the beginning of the end of what central banks do to manipulate free markets to the benefit of their only real constituents, the world's big banks.

First the good news.

It's already come out that traders at Barclays with huge derivatives positions leaned on co-workers who sit on "panels" that submit internal bank borrowing cost data to Thompson Reuters. And Reuters averages the middle lot of submissions to determine Libor (London Interbank Offered Rate) "fixings" (not my word, but actually the established nomenclature for what it apparently is that they do… as in "fix" rates). And it's all under the auspices of the British Banking Association.

What's good is that we now know for a fact that the traders (crooks?) were aided and abetted by their co-workers, the submitters (crooks?), who were overseen by managers and top executives who design most of these schemes (crooks?), and were all blessed by the British Banking Association, an illustrious association of 200 some-odd banks, whose many members (crooks?) are panel members submitting crooked (no question mark necessary) data.

Still don't get why that's good news?

Because it's proof there are crooks out there.And this time it's easy to see where the "fix" actually occurs.

It's also good news because, according to one multinational banking executive, just quoted in The Economist, it's "the banking industry's tobacco moment."

He was referring to the potential mountain(s) of litigation being drawn up already to claim that gross manipulation of interest rates caused billions, maybe trillions, of dollars of harm to borrowers and financial players of all stripes.

Remember, back in 1998, Big Tobacco had to settle class-action suits related to death and injury from cigarettes and other tobacco use. (These plaintiffs argued that tobacco companies knew of the health risk of smoking and failed to warn consumers.) These lawsuits cost them over $200 billion.

The bad news is the Bank of England, one of the world's stalwart and oldest central banks, is about to face its own potential Lehman moment (at least we can hope). That's on account of the fact that Paul Tucker, deputy governor of the Bank of England (and its supposed next top dog), is going to have to come clean in front of Parliament very shortly.

Mr. Tucker is apparently on record (according to Bob Diamond's phone call notes) suggesting that the Bank of England wanted Barclay's to manipulate it's Libor submissions downward so as to not panic counterparties and the country who might view tight interbank lending conditions as a sign of stress across the entire banking system.

So, here's why the bad news for the central bank (encouraging, no, make that, demanding fraud) is really good news for free markets.

Central banks have done nothing to countermand the trend (nothing but encourage) leading to big banks getting bigger; so big, in fact, that now all of the big banks around the world are all too big to fail.

The bigger the world's banks are (bankers want size, because more size equals more power to price, to manipulate markets, and to pay bigger bonuses), the more important central banks become, both to the big banks, nations, and the global economy.

Central banks are the saviors of big banks that get in trouble, especially when systems and economies are leveraged for profits that backfire, and they all have to be bailed out.

Central banks are supposed to be above what's going on below their ivory towers, but, in fact, they are the puppets being manipulated by the big banks. It's a case of the tail wagging the dog.

Why are central banks pouring money into banks, really? Why aren't governments printing money to pour into ailing economies but instead aiding and abetting central banks?

It's because central banks are independent supra-national bodies who have been ceded monetary power by governments almost everywhere to benefit banks and bankers the world over, who are their only constituents, and for all intents and purposes, effectively "own" legislators and governments.

They're pouring money into banks to keep them solvent. That's what central banks are there for. The banks aren't lending the money (massive reserves are sitting on balance sheets to shore up appearances) because they need it to meet reserve requirements and offset the illiquidity evident in the interbank lending market… the same interbank (Libor) market that the Bank of England wanted to make look more liquid than it was viscous back in 2008.

But it gets worse.

What will happen when the "multiplier effect" takes effect? I'm talking about the potential for massive inflation when all those huge quantities of reserves (stimulus) get lent out instead of shelved on balance sheets.

How about massive inflation?

Heaven help us if all these macro crises are fixed quickly. The flood of idle cash and credits globally will make past inflationary bursts look like a 40-yard dash, compared to miles and miles of potential problems ahead of us.

We need free markets, not manipulated markets. We need to break up all the world's big banks so they can fail when they overleverage themselves and entire systems, nations, economies, and the global economy aren't all brought to their knees.

If we break up all the too-big-to-fail banks, we won't need central banks. We can go back to what are supposed to be free markets dictating interest rates and creating honest, open economies and opportunities everywhere.

Who's with me?


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About the Author

Shah Gilani is the Event Trading Specialist for Money Map Press. He provides specific trading recommendations in Capital Wave Forecast, where he predicts gigantic "waves" of money forming and shows you how to play them for the biggest gains. In Zenith Trading Circle Shah reveals the worst companies in the markets - right from his coveted Bankruptcy Almanac - and how readers can trade them over and over again for huge gains. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.

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  1. erwin morris | July 10, 2012

    Always very interesting and ahead of the curves.

  2. Margo Robinson | July 10, 2012

    This is the first time I read you. How do we take control and bring back true free markets. How do I receive your other information .

  3. Alistair Ashley | July 10, 2012

    Don't wait for some government to do something about it, there are plenty of alternative currencies available. Don't wait for their market to become truly free just go to the market that is already free, agorism ( is everywhere.

  4. Allen Novotny | July 11, 2012

    I agree with everything you say, Shah. I've been investing for 37 years and have never been as frustrated in my life. However, I see nothing changing with the wimps we have in congress. I am really starting to question our system. Do we have to have a complete collapse before things improve.
    Six years ago, I was worth 1.4 million and now trying to hang on to the $800,000 I have left. I am scared to death of what may be coming.


  5. Eric | July 20, 2012

    Shah, your an amasing honest man, and we can thank you all of us for exposing the real problem, we MUST get rid of the central banks continous primeing the pump of the Banks too big to fail, ergo cut off the central banks, and the big banks will collapse like the house of cards they really are.

    It must never happen again, future generations should take heed, and make sure it does not happen again, but I'll be long gone if it does, and it will because they let it repeat as it always does.

  6. tedbohne | August 3, 2012

    HOW!!! it seems that nothing less than divine intervention can bring these corporate banks down. i hope for a good plan to wreck these institution of horror and crime. what can be done!!

  7. Ed | August 19, 2012

    Slay the serpent and put an end to the GranD(e)illusioN via higher LIBOR rates.

  8. Michael Warhurst | November 8, 2012

    Central banks do not need to be eliminated, they need to be reformed and re-tasked to serve the real economy. Currently central banks are now mostly privately owned and operated, not for the benefit of countries but for the profit of a very few extremely wealthy individuals. Central banks need to be under the control – not of private money – but of democratic national governments and re-tasked to target full employment, NOT inflation. Inflation is a scare crow created by big money interests and their boot licking media to suck up ever more wealth from the middle and working classes. If a middle class worker buys a house for 100,000 and next year the house is worth 110,000 – what's the problem??? There is no problem!!! However if one has 100 billion and next year it takes 110 billion to purchase the same products & services – THAT'S A 10 BILLION DOLLAR PROBLEM!! Now that IS a problem. Inflation under 15-20% is no real problem for the vast majority or the economy generally – as long as the economy does not rapidly lose jobs by some other means. However ANY inflation IS a problem for the very wealthy.
    What is the only solution for inflation – a serious problem for the very very wealthy?? Why it is to increase interest rates!?!? And what do interest rates do?? They transfer wealth from workers to the wealthiest individuals!?!?
    So we have inflation which IS a problem for the extremely wealthy as it makes their money worth less; but not for working classes as it makes their assets more valuable!! So inflation is a problem only for the very wealthy!! And what is the solution to this problem for the wealthy?? Why it is to raise interest rates which transfers more wealth from workers to the wealthiest individuals!!!
    Central banks, under the control of wealthy individuals NOT democratic governments, have been re-tasked from attaining near as possible full employment, to fighting the inflation scare crow by taking money from middle classes and giving it to the wealthiest few!?
    If inflation does become a problem democratic governments can take excess liquidity out of the system by taxation and simply destroy the money. Being monetary sovereigns they have no need to tax or borrow to spend money into the economy they can simply have the central bank up the balance in their account and spend the money into the economy by buying public assets, products and services. "Fighting" inflation by transferring wealth from workers to the wealthiest is totally unnecessary when the Central Bank and democratic government are operating correctly.

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