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…
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.
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.
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About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
He helped develop what has become known as the Volatility Index (VIX) - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
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