They forgot the "E"

Ever heard of LIBOR — the London Interbank Offered rate? Me neither, until recently.

What that refers to is an average of interest rates that banks in London estimate they’d be charged to borrow from each other. More information on how that is calculated is available from this article by Don MacKenzie in the London Review of Books. Of particular interest there is the sheer amount of assets somehow tied to that number globally (over $300,000,000,000,000), & how quaint the process for obtaining that number is. The average of guesses, moving mountains of money.

Now that you know the basics, here’s why I bring this up: Barclays, one of the banks involved with this interest rate, revealed it has been rigging the number, and down the wormhole we go. Several other banks are being investigated for potentially being in cahoots with them on this, making up the usual Rogue’s Gallery: BofA, UBS, Citigroup, JPMorganChase, etc. Since it’s an average, it makes sense that Barclays wouldn’t have acted alone. Rigging LIBOR matters because amidst those zeros are huge piles of our old friend consumer debt. If you’ve been screwed on a loan in the past few years, at least in part you have LIBOR to thank.

This is a measurement that despite its impact, at least at face value, makes no sense whatsoever. It’s not set by actual market transactions. It’s not based on past interest rates, which would provide the ones calculating it with something observable. It’s not even straight up government fiat, for all the faults that such would introduce. It’s just “hey, what do you think your number’ll be?” and they say whatever. Oligarchical capital might as well be operating off of a Magic 8-Ball, folks.

Consider how much these banks control, and their practices. If you’re asking how to regulate a handful of players holding trillions rather than why such huge institutions even exist, it’s time to rethink.

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About b-psycho

Left-libertarian blogger & occasional musician.
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2 Responses to They forgot the "E"

  1. Todd S. says:

    Huh. Back in the dark days of the late 20th century when I was a young finance and accounting student, the ‘O’ stood for ‘Overnight’. At least, that’s how we used it. I see now on the Wikipedia entry that there are many periods of LIBOR with Overnight being just one of them.

    Interestingly, it was my academic track that led me to first give up on capitalism and eventually to embrace anarchism in particular.

  2. B Psycho says:

    Yeah, that’s how more than a few reach it actually. I didn’t take finance as a formal route, but I read a crap-ton about economics in the meantime — then I compared the theory to the practice & caught myself saying “wait a minute…” too many times.

    Can’t really calculate worth a damn with all the distortion in the way.

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