The New York Post published an interesting article recently explaining to the lay reader just what, as the NYP’s headline writers put it, the Libor scandal really means. The paper’s headline read, “Li(e)bor Confirms It’s Rigged.” Wait. Bankers rigging inter-bank lending to suit their needs? No way! That’s a shock. I’ll never understand, though, why central banks should be allowed to have essentially the same privilege: Getting a bunch of bankers who think they are free of outside influence to set interest rates in a way—or more healthy way—than the market can. Unbelievable, really. You ought to read End the Fed by Ron Paul, the libertarian of the Republican party, who advocates for dismantling the Federal Reserve system, which, he claims causes inflationary depressions.
In early July, hedge fund manager Jonathon M. Trugman, wrote in the Post:
“To understand this indignity, we need to follow some of the internal plumbing of Libor. It is calculated by the aforementioned guys in London who receive daily “quotes” by 11 a.m. London time from a handful of London-based banks; the quotes indicate at what rates bankers think they will lend to/borrow from one another overnight.
“It’s a very small sample set—as few as eight and as many as 20. The highest and the lowest rates are thrown out, and then a mean rate calculated. That’s the Libor rate.
“It’s a system that’s very easy to manipulate. With such a small number of banks, each bank’s quote can and really did skew the numbers.”
We wondered in 2006—along with literally thousands of other market mavens—whether the Fed, in cahoots with other governmental officials, wasn’t trying to manipulate the market by using futures. Sounds truly nutty, no? But read our columnist Jonathan Moreland on what has become known as The Plunge Protection Team in a March 2006 column called “The Stock Market’s Da Vinci Code” :
“Is the Federal government manipulating the equity markets? For years, there have been whispers on Wall Street of secret government-backed actions—like stepping in to buy equity index futures to prevent investors from catastrophic plunges.
“It sounds like a crazy conspiracy theory for sure, but it is one that has currency and won’t go away. The conspiracy goes like this: There is a group of federal government officials—the Treasury secretary, the Fed chairman—plus senior NYSE officials who make up, the Plunge Protection Team. It is said they intervene to put a floor under stocks whenever they are at risk of penetrating important levels of technical support, such as when the 50-day moving average slips under the 200-day moving average. . . .”
David A. Geracioti