In today's AFR I assume an historically odd position: defending private banks against public prosecution. I also develop what I think is a fairly novel analysis of the scandal currently swirling around the London Interbank Offered Rate (aka 'Libor'), which has already cost Barclays $450 million, its Chairman and CEO, and implicated the Bank of England, the New York Federal Reserve, and Timothy Geithner. It is available for free over at the AFR. Excerpt only follows:
While institutions might have tried to undercook their Libor rates, the far more active distortions of bank credit costs were actually being wrought by central bankers and sovereign treasuries. If you question this claim, consider what Libor rates banks would have paid in the absence of this support. And vigorous manipulation of private credit costs by public authorities continues to this day.
Understanding this dynamic helps shed light on the profoundly influential public-private nexus that serves as both the insurance that protects economies from catastrophe, and the source of so much deeply ingrained moral hazard. This is precisely why I first canvassed the need for a “Son of Wallis” financial system inquiry back in July 2009.
While we popularly characterise financial markets – and the participants that populate them – as expressions of “laissez faire” capitalism, the truth is that the price of credit (and hence “money”) is normally determined by non-democratically elected officials working in central banks.
