I’ve been lazy on the Libor scandal because it made my head spin. It seemed like an obscure financial scandal confined to the UK. But I was wrong not to pay attention. As Matt Yglesias explains, this scandal — involving interbank loan rates — isn’t some obscure financial bullshittery:
Even though the typical American is never going to seek an interbank loan in London, the number is used as a benchmark for a wide range of other financial instruments. Credit instruments with variable interest rates—private student loans, auto loans, adjustable-rate mortgages, credit cards, etc.—need to be indexed to some underlying marker of the overall cost of funds within the financial system. Often that’s something called the “prime rate” set here in the United States, but it’s also frequently the Libor. So growing evidence that Libor numbers have been deliberately manipulated by banks for years means that millions of people have been paying the wrong interest rate on all manner of financial products. Vast sums of money have been wrongly snatched from innocent people and created equally vast undeserved windfalls for others.
Essentially, Libor is an estimate of what it costs for banks to lend each other money. Those interest rates feed … everything. They are based on banks reporting data on borrowing. And it turns out that banks tailored their reports to under- or over-estimate Libor so that their financial arms could make huge profits on the information asymmetry. The banks knew what the real libor was but made sure a bogus libor was put out so that they could make millions. Then, when the financial crisis hit, both the banks and the regulators conspired to keep the rates low so the economy and the banks would seem healthier than they actually were.
A few heads have started rolling — put a pin in that for a second — but I think people are missing the forest for the trees. The corruption of Libor was inevitable. An informal system like this may have worked when all the bankers knew each other and agreed not to manipulate the system. But as Mark Calabria notes, it was never going to be as good as a system based on actual market performance. It was precisely the sort of cosy insider bullshit that has been exploding in our faces for the past five years.
And this is bigger than the billions or maybe trillions these guys ripped out of our pockets. What this really is, when you think about it, is a suicidal attack on the financial system itself. The financial system functions on trust. If we come to believe the game is rigged, we might as well just rename ourselves New Zimbabwe. So far, Barclay’s is the only bank implicated, but that’s because they’re cooperating (sorta). This will spread and spread until banks across the world are engulfed.
Now, returning to the head rolling: I’ve frankly lost patience with these fuckers in the banking industry. When they make me agree with an op-ed by Robert “The Littlest Communist on Slate” Reich, they’ve gone too far. Rolling out the heads of a few mid-level executive is simply not going to cut it this time. Entire boards need to be fired. People need to be jailed. This business of shrugging shoulders and offering a few ritual sacrifices is insufficient for this crisis.
Let’s be clear: we don’t need some new huge slate of regulations and capital restrictions. Stephen Baindbridge points out how often these crises result in bad laws that hurt the economy and do nothing to prevent further scandals. No, what we need to do is enforce the laws we have to the fullest extent. What these guys did was fraudulent. We’ve had laws against that for centuries.