Central Banks are the Problem

5 | By Shah Gilani

The Libor scandal is about to get a whole lot worse.

And that’s the good news…

Not only are at least 20 more big banks under investigation as part of a massive fraud to manipulate interbank lending rates that affect some $800 trillion in loans and derivatives, but the Bank of England is about to take center stage in the scandal.

And that’s bad news for central banks around the world.

Well, actually, it could be good news, as in really good news, if it’s the beginning of the end of what central banks do to manipulate free markets to the benefit of their only real constituents, the world’s big banks.

First the good news.

It’s already come out that traders at Barclays with huge derivatives positions leaned on co-workers who sit on “panels” that submit internal bank borrowing cost data to Thompson Reuters. And Reuters averages the middle lot of submissions to determine Libor (London Interbank Offered Rate) “fixings” (not my word, but actually the established nomenclature for what it apparently is that they do… as in “fix” rates). And it’s all under the auspices of the British Banking Association.

What’s good is that we now know for a fact that the traders (crooks?) were aided and abetted by their co-workers, the submitters (crooks?), who were overseen by managers and top executives who design most of these schemes (crooks?), and were all blessed by the British Banking Association, an illustrious association of 200 some-odd banks, whose many members (crooks?) are panel members submitting crooked (no question mark necessary) data.

Still don’t get why that’s good news?

Because it’s proof there are crooks out there. And this time it’s easy to see where the “fix” actually occurs.

It’s also good news because, according to one multinational banking executive, just quoted in The Economist, it’s “the banking industry’s tobacco moment.”

He was referring to the potential mountain(s) of litigation being drawn up already to claim that gross manipulation of interest rates caused billions, maybe trillions, of dollars of harm to borrowers and financial players of all stripes.

Remember, back in 1998, Big Tobacco had to settle class-action suits related to death and injury from cigarettes and other tobacco use. (These plaintiffs argued that tobacco companies knew of the health risk of smoking and failed to warn consumers.) These lawsuits cost them over $200 billion.

The bad news is the Bank of England, one of the world’s stalwart and oldest central banks, is about to face its own potential Lehman moment (at least we can hope). That’s on account of the fact that Paul Tucker, deputy governor of the Bank of England (and its supposed next top dog), is going to have to come clean in front of Parliament very shortly.

Mr. Tucker is apparently on record (according to Bob Diamond’s phone call notes) suggesting that the Bank of England wanted Barclay’s to manipulate it’s Libor submissions downward so as to not panic counterparties and the country who might view tight interbank lending conditions as a sign of stress across the entire banking system.

So, here’s why the bad news for the central bank (encouraging, no, make that, demanding fraud) is really good news for free markets.

Central banks have done nothing to countermand the trend (nothing but encourage) leading to big banks getting bigger; so big, in fact, that now all of the big banks around the world are all too big to fail.

The bigger the world’s banks are (bankers want size, because more size equals more power to price, to manipulate markets, and to pay bigger bonuses), the more important central banks become, both to the big banks, nations, and the global economy.

Central banks are the saviors of big banks that get in trouble, especially when systems and economies are leveraged for profits that backfire, and they all have to be bailed out.

Central banks are supposed to be above what’s going on below their ivory towers, but, in fact, they are the puppets being manipulated by the big banks. It’s a case of the tail wagging the dog.

Why are central banks pouring money into banks, really? Why aren’t governments printing money to pour into ailing economies but instead aiding and abetting central banks?

It’s because central banks are independent supra-national bodies who have been ceded monetary power by governments almost everywhere to benefit banks and bankers the world over, who are their only constituents, and for all intents and purposes, effectively “own” legislators and governments.

They’re pouring money into banks to keep them solvent. That’s what central banks are there for. The banks aren’t lending the money (massive reserves are sitting on balance sheets to shore up appearances) because they need it to meet reserve requirements and offset the illiquidity evident in the interbank lending market… the same interbank (Libor) market that the Bank of England wanted to make look more liquid than it was viscous back in 2008.

But it gets worse.

What will happen when the “multiplier effect” takes effect? I’m talking about the potential for massive inflation when all those huge quantities of reserves (stimulus) get lent out instead of shelved on balance sheets.

How about massive inflation?

Heaven help us if all these macro crises are fixed quickly. The flood of idle cash and credits globally will make past inflationary bursts look like a 40-yard dash, compared to miles and miles of potential problems ahead of us.

We need free markets, not manipulated markets. We need to break up all the world’s big banks so they can fail when they overleverage themselves and entire systems, nations, economies, and the global economy aren’t all brought to their knees.

If we break up all the too-big-to-fail banks, we won’t need central banks. We can go back to what are supposed to be free markets dictating interest rates and creating honest, open economies and opportunities everywhere.

Who’s with me?


5 Responses to Central Banks are the Problem

  1. Val says:

    I’m a sideliner, but i’m sure we’ve had enough with that ILLUMINATI crap out there. Everybody who feels that something’s wrong with the artificial life we live, then needs to stop and just think of how much time he(she) will resist if all reality that we know dissapears. I’m asking myself and honestly, i’m frightening. With you Shah, if you need one!

  2. tr99 says:

    As always (nearly) your in the money Shah. We all know any system is only as good as the people running it, the same goes for regulations, without enforcement they are useless.

  3. Veronica says:

    We have to get momentum going on this – the whole population of ordinary folks already now knows these are the truths of what is going on, but who is going to mobilise the base to
    make sure the problem is addressed – all those who have power to change things are scared for their political lives by big moneyed interests, so they do nothing and the results are just the status-quo – and we are all ignored – there WILL be a revolution eventually, and they will be very sorry if they cause the masses to get REALLY MAD because then there will be violence – they are real fools if they think they can do this and get away with it for ever. I really hope we can do something about these issues before we get to that result – we are supposed to have reached a higher level of civilization – ha !

  4. ciceroji says:

    Shah, I think you touched on one key point of all this fiasco. The central banks are printing tons of money to bail out Banks while adding no real value to the economy. This money could instead be used in the real economy. Its like government printing money is taboo, but banks printing money is Okay. I know printing money may cause inflation. But we are already doing it. It is just that banks are supposed to print money with the help of the central bank at a rate that matches the growth in the economy and is above the current market interest rate. So if we are printing money anyway why not give the government printing power take it away from the banks and abolish taxes. We will basically all be taxes indirectly through the money we use. However at the same time allow the use of gold as money.

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