Basis for Trillions of Dollars Worth of Transactions is Possibly Fake

If something goes wrong with this fictional basis of trillions worth of financial transactions, it totally won’t destabilize the world’s economies or anything. There can’t be any precedent to that.

Sarcasm aside, if LIBOR being fake and manipulated is true, it does more to affirm that a tremendous level of risk and shakiness is at the core of the financial system. If this shaky core is undercut, many of the structures built on it will either fall or be damaged. That’s another way of saying that it could cause another economic crash.

It doesn’t seem likely to me that another crash similar to 2008 will happen in the near future, but it can’t be entirely ruled out as a possibility. After all, a lot could happen in the next 300-500 days, as recent history has shown.

More probable though is that there will be a moderately significant economic downturn in the U.S. soon, within the next 18 months or so. The U.S. economy is already overdue for a downturn, as capitalism typically produces a downturn every 4-7 years. In the few hundred years that capitalism has been around, that’s been the trend.

Amusingly enough, it was the late Paul Samuelson who said “The stock market has forecast nine of the last five recessions.”

LIBOR stands for the London Interbank Offered Rate. It measures the rate at which banks lend to each other. If you have any kind of consumer loan, it’s a fair bet that it’s based on LIBOR.

A 2009 study by the Cleveland Fed found that 60 percent of all mortgages in the U.S. were based on LIBOR. Buried somewhere in your home, you probably have a piece of paper that outlines the terms of your credit card, student loan, or auto loan, and if you peek in the fine print, you have a good chance of seeing that the rate you pay every month is based on LIBOR.

Years ago, we found out that the world’s biggest banks were manipulating LIBOR. That sucked.

Now, the news is worse: LIBOR is made up.

Actually it’s worse even than that. LIBOR is probably both manipulated and made up. The basis for a substantial portion of the world’s borrowing is a bent fairy tale.

The admission comes by way of Andrew Bailey, head of Britain’s Financial Conduct Authority. He said recently (emphasis mine):
“The absence of active underlying markets raises a serious question about the sustainability of the LIBOR benchmarks. If an active market does not exist, how can even the best run benchmark measure it?”

As a few Wall Street analysts have quietly noted in the weeks since those comments, an “absence of underlying markets” is a fancy way of saying that LIBOR has not been based on real trading activity, which is a fancy way of saying that LIBOR is bullshit.

LIBOR is generally understood as a measure of market confidence. If LIBOR rates are high, it means bankers are nervous about the future and charging a lot to lend. If rates are low, worries are fewer and borrowing is cheaper.

It therefore makes sense in theory to use LIBOR as a benchmark for borrowing rates on car loans or mortgages or even credit cards. But that’s only true if LIBOR is actually measuring something.

The article is meaningful, but it’s written somewhat too loosely for my own standards. I therefore might write an article on LIBOR myself soon.