Who is the real Libor manipulator?

Will you save and keep money in bank in exchange for 0,25% annual interest?
Will you invest in government debt for 1-2% annual interest?
Will you invest in a de facto bankrupted debtor in exchange for 7% interest?
I can ask tens of such questions, but these 3 are enough to be asked at the current moment of exploding "libor-scandal" that is to decapitate some of the most important CEO-s in bank-world.
Why these 3 questions are important?
The answer is very simple - because they point to the real and most dangerous interest manipulator in last decades. A manipulator that is not under investigation. A manipulator that can manipulate absolutely legally and call this "policy".

What is the difference between "policy" and "crime"?

The difference is if you are a Central bank or not. If you are, then we will call it a "policy". If you are a private bank with no special privileges by law, then you will be a criminal.

The main interest manipulator in last decades are the central banks of leading economies. Their influence even on Libor is much higher that the influence of any other market participant, including the possible secret alliance of some of the biggest banks.

At current moment, FED is keeping a record low interest rate of 0,25%. At the same moment the interest of government securities of countries like USA, Germany and Japan is 1-2%, with moments even below 1%. And also at current moment the "market" interest rate on Spanish debt is about 7%...

The common answer of all 3 questions is "No". It is not worth saving at 0,25%. It is not worth to finance governments at 2%. And it is madness to invest in Spain debt for only 7% interest.

But why then we see all this market parameters existing?

The answer is very simple - because of the absolutely legal interest manipulation made by Central banks.

In theory, the interest rate of the Central bank must be around the market equilibrium. The Central bank can influence the market by increasing or lowering the rate, but only with a small difference with the market equilibrium. This is so because if the Central bank establishes too high level it will crush the economy with too expensive money supply. At high rate everyone will start to withdraw the money from business and put it on deposit for interest. At very low rate everyone will start taking credits and spending them, and no one will save.

In fact in the times of gold-money the Central bank could not offer a rate much different than the market equilibrium. If the rate was too low the bank would go out of gold. If it was too high it would be overflowed with gold at an interest price that would not be possible to pay because no one would borrow loans.

So this situation is possible only in the world of "fiat"-money. The central bank can establish high rates, as it will be paid by newly printed money, and does not need a real economy business to make such a profit. The central bank can establish low rates as the increasing borrowing can be satisfied again with newly printed money.

Having this "magic wand" in hands in last decades the Central banks have manipulated the interest rates to be much lower than the market equilibrium. This was in answer to the political dependence of banks. The politics required lower rates to borrow more and spend on bribing electors with social privileges. They also pressed the Central banks to help in fighting recessions by low rates and pouring money in economy.

In fact the politics liked the low-interest idea and refused to think of an inflation and of a long term consequences.

The result of this "low-interest-bonanza" was a great pressure of all interest rates in down direction. When you can borrow from the Central bank at 1%, will you borrow from the market at 6-7%? Will you need savers and pay them enough interest so they are motivated to save?

Now some banks are investigated on Libor manipulation that in the worst scenario can be 0,25%. I.e. if the interest must have been 5%, they pressed it down to 4,75%. That is the possible maximum of such an intervention and such a secret bank-alliance. At the same time we can see years and decades of artificially low interest rates of FED, ECB, BoJ, BoE... And not only low, but brutally low. If the market was to require 5 or 7% interest, they offered at 2%. And even now - when the market is frightened and it is normal to ask for higher rates, the Central banks are pressing the rates to even below 1%! So who is the real manipulator?

You will not buy Spanish bonds for 7%. It is a too risky asset and is good only for financial adventurers. But such type of investors can ask for a higher rate - 20,30, even 40%. They will really take the risk of not having their money back.

But we see only a 7% interest and the reason for this absurd is obvious - Spanish banks under government pressure are borrowing from ECB at under 1%, and buying government bonds at 7%. The banks don't need real savers and real confidence in them to keep the money in a bank that invests in bonds. So the banks don't need to pay the real market price for the money. So the interest on super risky Spanish bonds is only 7%. No one is buying them. But all bonds are bought by politically dependent investors, funded with cheap fiat money from ECB at under 1% interest.

So who is wiser to be investigated if we are looking for the real interest manipulator? The banks-cartel of leading banks? Or the absolutely legal cartel of governments and Central banks?

The answer is obvious...

July 22nd 2012

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