News and Society Blog-Economics: The Libor Scandal

currently unfolding, suggests the worlds top banks have been rigging the Libor rate for years, a rate by which interest rates on financial instruments everywhere are derived on a daily basis. Even worse, it appears that some of this activity must have been known about by regulators.

in London will hopefully raise a long overdue international discussion about the foundations of our global monetary system that should have taken place back in 2008.

That discussion involves a re assessment of the rights of banks to use their deposit base (clients money) as leverage for speculative activities like derivatives.

Originally in what was known as the Glass-Steagall standard (a piece of legislation originated by Roosevelt) a firewall was created between ordinary banking activities and other speculative investment activities.

However over time, (the 1990s in the US and the 1980s in the UK) that type of legislation was repealed and the underlying principles and reasons for the protection forgotten. The general economic philosophy of the day was that the merchant banking investment market was capable of self regulation and should be left to its own devices notwithstanding increasingly speculative activities.

We now know this is not the case. The banks derivatives obsession and focus on short term profit to lend primarily to non profit producing assets is what bankrupted banks, devastated the productive capacity of economies and left ordinary people to pay the bill resulting in alarming drops in standards of living.

The combination of highly speculative activity with traditional banking resulted in a loss of prudence, a necessary feature of banking and a heavy focus on sales - selling as much debt as possible to make as much short term profit as possible for banks. We shouldn't be surprised by this outcome. It is the underlying motivation of uncontrolled capitalist activity.
In fact, we are now seeing perhaps for the first time, that the end game of completely unfettered capitalism concentrates wealth into fewer and fewer hands making it the ultimate nemesis of a true democracy. The market crash and continuing fallout is driving the lesson home. It is counter intuitive to how we have previously thought.

The problem is that banks have almost total control of the monetary system. There is no benefit to the banks under the existing system in taking into account the long term effects of their lending decisions on society, only in how those decisions affect the profit or health of the bank itself.

The anger and rage echoing around the world now is that the wrong people are paying the price while the ones involved in the crisis continue to practice similar activities with impunity. This is the REAL issue with . It demonstrates dishonesty and unfairness in the existing system and how it's manipulated from the inside to favour a minority. It also brings home that for all the rhetoric and posturing of the last few years, nothing fundamentally about the system has changed.
What is needed now is an awareness of this and a radical and careful overhaul.

Banking as an activity is a necessary component of a healthy well functioning modern society; the idea being that people deposit their funds with banks then banks use those funds to make loans to other citizens for the purpose of economic growth and improving the overall standard of living in communities. Currently this is just a fairytale. The bulk of lending is to non profit producing assets (homes) that create no growth in an economy but provide the bank security if there's a default. These are seen by banks as easier and safer investments than more risky start up loans for new or even existing business's. Again we shouldn't be surprised by this trend because the banks primary goal is to protect itself from financial loss not grow a healthy economy.

For the system to function effectively, any depository institution needs to be highly regulated and work within a controlled framework of what is and what is not permissible. A Glass-Steagall 'type" of standard would protect legitimate deposit and commercial banking activities while allowing the more speculative activities to fail (because they would not be part of the banking system) without damaging innocent victims.

The real challenge right now is to make people aware of these stark realities, especially our policy makers and then to consider "how" this enormous decoupling process and overhaul of the banking system can best be carried out with the least amount of pain to everyone.

For more check out: YouTube Positive Money-Money and Debt and http://www.positivemoney.org.uk

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Source: http://newsandsocietyblog-economics.blogspot.com/2012/10/the-libor-scandal.html

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