Exposing the madness wehind current economic thought

Monday, July 9, 2012

LIBOR is a flawed man-made construct

By Robert Wenzel:

LIBOR, like the eurozone, is a flawed man-made construct. Using market forces are much better ways to come up for solutions in both cases.

The Basel capital-adequacy rules were flawed because governments, as they always will, directed banks to invest in financial instruments that will benefit governments. No sane bank would have their portfolios structured the way LIBOR banks did, without regulations forcing them to move in such a direction.

It would be pretty difficult to really game the LIBOR even from a technical perspective, aside from the fact that it is also absurd to think that bankers would be able to manipulate world rates in the first place---without seeing huge distortions in the supply and demand for loans across the globe.

"All banks are potentially insolvent" not only during a crisis, but at all times given the fractional reserve system under which banks throughout most of the world operate under. The solution is not interest rate controls instituted by the BOE, which would lead to even more distortions in the markets, but the closing down of the BOE, the liquidation of banks who can't meet their obligations (which would be most English banks) and allowing sound banks to emerge via the free markets.