Barclay’s, the huge British bank (fourth largest in the world) whose roots in London trace to the late 1600’s, has been very bad.  It is one of several banks responsible to the British Banking Association (BBA) for reporting the interest rates it would be charged on credit transactions with other banks in order that such quotes be compiled and averaged together as the London Interbank Offering Rate, or LIBOR.  LIBOR is then used as a benchmark for setting the rates charged on some $360 trillion of credit facilities worldwide, including everything from the credit card rates charged consumers, to the credit swap derivative rates for investment bankers, to the rates holders of adjustable rate residential mortgages pay. 

Barclay’s was fined nearly half a billion dollars by US and UK regulatory agencies for having intentionally falsified its submissions to the BBA.  Barclay’s is only the first of what surely will be a cascade of stalwart banks so charged and fined.  The false submissions go back as far as 2005, and in the words of Jonathan Weil of Bloomberg, “It has been an open secret for years that banks routinely misstated their numbers”.  In some cases, Barclay’s colluded with other banks to nudge the rates in the preferred direction.  Sometimes it attempted to manipulate them acting alone.  Sometimes it attempted to manipulate rates in order to squeeze out a bit more profit for itself.  In other cases, it did so simply to keep itself or the banking system from looking bad.  On at least one occasion it apparently falsified rates at the behest of central banking authorities.  During the depths of the financial crisis, the head of Barclay’s rate-setting division, Robert Diamond, who later became its chief executive officer (now resigned) received a call (according to Mr. Diamond) from Paul Tucker, deputy governor of the Bank of England, the British version of the Federal Reserve, imploring the bank to lower the amount it reported as its cost to borrow money, concerned that the relatively high rates might call into question the stability of Barclay’s, and with it, the whole of the financial system.

Of course, the US Federal Reserve was as much concerned with the stability of the financial system during that time as was the Bank of England, and was frenetically pushing money out the door in order to forestall a credit freeze and the collapse in confidence that it would engender.    The Federal Reserve, the Bank of England, Barclay’s, et al in the industry, sought the same object–deceiving the public about the true severity of the crisis.  That Barclay’s and the BOE went about it differently than the Fed does not change the character of the impulse, which was deception.

How successful were their operations?  The following chart depicts the overnight LIBOR, the average of rates reported to the BBA for borrowing money overnight:

Graph of Overnight London Interbank Offered Rate (LIBOR), based on U.S. Dollar

It appears that about midway through the crisis, the overnight market had practically seized up (the spike to nearly seven percent).  The Bank of England flushed away the fear clogging the system with a flood of sterling midway through the recession.  It would be hard to imagine that Barclay’s alone could have caused or prevented the spike in borrowing costs that happened as the crisis deepened.  Even had they colluded with other BBA reporting banks, it’s doubtful the reality would have long remained obscure.   They may have tried to deceive at the behest of their central banker, but it appears to have had little or no effect.

The Fed overnight money curve looks similar, but with a much lower spike higher mid-recession than LIBOR had. 

FRED Graph

The Fed also flooded the portion of the international financial system it oversaw with money midway through the recession, buying up faltering assets in some cases, purchasing loans in others, in an effort to prevent seizure by making things look better than they were, pumping liquidity into the system to keep it smoothly running (incidentally, “liquidity” is banker euphemism for cash, or money).

It might be objected, in comparing Barclay’s actions to the Fed’s, that the Fed and the Bank of England, both of whom ultimately took direct action to push rates down, were acting for the good of the public, whereas Barclay’s attempts at manipulating LIBOR were of a more selfish origin.  Perhaps in some cases that was true (there is that ever-present impulse to greed), though it’s hard to see how Barclay’s alone could have successfully manipulated the LIBOR to its advantage, and when it attempted to manipulate LIBOR in concert with others to pretend things weren’t as bad as they seemed, it was doing exactly what the Fed and BOE were attempting through different means.

What to learn from all this?

First, that the financial system, such as it is, exists to serve itself and only itself.  It does not exist to serve the economic system which produces the capital it shuffles about.  This should have always been patently clear, and arguments about the importance of the financial system for capitalist development dismissed as so much balderdash (as the Brits might say) years ago, but a great store of political capital is vested in the nonsense that a healthy financial system is necessary to a healthy economy, never minding for a moment the fact that healthy economic growth has always preceded the development of a financial sector.  Capitalist development and profitability are important for the financial system if it is to have capital flows to direct hither and yon, but by the way things now stand, the financial system perceives itself to be the purpose for which those capital flows are created, instead of being simply a parasitic creation of them.

Second, that the line between government and private banking is so thin and fuzzy as to be almost imperceptible.  Collusion in impairment of the public’s interest is the rule, rather than the exception.  Manipulating interest rates affecting billions of consumers is de rigueur for both government and private bankers.   Not a moment’s thought is given to the impact changing rates or cheapening money might have on the public, except as an affect on the public might impact the viability of the financial system.

Third, that hubris is the most pervasive and durable of character traits found among financial system actors and participants.  Ben Bernanke, Mervyn King (BOE Governor), Robert Diamond, et al, really believe that real economic outcomes can be determined by tweaking this or that monetary metric, and even more outrageously, believe they are sufficiently wise and insightful to know the manner in which the tweaking should be conducted.  It is not an exaggeration to say these guys consider themselves akin to demigods, knowing, whereas the public doesn’t, what is best for them, and even further, knowing how to magically engineer and manipulate financial system metrics so that what’s best is achieved.

I’ve said this many times before, and I’ll say it again–the massive monetary manipulations since the financial crisis have served to do nothing but delay the inevitable, and to make the inevitable all the more painful when it arrives.  There is a financial reckoning in store, and it will mainly be the fault of all those clever “masters of the universe” in government and private banking who believe real economic outcomes can be determined through monetary deceptions.  When the crisis strikes again, everybody should by then have learned to discount fully everything a banker, government or otherwise, says, and they should assume that anytime they’re silent, it’s because they’re hiding something.  Bankers haven’t a shred of remaining credibility. 

The financial crisis won’t be finally over and put to bed until the parasitic financial system is utterly and completely demolished, and people are able to again see that sloshing money around is not the point of economic life, but is only a potential by-product of an economic system that is functioning properly, one in which real value in tangible goods and services is being created.  It might take a good deal of economic pain to get there, but shaking the financial parasites off the back would be a cure well worth the discomfort of the medicine.