by Paul Craig Roberts
19-Jul (Institute for Political Economy) — The article about the Libor scandal, coauthored with Nomi Prins, received much attention, with Internet repostings, foreign translation, and video interviews. To further clarify the situation, this article brings to the forefront implications that might not be obvious to those without insider experience and knowledge.
The price of Treasury bonds is supported by the Federal Reserve’s large purchases. The Federal Reserve’s purchases are often misread as demand arising from a “flight to quality” due to concern about the EU sovereign debt problem and possible failure of the euro.
…The lower is Libor, the higher is the price or evaluations of floating-rate debt instruments, such as CDOs, and thus the stronger the banks’ balance sheets appear.
Does this mean that the US and UK financial systems can only be kept afloat by fraud that harms purchasers of interest rate swaps, which include municipalities advised by sellers of interest rate swaps, and those with saving accounts?
The answer is yes, but the Libor scandal is only a small part of the interest rate rigging scandal. The Federal Reserve itself has been rigging interest rates. How else could debt issued in profusion be bearing negative interest rates?
…How long can the regime of negative interest rates continue while debt explodes upward? Currently, everyone in the US who counts and most who don’t have an interest in holding off armageddon. No one wants to tip over the boat. If the banks are sued for damages and lack the money to pay, the Federal Reserve can create the money for the banks to pay.
…To sum up, what has happened is that irresponsible and thoughtless–in fact, ideological–deregulation of the financial sector has caused a financial crisis that can only be managed by fraud. Civil damages might be paid, but to halt the fraud itself would mean the collapse of the financial system. Those in charge of the system would prefer the collapse to come from outside, such as from a collapse in the value of the dollar that could be blamed on foreigners, because an outside cause gives them something to blame other than themselves.
PG View: An excellent article that illustrates just how far beyond the Libor scandal the “fraud” seems to extend. Discussions about the manipulation of global financial markets are no longer relegated to just the tin-hat crowd, and Roberts calls the Fed’s zero interest rate policy what it is: “Rigging interest rates”, which is fundamentally little different from what Barclays and the other setters of Libor where engaged in.
Perhaps now is a good opportunity to take a portion of your assets outside of the traditional financial markets, which are increasingly acknowledged as being “rigged.”