Archive for July 6th, 2012

Trust No More

by lizard

There’s an intangible factor that plays a significant role in determining economic activity: trust.

And if there wasn’t already bundles of evidence that Big Finance is a clusterfuck of dangerously untrustworthy individuals and institutions, driven by reckless greed and enabled by complicit politicians, then the latest scandal with LIBOR should be enough to shut up even the most craven apologists for the banksters.

First, what is LIBOR?

LIBOR, the London Interbank Offered Rate, is the most active interest rate market in the world. It is determined by rates that banks participating in the London money market offer each other for short-term deposits. LIBOR is used in determining the price of many other financial derivatives, including interest rate futures, swaps and Eurodollars. Due to London’s importance as a global financial center, LIBOR applies not only to the Pound Sterling, but also to major currencies such as the US Dollar, Swiss Franc, Japanese Yen and Canadian Dollar.

LIBOR is determined every morning at 11:00am London time. A department of the British Bankers Association averages the inter-bank interest rates being offered by its membership. LIBOR is calculated for periods as short as overnight and as long as one year. While the rates banks offer each other vary continuously throughout the day, LIBOR is fixed for the 24 hour period.

While Americans celebrated our Independence, across the pond, it became just a little clearer how dependent we are on a system that’s being rigged from the very top. This from Matt Taibbi’s blog:

This Libor-manipulation story grows crazier with each passing minute. We have officially disappeared now down the rabbit-hole of the international financial oligarchy.

Former Barclays CEO Bob Diamond is testifying before parliament in London today, and that’s sure to bring some shocking moments. But there’s already been one huge stunner. In advance of that testimony, Barclays released an email from October 29, 2008, written by Diamond to then-Chairman John Varley and COO Jerry del Messier (who also stepped down yesterday). The email from the CEO to the other two senior Barclays execs purports to detail the content of the conversation Diamond had with Bank of England deputy governor Paul Tucker that same day.

In the email, Diamond essentially tells the other two execs that he has been given permission by Tucker – encouraged, actually – to rig Libor rates downward. What’s even worse is that Diamond’s email suggests that Tucker was only following orders, i.e. that Tucker had received phone calls from “a number of senior figures within Whitehall” – that is, the British government – expressing concern about Barclays’ high Libor rates. Tucker in this version of events was acting as a middleman for the British government, telling Diamond to fake his borrowing rates in order to preserve the appearance of financial stability, for the good of Queen and country as it were.

Back at home, our Plutocratic Pleasing President has the jobs report to weather as the nation roasts. Over at ECW, Dave Budge has his take, which is worth reading, as it doesn’t resemble a blood-in-the-water electioneering pounce for obvious political points.

Here is Dave’s brief list of factors at play for global business:

…unworkable currency and likely recession in Europe, undiscoverable economics metrics in China, and all sorts of geopolitical risks that may lead to a real shooting war in the not-to-distant future. Combined, these factors and many others make the global business climate fraught with uncertainty that makes businesses – both domestic producers and international players – hesitant to create the supply-side activity…

Dave goes on to talk about how “We are choking on a system of restrained trade everywhere we look” but there is nothing in his look at the Big Picture about the deep, undeniable corruption that has created a lot of uncertainty for everyone.

The tea party anger was initially focused on the bailout of the banks. Three years later, Occupy sprang up to point out how the biggest redistribution of wealth in US history has created a chasm between the 99% and the plutocrats. The Ron Paul insurrection (that will be quietly put to sleep by fall) continues to justifiably rage against the actions of the Federal Reserve. And, like Charles Ferguson keeps reminding us, prosecutions are, to put it nicely, sorely lacking. From the link:

According to Ferguson, there is overwhelming public evidence in (1) lawsuits, (2) depositions, (3) government investigations, and (4) whistleblowers of highly illegal conduct in the housing bubble and financial crisis. There is a staggering amount of evidence that CEOs of Wall Street firms, like Lehman Brothers, were warned that their financial controls were inadequate and their accounting was wrong, or to put in it in plain English: ‘their books were cooked’. A prime example is a memo warning to top Lehman executives by Senior Vice President Matthew Lee, “I feel it is my ethical and legal responsibility to point out to you that there are billions of dollars of unjustified assets on our balance sheet.” (To see the memo, Google: “Matthew Lee and Lehman.”) A month later Lee was dismissed from the firm and the CEO of Lehman continued to stand by the firm’s financial statements even though warned of extreme problems, inaccuracies, and overstatements, e.g., ‘Repo 105’ transactions artificially boosted the firm’s balance sheet by $50 billion! This is illegal corporate behavior of the first order, but where are the criminal charges?

J-girl points out what happens when some laws are blatantly not enforced—the illegal behavior happens in abundance.

Exactly.

Luckily, uneducated violators of firework bans aren’t in the position to blow up the global economy with their mortar shells and roman candles.

Ivy league educated titans of finance are, on the other hand, in that position, and they continue to fight any attempt, however meager, to restrain their habitual greed and chronic corruption (for a good distillation of the absurdity of Congress’ “grilling” of Jamie Dimon, Jon Stewart does it again).

Trust, some argue, is integral to economic development. I haven’t had a chance to look too closely at at this article yet, titled Social Attitudes and Economic Development: an Epidemiological Approach, but I like how it starts:

What are the fundamental causes of differences in income per capita across countries? Although there is still little consensus on the answers to this question, it is often argued that social attitudes such as trust are one of the main determinants of economic development. As stressed by Kenneth Arrow:1 “Virtually every commercial transaction has within itself an element of trust, certainly any transaction conducted over a period of time. It can be plausibly argued that much of the economic backwardness in the world can be explained by the lack of mutual confidence.”

The intellectual tradition stressing the importance of social attitudes dates back to at least Max Weber, and has seen many recent restatements in political science in particular, recent ones being Robert Putnam2 and Fukuyama3. In his influential book Making Democracy Work, Robert Putnam showed, for instance, how civic attitudes and trust could account for differences in the economic and government performance between northern and southern Italy. This tradition has been so influential that it has led the World Bank to put on the top of the agenda the promotion of a new kind of capital stock to trigger economic development: the social capital. Following Fukuyama, this social capital can be defined as the “set of informal values or norms shared among members of a group that permits them to cooperate with one another”. Obviously the propensity to trust each other is likely to be key for fostering such mutual cooperation and growth.

As long as justice is two-tiered, and accountability at the top non-existent, addressing the sometimes onerous regulations that hamper small business at the local level is just fiddling while the ship sinks.

What more evidence do we need that the system is rigged, and there’s virtually no political will to fix it?

I’d like to conclude this post with a ridiculous music video of the song Everything’s Ruined, by Faith No More. If you listen to the song, it fits. Stay cool Missoula!

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