LIBOR is SF – but Not Why You Think It Is

By Shlomo Maital




  My favorite SF (Science Fiction) writers are the late Ray Bradbury (Fahrenheit 451, The Martian Chronicles) and Philip K. Dick (Do Androids Dream of Electric Sheep?).  Bradbury famously said, when asked if he tried to predict the future:  “No! I’m trying to prevent it.” 

   They now have a rival. It is the LIBOR (London Interbank Offered Rate), the rate at which banks lend money to one another. LIBOR is truly science fiction. But not why you think.  Not just because big banks manipulated it (among them, Barclay’s), with the apparent knowledge (as early as 2007) of the New York Fed, headed then by Tim Geitner, who is now US Secretary of the Treasury.     

   No, it’s much more serious.  You see, in order to have an Interbank Offered Rate, you have to have an Interbank Offer – banks lending to one another.  According to The Economist (July 14, p. 55) “banks are lending almost no money to one another”.  Why?  Because they know that if other banks are in as bad shape as they are – it’s too risky.  How bad? We don’t know, because European banks have “marked to market” (written off) only a tiny fraction of their ultimate losses, and we don’t know how much. 

   So LIBOR, even if it is not fiddled, is STILL science fiction.  Indeed, as fast as the European Central Bank pumps money into Europe, the banks pump it back, depositing ECB loans back in the ECB (at zero interest, by the way), instead of lending it to people and to businesses.  (That’s too risky, apparently).   This is why ECB “quantitative easing” has no impact.  There is something called a EURIBOR (euro interbank offered rate), which is even MORE science fiction.  It’s supposed to present lending between one “prime” European bank to another.  Well, there ARE no ‘prime’ European banks, except German ones, and they can borrow at far far lower rates than any other bank in Europe…so the EURIBOR rate is just the German rate, which reflects nothing but, well, Germany.   

    Does this all sound wacky?  Could the weird imaginative brains of Bradbury and Dick have dreamed this all up?  Not a chance.  When it comes to science fiction, you have to hand it to the bankers.  They’re doing their best to ensure that we truly don’t have a future.