FacebookTwitterGoogle+RedditEmail

System Failure

by ROB URIE

Bankers are losing their jobs and the financial press is up in arms over the manipulation of a key interest rate, LIBOR (London Inter Bank Offer Rate). The manipulation is a big deal because of how large of an effect LIBOR has– $750 trillion of Swaps (notional) is outstanding and most of it is priced to LIBOR. Additionally, another very large amount of loans have interest rates based on LIBOR. So manipulation of the interest rate shifts a very large amount of money from one group of people to another.

For a sense of the size of the problem, the goods and services the U.S. economy produces in a year are worth around $16 trillion. So the idea of $750 trillion in securities being manipulated is nearly beyond comprehension. But consider this: (1) most of the $750 trillion in Swaps (notional) outstanding were issued after the financial crisis in 2008 and (2) most financial markets are already being ‘managed’ meaning that manipulation of prices is the rule, not the exception.

Swaps are used to trade one financial return for another. Swaps notional is a scalar, a fictional value used to scale payment calculations, not a dollar amount at risk. The actual dollar amount at risk is the summed difference between these returns over some period of time. The manipulation of LIBOR produces gains for one group at the expense of another. Manipulating LIBOR is straightforwardly theft. And given the scale and that banks and bankers are the culprits, this interest rate manipulation is organized crime on a massive scale.

However, the existence of the Swaps market already was a scandal. The Swaps market is OTC (over-the-counter), meaning by design there already was little price transparency for Swaps. If a Swaps dealer can set the price that they pay (or receive) a bit lower (higher) without the purchaser knowing it, because there is no price transparency, the market has already been manipulated. Manipulating LIBOR in addition just adds insult to injury.

The Swaps market would be relatively easy to put onto a securities exchange. Doing so would provide price transparency and the potential for regulatory oversight. But Wall Street, with the help of current and former Obama administration officials, has lobbied furiously to keep Swaps off of exchanges because the banks don’t want price transparency. The banks profit from having information that their customers don’t have. This $750 trillion game was already rigged before the LIBOR scandal.

Even if the total dollar amount at risk from Swaps is less than $750 trillion, it is still in the tens, if not hundreds, of trillions of dollars. This is risk that the banks took on after the financial crisis of 2008 that saw them bailed out with trillions of dollars in public money. Credit Default Swaps (CDS) were the reason for the $160 billion bailout of AIG. This market will be the most likely culprit to bring down the global financial system when it inevitably moves back into crisis. The continued existence of the Swaps market after 2008 dwarfs LIBOR manipulation as a scandal.

For the uninitiated, price manipulation, be it interest rates or stock prices, is the only thing keeping Wall Street alive. The entire business of the Federal Reserve is to ‘manipulate’ interest rates and the money supply for the purported benefit of ‘the economy.’ This isn’t to accuse the Fed of wrongdoing, given the economic premises behind their actions. But (1) changing interest rates as the Fed does benefits one group at the expense of another and (2) the beneficiaries just happen to disproportionately be the already rich and powerful. And the banks eternally benefit from Fed actions. The Fed works for, and is run by, the banks. So also does the Western political system.

With respect to current interest rates, the reason that the Fed is keeping interest rates low (manipulating them), and will continue to do so for a decade or more to come, is to prevent adjustable rate mortgage holders from defaulting on their home mortgages at further expense to the banks. The nonsense about doing so to ‘spur lending’ runs into (1) the existing excess of private credit, (2) the dearth of credit worthy borrowers among those needing loans due to the ongoing economic depression and (3) that large corporate borrowers already have access to as much credit as they desire through the capital markets. Additionally, banks profit from cheap credit because to the extent that they do make loans, they lend at a higher rate than they borrow at.

The claim the Fed has been manipulating global stock markets higher for the benefit of the already rich that own all of the stock is not controversial. Fed Chairman Ben Bernanke has publicly proclaimed this goal and has explained the mechanism that the Fed is using to do so, the ‘portfolio balance channel.’ This represents a transfer of wealth from a quasi-public entity, the Fed, to rich, powerful interests through the manipulation of financial market prices. Should readers buy the Fed’s explanation that manipulating stock prices higher is for the public good, please look into who owns stocks. Sorry to break this news, but the Koch brothers’ interests and yours are not the same.

Last, with all of the hand wringing over ‘austerity’ policies in Europe and the U.S., austerity economics are banker economics and have been for a few centuries. Austerity causes disinflation or deflation, meaning that the accompanying social disasters– unemployment, poverty, homelessness, and permanent debt servitude benefits bankers because they see loans repaid in more valuable dollars. With austerity policies to benefit bankers ruling the day, why is this not the ‘scandal of the century?’

For those who wish to be constructive toward the existing political economy, the number of criminal prosecutions that could be brought against the banks is nearly infinite. This has been known is some detail since 2008. Barack Obama has done everything in his power to assure that no criminal investigations occur. Mitt Romney would do the same.

So, if I may, the system is the problem, and not this banking scandal or that.

Rob Urie is an artist and political economist in New York.

Rob Urie is an artist and political economist. His book Zen Economics is published by CounterPunch Books.

More articles by:
June 28, 2016
Jonathan Cook
The Neoliberal Prison: Brexit Hysteria and the Liberal Mind
Paul Street
Bernie, Bakken, and Electoral Delusion: Letting Rich Guys Ruin Iowa and the World
Anthony DiMaggio
Fatally Flawed: the Bi-Partisan Travesty of American Health Care Reform
Mike King
The “Free State of Jones” in Trump’s America: Freedom Beyond White Imagination
Antonis Vradis
Stop Shedding Tears for the EU Monster: Brexit, the View From the Peloponnese
Omar Kassem
The End of the Atlantic Project: Slamming the Brakes on the Neoliberal Order
Binoy Kampmark
Brexit and the Neoliberal Revolt Against Jeremy Corbyn
Doug Johnson Hatlem
Alabama Democratic Primary Proves New York Times’ Nate Cohn Wrong about Exit Polling
Ruth Hopkins
Save Bear Butte: Mecca of the Lakota
Celestino Gusmao
Time to End Impunity for Suharto’’s Crimes in Indonesia and Timor-Leste
Thomas Knapp
SCOTUS: Amply Serving Law Enforcement’s Interests versus Society’s
Manuel E. Yepe
Capitalism is the Opposite of Democracy
Winslow Myers
Up Against the Wall
Chris Ernesto
Bernie’s “Political Revolution” = Vote for Clinton and the Neocons
Stephanie Van Hook
The Time for Silence is Over
Ajamu Nangwaya
Toronto’s Bathhouse Raids: Racialized, Queer Solidarity and Police Violence
June 27, 2016
Robin Hahnel
Brexit: Establishment Freak Out
James Bradley
Omar’s Motive
Gregory Wilpert – Michael Hudson
How Western Military Interventions Shaped the Brexit Vote
Leonard Peltier
41 Years Since Jumping Bull (But 500 Years of Trauma)
Rev. William Alberts
Orlando: the Latest Victim of Radicalizing American Imperialism
Patrick Cockburn
Brexiteers Have Much in Common With Arab Spring Protesters
Franklin Lamb
How 100 Syrians, 200 Russians and 11 Dogs Out-Witted ISIS and Saved Palmyra
John Grant
Omar Mateen: The Answers are All Around Us
Dean Baker
In the Wake of Brexit Will the EU Finally Turn Away From Austerity?
Ralph Nader
The IRS and the Self-Minimization of Congressman Jason Chaffetz
Johan Galtung
Goodbye UK, Goodbye Great Britain: What Next?
Martha Pskowski
Detained in Dilley: Deportation and Asylum in Texas
Binoy Kampmark
Headaches of Empire: Brexit’s Effect on the United States
Dave Lindorff
Honest Election System Needed to Defeat Ruling Elite
Louisa Willcox
Delisting Grizzly Bears to Save the Endangered Species Act?
Jason Holland
The Tragedy of Nothing
Jeffrey St. Clair
Revolution Reconsidered: a Fragment (Guest Starring Bernard Sanders in the Role of Robespierre)
Weekend Edition
June 24, 2016
Friday - Sunday
John Pilger
A Blow for Peace and Democracy: Why the British Said No to Europe
Pepe Escobar
Goodbye to All That: Why the UK Left the EU
Michael Hudson
Revolts of the Debtors: From Socrates to Ibn Khaldun
Andrew Levine
Summer Spectaculars: Prelude to a Tea Party?
Kshama Sawant
Beyond Bernie: Still Not With Her
Mike Whitney
¡Basta Ya, Brussels! British Voters Reject EU Corporate Slavestate
Tariq Ali
Panic in the House: Brexit as Revolt Against the Political Establishment
Paul Street
Miranda, Obama, and Hamilton: an Orwellian Ménage à Trois for the Neoliberal Age
Ellen Brown
The War on Weed is Winding Down, But Will Monsanto Emerge the Winner?
Gary Leupp
Why God Created the Two-Party System
Conn Hallinan
Brexit Vote: a Very British Affair (But Spain May Rock the Continent)
Ruth Fowler
England, My England
FacebookTwitterGoogle+RedditEmail