The LIBOR Scandal: Tim Geithner Et Al

Posted: July 14, 2012 | Author: dakinikat

Geithner Begging Ben for more Bones

 
I’ve been trying to figure out a way to describe how serious the LIBOR scandal is without resorting to esoteric finance and economics models.  LIBOR–the London Interbank Offered Rate–is the rate at which many international banks lend money to other banks.  As such, it’s the underlying rate for prime rates around the globe.  It is akin to our Fed Funds rate.  It’s a rate watched by central banks closely and can be targeted by them.  It is not directly under their control but monetary policy can influence it.  Many, many loans are attached to the LIBOR rate and changes in the LIBOR rate.  As such, it allocates loanable funds to many many projects around the world.  It directly allocates funds to projects which–when missed–can lower the economic welfare of many countries.  Here’s just  a small bit that will give you an idea of how important the rate is from footnoted entries at Wiki.

Libor rates are calculated for ten different currencies and 15 borrowing periods ranging from overnight to one year and are published daily after 11 am (London time) by Thomson Reuters.^[4] Many financial institutions, mortgage lenders and credit card agencies set their own rates relative to it. At least $350 trillion in derivatives and other financial products are tied to the Libor.^[5]

Companies will use LIBOR as a base rate for discounting when evaluating capital projects. This means if the rate is too high or too low, it can impact the decision to build a factory, buy a machine, or expand a project. Let’s just say that nearly every financial and economic decision that’s evaluated based on opportunity costs or discounting uses a rate that’s base on the FED funds rate or LIBOR. It’s probably the most important interest rate in the world.

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