An amazing inadequacy in the architecture of financial markets

Dialogue with the Alter Ego on the Paul Tucker hearing in Britain’s Select Treasury Committee, drafted and published on  July, 10, 2012

Question by the Alter Ego of Noah denkt™ (AE): Yesterday the British parliament’s Select Finance Committee crossquestioned the Bank of England’s Deputy Governor Paul Tucker on allegation that the Bank of England may have been involved in the manipulation of the Interbank short-term lending rates which are being reflected in the semi-official LIBOR-rate. Did Noah denkt™ follow the deposition which was broadly televised?

Answer by Noah denkt™ (Nd): Yes, we did.

AE: And what do you make of it?

Nd: Well, given that the Libor-Rate apparently is the basis for a wide range of  financial products whose total volume is said to reach more than 500 trillion $, it is actually quite  astonishing that the Bank of England never seems to have taken that rate all that serious.

AE: Why do you say this?

Nd: Paul Tucker mentioned in his testimony that while taking into account the daily Libor-rate, the Bank of England never views it as a stand alone piece of importance. Instead Mr. Tucker made it clear that the Bank prefers to look at the rates which are actually being paid in the interbank market rather than rely on the estimates which to a certain degree form the basis of the Libor rate calculations. In other words, the Bank of England was quite aware of the flaws that go into the Libor-rate fixing process but didn’t deem them relevant enough to go front-page with their scepticism towards that supposedly all important indicator.

AE: But isn’t it understandable that the Bank wouldn’t feel a larger responsibility for that Libor-rate given that the latter is indeed being calculated by the British Banking Association (BBVA) and not by the Bank itself?

Nd: Well, the Bank of England’s prime responsibility is to watch for the stability, the viability and balance of the country’s financial and economic system. One should, hence, assume that it must concern it somewhat if there is a trillion dollar financial service sector whose valuations are apparently anchored in a flawed base-rate.

AE: Well, first of all, it has to be said that the Libor rate with all its  low balling never strayed that far away from reality. And secondly, we also have to recognize that the Bank did raise its concerns with the BBVA, didn’t it?

Nd: Yes, they discussed these things in private meetings but they didn’t make a huge effort to educate the public about all that. And transparency would have demanded that they do so given the fact that even the most minimal percentage point Libor variation from reality will cost quite a bit of money in that large sum capital market.

AE: But it is also true that private financial institutions which calculate their own interest rate offerings should have sufficient financial expertise to understand that it is inadequate to view the Libor-rate as a Word-of-God measuring stick.

Nd: Well, hopefully, they know now. And hopefully, the general public finally understands that its financial infrastructure is a lot less sound-proof, and a lot less water-tight than the system’s representatives would have us believe with all their expert talk and expert salary.

AE: In other words, you should always form your own, independent judgment and never kowtow to reputation and standing just because it is reputation and standing that is trying to impress you?

Nd: Correct?

AE: And is it truly feasible for your average Joe to form an independent judgment on all these complex issues when you really need to have a lot of information to be able to put them into the right perspective?

Nd: Well it’s certainly a lot to ask, but there is no other way out of this. And that is why it is so very important that the media would finally provide more first hand access to relevant events such as the deposition of Paul Tucker, Bob Diamond and others in our respective national parliaments.

This entry was posted in Democracy, Economics, Finance, Politics and tagged , , , . Bookmark the permalink.

Comments are closed.