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What blows me away about this story is that, as far as I can tell, the entire financial world is built on this rate that is calculated by taking completely unve

What blows me away about this story is that, as far as I can tell, the entire financial world is built on this rate that is calculated by taking completely unverified estimates from a handful of enormous banks who have every incentive to manipulate those estimates. How on earth is such a conflict of interest allowed to parade around out in the open? And why should we have any reason to believe that there aren't other similarly absurd structural problems with the financial system? The whole thing sounds like a house of cards.

seanp2k2 14y ago
The world economy is a house of cards, propped up by ignorance. If the public at large knew how stupid much of this really was, there would be riots. How many people do you know who /really / understand the world economy? It's the best act of "security through obscurity" combined with "security theatre" ever.
- swombat 14y ago
  Must be the most robust house of cards in history, since this latest iteration seems to have managed to get us here all the way from the 18th century where capitalism originated to the present day where we have supermarkets, planes, the Internet, and a number of other wonders of the modern world.
  - anigbrowl 14y ago
    Oh now, you're smarter than that. Capitalism existed well before the 18th century (where it would be more proper to say that it was first named and studied properly), and there have been plenty of temporary but drastic reversals before and since. I'm very much pro-market, but it's hardly immune to herding problems or irrational outcomes; and when markets fail, the burdens of that failure often fall upon those least equipped (intellectually or economically) to bear them.
lifeguard 14y ago
The LIBOR is widely used, but there are others like the Fed's prime rate, and the consumer price index. The entire entire financial world is built on insider manipulation. Too many examples to list.
- haberman 14y ago
  I just don't understand why things are pegged to indexes at all instead of just letting prices be naturally determined by supply and demand. If prices are determined adversarially, then there is no room for manipulation or conflict of interest. Why have these indexes at all? Put another way, who is willing to buy or sell according to prices that are open to manipulation (by being pegged to something like LIBOR), and why are they willing to do this? And why shouldn't competition favor produce better alternatives like financial instruments that aren't pegged to any artificial index?
  - crasshopper 14y ago
    why shouldn't competition produce ... financial instruments that aren't pegged to any artificial index? There are those, too, but people want to hedge against the risk that "interest rates" move. Then they must define "interest rate": is it mortgages in Peoria? Car loans in Manila? 30-year Treasurys? ... Well, how about we use LIBOR.
  - lifeguard 14y ago
    >> letting prices be naturally determined This only works in economics textbooks. Economic actors never have perfect knowledge is another example. I think most of these benchmarks are chosen out of expediency at the time, then they become entrenched. The use of the Dollar for oil transactions might be another example.
  - anigbrowl 14y ago
    LIBOR is supposed to be determined adversarially; it theoretically represents the equilibrium of supply and demand for overnight liquidity. It's subject to manipulation because the number of participants in the market is necessarily small.
crasshopper 14y ago
the entire financial world is built on this rate The Epicurean Dealmaker (@epicureandeal) posted the standard response to your comment a few days ago ("Ready, Fire, Aim"). Prices are calculated as LIBOR + spread. You and I argue over the spread meaning that if I want 185 bp then I'll either ask LIBOR+165 or LIBOR+65 if the base rate went up by a whole 1%. Check the people who responded to his twitter comments (e.g., @dsquareddigest) for more of the standard back-and-forth here. For example Eurodollar futures hedge the LIBOR so people short LIBOR during the period in question directly lost money. Tangent: this is something I love about twitter. I imagine the meatspace equivalent would be eavesdropping on some Wall Street people in a bar, or hoping that a variety of voices get heard in the WSJ. But today, on twitter, I can read financial market participants' back & forth to each other about the scandal of the day, using their own terminology and reasoning. Very cool. How on earth is such a conflict of interest allowed to parade around out in the open? It's in no-one's interest to admit that systemically important banks have lost the confidence of their counterparties.

seanp2k2 14y ago

The world economy is a house of cards, propped up by ignorance. If the public at large knew how stupid much of this really was, there would be riots. How many people do you know who /really / understand the world economy? It's the best act of "security through obscurity" combined with "security theatre" ever.

swombat 14y ago
Must be the most robust house of cards in history, since this latest iteration seems to have managed to get us here all the way from the 18th century where capitalism originated to the present day where we have supermarkets, planes, the Internet, and a number of other wonders of the modern world.
- anigbrowl 14y ago
  Oh now, you're smarter than that. Capitalism existed well before the 18th century (where it would be more proper to say that it was first named and studied properly), and there have been plenty of temporary but drastic reversals before and since. I'm very much pro-market, but it's hardly immune to herding problems or irrational outcomes; and when markets fail, the burdens of that failure often fall upon those least equipped (intellectually or economically) to bear them.

lifeguard 14y ago

The LIBOR is widely used, but there are others like the Fed's prime rate, and the consumer price index. The entire entire financial world is built on insider manipulation. Too many examples to list.

haberman 14y ago
I just don't understand why things are pegged to indexes at all instead of just letting prices be naturally determined by supply and demand. If prices are determined adversarially, then there is no room for manipulation or conflict of interest. Why have these indexes at all? Put another way, who is willing to buy or sell according to prices that are open to manipulation (by being pegged to something like LIBOR), and why are they willing to do this? And why shouldn't competition favor produce better alternatives like financial instruments that aren't pegged to any artificial index?
- crasshopper 14y ago
  why shouldn't competition produce ... financial instruments that aren't pegged to any artificial index? There are those, too, but people want to hedge against the risk that "interest rates" move. Then they must define "interest rate": is it mortgages in Peoria? Car loans in Manila? 30-year Treasurys? ... Well, how about we use LIBOR.
- lifeguard 14y ago
  >> letting prices be naturally determined This only works in economics textbooks. Economic actors never have perfect knowledge is another example. I think most of these benchmarks are chosen out of expediency at the time, then they become entrenched. The use of the Dollar for oil transactions might be another example.
- anigbrowl 14y ago
  LIBOR is supposed to be determined adversarially; it theoretically represents the equilibrium of supply and demand for overnight liquidity. It's subject to manipulation because the number of participants in the market is necessarily small.

crasshopper 14y ago

the entire financial world is built on this rate The Epicurean Dealmaker (@epicureandeal) posted the standard response to your comment a few days ago ("Ready, Fire, Aim"). Prices are calculated as LIBOR + spread. You and I argue over the spread meaning that if I want 185 bp then I'll either ask LIBOR+165 or LIBOR+65 if the base rate went up by a whole 1%. Check the people who responded to his twitter comments (e.g., @dsquareddigest) for more of the standard back-and-forth here. For example Eurodollar futures hedge the LIBOR so people short LIBOR during the period in question directly lost money. Tangent: this is something I love about twitter. I imagine the meatspace equivalent would be eavesdropping on some Wall Street people in a bar, or hoping that a variety of voices get heard in the WSJ. But today, on twitter, I can read financial market participants' back & forth to each other about the scandal of the day, using their own terminology and reasoning. Very cool. How on earth is such a conflict of interest allowed to parade around out in the open? It's in no-one's interest to admit that systemically important banks have lost the confidence of their counterparties.