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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 dete
by 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 agowhy 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 agoLIBOR 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.