A Keynesian Economist Melts During the Robert Wenzel Show

This is by far the most difficult Robert Wenzel Show interview I have conducted. The guest of the show, Robert Shapiro, attempted to deliver a monologue. It was difficult to get a word in edgewise and further, on a number of occasions, he made statements that were simply untrue. Below I reference, a number of facts that will provide clarity to the interview, given some of the off-the-wall statements made by Shapiro.

One of Shapiro's current major claims is that the LIBOR "scandal" is  such a mess that it "could be the biggest financial fraud in history."

I don't doubt that some banks may have tried to manipulate LIBOR, at different times. When money is involved, people are going to try the game the system. However, it would be very difficult to game the system anywhere close to the degree Shapiro suggests. He's a revolving door government-private sector operator who will take any opportunity to call for more government regulation.

Here are a few notes that will help you in understanding the discussion between Shapiro and me. Shapiro, himself seems to concede there wasn't much "manipulation" before 2007. He writes:

From 2000 to 2006, LIBOR rates averaged one-quarter of one percentage point above Treasury rates.

In his writing and during my interview, he seems to want to imply that the climb in the LIBOR rate in 2007 was suspicious. He writes:

In 2007, however, that spread more than doubled to nearly two-thirds of a percentage point, and their movements up and down did not track each other so closely. By 2008, the difference in the rates was five times what it was in 20002006, averaging 1.3 percentage points, and the up-and-down movements of the two rates no longer tracked each other.

When I confronted him with the fact that 2007 was the start of crisis in the banking sector, he ignored my statement, and tried to push the start of the crisis into 2008. He did this because it gives him the ability to claim that the climb in LIBOR in 2007 was a manipulation and not because of market forces. However, if we look at a timeline compiled in 2008 by Bloomberg, it is obvious the crisis started for banks in 2007 and would justify a climbing LIBOR, as the markets viewed bank paper as more risky.

Here's the Bloomberg and the facts Shapiro chooses to ignore during the interview:

The following is a timeline of events that led to the current global financial crisis.

March 5, 2007: HSBC Holdings Plc, Europe's biggest bank by market value, says the U.S. subprime market is ``unstable'' and now in a ``downturn,'' making it the main drag on company earnings.

March 29, 2007: HSBC Chairman Stephen Green says the U.S. subprime mortgage services division will be ``run down significantly'' as the bank tries to recover from loan losses.

April 2, 2007: New Century Financial Corp., which specialized in loans to people with poor credit, files for bankruptcy protection after being overwhelmed by customer defaults.

July 17, 2007: Investors in two Bear Stearns Cos. hedge funds that invested in collateralized debt obligations backed by subprime mortgage loans are told there is no value left in the funds, wiping out $1.6 billion originally invested.

July 19, 2007: Federal Reserve Chairman Ben S. Bernanke tells the U.S. Senate's Banking Committee that there may be as much as $100 billion in losses associated with subprime mortgage products.

Aug. 9, 2007: BNP Paribas SA, France's biggest bank, halts withdrawals from three investment funds because it can't ``fairly'' value their holdings, as concern over U.S. subprime mortgage losses roils credit markets.

Aug. 17, 2007: The Fed lowers the interest rate it charges banks and acknowledges for the first time that an extraordinary policy shift is needed to contain the subprime-mortgage collapse.

Aug. 22, 2007: Countrywide Financial Corp., the biggest U.S. mortgage lender, sells $2 billion of preferred stock to Bank of America Corp., the biggest U.S. bank by market value, to bolster its finances.

Sept. 7, 2007: The three-month London interbank offered rate, or Libor, the rate banks charge each other for dollars, rises to a seven-year high, signaling efforts by central banks to free up lending are sputtering.

Sept. 14, 2007: Northern Rock Plc says the Bank of England agreed to provide emergency funds to ease a ``severe liquidity squeeze'' sparked by U.S. subprime mortgage defaults following the first run on a British bank in more than a century.

Shapiro also dismissed the notion that it was the Bank of England that was behind Barclay's move in 2008 to submit lower bids. He painted an absurd picture of BOE just checking up on Barclays. But here' how the UK's Telegrapgh explains what went down:

The release of the emails, first seen by ITV News, came minutes before Bank of England governor, Mervyn King, and his deputy, Paul Tucker, faced MPs investigating the Libor scandal that has engulfed Barclays.

John Mann was reported as calling the emails, obtained by through a freedom of information request, "explosive" and showed the central bank in 2008 encouraging the three bank to lower Libor.

Sent on Wednesday May 28, 2008 with the subject 'Libor', an email from Mr Tucker to Bob Diamond, former Barclays chief executive, reads: "Have spoken to HSBC and RBS, Stuart and Johnny. Sense similar across all three of you. I encouraged contact amongst Mark Dearlove peer group."

When you listen to the clip, I'm sure you will be amazed as I was that Shapiro claimed this was just the BOE checking up on Barclay's. It's another case of Shapiro painting Barclay's in a negative light, so he can call for more regulations.

BTW, here is the reference to Shapiro calling American conservatives (I really think he means free market advocates) "childlike":

Yet, the refrain that the big banks know best remains the default position of most American conservatives and many policymakers. This childlike faith will be tested by the new scandal swirling around some of the most basic interest rates in the global economy, the LIBOR or London Inter Bank Offered Rates.

Yet at the same time he also wrote this:

All of the obvious parties that might have done something about it the Fed and the SEC, for example, or the Financial Services Authority in Britain apparently looked the other way.

And in his conclusion:

So long as big finance will do almost anything to goose its own profits and bonuses, self-regulation is a dangerous myth. It should give way to sound law enforcement, which in economic terms is government regulation.

I challenged him and said that his view might be considered childlike since he was calling for more government regulation, even though he stated government agencies had already "looked the other way"

I then went in for the kill on his view that it was free markets (or as he calls it "self regulation") that caused the surrounding crisis. These Keynesians that state it was free markets that failed, generally have no idea  how much government money manipulation via central banks is going on during these periods of so called "failure of free markets." The truth is there is heavy manipulation of money supply (and therefore interest rates), but the Keynesians seem to have no clue. I tried to draw out this cluelessness by questioning of Shapiro and this is where he hangs up the phone as he realizes he is getting trapped.

(One final note: During the interview, a third voice is heard for a short bit. That was the voice of The Robert Wenzel Show executive producer Chris Rossini. He provides the name of Diana Carew, who works for the Progressive Policy Institute, where Shapiro was a co-founder. I was comparing her domineering interview style with that of Shapiro's, where they both attempt to monopolize the interview time. Here is the clip with Peter Schiff.)

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