Saturday, July 7, 2012

The Biggest Manipulator of the LIBOR Rate is the Federal Reserve

The 16 banks that "set" the LIBOR rate can't come close to the manipulation that the Fed does, simply because they can't add money or drain money from the system, the way the Fed and other central banks can.

Peter Tchir of TF Market Advisors, (via ZeroHedge) explains:

The Fed does everything it can to keep LIBOR low.
This chart says it all.

The Fed cannot affect LIBOR directly, but in general LIBOR trades in line with Fed Funds.  You can see that historically as Fed Funds was changed, LIBOR responded appropriately.  There was typically some small premium to reflect the "credit risk" of banks versus the Fed, but it was relatively small, and fairly stable.  3 Month LIBOR would deviate a bit as rate cuts and hikes were anticipated in the market, but in general, it was a fairly stable game.
That all started to break down in 2007.  We saw the first real signs of LIBOR deviating from its normal spread to Fed Funds in the summer of 2007. The Fed responded by cutting the "penalty" rate for using the discount window, and in fact encouraged banks to use the discount window (I still can't shake the mental image of someone sitting in a dark basement with a green eye-shade doling out money to banks that request it).  Then the crisis got worse.  Bear needed to be rescued.  Facilities such as the Term Auction Facility that had been put in earlier were increased in size.  The Fed backstopped some portfolios that JPM acquired as part of the Bear Stearns deal.
As the crisis re-ignited in the late summer of 2008 and peaked after Lehman and AIG, the Fed took step after step to reduce borrowing costs.  The Fed was blatantly clear that it wanted borrowing costs to go down.  They had the obvious tool of reducing Fed Funds to virtually zero, but when LIBOR didn't follow, the Fed took further action.  The Fed did not want bank borrowing costs to be high.
They increased dollar swap lines so foreign banks could borrow.  The Fed stepped into the commercial paper market so banks wouldn't have to use money to meet drawdowns on revolvers.  TALF was another creation to take pressure of bank lending.
The FDIC allowed banks to issue bonds with FDIC backing (so not quite Fed program, but who is going to quibble).
Fears that MS and GS and GE would topple the banks were alleviated by making them banks.
The list goes on.  The Fed has done a lot and trying to control LIBOR as a key borrowing rate is one of the things they have worked on, both directly and indirectly.


  1. Still not buying it. I would use the above to say the Fed doesn't "set" anything. They just create money from nothing in an attempt to push interest rates where they want. Even the Fed Funds rate is a TARGET rate. It's what they Fed targets, not sets. As has been stated several times, the Fed cannot truly set an interest rate.

    LIBOR on the other hand is set by an average of the reported borrowing costs of the member banks. This can be manipulated by an individual bank or a collection of the reporting banks misreporting their rates. They are contributors to a numerator to which they are the denominator of an average. They have a direct mathematical impact on the setting of rate used to benchmark other debt instruments.

    Furthermore, the fact that in 2007 LIBOR decoupled from the Fed Funds rate supports the Fed is ineffectual in managing interest rates for interbank lending. The above programs just expanded the pool of assets that Fed would take as collateral in lending. They did this because interbank lending (swaps and repos) froze during the crisis. The Fed in this instance was simply creating a market where one would not clear. Again, supporting the fact they are ineffectual as manipulating interest rates.

    I think it's important for Austrian economists to get this right. This is about discerning cause from effect for the 2008 crisis. I would hold that the Fed is only ever a reactionary institution and only ever has one real "policy tool" and that's printing money.

    1. They are getting it right. The issue is that the whole LIBOR scandal is pissing in the wind compared to what central banks do. Yet the govt's and media's focus is fixated on this. What does that tell you about how misplaced priorities are? The Fed can set an interest rate but to do that it'd have to nationalise banking and debt fully. Yet it can certainly muddy the waters and continuously pump massive volumes of excrement into them.

  2. I think the Austrian argument is simply that prices should be discovered by the market, rather than be targeted by central banks; but you make a good point. Nothing is actually set.

  3. we get it, FED manipulates (influences) rates. It is its charter. No surprise.

    LIBOR manipulation is fraud and corruption, plain simple.

    You cant marginalize it, by continuously bringing FED into discussion. Everybody knows about FED, they actually say it themselves "ZIRP policy" and so..on.

    Lets not loose focus here. Wall.St and "The City" is drowning with borderline criminal/financial fraud. There has to be atleast few top CEOs going to jail, atleast it will cleanse/act-as-deterrent the system.

    Austrian economics i thought was about fairness. Not justifying, despite of it.

  4. Austrian economics is not about fairness or justifying anyones actions, it is a science tha uses what we know about human behavior, and the data available to discover the truth of markets. We as people need to learn to keep our personal opinions out of where the evidence takes us and not ignore it when we do not agree with it. This is strong evidence that the fed manipulates LIBOR more than any individual bank. This does not mean that there was no fraud commited it just shows that stating everything that has happened with the LIBOR rate is fraud just is not true.

  5. The Fed is a PRIVATELY owned corp supposedly not chartered in one of the 50 states or DC. WHO are they who control our $$? ANYBODY? Where does their power come from?

    1. The president who appoints their chairman. Stop this "private" corporation crap. They remit all their "profits" to the treasury.

  6. Yes, they remit certain (not all) profits, but they are still a private corporation, owned by private banks. They do not have a constitutional mandate. They are unconstitutional, but you won't find the US Supreme Court ruling that they are. They have illegally usurped a vital sovereign function of the federal government. The president appoints a chairman from a list of nominees that they control. Any president who tries to change the status quo gets assassinated. They are thugs.

    1. lol what is the basis of you saying they are "private"? Yes, they may be unconstitutional but so is the DOJ in terms of anti-trust. That doesn't make it "private". And fuck a "sovereign" function of the federal government and its ridiculous excuse of a "constitution", which supplanted the articles of confederation.

      I guess that's why presidential assassinations are far and few between, perhaps the fact that the politicians require the banks to keep their corrupt system afloat. None of this makes the Fed "private" in any respect.

  7. How does this chart demonstrate cause and effect? The FED line closely follows the LIBOR line because it is affected by LIBOR. Sometimes it seems to be leading and sometimes it seems to be following. A more telling chart would be one in which all of the 16 Central Banks were plotted, but even those actors are following the directive of the LIBOR.

  8. LOL Are you saying that the Fed doesn't control the Fed funds rate?