|Barclay's Rate Fixing Scandal
||[Jul. 3rd, 2012|05:56 pm]
Recently, banks do not appear to be having a good time. First there was the NatWest/RBS transaction debacle, then it emerged that Barclay's had been manipulating Libor, an important interest rate, which is used in many other rates, to make itself look better. Interestingly, the tone in the media has changed. It's gone from what could be called banker-bashing, where people are outraged but don't want to do anything, to banker-lynching, where people are out for blood and don't really care who gets hurt so long as enough bankers pay. It's an incredible shift.
Strangely enough, I'm really relieved by the who rate fixing scandal. If you accept the theory that markets are self-regulating, then the fact that the Credit Crunch happened means that something went wrong as outlined in the assumptions behind that theory. The most likely thing, according to the theory, would probably be the free flow of information through the system. This would happen when people resorted to fraud and deception to manipulate the market.
Throughout the last few years, I've been pretty sure that's what happened. I think this because, having studied the self-regulating theory argument, I think it's a solid piece of thinking, so I'm not tempted to throw it away just because it failed, which is the socialist argument. But neither do I think that, just because some theory predicts that something will happen, it must, which has been the capitalist argument for some time, because in reality, theories are never entirely accurately applied and their assumptions are never entirely true. Therefore, the failure of the markets to self-regulate due to information failure and endemic fraud/deceit strikes me as the nicest middle ground between the two extremes.
The problem with that view has been that, well, there should have been a lot more blatant market manipulation going on than has emerged so far. This is why I find the rate fixing scandal to be really reassuring, because if information failure is to blame, then this is exactly the kind of thing that should have been happening. It's also exactly the kind of thing we need to face to fix the system.
If the theory is right, then my feeling is that we need a bit more manipulation happening than this. Either a full-blown conspiracy by the banks to manipulate Libor, or one or two more scandals about market manipulation to erupt. Maybe even both.