July 07, 2012
In a piece that has the word “explainer” in its headline, the post proceeds to mis-explain the LIBOR scandal to its readers. The second paragraph tells readers:
“This is a big deal. Remember that JP Morgan scandal a few months back? That was mostly JP Morgan hurting itself. The LIBOR scandal was Barclay’s making money by hurting you.”
The claim is that LIBOR liars cost people money by inflating the LIBOR rate, thereby causing people to pay more on mortgages, car loans and other debts that were tied to the LIBOR. The problem with this claim is that there is no evidence that the mis-reported LIBOR rates had an upward bias. In fact during the financial crisis they were understating the true rate.
This means on average, there is no reason to believe that people paid more on their loans because of the lies than they would have in an honest market. Some people undoubtedly did pay slightly more, but others paid slightly less. And, since the direction of the lies was systematically downward in the crisis period, consumers may have actually benefited from this scam.
The LIBOR scandal is primarily about bankers ripping each other off by using false information to make their trades winners. The bankers deserve to go to jail for this fraud, but their main victims were other traders.
The public did lose in this story but the loss is primarily from resources being devoted to game playing and nonsense in the financial sector which instead could have been devoted to building up the economy. In this sense, the financial sector can be thought of as the equivalent of a massive government agency devoted to promulgating waste, fraud and abuse. The money used to fund this department would be a pointless drag on the economy, just like our bloated financial sector.
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