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The Way Things Work At The Central Bankers’ Club – OpEd

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The case of the rigged Libor turns out to be the scandal that just keeps on giving. It reveals a great deal about the behavior of the Federal Reserve Board and central banks more generally.

Last month, Federal Reserve Board Chairman Ben Bernanke gave testimony before Congress in which he said that he had become aware of evidence that banks in England were rigging the Libor in the fall of 2008. According to Bernanke, he called this to the attention of Mervyn King, the head of the Bank of England. Apparently Mervyn King did nothing, since the rigging continued, but Bernanke told Congress there was nothing more that he could do.

The implications of Bernanke’s claim are incredible. There are trillions of dollars of car loans, mortgages, and other debts, in the United States, tied to the Libor. There are also huge derivative contracts whose value depends on the Libor at a moment in time. People were winning or losing on these deals not based on the market, but rather on the rigged Libor rate being set by the big banks.

Bernanke certainly had an obligation as Fed chair to expose and stop this rigging, which was interfering with the proper working of U.S. and world financial markets. But hey, Mervyn King didn’t want to take any action, what could Bernanke possibly do?

It is truly incredible that Bernanke would make such a statement to Congress and the public. There was nothing he could do about the rigging?

Suppose that he told the head of the Bank of England that he had no choice but to stop the rigging. Bernanke could have said that if King doesn’t immediately take the necessary steps to end the rigging then he would hold a press conference in which he would publicly display the evidence of the rigging and report King’s failure to take action.

Is it conceivable that this threat would have left King unmoved? Would King continue to tolerate the rigging even if could cost him his job and leave him open to public humiliation for failing to carry through his responsibilities to the people of the United Kingdom? That seems unlikely.

Of course such a threat would have been rude. It would have required Bernanke to tell a fellow central bank head that he was failing in his job and that Bernanke was prepared to ruin his career in order to force him to act responsibly. Apparently Bernanke never even considered this course of action.

This should make everyone very angry. Whatever personal relationship Bernanke has with Mervyn King and other central bank heads should be subordinate to his responsibility to ensure the integrity of U.S. financial markets. If the latter requires that he be rude to the head of the Bank of England, then there is no question that his job requires that he be rude to Mervyn King. But that is not the way things get done in the central bankers’ club.

It is not just the Libor scandal that shows the bad effects of central banker clubbiness. Bernanke has recently committed the Fed to a policy of targeting a 2.0 percent inflation rate. The basis for this targeting is seen as the congressional mandate for the Fed to pursue a policy of promoting price stability. Of course that is only half of the Fed’s mandate; the other half is to pursue a policy of promoting full employment.

No prior Fed chair has seen the commitment to price stability as implying a specific inflation target, so Bernanke has taken a big leap in picking this 2.0 percent inflation target. This is a big deal because it could mean that the Fed would neglect the other half of its mandate, the commitment to maintain full employment (as it is arguably doing now) in the interest of hitting its 2.0 percent inflation target.

Why would Bernanke pick this 2.0 percent inflation target? After all, there is little evidence that moderate rates of inflation in a 3.0-4.0 percent range cause any major harm to the economy. There are hundreds of examples, including in the United States, where economies have maintained strong growth over prolonged periods with rates of inflation that exceeded 2.0 percent.

Of course the 2.0 percent inflation target came from Bernanke’s friends at other central banks. Mervyn King has announced a 2.0 percent inflation target for the Bank of England. The European Central Bank (ECB) is legally committed to a 2.0 percent inflation target.

This legal commitment to 2.0 percent inflation meant that when housing bubbles were growing to ever more dangerous levels in Spain, Ireland, and elsewhere in the eurozone, the ECB just looked the other way. Rather than taking any steps to prevent the collapse that has devastated the eurozone’s economy, the ECB said: “what does this have to do with us?”

Bernanke apparently wants the Fed to have the same attitude. If tens of millions have their lives ruined by unemployment and/or the loss of their home, Bernanke will still be able to pat himself on the back because the Fed reached its 2.0 percent inflation target. That’s the way things work at the central bankers’ club.

This column originally appeared in Al Jazeera and is reprinted with permission.

Dean Baker

Dean Baker

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy.

One thought on “The Way Things Work At The Central Bankers’ Club – OpEd

  • Avatar
    August 10, 2012 at 6:32 am
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    Banksters
    I use the term “fictitious capital” to describe what the Big Bankers, public and private, are attempting to inflict on the ordinary 99% people who through their entrepreneur led labour create ALL REAL value, capital included.
    In the middle of the 19th century Karl Marx coined this term to describe the notes and loans that governments and gentry used to finance wars, luxuries, estates and otherwise living beyond their REAL means.
    At that time such paper would accrue during “Boom” times as the economy expanded and would usually max out at around 10-12% of a countries GDP. As long as the good times rolled on it was not a problem, but came a crisis of over production (of all the wrong things) there would be the day of reconing. Ergo, the bill collectors came and cash not paper promises was the order of the day. This resulted in a variety of ways to settle, some were paid in part or in full but more often bankruptcies and swindles resulted. Then the stage was set for the next cycle – boom bust.
    Today though the situation with ‘ficticious’ or ‘counterfeit capital is vastly different.
    100 years of pumped up growth for growths sake first based on the now discredited ideas of John Maynard Keynes has produced a situation where some 20 times the worlds gross domestic product exists as ficticious capital, a counterfeit collection of deficits, bills, bonds, exchanges, derivatives, swaps and the latest fraud, “quantitive easing”. (Le Monde Diplomatique puts it at 50 times)
    Every day we read of new Central and Private bank meetings, “Increasing capital base” is their current fad.
    OFF THE WALL! There is not a farthing of REAL capital in all of this ratbag of lies, swindles and manipulations.
    REAL capital is ONLY accumulated labour dedicated to enhancing future production. Ergo entrepreneur led LABOUR (of the 99%) is the only source that can augment existing capital or create new.
    The banksters, led by the IMF, USA FED, and British “financial services” are well aware of this fact but that will not stop them from attempting to download this fraud onto the REAL product of Labour in the form of “bailouts” of “sovereign” debts, to be serviced by taxes on the REAL producers.
    The 99% will be robbed of (much prepaid) social services and benefits to sevice “debts”. Austerity it is called when those who had NO hand in running up this fraud are required to pay interest that will amount to 40-60% of the future product of their labour. Gone will be pensions, good schools, decent medical care, infrastructure (e.g. utilities that work reliably); even adequate diets will be history.
    “Let them eat cake!” exclaimed La Royale Marie Antoinette.
    Let them eat garbage, implies La Grande Dame Christine LaGarde, of the International Monetary fascists(IMF)
    So Greece, you are the front line today, Italy and Spain may be next, but do not think that any country, including the relatively well off Germany or the resource rich Canada and Australia will be forever exempt. Ms Merkel, beware!
    The “poor little ones” are but appetisers who will whet the appetites of these financial service vultures and jackals. For certain if they succeed at the start the taste of financial carrion will make them hunger for more, and they will finish only when the 99% of humanity is subject as debtors to enslavement by 1%.

    But his does not have to be! Greece you can repudiate the fraud! Lead the way! DEFAULT is the way to go!
    99% be inclusive! Support Greece today, Italy Spain, &c. tomorrow and…?? the world in future.
    Hold on to your souls!
    You have a WORLD to WIN!!

    Reply

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