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Cheating bankers could give Olympians a run for their money
Publication Date : 31-07-2012
I was fortunate recently to share my flight to London with many of the eager, bright-eyed Olympians of the Thai national team.
My first reaction to brushing the shoulders on which the hopes of a nation rest was vicarious enjoyment of the sheer excitement and pride that bubbled through the athletes embarking on the final leg of a journey that's no doubt taken years of dedicated hard work already. I felt uplifted by the Olympic dreams shared by athletes of every nation.
Then my thoughts filled with green-eyed envy of the talent it must take to represent your country.
Worse still, I recalled a story, which captures nothing of the purity of the Olympic dream, the inspiring sensation of extraordinary human achievement or the dramatic spectacle of competition. Instead I thought about the Games' greatest scandal, which sadly has too many echoes in London in 2012 - not in the Olympic stadia but in the square mile of The City of London financial district.
Even the farcical, chaotic preparations for the 2012 Olympiad have been kept off the front pages by scandals involving bankers rigging the LIBOR (London InterBank Offered Rates) to the extent that it's now universally known as "Lie-Bore". This is the rate at which banks do, would, or might lend to, and borrow, from each other, compiled every day by asking them the searching question, "At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11am?"
But first, back to the Olympics. In the 1936 Berlin Olympics, America's Helen Stephens won the women's 100 metre gold. Her powerful build brought unfounded accusations from her rivals, including silver medallist Stanislawa Walasiewicz; they said that Stephens should be disqualified because she wasn't female but was actually a man. However, examinations showed these allegations to be unfounded and Stephens was exonerated. However, 54 years later, when Walasiewicz died (a victim in an armed robbery in Cleveland) it turned out that in fact Stephens' chief accuser was indisputably male.
What does this have to do with Lie-Bore? Just that the most aggrieved party in the Lie-bore scandal appears to be Paul Tucker, the Bank of England's chief protagonist in hounding out CEO Bob Diamond from Barclays.
The same Deputy Governor Paul Tucker who told delegates at a central bankers' conference in Japan in 2009: "All of those contingencies involve events affecting either the demand for reserves or their distribution around the system. And the measures designed to cope with them are therefore part and parcel of the Bank's management of the banking system's day-to-day Sterling liquidity in the course of implementing monetary policy. Of course, that is helpful to - indeed, is a necessary condition for - the maintenance of financial stability.
Most obviously, during the current crisis banks chose to more than double their targets for reserves balances with the Bank in the months following August 2007, and we injected the required increase in money into the system. That was necessary to keep overnight rates broadly in line with Bank Rate; and it was also necessary, although not sufficient, to stabilise the short-term money markets and the banking system."
For "Bank Rate" read LIBOR: ie, one rationale for Bank of England policy was the need to control LIBOR in order to stabilise the financial system. I'm no fan of Bob Diamond, but it seems he was ousted precisely because his bank managed exactly what the Bank of England wanted to achieve and precisely what they were doing themselves. Okay, the "Old Lady" achieved this through covert policy mechanisms whereas Bob allegedly just resorted to outright fibbing, and Paul Tucker would, of course, be quite within his rights to insist the domains of monetary and fiscal policy should be the central bank's preserve. But where does policy stop and jiggery-pokery begin?
Maybe we should ask the American central bank, the Fed, which saw clean through LIBOR manipulation. They'd no doubt like to think this was because of greater sophistication. But maybe it just takes a thief to catch a thief. Former Fed chairman Alan Greenspan and his successor Ben Bernanke have jointly employed the widest range of fiscal and monetary tools in history. Yet how much of this was delivered with forked tongues? Greenspan played prudence cards long and loud, making a great deal out of hiking interest rates 0.25 per cent at a time. However, at the same time, he also created huge pools of additional liquidity and leverage in the system - surreptitiously undermining prudent monetary policy with wild, reckless fiscal policy.
Bernanke meanwhile has been keenly justifying his prudent policies by reference to the Taylor Rule. Developed by Stanford economist John Taylor in 1993 this formula is designed to provide central banks with guidance on setting interest rates in response to changing economic conditions. Adherence to the Taylor Rule systematically reduces uncertainty, fostering predictable price stability and full employment. One of the key elements of the theory is that any rise or fall in inflation should at least be matched by relative increases or decreases in base interest rates, thereby dampening growth with higher interest rates when growth leads to inflation, or by stimulating economic activity (spending and investment) with rate cuts during periods of subdued growth.
In 1999, Taylor wrote a further paper hypothesising possible additions to his original theory, but subsequently discarded these changes on empirical grounds. Bernanke appropriated these briefly postulated changes to justify his policies, especially quantitative easing. Despite Taylor's disavowals, Bernanke continued to cite adherence to the Taylor Rule, patently aware that his policies constitute no such thing. Central bankers the world over have followed Bernanke, claiming to follow the prudent strictures of John Taylor's rule, while recklessly increasing money supply.
This kind of double standard is far removed from the Olympic ideal but it does somehow bring to mind Helen Stephens. Maybe the Olympic dream can inspire bankers and central bankers in the way it's clearly inspired Thailand's Olympians. Maybe bankers can behave less like Stanislawa Walasiewicz. I won't hold my breath on that, even as I enjoy London 2012!
Paul Gambles is managing partner and chief investment officer of MBMG G.