Revelations that banks lied about Libor interest rates should be more rage inducing than the housing bubble in the U.S. And yet, the story seems to be a blip on everyone’s radar because the problem was rooted in London banks. It’s time to get Liborated.
Here’s why you should care: It’s not just about London. The Libor underpins the interest rate on U.S. mortgage rates, credit cards, student loans and financial instruments such as derivatives. It has become clear over the past several weeks that banks had lied about interest rates to make more money. The U.S. Department of Justice is readying criminal indictments, according to this Business Week story.
Here is a useful graphic from The New York Times explaining how the Libor works. Still scratching your head? Here is a three-minute explainer video from MSNBC, without the “lie” or the “bore.”
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The Libor is the interest rate banks charge to lend to each other in London, that is then used as a global benchmark. Think of it as the Fed’s interest rate in the U.S., but one that is set by the banks (their interests are fiduciary, and they are accountable to their shareholders) instead of our government’s central banking system (its interest is the U.S. economy, and it is accountable to the public).