Libor

The London Inter-Bank Overnight Rate - Libor - is the global gold standard market "risk free" rate. The rate at which banks can borrow from each other in London - and used across the world to set lending rates. Generally borrowers (and in total there is about $360 trillion in debt globally...) are set off the Libor. They get a rate depending on their credit rating etc of Libor plus something. A few bps (hundredths of a percent) for the best rated borrowers, and on down the line to the "we are going bankrupt" firms of the world.

 

But there is a problem in the system. For the last 14 months, Libor has basically been a guess.

 

``Whatever answer you give is by definition wrong,'' said Meyrick Chapman, a strategist at UBS in London. ``There is no interbank lending, so the only proper answer to where could you fund yourself is `I don't know' or `I can't.'''

 

Since the start of the credit crises, banks have generally not been lending to each other, or lending very little. Completely diverging from the Fed target rate, the Libor is now far higher than rates put out by the G7 central banks. It is the key to the costs of financing across the world, no one is even sure right now what it is worth.

 

A lot of politicians and others refer to the markets right now as "broken." They seem to assume that if markets are going up, they are "working well" but if they are going down they are "broken." This is of course totally illogical, and the market is, mostly, correcting in a logically manner right now (though irrationality is of course present). However, Libor truly is broken. The key global interest rate, off of which most global debt it priced, is being set by 16 banks guessing at what it would cost them to borrow.

 

That is not a market, that is a fudge or a punt, and it scares me we are basing our global economy on a daily punt.