Photo: Wikimedia Commons
We wrote yesterday about a paper published by former Federal Reserve analyst Jeremy Berkowitz in 1998 which suggested that the Fed had considered the possibility that LIBOR could be manipulated some 10 years before the financial crisis.In a phone interview yesterday, Berkowitz argued that many of the world’s central banks probably knew and condoned bankers’ efforts to manipulate the benchmark lending rate, considering that the ease of manipulation had already been acknowledged by 1998.
“I think they knew at the Bank of England,” Berkowitz told us. “The ECB—well, I wouldn’t put it past them. They’re very political over there.”
That said, the Fed was probably out of the loop on attempts to distort the benchmark rate at which banks lend to one another. “I don’t think at the Fed they knew,” he pointed out, despite concerns that the rate could be manipulated.
He suggested that even if the Fed had suspected some foul play, they never would have backed it: “People at the Fed are very scrupulous about these things. I can’t imagine anyone I knew there condoning it.”
He indicated that the Fed’s commitment to transparency is far stronger than most other central banks’. This is a topic we’ve seen discussed a lot recently, particularly in relation to the ECB’s potential role as a European bank regulator.
While Berkowitz admitted that “it’s hard to imagine that anyone would have a very strong incentive to lie to the British Bankers Association” about the rate at which one’s bank could borrow, the impetus for such manipulation likely had roots in an exchange of favours among traders and banks.