The world built on financial quicksand

Published on July 13th, 2012 | by

Yesterday, I profiled a survey of the small business community showing that the specter of regulation being the bain of business as we know it is really just a financial boogeyman. Small businesses don’t fear regulation the way that the big polluter-controlled U.S. Chamber of Commerce would like us to believe. Add to this, the recent Libor (the London Interbank Exchange Rate) scandal, in which the CEO and the rest of the executive board at Barclay’s Bank was forced to resign amid growing speculation that the 16 banks that set the interest rate they charge each other for lending capital had been bilking the system for years in a deregulated banking environment in the U.K.

The level of corruption makes the financial meltdown in the deregulated American financial system in 2007-2008 look like child’s play. According to Matt Taibbi in Rolling Stone, it’s like finding out that the  whole world was built on quicksand.

Consider it this way: the interest rate that banks are allowed to charge other banks is generally set by a central bank, like the Federal Reserve Bank in the United States. This rate allows Wells Fargo, for instance, to lend to homeowners a “fair rate” for a mortgage loan. By lying about the rate, Wells would effectively be using cheap government loans to make a much bigger profit on the loan to the homeowner.

Multiply this by the 16 largest banks in the UK, and the ramifications are clear. Barclay’s settled the suit against them by paying $450 Million in fines.

In a 2008 email, an official at the Bank of England gave what would appear to be “a nod and a wink” to Barclay’s encouraging them to manipulate the rate. To the government’s defense, having a high LIBOR rate across the board in the banking industry would indicate weakness in the financial sector, and in 2008, with the world economy teetering, the government of England could be excused for wanting everyone to calm down.

But according to Taibbi, it had the “consequence of affecting hundreds of trillions of dollars’ worth of financial products worldwide. Another financial system with insufficient regulation, another house of cards built that drives billions to the 1% at the expense of the 99%.

According to a story on CBS News:

Stephanie Rawlings-Blake, the Mayor of Baltimore, said the LIBOR rate manipulation hurt most American cities at the worst possible time — the height of the recession. As the city balanced a budget deficit by closing fire stations, recreational centers and schools, the mayor says the banks added to the deficit with artificially low interest rates that underpaid the city on investments. Officials estimated the loss at up to several million dollars.

As the U.S. continues to lay off public sector workers, we have to start wondering when the financial tinkering that can lead to billions in misappropriated funds will ever find its end. If I had a recommendation, it is to pull all of your money out of big banks, and move it into local credit unions and green banks. These financial institutions recycle money in our communities and help small businesses grow. You’ll never see New Resource Bank or a community credit union creating a derivatives market that is so difficult to understand that you never know where your money is.

Check out the latest on the LIBOR scandal here, courtesy of Current TV:

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About the Author

Scott Cooney (twitter: scottcooney) is an adjunct professor of Sustainability in the MBA program at the University of Hawai'i, green business startup coach, author of Build a Green Small Business: Profitable Ways to Become an Ecopreneur (McGraw-Hill), and developer of the sustainability board game GBO Hawai'i. Scott has started, grown and sold two mission-driven businesses, failed miserably at a third, and is currently in his fourth. Scott's current company has three divisions: a sustainability blog network that includes the world's biggest clean energy website and reached over 5 million readers in December 2013 alone; Pono Home, a turnkey and franchiseable green home consulting service that won entrance into the clean tech incubator known as Energy Excelerator; and Cost of Solar, a solar lead generation service to connect interested homeowners and solar contractors. In his spare time, Scott surfs, plays ultimate frisbee and enjoys a good, long bike ride.