Explanation of the Alleged LIBOR Manipulation Scheme

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Good background on the alleged scheme to manipulate LIBOR.  Via NPR’s Planet Money program, again.  About halfway through, the program discusses allegations of interbank agreements to manipulate reported LIBOR rates.  (It’s NPR show #384 on the page that opens if you click the link.)

But does an interbank LIBOR conspiracy even make sense?  Below in the link from economicpolicyjournal.com there’s an argument that the scandal is really a tempest in a teapot, because the banks can’t set the interest rates:

Interest rates are market prices. If banks got together and claimed to be paying less than they were, which resulted in lower rates overall, this would result in a situation where the demand for loans would be greater than the supply. If banks claimed they were paying more than they were, then the demand for loans would be less than the supply.

Well, perhaps . . .  But — and without knowing anything about the actual facts of what has transpired here — it seems to me that there might nevertheless, purely as a matter of economic theory, be short-term opportunities for agreements to adjust or affect the reported LIBOR rates.  Although the economicpolicyjournal.com article argues that those opportunities are “infinitesimal,” it would be interesting to see some actual data or analysis.  They may back up the article’s intuition.

P.S. — the rather archaic way in which LIBOR is actually calculated — covered in the NPR story — is really quite fascinating.