E LIBOR Destroyed Subprime. But The Fed Deepened The Great Recession

The Fed should have intervened much sooner in the process. If the Fed shared Henry Paulson's concept that subprime was contained as he stated in 2007, that was either a mistake or fraud. With LIBOR exploding at that time, there was nothing that was contained. 

IOR for the big banks, coupled with lack of responsible actions for at least two years prior, increased the intensity of the Great Recession, first by ignoring NGDP, second by ignoring the LIBOR explosion, and third by the combination of the Lehman collapse coupled with the implementation of IOR for the big banks.

 Bernanke made the crisis worse by inaction and IOR which was a tightening of the money supply, and then failed to explain it correctly.

And was it necessary to halt interbank lending by implementation of IOR (chart 3) in order to drop LIBOR below the Swap Line in chart 2? That drop in LIBOR didn't restore trust or interbank lending, and included bank manipulation of the rate. That became known as the LIBOR scandal, a massive fraud upon the counterparties of the banks.

London, the seat of world finance, controls that system by controlling LIBOR. That fact certainly should not be taken lightly by US regulators going forward.

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Disclosure: I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice.

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Joe Economy 5 years ago Member's comment

Its questionable whether the Fed's raising rates by 0.25% has had such a drastic effect on the economy. Other major factors combine together to make a recession. The overly strong dollar which hurts exports, the decline of oil, and the fall of China's economy and the knock on effect globally are likely more likely to blame. You never know, if things get bad, maybe Yellen will decide to reverse her decision and lower rates again. Stranger things have been known to happen!

Gary Anderson 5 years ago Author's comment

Rising rates would not be a problem if the Fed did other things to loosen.

Joe Economy 5 years ago Member's comment

Do you foresee the US following Japan and going negative on rates?

Gary Anderson 5 years ago Author's comment

It doesn't seem to concern the Fed if that happens. I will have a new article, hopefully, out on that today, Joe.