I believe that the biggest loser of the current era will be the savers.

The crisis of 2008 continues to shake our faith in the system. Recently, another supporting column of the system collapsed. It has been revealed that the calculation of the London Interbank Offered Rate (LIBOR) was being manipulated. You must be kidding! Daily transactions worth trillion dollars are priced on the basis of LIBOR, as a reference interest rate. British Barclays’ former chief operating officer, forced to leave office by the Bank of England (BoE), stated that the bank had declared borrowing rates lower than the LIBOR back then and that the BoE had been aware and even supportive of their actions. Then all Hell broke loose. This Barclays incident is really bad for us all. It has tempted us to question the system at a deeper level. It reminds us all  that we have forgotten, and it has stirred up our discontent. Would you like to see a short list of it all?

Please let me begin with LIBOR. The official abbreviation is BBA LIBOR. The British Bankers’ Association (BBA) asks member banks to submit the reference interest rate to the interbank market and announces the average. The question it asks to member banks is quite easy, indeed: “If you had to borrow from another bank today, at what rate you would borrow?” Banks do not keep prompt cash, but place the funds. When there appears a new investment opportunity or a payment order, they borrow short-term funds at the interbank market. So the rate the BBA asks banks about on a daily basis is the cost of the afore-calculated potential borrowing. The Barclays scandal was revealed as follows: in the midst of the 2008 crisis, some bankers submitted false rates. It doesn’t matter if this was because they wanted to hide their credit riskiness or if the BoE asked them to do so. What matters is that we all openly witnessed the lies of these banks. Some of you might say, “Did we need another occasion for this?” If you ask me, no one has been caught telling such a big lie before. This is why one of the supporting pillars of the system has been damaged. This is the first point.

What is more, this supporting column is placed in each and every system. In Turkey, interbank reference rate, TRlibor is calculated with the same method. Banks regulate themselves. The Turkish Bankers' Association asks thirteen member banks to submit reference interest rates each day for different borrowing terms and then announces the results. London’s system has been operating under the current structure since 1986 and Turkey’s system hass been in place since 2002. The purpose of the system is to move interbank operations out of the authority of central banks and monitor reference market rates. With the Barclays scandal, we get to discuss how appropriate the current interbank reference rate calculation method is and even how solid London’s financial center is. In fact, the West had started questioning this already. This is the second point.

And here is the major source of the unhappiness of the current era, of which the latest scandal has reminded me: I believe that savers are the biggest losers of the era. Those who used to recommend us to save are now doing what they warned us about: they are putting downwards pressure on the interest rates. Every single step central banks take to purchase public securities end up pushing interest rates down. Pension funds are used to purchase public securities at rates above the market rate. Most recently, Spain put an upper limit to banks’ deposit interest rates. What countries like Turkey used to do under the name of “financial repression” is done by developed countries now. If it were us, they said, “Countries like you cannot improve savings volume; efforts to that end will just reduce the volume of funds for investment.” Today, they are doing the same. Obviously, the harshest damage is done to savers. Today with the Barclays scandal, we have learned about another kind of damage done to savers via mispricing. I believe that the biggest loser of the current era will be the shaken confidence of the savers.

So, what are we trying to do? We are trying to cross the river alive by imposing additional taxes on savers, that is, transferring funds from savers to the state. I think it is time to take a medium-term perspective and start thinking about the undesired outcomes of this process.

This commentary was published in Radikal daily on 24.07.2012