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Countries in mutual suicide pact

RP’s Diary

The appalling UK GDP figures, which mark the longest period of contraction for 100 years, plus the weakening of US and Euro area economies, provides yet further evidence that current policies everywhere are failing. Yet the debate on what to do is getting nowhere. The sterile argument between Keynesian expansionists and advocates of austerity continues. That is the way to economic suicide.

When will somebody realise that only the most forceful international action will be effective in dealing with this international problem? The situation is crying out for top-level international coordination to put in place a structure, as proposed in The Money Trap. Only such a system will inspire private sectors throughout the world to spend and invest. That must imply constructing a true international monetary order.

The only people who realise this are a few outstanding leaders such as Jacques de Larosiere and Paul Volcker. Where are the visionaries among the younger generation? Nowhere to be seen.

- as clouds gather over Threadneedle Street

In London, the plight of the UK authorities has deepened since I filed my last Diary piece on LIBOR. It is becoming hard to imagine how they can play the leadership role needed to get the UK out of the money trap, as they will lack the one prime quality required: moral authority. Three developments may be cited:

First, Tim Geithner, US treasury secretary and former head of the New York Fed, has, as The Times puts it, (July 26) again “pointed his finger at the Bank”. In testimony to the House Financial Services Committee he said:

“In detailed recommendations we gave to the British, we identified a series of specific things that would make it impossible for banks to manipulate the rate. If these had been adopted it would have severely reduced, or eliminated, the risk going forward.”

Mervyn King has said in defence that the New York Fed had not made the Bank aware of “specific evidence of wrongdoing”.

Secondly, the feeling has grown in the City that the authorities should have been aware of the alleged manipulation of LIBOR by traders for profit, as this had been going on for many years prior to 2008. In that crisis rates were manipulated for quite a different reason – with or without the knowledge of the authorities – in an effort to cover up difficulties faced by banks in accessing interbank funding. To many in the City, it is simply implausible to believe they were not aware.

Thirdly, even more potentially damaging are new rumours about alleged collusion between the authorities and the banks on the setting of UK base rate itself. Traders active in the markets in the 1990s allege that key people in one or more banks had on at least one occasion advance information that base rates would be lowered.

If credible evidence if produced to support such allegations, it would be explosive indeed. It would ditch the hopes of Bank and perhaps also former Treasury officials to succeed Mervyn King next year (at the time the Treasury set the rate). The last official inquiry into an alleged leak of information was the Bank rate tribunal of 1958, which harmed the reputation of the City, even though everybody at the Bank and the Court was cleared of any wrongdoing.

The Bank can still blow away the clouds, but time is short.