You have to admire the spin. The US Treasury Secretary, Comrade Hank Paulson, pictured here, announced today, Sunday 7th September, 2008 that the US government is natonalising two huge US banks, Fannie Mae and Freddie Mac. Which means in effect that Comrade Paulson is socialising the losses of the shareholders and investors in these banks – $5.4 trillion of guaranteed mortgage-backed securities (MBS) (mortgage backed securities) and debt outstanding. These liabilities are equal to all the publicly held debt of the United States. This in the words of Prof. Roubini is ‘socialism for the rich, the well connected and Wall St.” (see below).
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Few people understand how one of the most important levers in a debt-laden economy – interest rates – are set. Many believe that the rate is simply a result of supply and demand – the supply of savings and demand for those savings. Not true. In fact in Anglo-American economies savings have precious little to do with it. Interest rates – those for short-term and long-term loans; safe loans or risky loans – are a social construct. They are decided by a committee of mostly men. In Britain, the official rate is set by the Bank of England’s Monetary Policy Committee. In the US the official rate is set by the Federal Reserve’s Open Market Committee.
But there is another, less transparent committee of men that set interest rates. They are members of the private British Banking Association, and they set a rate of interest known as the Libor rate …. as Bloomberg (27 May, 08) explains:
” Every morning the BBA, an unregulated trade group, asks member banks how much it would cost them to borrow from each other for 15 different periods, from overnight to one year, in currencies from dollars to euros and yen. It then calculates averages, throwing out the four highest and lowest quotes, and publishes them at about 11:30 a.m. in London. Three-month dollar Libor was set at 2.64 percent today.”
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