After the LIBOR scandal, are we witnessing the ISDAfix scandal? This time it’s not about interbank lending rates, but rather about interest rates for swaps. It is estimated that the ISDAfix is active in a $380,000Billion market, just about the same size as LIBOR... and it appears that it, too, is manipulated! The Commodity Futures Trading Commission (CFTC) is enquiring on the matter.

Whether it’s LIBOR or ISDAfix, rates are fixed in the same fashion : a few banks, the largest ones, decide among themselves of a rate and it applies for everyone! These banks thus have an undeniable advantage, a step forward of the market, the possibility of colluding or hiding their difficulties by underestimating the numbers.

However, let’s not forget that the greatest interest rates manipulators are the central banks! With their « monetary policies », they always fix the lending rates at the lowest, supposedly to bolster the economy and to encourage credit. We’ve all seen the results... it doesn’t work. If central banks were to abstain from any intervention, interest rates would be much higher.

In any case, these rates do not reflect the reality of the market, the real state of the economy and the financial sector. The « cost of time », or the cost of capital, should constitute a fundamental variable for all the actors in the economy, but their decisions are affected by this bias.

Another thing disappearing with the manipulated rates is the risk premium. The central banker must not acknowledge that his country has trouble financing its budgetary deficit or that its banking system is failing. The trader must not acknowledge that his bank has difficulties refinancing itself, so he will declare a lower interbanking rate than the real one, thus contributing to a lower LIBOR than what it should be.

But, of course, eliminating the risk premium doesn’t make the risk itself vanish magically. It just gets spread somewhere else (in the central bank’s balance sheet, in the bond bubble and God knows where else). It speads without being clearly identified, as borrowers and investors believe it has disappeared. This is a tragic misunderstanding that leads to bubbles and, later, to a more serious crisis.

This manipulation of the rates goes hand in hand with the money printing : both serve to hide the reality, to make us think everything is hunky-dory, to give optimism to the planners, to foster a bullish stock market, in the hope that, finally, growth comes back. But lying lasts only for so long before the next crisis hits, more and more violently.