The Best Way to Reform Libor: Scrap It

“The British have learned nothing from the recent Libor scandal” involving the manipulation by banks of a vitally important interest-rate benchmark, writes Professor of Economics Richard Grossman in an op-ed in The Wall Street Journal. This is clear from a recent decision by a British government-appointed committee to hand over control of Libor to NYSE Euronext, a company that owns the New York Stock Exchange, the London International Financial Futures and Options Exchange, and a number of other stock, bond, and derivatives exchanges. “In other words, the company that will be responsible for making sure that Libor is set responsibly and fairly will be in a position to profit like no one else from even the slightest movements in Libor.”

The only solution, writes Grossman, is to scrap Libor and devise alternative market-determined benchmark rates, which cannot be manipulated. He concludes, “The incentive to game an benchmark rate such as Libor is just too high to risk putting it in the hands of a single private entity, however committed that entity may be to restoring its credibility. Replacing Libor with a transparent, fair, market-based alternative is the only sensible solution.”

The op-ed can be read on The Wall Street Journal website by those in the Wesleyan network, and WSJ subscribers.