There are two kinds of market manipulation. There are those where players try to manipulate markets for their individual advantage outside the rules, as with LIBOR, and those where the authorities try to manipulate the whole financial universe to meet some well-intentioned goal. The former is occasional and may have gigantic repercussions. The second has long been systematic policy: we now see it could have catastrophic consequences for our social system.
Central banks held down interest rates to stimulate economies with new credit, to push impending corrections out of sight. Those artificially low interest rates discouraged saving and encouraged borrowing but banks can extend credit into existence to cover the gap. With moral hazard endemic, banks loaned recklessly, using derivatives to book unrealised cash flows as profit up front. Some individuals went home unjustly rich and politicians won elections as the system over-extended itself.
The really important question today is not whether the Bank of England encouraged manipulation of credit markets by self-interested rogues but why we tolerate systematic credit market manipulation by the central banks as a matter of policy: nowhere else in the economic system would we accept explicit planning of the price and quantity of a vital commodity. If it worked, we’d all be communists.
The LIBOR scandal shows that everyone knows prices should be set by markets. It’s time to look again at the central banks, for those particular emperors have no clothes ..