Is Libor part of the problem?

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Adam Lent at the TUC has written one of the most thoughtful and original blogs on the current economic crisis that I have yet read. In it he asks a straightforward question: how is LIBOR set? This is pretty critical when this determines the price of most commercial credit in the UK. As Adam asks:

Is it right that the base rate which is set transparently and in a disinterested fashion is seriously weakened in its effect by a rate that is set in an opaque fashion by a panel that has a vested interest in the impact of their decisions? By opaque I don't mean that we don't know what rates the banks propose to the BBA or how the BBA sets the final Libor rates based on those proposals. This data is all published. But there is no way of finding out how or why individual banks propose the rates they do to the BBA each day. Nor is it entirely clear to me what steps are taken to stop banks consulting with each other on the rates they recommend before responding to the BBA.

There's more than that he raises as well.

This is the sort of question we need to be asking now.

Put simply, the question is, can we trust old established market mechanisms to get us out of a problem at least partly of their making?

Disclosure: as is widely known, I advise the TUC