Public Trust and the Libor Scandal

By Dr. Jeff Mirus ( bio - articles - email ) | Aug 27, 2012

Now that Barclays (the second largest bank in Britain) has admitted that it routinely rigged the London InterBank Offered Rate (Libor), the condemnations are starting to pour in. Libor determines the price of $800 trillion in financial instruments, affecting the prices of such common things as adjustable rate mortgages and student loans. Barclays manipulated the rate to increase profits, with (apparently) the tacit approval of regulators, and probably in conjunction with many other large banks.

The comment I like best is the editorial in London’s Financial Times, which notes that few scandals have “shone such an unsparing light on the rotten heart of the financial system” which has enabled “nothing less than a long-running confidence trick played on the public.” Moreover, the editors are shocked—shocked!—at the “casual way in which this con was perpetrated.” They conclude that banking’s culture of recklessness cannot be fixed through regulation (“rule tweaks”). Instead, there needs to be a wholesale change of culture to keep the industry from permanently losing its last ounce of public trust.

It is a little strange, but it seems that Pope Benedict XVI made this same point over three years ago, in his landmark social encyclical Caritas in Veritate:

[T]he social doctrine of the Church has unceasingly highlighted the importance of distributive justice and social justice for the market economy, not only because it belongs within a broader social and political context, but also because of the wider network of relations within which it operates. In fact, if the market is governed solely by the principle of the equivalence in value of exchanged goods, it cannot produce the social cohesion that it requires in order to function well. Without internal forms of solidarity and mutual trust, the market cannot completely fulfil its proper economic function. And today it is this trust which has ceased to exist, and the loss of trust is a grave loss. (#35)

It turns out that the most important ingredient in all human systems is morality.