By Wilberne Persaud, Financial Gleaner Columnist
By the time you read this Martin Wheatley, managing director of Britain's Financial Services Authority (FSA), may already have made public the findings of a review of Libor ordered by the Cameron government after the scandal over potential rate fixing broke and Barclays agreed to pay UK and US regulators US$453m to settle the charge that its traders manipulated the rate for its own financial gain.
Now consider this: "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices".
From the language, you know this is not a recent MBA or business-school graduate versed in complex algorithms and knowledge of the art of 'power dressing'. These are the words of Adam Smith, 18th-century man of letters, moral philosopher and economist. His observation maintains its relevance through the ages.
After the rate-fixing scandal broke, Barclays CEO Robert E. Diamond Jr and Chairman Marcus Agius both resigned admitting to no wrongdoing, while some of the bank's traders may yet face criminal prosecution for their alleged roles in manipulating the Libor setting process.
Wheatley is also expected to announce that the British Bankers Association (BBA) will no longer perform the function of setting Libor, an activity for which it held responsibility from the time they created it a quarter-century ago.
Libor is a central plank in the process of global money and capital flows associated with innovative financial products. The rate provides a global benchmark used to price an array of financial products, valued at in excess of US$300 trillion and including mortgage and student loans.
It affects possibilities for Jamaica's international borrowing and local interest rates, too.
Libor is actually a daily quotation of 150 different interest rates, associated with 10 currencies and 15 maturity structures.
Now consider this: "Every individual ... generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it ... he intends only his own security; and by directing [his] industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention".
When in 1986 the BBA created Libor it acted in the interest of its members — to promote its own gain.
Smith's invisible hand was present front and centre. But eventually, a "conspiracy against the public" occurred.
Libor's "existing structure and governance," said the FSA's Wheatley in August, was "no longer fit for purpose".
"Trust in a vital part of the financial system has been badly damaged, and timely action is needed to restore it," he said.
It is generally expected that Mr Wheatley shall announce a takeover of the responsibility for Libor and the BBA shall indicate its support.
So perhaps we might again return to Adam Smith: "No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable".
Should this confidence which has been shaken and the perverse incentives which have grown large over the years, be allowed to continue unchanged, surely we should end up with a greater part of the globe, 'poor and miserable'.
Smith recognised and celebrated the power of human ingenuity, its twinning with inquisitive minds, the drive for selfish gain and constant innovation. But he also perceived the slippery slope, especially for corporate entities to proceed in antisocial, almost psychopathic tendencies without regulation.
It is prudent and self-preserving to champion and create sensible, level-headed and practical regulation.
Without it, we move not unto the power of the invisible hand and wisdom of the crowd but, rather, that opposite attribute of the crowd: a mindless collective lunacy.
Wilberne Persaud is author of 'Jamaica Meltdown: Indigenous Financial Sector Crash email@example.com