For decades, the public generally placed its trust in technocrats, the people perceived to be skillful and knowledgeable managers of economically and politically important institutions (including banks). The thinking was that aspects of the economy and politics had become too complex for ordinary citizens to understand and that the best way to handle this complexity was to allow the experts to take over. The events of 2008–09 shattered that belief.

Its demise has swept away some of the old ways, and the next casualty is Libor, the London Interbank Offer Rate. This is the benchmark interest rate that many of the largest banks in the world charge one another for loans. It underlies an estimated $350 trillion in debt and debt-related derivatives worldwide, including everything from mortgages to corporate loans to student debt.

In July, the Financial Conduct Authority, which regulates Libor, announced that the rate would be phased out over the next four years, ending in 2021. It’s unclear what will replace it, but whatever it is won’t be as easy for bankers to manipulate.

Nearly a decade later, the 2008–09 financial crisis is still reverberating through the system, demanding the attention of regulators and affecting the global political environment. It is for this reason that the true impact of the crisis can’t be understood in purely economic terms.

Rise and Fall

The British Bankers’ Association introduced Libor in 1986 as a measure of wholesale interbank lending rates. Similar traditions existed before that point in London (where the rate originated) for syndicated loans (those that are large enough that many banks participate) whereby large banks would submit funding costs to the syndicate. Many of these banks began borrowing against this reference rate, however, which gave them incentive to underreport the cost. So the BBA began formalizing the data collection process for the interbank rate, which became Libor.

Libor is essentially set by “expert judgment.” Each day, a panel of banks submits its estimated cost of lending to another bank for various time periods to ICE Benchmark Administration (formerly the British Bankers’ Association), the administrator of the rate. What this means in practice is that only some of the bank submissions are based on real underlying transactions, and the rest are left up to traders’ estimates. In 2015, for example, about 70% of the submissions were experts’ guesses.