Why won't the Banks cut interest rates?

Alistair Darling and Yvett Cooper are getting a bit cross with the banks, because the Bank of England (BoE) has cut interest rates to 3%, the lowest for 50 years, and they want the banks to reciprocate by cutting rates to business and mortgage borrowers. The banks show little sign of enthusiastic compliance, and Northern Rock, the bank that Darling bought part of only the other day, has joined several others by withdrawing tracker mortgages which are linked to the base rate - a deliberate act of disobedience.

The BoE rate is now a mere 3%, at its lowest for 54 years, but the rate that banks use to lend to each other, LIBOR, is still 4.98%, 60% higher.

Why the gap?

First, interest rates are how banks make their (and our) money, so lower interest rates mean less profit per pound lent out for the banks - at a time when they are desperate to fill their gasping empty coffers.

Second, they do not trust each other with their money, do not trust each other not to go bust owing them billions. Some interbank loans are overnight, to allow the banks to balance their books as they are required to do, and presumably they do not expect each other to not wake up in the morning, but other interbank loans go out for months.

So high LIBOR rates is banks' a way of saying, "We are not confident about the health of our colleagues/competitors in the financial system".

So why are they not happy? Part of the answer must lie in the derivatives, the enormous, unstable inverted pyramid of multiplied debt that hovers over the financial markets like an enormous alien mother ship casting a threatening shadow over the City. Never forget that some derivatives are nothing but a massive Ponzi scheme, a pyramid selling scam that works while the system is expanding, but implodes when the system reaches its limits.

The bankers and politicians are like soldiers in a WWI shell hole in which a grenade has just landed. They are frozen rigid with fear, waiting for it to go off. None of them has the guts to grab hold of it and chuck it away, by challenging the legality of Ponzi derivatives in the courts.