My wife can't stand Bob Diamond, the recently departed CEO of Barclays Bank. She doesn't actually know him and I doubt whether her dislike stems from anything as mundane as the enormous amount of money he awarded himself for running somebody else's bank. She just doesn't like his mouth because she thinks it makes him look smug and self satisfied. So while she is much too nice a person to celebrate his fall from grace for allegedly rigging the London inter-bank offered rate (LIBOR) she will be relieved not to see his pursed lips on TV so often, not to mention his dreadful taste in neckties.
I happen to agree with my wife that Bob Diamond has the sort of face that you might want to punch for no other reason than it seems the right thing to do. But I have to leap to his defence on this charge of interest rate rigging which seems a little unfair in a world where interest rates have been rigged by people far more powerful than Bob Diamond.
Those of us who did a bit of economics at school will remember that scarcity of a product drives up the price of that product providing the demand remains constant or rises. An obvious example is oil and we all know to our cost that if supplies are threatened then the price of oil rises because it's a commodity we simply can't do without. Conversely, an over supply of something usually leads to a fall in price and wine would be a reasonable example in this instance.
So if you think of money as a product or commodity then the price for it is the interest rate you are charged to borrow it. High interest rates means a high cost of money and low interest rates means a low cost of money. So far so good.
I think it's fair to say that demand for money currently far outstrips supply which is why countries like the US and the UK have gone in for what they euphemistically call "quantitative easing", the posh phrase for printing money. One of the reasons the Eurozone is in such a financial mess is that they couldn't resort to quantitative easing because there are so many member countries with different economic strengths that use the Euro as their currency. I have no doubt that Greece and Spain would dearly love to be able to print money to get them out of the hole they find themselves in but that wouldn't help Germany much.
As various members of the Eurozone have got themselves into ever deeper financial dwang the cost of their borrowing has risen. There are at least two good reasons for this. The first is the good old economic reason of demand for money exceeding supply therefore the price of money has to rise. The second is the risk attached to a loan to a country desperate enough to borrow at a higher interest rate. So, part of the high cost of borrowing relates to the price of money and part relates to the inherent risk of lending to a country that may not be able to repay on time or at all.