A Few Questions for Dr. George Friedman About Libor

A Few Questions for Dr. George Friedman About Libor

Dr. George Friedman is a true expert in international affairs. His Wikipedia entry describes him as “a U.S. geopolitical forecaster and strategist on international affairs”. He has a Cornell PhD and a long list of impressive public and private consulting roles. I read his reports with great interest.

He recently joined John Mauldin’s team of writers, probably increasing his reach and visibility quite significantly. Bravo.

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As a subscriber to the regular Mauldin letters, I look forward to Dr. Friedman’s work. A few weeks ago, I was astonished at what I read. Last week I had a similar reaction.

His latest post carried the byline of Xander Snyder, but appeared over his signature. It had a strange linkage of two topics, as the title suggests: Skepticism of Experts and the End of Libor.

The article includes some reasonable facts about the LIBOR controversy, but seems to have a mission.

“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”.

The controversy did not come from a failure of experts, but from the biased reports of traders and banks with a stake in the game. What does this have to do with criticizing experts?

Here is another example of a false linkage:

The crisis abolished the idea that “experts” can manage the complex systems with which they have been entrusted. This is about more than the financial system. There is growing skepticism that experts of all kinds know what they’re doing. And if they don’t, will the public continue to tolerate the degree of complexity that has developed in public and financial institutions that justifies the experts’ existence?

The demise of Libor is just one example of the consequences stemming from this lack of faith.


This is a reasonable question, and I would welcome Dr. Friedman’s reasoned analysis. LIBOR was not created as something for “experts” to manage. The financial crisis showed that regulators often lacked the information to do their jobs properly. Do Dr. Friedman and John Mauldin advocate tightening those regulations? How should we deal with this alleged lack of experts?

The second example was even more disturbing. There was no other byline, but I seriously doubt whether Dr. Friedman wrote or even approved this post. For starters, he has no particular expertise in labor economics. (I do). The author combines a series of riffs on popular, but inaccurate themes. Mr. Mauldin’s introduction is about signal and noise, but this post has little of the former and amplifies the latter. Let’s see if we can help with that. I am trying to find a polite way to say that the entire post is replete with errors. I’ll stick to the big ones.

Major Errors

“Dr. Friedman:” The Bureau of Labor Statistics maintains a list of 60,000 households it calls monthly to determine who is employed, who isn’t, who has gotten a job that month, who had their hours cut or increased, and so on. Each month one quarter of this sample group is replaced, and after eight months, those who were dropped return to the rotation.

Jeff: Almost right.  The sampling frame is four months in, eight months out, four months back in, and then completely out.

Dr. F: I don’t mean to demonize the Bureau of Labor Statistics. It employs only about 2,500 people who must select a representative sample of the population, contact them directly, and develop and apply statistical analysis to get final numbers. It is a huge task for so few people. And even if they do their jobs perfectly, their findings still may not be all that reliable.

Jeff: Not right.  The BLS does the data analysis.  The Census Bureau conducts the survey, and has done so for the last 75 years. This is information that even a complete rookie would know.

Dr. F: Employment figures are never published with a margin of error. This is not because statisticians at the Bureau of Labor Statistics believe they are spot on but because they don’t know what the margin of error is.

Jeff: This is also completely wrong. The BLS reports a confidence interval on everything, using the same methods as other professional surveys. The author makes it seem like sample size effects are a matter of opinion, not scientific fact. Whoever wrote this knows nothing about statistics or the BLS.

Here is the process:


and the full list of technical notes and concepts



Importance – Why Should You Care?

The current trend to disparage experts is overdue for some careful examination. Does Dr. Friedman still claim status as an expert in International Strategy? Does Mr. Mauldin support that? I certainly think he is. If so, what is he doing opining about labor economics and statistics? One reason that people lose confidence in experts is that there are too many imposters!

There is a danger that the government will reduce the data collection on the employment situation. This would cripple one of the best and least partisan sources we have. True experts would suffer. Why is Dr. Friedman attacking the data that I need?

What Do I Hope?

I am hoping that Dr. Friedman (perhaps through John Mauldin) will respond, renouncing these views. He is offering paid newsletters and speaking appearances. If we are to regard him as authoritative, he needs to protect his reputation.

Since there is no way to comment on the post directly, I am struggling to find an effective way to respond. Mr. Mauldin has a million readers. I have 30,000 or so. It is an uphill battle.

If investors want accurate information, we all need a way for respectful and constructive engagement. This is my effort. As always, suggestions are welcome!!

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