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True Size of the Shadow Banking System Revealed (Spoiler: Humongous)
KentuckyFC writes "The banking system is closely regulated and monitored by central banks and other government agencies. But it has become common practice for banks to get around this by doing business in ways that don't show up on conventional balance sheets. This so-called shadow banking system is thought to be huge, but nobody knows exactly how big. Now three econophysicists have discovered that the size distribution of the world's largest financial firms significantly differs from the size distribution of smaller ones or indeed non-financial firms. And they hypothesize that the difference is the result of the hidden transactions that make up the shadow banking system. By this new measure, the shadow banking system has grown dramatically since the financial crisis and was worth over $100 trillion in 2012, significantly more than had been thought and more even than the GDP of the entire planet. Nothing to worry about, then."
AHAHAHAHA Stop it! Yer killing me!
I did my masters in non-Newtonian budget surpluses.
Those shining brand new banknotes need to accumulate somewhere, preferable to those that would be impacted the most in absolute value by the ensuing inflation.
You wouldn't expect "the 1%" to take the hit, that's what the "middle class" is for. The trickle economy is still operating, except that now it's no longer the "value" that trickles, it is the "value depreciation".
Questions raise, answers kill. Raise questions to stay alive.
All contributions should be tax deductible.
“He’s not deformed, he’s just drunk!”
Exactly. As Rothbard stated, the purpose of the Fed is twofold: to enrich the large banking cartel, and to facilitate government deficits. In essence enriching the bankers is the payoff granted to the banking sector for financing government programs which purchase votes across the electoral spectrum.
"Shadow", that sounds really scary. I don't like scary things like shadows and terrorists.
Let's give the government a lot of power to regulate cash flow so they can protect us.
If video games influenced behavior the Pac Man generation would be eating pills and running away from their problems.
There are surprisingly people in other parts of the world than American (IKR!!), but even if you take the global working population that still comes to around $40,000 for every worker per year. So, still calling bullshit.
and more even than the GDP of the entire planet.
The size of the shadow banking system may be worrisome (I guess), but banks hold assets, whereas GDP measures income. It would be extremely surprising if the GDP of the world were more than its income.
Incidentally, if you are upset about the 'shadow banking system' or the name 'shadow' scares you, money market funds are part of the shadow banking system. So are ETFs. So it is very possible that you are part of the SBS, since normal people invest in these kinds of things.
In general the SBS only matters because tax payers are committed to bailing banks out if they lose too much money there. If we followed Paul Volcker's advise and made a rule that, "any bank that is too large to fail is too large to exist. Any bank that receives money from the federal government will be broken up in pieces and sold," then it would solve a large portion of these problems. Make a rule that you can clawback salaries and bonuses from execs who made very very bad decisions, and that will solve another large portion of the problem.
As it is now, all the incentives are aligned to ensure another financial crisis, whether we have a shadow market or not. Focus on fixing the incentives, focus on smaller details. But we won't focus on changing the incentives as long as the administration continues to keep stooges from the financial industry in his cabinet.
"First they came for the slanderers and i said nothing."
There is a guy in a corner office somewhere that is apparently making my $40k share of the underground banking economy.
I would guess to say he's also making the $40k share of many most of the people in my 5 square miles as well.
An investor in a bank, or a purchaser of A-rated securities offered by that bank, may not be aware that there are unregulated, undocumented liabilities held by that bank, which, were they to go sour (see "Credit Default Swap"), could cause the bank to collapse.
If you knew that your bank was involved in large, unregulated transactions worth more than the bank's holdings, would you continue to do business with them?
Mission: To provide products that consume time and energy as entertainingly as permitted by the laws of thermodynamics.
And they hypothesize
In other words they are making this shit up for some unknown reason.
In his Principia, 2nd ed (published 300 years ago in 1713) Isaac Newton made some pithy comments about this sort of baloney.
"I have not as yet been able to discover the reason for these properties of gravity from phenomena, and I do not feign hypotheses. For whatever is not deduced from the phenomena must be called a hypothesis; and hypotheses, whether metaphysical or physical, or based on occult qualities, or mechanical, have no place in experimental philosophy. In this philosophy particular propositions are inferred from the phenomena, and afterwards rendered general by induction."
So really there is nothing to see here. Just move along now.
The Fed can and has printed a ton of money. There's no question about that.
But because the banks aren't lending that money out to consumers, the overall money supply hasn't gone up, and inflation rates have been historically low, not high. If you believe, like almost all economists, that inflation and employment are inversely related, then you want to be doing exactly what the Fed is doing, because that will create jobs that people desperately need, and will have no negative effects on savings (because inflation has been almost 0% for years). This is the Fed doing exactly what they should do in a deep recession.
And if you want to see what not to do in a financial crisis, look at the central bank that steadfastly refused to print money like crazy during the recession: the European Central Bank. The result is Spain with a 26.9% unemployment rate, compared to the 7.4% just reported in the US.
I am officially gone from
At what point can we end the delusion that fiat currencies are worth anything at all?
Let's just go back to bartering. How many chickens do I need to give my Cox Cable for my internet access?
We don't have a state-run media we have a media-run state.
Other than the tens of millions who are upside-down on their house loans, or who have already lost them; other than the entire middle class, who have had stagnant wages for the last 40 years, no, no-one at all. Everything is lollipops and unicorns when the 0.1% are allowed to "trickle down"* on the rest of us.
*
An investor in a bank, or a purchaser of A-rated securities offered by that bank, may not be aware that there are unregulated, undocumented liabilities held by that bank, which, were they to go sour (see "Credit Default Swap"), could cause the bank to collapse.
I thought everyone knew these ratings were bullshit.
If you knew that your bank was involved in large, unregulated transactions worth more than the bank's holdings, would you continue to do business with them?
Well, this presumes that I am doing business with them in the first place, but I would say that this information wouldn't change my mind, because I just assumed nearly everything the banks did was not actually regulated anyway. Yes there are bank regulators, but they don't really understand how anything works, nor do the banks for that matter. This might be pretty scary for the banks if they weren't able to get taxpayers to pay their losses. It also might cause regulators to start shutting all these banks down if their bosses weren't completely in the pockets of the banks.
Hell even I have my money in a bank. I basically dumped almost all my money into a house because I don't trust banks, but the money I have left over is in a bank. The Federal reserve has made it so that the only thing dumber than putting your money in a bank is not putting your money in a bank. They basically force everyone to become irresponsible investors or they confiscate your money through inflation. It's really quite an ingenious system, but it sucks for people who want to play it safe. Then again life sucks for people who want to play it safe.
That article is weird. But then, so is the site. In the middle of the article, there are ads for other articles:
New Healing Mechanism Closes Wounds By Up to 50 Percent in 30 Seconds -- And Leaves No Scar
Universe May Contain "Tardis-like: Regions of Spacetime, say Cosmologists
Reliable source problem here.
Anyway, their claim is that, based on Zipf's law, there must be some "long tail" of unknown small financial institutions which have vast but uncounted assets. No way. There's halawa, Indian gold merchants, and Bitcoin, but together they don't add up to one of the big banks.
"It is in the nature of markets to move money from the many to the few."
We are ALL being harmed by the vicious hoarding of capital and wealth by a select group of individuals. Things like this are a major driving factor in poverty which is directly correlated to higher rates of crimes both violent and non-violent. Don't like your car being broken into? Don't like getting mugged? Don't like not being able to go to certain cities or areas of cities around the world? It is directly related to the fact that the global banking industry is moving wealth our of the hands of the many to the hands of the few at a pace never seen previously in recorded human history.
I got here through a series of tubes
The banker initiation involves kicking a puppy and stealing a little old lady's pension check.
The cow says "Moo." The dog says "Woof." The Timothy says "Thanks, valued customer. We appreciate your input."
You are completely right – it is the other people who are confusing you. “Shadow Banking” is when non-banks, such a pension funds and money markets provide funding for lending instead of the banks.
Credit Default swap is a bad example. If it is held by the bank then it is on the books. It might be mispriced but that is another issue.
Commercial paper is the classic example. Companies go out into the market and borrow money for less than 270 days. The normally sell to money market funds and the like. Banks help in issues and selling the paper. It is off the books but it is lending. A lot of firms were borrowing lots of money like this because it was cheap. And at the end of the 270 days you just rolled it over. When the financial crisis hit nobody wanted to buy anything so you could not roll over your paper. A lot of good companies had to scramble.
Asset Backed Securities might be better. A bank (or GE, Target, or anybody selling almost anything) has 100m in loans. They then package those loans into a bond and sell 90m of that bond. They sell mainly to pension funds. Now the bank only has 10m on the books. This keeps leverage low and regulators happy. However now they are dependent on the market to buy their bonds. If they can’t sell their bonds then they can’t lend.
From their site
1.18% through October 31, 2013
So you still have roughly a -8% ROI through these bonds if you are going by real inflation figures. So how exactly are these protected from inflation?
Hear hear, another scam from your federal treasury and your not-so-federal central bank.
According to this web site, there's $228 trillion in derivatives. I didn't believe that number at first, but then I checked the source of the data and it comes from the FDIC (Schedule RL-C). Oh, and that data was for the end of the 2011 calendar year. Anyone wanna take bets that the number was much higher for 2012 and will be even higher in 2013? Don't worry, though - I'm sure the banks aren't playing fast and loose and we have absolutely nothing to worry about.
One of the key words in what you said was in the last paragraph: "reported". I quote:
And if you want to see what not to do in a financial crisis, look at the central bank that steadfastly refused to print money like crazy during the recession: the European Central Bank. The result is Spain with a 26.9% unemployment rate, compared to the 7.4% just reported in the US.
Consider the significance of the word "reported". I believe the report to be quite an erroneous. And also consider that 45% of currently existing jobs are expecte to be automated by around 2020. (I, personally, think that this is an overestimation of the rate of automation, but I haven't studied it recently.) Note the article today that says robots-join-final-assembly-line-at-us-auto-plant. It could be that I'm underestimating the rate of automation.
Unemployment needs to become acceptable, and employment needs to become unnecessary for survival. But this will be difficult as there are still boring and unpleasant jobs that can't be automated. Also because many people believe that one's worth is determined by their job. Also because the tax structure is such that jobs need to be as efficient, meaning employ as few people, and coerce as much work out of them at possible. It doesn't really mean that jobs need to be made as unpleasant as possible, but many managers seem to think that it does, and while a job is necessary for (reasonable) survival, they are free to exercise power.
OTOH, one needs to realize that this is going to mean that an increasing number of people are dependent on the government for survival. With the implications that those psychotically driven by a need to control will flock from their current positions to roles in government that provide equivalent opportunities. (Not that there isn't a significant tendency in that direction already, but the current system provides them with a diffuse network of niches, and most of those would disappear.)
I don't really see a good answer, but I sure see a lot of bad ones. And the current situation isn't even meta-stable.
I think we've pushed this "anyone can grow up to be president" thing too far.
It's a term that attempts to distinguish between economists who study monetary fictions and those who study reality based on measurement of resources.
Traditional economists of all schools practice "econo-fantasy" and almost universally support the making of money out of money. This is why current-day monetarism bears no relationship to the physical resources of the planet, and why financial institutions continue to profit despite the planet being in a death spiral.
Lacking even a vestigial brain cell, the practitioners of econo-fantasy don't recognize any such distinction of course.
Well, since they're not lending it, small businesses can't get loans to expand and thereby hire more people to reduce unemployment and prospective home buyers can't get financed and thereby can't help the housing recovery.
Instead, the banks get loans from the Fed at .25%, then buy treasury notes. Right now a 2 year treasury note is only like .5%, but in recent years they've been upwards of 1%. Inflation doesn't matter when it's all risk-free interest profits off somebody else's money.
Since the taxes to pay off those notes come from income earning Americans, it's basically a perpetual motion slavery machine.
1) Fed loans to banks.
2) Banks ignore individuals and loan to government.
3) Government taxes labor to repay banks.
4) Banks repay Fed.
5) Profit!
6) Goto 1
It's just a straight-up evil system to enrich the banking cartel off the backs of workers.
We don't have a state-run media we have a media-run state.
You sir, are a fucking moron and don't really deserve a response farther than this.
I got here through a series of tubes
And if you want to see what not to do in a financial crisis, look at the central bank that steadfastly refused to print money like crazy during the recession: the European Central Bank. The result is Spain with a 26.9% unemployment rate, compared to the 7.4% just reported in the US.
Well, no - the result is the EU with an 11% unemployment rate. If you want to take numbers out of context, you might as well quote Germany with 5% unemployment, and claim that that is the result of not printing money.
Greece and Spain are outliers - their economies have been poorly managed for a while, and it's nothing to do with the recent recession. Greece propped up its employment for years by just employing everyone in the civil service, going into debt, and concealing it. Spain has had massive unemployment for decades, on and off - 20 years ago, it was as high as it is now.