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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.
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.
Nothing scarier than having your entire life savings become worthless.
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."
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.
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
And, remember. The same people who run the shadow banking system are the ones who want you to put all your money into it rather than pay down your mortgage.
If you own your home free and clear, you don't need anywhere near as much savings (or income!) to be comfortable. But if you have a hundred grand outstanding on your mortgage and a hundred grand in the market and the market goes tits-up, that hundred grand is gone and you still have to pay the mortgage and the lender can still kick you on the street if you don't. And, ohbytheway, all that equity you've put into the home goes *poof* when the bank evicts you as well.
Debt may be what's driving the economy, but it's pure evil for the little people.
If you want a stress-free life, pay cash for everything. If you want something and you can't afford it, set aside whatever you'd spend on the monthly payments and then buy it outright when you've saved up enough. It won't take anywhere near as many monthly payments to save up for it as it would to buy it on credit. You're pretty much always going to spend a bare minimum of half the purchase price on finance charges, and often more than the purchase price.
That's really all you have to do to double your purchasing power: don't buy on credit.
(The only types of exceptions are for capital investments, such as big equipment for a business. If a company will make significantly more money from the equipment than it'll pay in finance charges, the loan makes sense. But that's almost never the case for individuals, and certainly not the case for living room furniture and kitchen doodads and exercise equipment that rusts from disuse. And rarely the case for vehicles. Homes you might have no choice but to finance, but buy something you can pay off in five to ten years, even if it means living on rice and beans in the mean time; if you can't afford to pay it off that fast, you can't afford the house.)
Cheers,
b&
All but God can prove this sentence true.
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.