True Size of the Shadow Banking System Revealed (Spoiler: Humongous) 387
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."
Re:BWAHAHAHAHAHAHA (Score:5, Insightful)
In the United States, the central banks are regulating the Government.
They love the government as long as it sets rules that let them win.
Re:Shadow economies (Score:2, Insightful)
And is anyone actually being harmed by this "shadow banking"? If so, I'd be interested in a concrete example.
Re:Shadow economies (Score:4, Insightful)
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.
Re:Shadow banking system (Score:5, Insightful)
Nothing scarier than having your entire life savings become worthless.
size (Score:5, Insightful)
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.
Re:Shadow economies (Score:5, Insightful)
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?
Re:BWAHAHAHAHAHAHA (Score:5, Insightful)
Sorry? I completely fail to see any humor in the fact that the banks of the world explicitly and openly collude to fuck us as hard as they can - And with the outright support of government, at that.
Re:Because of FED (Score:5, Insightful)
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.
Re:Shadow economies (Score:5, Insightful)
* [urbandictionary.com]
Re:Because of FED (Score:2, Insightful)
Every single dollar in circulation was borrowed at interest. Governments don't issue their own money. It's all borrowed from. . . who? We don't really know, but we suspect.
So it doesn't matter how much you print, you're still in automatically in debt. There's *never* enough money in circulation to pay back both the principal and the interest debt.
And interest ain't static. It increases debt with time, so you gotta borrow more (and print faster) as the whole charade steam rolls to the next crash and wave of mass foreclosures.
It's a system designed to move real property and physical wealth into the hands of those lending the money to governments and people. The economy is a con.
It's really that simple once you cut through all the bullshit terminology and confusion.
One of the main reasons the West took out Iraq and Libya, and are hot on the tail of Syria and Iran is that those companies weren't (and the latter two aren't) playing ball with the secret banking cartels. They actually issue their own state controlled money rather than letting the middle men rape the economy. And charging interest is considered a sin.
You don't have to be any particular race or gender (Score:2, Insightful)
Buy a couple dozen senators, just like anybody else. You can get a discount price if you're a Christian Armageddonist, or willing to go along with them.
We have two intermingled crises - governmental corruption on a global scale, administered and centered in the USA, and of course the failure of the hereditary ruling class to build anything resembling a sustainable economy.
Re:BWAHAHAHAHAHAHA (Score:4, Insightful)
No, the little people don't have all the money (Score:4, Insightful)
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."
Re:Shadow banking system (Score:4, Insightful)
Said by someone with life savings.
Re:BWAHAHAHAHAHAHA (Score:4, Insightful)
Whereas I make that judgment based on what they say. But whatever floats your boat.
Re:BWAHAHAHAHAHAHA (Score:5, Insightful)
That's funny, when I see someone dismiss something because wikipedia was the citation I always figure they're just rejecting things on the basis that Wikipedia got mentioned because they think that makes them sound clever.
Re:Shadow banking system (Score:5, Insightful)
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&
Re:Shadow economies (Score:5, Insightful)
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.
Re:BWAHAHAHAHAHAHA (Score:5, Insightful)
Re:Econophysicists. WTF? (Score:5, Insightful)
"I have a very special service for rich people..." "Oh yes," said Ford, intrigued but careful, "and what's that?" "I tell them it's ok to be rich."
Actually, our planet has a whole industry telling poor people it's their fault for being poor and misdirecting their justifiable anger.
Re:Shadow economies (Score:4, Insightful)
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.
Re:I am not amused (Score:4, Insightful)
At what point can we end the delusion that fiat currencies are worth anything at all?
Probably when I can't buy a sandwich for a dollar.
Until then, it seems to work pretty well.
Re:Because of FED (Score:4, Insightful)
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.
Re:BWAHAHAHAHAHAHA (Score:5, Insightful)
Currency and banks need not go hand in hand. Even if we drive the money changers from the temple, there will still be money.,/p.
Re:Shadow economies (Score:4, Insightful)
Re:I am not amused (Score:4, Insightful)
Bartering doesn't work for transactions with large disparities in value. If I build you a house I'm not going to accept 200,000 chickens as payment. Even if the deal was to give me one chicken per day for the rest of my life it doesn't work because:
1) I can't eat more than one chicken per day
2) I'm not in the business of re-selling excess chickens - I'm a home builder
3) That would be 548 years of daily chickens and neither of us will live nearly long enough to fully satisfy your debt to me
Even if the trade imbalance was smaller, say 10,000 chickens worth, I can't (or rather, YOU can't) guarantee that you'll even still be around with chickens in 5,10,20,30 years when I'll still have the need to eat every day.
If you want me to build you a house you're going to need to pay me in currency that I can easily and readily exchange for a chicken from ANY chicken supplier at the time I'm ready for the chicken, even if that chicken supplier won't exist in the marketplace for another 20 years from now.
Re:Shadow banking system (Score:4, Insightful)
Not at all -- and quite the contrary!
Might you spend more per year in repairs on an old clunker than an under-warranty new car? Perhaps.
But even the most expensive things that might ever go horridly worng with that old clunker will still cost you less than a couple months of typical new car payments. And that's including you paying for a rental out-of-pocket while the car's at the mechanic.
That's another point -- there's no need to take car to the dealer for service and repairs. My own mechanic is a righteously grizzled shade-tree mechanic who works out of his back yard. He does awesome work; hardly surprising, since in a past life he was on the team of a top fuel racer. And every time I go there he's got some new Tin Lizzie or some such that he's restoring for somebody else; it's like an automobile museum. As a nice bonus, he doesn't charge anywhere near what he should, mainly because he has almost none of the overhead of a garage.
The short version is that it's always cheaper to fix up an old-and-busted car than it is to buy a new one. Always.
Will you have the latest and greatest array of gadgets, like three climate-controlled cupholders per passenger? No. But you'll have safe and affordable transportation.
Of course, if you do have lots of money and you can afford to buy (with cash!) a new luxury car every year and you enjoy spending your money on that sort of thing, go for it! The problem is that far too many people are spending money they don't have on things they can't afford, or they're giving half or more of their money to banks for no good reason.
That line above where I mentioned that you could double your purchasing power by not buying on credit? Imagine if everybody did that -- we'd double the size of our economy, just at the expense of the parasitic aspects of the banking industry. I daresay that just might do a wee bit of good for our economy...but only if we turned around and invested the windfall in solar power...and that's a rant for another time....
Cheers,
b&