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The Almighty Buck

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."
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True Size of the Shadow Banking System Revealed (Spoiler: Humongous)

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  • by c0lo ( 1497653 ) on Tuesday September 17, 2013 @02:32PM (#44875823)
    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".
  • Re:Because of FED (Score:5, Interesting)

    by digsbo ( 1292334 ) on Tuesday September 17, 2013 @02:36PM (#44875865)
    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.
  • by the eric conspiracy ( 20178 ) on Tuesday September 17, 2013 @02:51PM (#44876071)

    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.

  • Re:Shadow economies (Score:5, Interesting)

    by TsuruchiBrian ( 2731979 ) on Tuesday September 17, 2013 @02:57PM (#44876153)

    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.

  • Re:Shadow economies (Score:5, Interesting)

    by Reverand Dave ( 1959652 ) on Tuesday September 17, 2013 @03:27PM (#44876555)
    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.
  • Re:BWAHAHAHAHAHAHA (Score:4, Interesting)

    by Dunbal ( 464142 ) * on Tuesday September 17, 2013 @03:50PM (#44876895)
    Render unto Caesar what is Caesar's? Banks have always existed to fuck people. We put up with it because it's an easier system to deal with than using cattle, chickens or rocks to trade with.
  • Re:BWAHAHAHAHAHAHA (Score:4, Interesting)

    by erikkemperman ( 252014 ) on Tuesday September 17, 2013 @04:36PM (#44877339)

    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.

    How is this Flamebait? Come on, mods. Inside Job [wikipedia.org], watch it.

  • Re:Peanuts (Score:4, Interesting)

    by organgtool ( 966989 ) on Tuesday September 17, 2013 @05:42PM (#44878071)

    Derivatives are based around completely unregulated insurance, so yes if absolutely everything went tits up at the same time (and sometimes there are bets that it won't go tits up, so it would have to both GO tits up and Not-Go tits up at the same time) then yes, that number would mean something.

    FTFY. Also, it doesn't require "absolutely everything" to go tits up. Everything in our economy is so tightly coupled to each other that big waves in one sector are guaranteed to have some effect in most other sectors. And if the waves grow big enough, the whole thing could come down.

    In addition to that, your assertion that the number means nothing assumes that the number of bets that it will go tits up are relatively balanced with the number of bets that it will not go tits up. The greater the disparity, the greater the economic effect. And the lack of regulation means that banks don't have to act in a manner that guarantees that they can cover even a majority of their bets, hence the 2008 bailouts. And nothing has been done to change that, so be prepared for it to happen again.

  • Re:BWAHAHAHAHAHAHA (Score:2, Interesting)

    by Maudib ( 223520 ) on Tuesday September 17, 2013 @06:45PM (#44878703)

    Almost used mod points to mark this as a troll, but decided to give you a reasoned response. Much of the banking regulation in the U.S. today is politically motivated for appearance sake, and is in fact to the disadvantage of both lenders and individual borrowers.

    Take for example the fair lending act, which seeks to protect consumers from predatory lending. One thing it does is to block lenders of record (banks) from considering certain data like race, geography, certain employment facts, most social data, etc. Underwriting models have to use approved metrics. The goal of this is to keep lending fair and prevent banks from using things like race when deciding loans.

    Most of this sounds great, however it actually means that a whole set of people will never get bank loans. Instead of developing intelligent models that are nuanced enough to identify credit worthy high risk individuals, banks rely on things like FICO and wont consider anyone below a given score.

    As a result banks cant price the risk for tons of very poor people that need loans, and as a result those people end up having to take payday loans at 300% annual interest.

    The banks hate this. Consumers suffer. Some politicians get to look good.

  • Re:Because of FED (Score:4, Interesting)

    by Smauler ( 915644 ) on Tuesday September 17, 2013 @09:38PM (#44879969)

    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.

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