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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 NoNonAlphaCharsHere ( 2201864 ) on Tuesday September 17, 2013 @02:26PM (#44875763)

    "The banking system is closely regulated and monitored by central banks and other government agencies."

    AHAHAHAHA Stop it! Yer killing me!

  • by Russ1642 ( 1087959 ) on Tuesday September 17, 2013 @02:28PM (#44875781)

    I did my masters in non-Newtonian budget surpluses.

    • by king neckbeard ( 1801738 ) on Tuesday September 17, 2013 @02:33PM (#44875825)
      Econophysicists are just aspiring botanopsychologists who couldn't cut it.
    • I immediately thought of Sid Maier's Alpha Centauri and it's wonderful tech tree and prescient ideas [1]
      Note: while in SMAC, computing resources are used to solve big problems, mainly we're using them to run HFT schemes aiding the super-wealthy get even more wealthy.

      [1] http://alphacentauri2.info/wiki/Sentient_Econometrics [alphacentauri2.info]

      • by dywolf ( 2673597 )

        You thought of that, but not of Psychohistory?

        Hari Seldon would be very disappointed in /. today.

    • Re: (Score:3, Funny)

      by xvzf ( 3111567 )
      Dark matter, ya know.
  • 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".
  • No surprise here. What FED was doing for the last couple decades?
    Printing the money and printing and printing and printing and printing and printing and printing and printing and printing and printing and printing and printing

    All these cries about savings and cuts are pathetic.
    There is enormous amount of money in circulation, so much that economic bubbles just put little dent in it.

    • 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.
    • Re:Because of FED (Score:5, Insightful)

      by dkleinsc ( 563838 ) on Tuesday September 17, 2013 @02:53PM (#44876101) Homepage

      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:Because of FED (Score:4, Insightful)

        by HiThere ( 15173 ) <charleshixsn AT earthlink DOT net> on Tuesday September 17, 2013 @04:48PM (#44877457)

        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:Because of FED (Score:4, Informative)

        by meta-monkey ( 321000 ) on Tuesday September 17, 2013 @05:32PM (#44877957) Journal

        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.

      • 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.

  • by fustakrakich ( 1673220 ) on Tuesday September 17, 2013 @02:34PM (#44875839) Journal

    All contributions should be tax deductible.

  • See subject line.
  • by Iamthecheese ( 1264298 ) on Tuesday September 17, 2013 @02:38PM (#44875885)
    "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.
    • by amiga3D ( 567632 ) on Tuesday September 17, 2013 @02:42PM (#44875933)

      Nothing scarier than having your entire life savings become worthless.

      • by houghi ( 78078 ) on Tuesday September 17, 2013 @03:01PM (#44876209)

        Nothing scarier? How about a twilight marathon?

      • by HeckRuler ( 1369601 ) on Tuesday September 17, 2013 @03:04PM (#44876227)

        Said by someone with life savings.

      • by TrumpetPower! ( 190615 ) <ben@trumpetpower.com> on Tuesday September 17, 2013 @03:28PM (#44876581) Homepage

        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.)



    • The government enables these kinds of transactions. What, you thought your elected representatives were in it for the sake of their voters and their countries? This is it folks, the real picture. It's all about the money.

    • by gmuslera ( 3436 )
      The government wont dare to touch their bosses. Any hint of this reaching the NSA will be promptly erased, even from the backups.
  • size (Score:5, Insightful)

    by phantomfive ( 622387 ) on Tuesday September 17, 2013 @02:43PM (#44875957) Journal

    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.

  • ... and do they have any expertise in economics? Or is it kind of like an econobiologist or econocabdriver -- someone interested in economics but doesn't know any more than I do about it.

    • Re: (Score:3, Informative)

      by Anonymous Coward

      Re:What is an "econophysicist"

      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

  • Lord Humongous: Transact, my vermin, transact!
  • 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.

  • by meta-monkey ( 321000 ) on Tuesday September 17, 2013 @02:54PM (#44876111) Journal

    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?

    • by locopuyo ( 1433631 ) on Tuesday September 17, 2013 @03:41PM (#44876753) Homepage
      How do your cocks compare to Cox?
    • Re:I am not amused (Score:4, Insightful)

      by HeckRuler ( 1369601 ) on Tuesday September 17, 2013 @04:31PM (#44877301)

      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:I am not amused (Score:4, Insightful)

      by Anonymous Coward on Tuesday September 17, 2013 @05:46PM (#44878121)

      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.

  • by Animats ( 122034 ) on Tuesday September 17, 2013 @03:02PM (#44876213) Homepage

    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."

  • by argStyopa ( 232550 ) on Tuesday September 17, 2013 @03:03PM (#44876221) Journal

    The page is down, so hopefully someone can explain: how can the GDP of a system which is itself only a fraction of the planet, exceed the value of the planet?

    If, as I suspect, this is calculated by totaling transactions alone - ie if I sell you an apple for $1, and then buy it back for $1, we've just added $2 to the total GDP of the system...well then my next question is why we even pay attention to such a worthless number in the first place?

  • Peanuts (Score:4, Informative)

    by organgtool ( 966989 ) on Tuesday September 17, 2013 @04:28PM (#44877279)
    According to this web site [demonocracy.info], 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.

You can write a small letter to Grandma in the filename. -- Forbes Burkowski, CS, University of Washington