Rebooting Economy XVII: Why governments promote shadow banking
Solutions to shadow banking risks are well-documented: tightening regulations, extending central banks' cover as lender-of-last-resort, mandating deposit insurance to prevent overnight collapse, controlling trade in highly complex, opaque and high-risk derivatives and changing short-term-funding-long-term-lending business model
- Aug 12, 2020,
- Updated Aug 12, 2020 10:30 PM IST
Shadow banking isn't exactly a neoliberal (radical right) concept, it existed earlier, but as Prof. Nouriel Roubini of New York University and Prof. Stephen Mihm of the University of Georgia pointed out in their 2010 book "Crisis Economics" it entered mainstream financing in a big way and turned the rules of the game in the neoliberal era.
They wrote: "A growing number of people who joined the financial services industry from the 1980s onward realised that they could make plenty of money, so long as they were willing to walk the banking tightrope without a safety net underneath. There were ways to conduct banking free of regulations, but also free of the protections afforded ordinary banks. So began a game of "regulatory arbitrage," the purposeful evasion of regulations in pursuit of higher profits. This quest gave rise to the shadow banks."
It is by now well-documented that governments world over continue to run and promote shadow banking entities even after the 2007-08 Great Depression, knowing fully well that they played a central role in it, which is also well-documented.
The question then is why governments do it. Why this extraordinary inclination for self-inflicted injury?
Shadow banking isn't exactly a neoliberal (radical right) concept, it existed earlier, but as Prof. Nouriel Roubini of New York University and Prof. Stephen Mihm of the University of Georgia pointed out in their 2010 book "Crisis Economics" it entered mainstream financing in a big way and turned the rules of the game in the neoliberal era.
They wrote: "A growing number of people who joined the financial services industry from the 1980s onward realised that they could make plenty of money, so long as they were willing to walk the banking tightrope without a safety net underneath. There were ways to conduct banking free of regulations, but also free of the protections afforded ordinary banks. So began a game of "regulatory arbitrage," the purposeful evasion of regulations in pursuit of higher profits. This quest gave rise to the shadow banks."
It is by now well-documented that governments world over continue to run and promote shadow banking entities even after the 2007-08 Great Depression, knowing fully well that they played a central role in it, which is also well-documented.
The question then is why governments do it. Why this extraordinary inclination for self-inflicted injury?