PAUL KRUGMAN AND THE SHADOW BANKING SYSTEM
Sep 10th, 2012 by Conor McCabe
interesting article on the crisis in economic theory by Paul Krugman. In this quote here he’s talking in general terms, but the moment I read it I saw Anglo Irish Bank:
In retrospect, it shouldn’t have been hard to notice the rise of shadow banking, banking that is carried out by non-depository institutions such as investment banks financing themselves through repo. And it shouldn’t have been hard to realize that an institution using overnight borrowing to invest in longer-term and somewhat illiquid assets was inherently vulnerable to something functionally equivalent to a classic bank run – and, furthermore, that the institutions doing this were neither backed by deposit insurance nor effectively regulated.
I think it really has to be pointed out that the above was essentially Anglo’s business model. It was the failure of that model, and the subsequent bail-out of the shadow banking system in Ireland to facilitate/hide the bailout of Anglo’s business model, that destroyed a nation.
The full article is here:
http://krugman.blogs.nytimes.com/2012/03/05/economics-in-the-crisis/
Its curious to read BIS and Irish Central Bank reports on shadow banking since the crash. It’s not unexpected that they should break shadow banking down into two groups: good unregulated, technically unguaranteed shadow banking and bad unregulated, technically unguaranteed shadow banking. In my reading both the BIS and CBoI suggest that now that the bubble has burst the bad shadow banking is receding, but that good shadow banking remains in place as the vehicle of choice for governments and the ECB to pay off those who were supposed to suffer the consequences if their investment went bad. This is basically what Armoin Securities is after all. Using shadow banking to pay off in full those who caused the hyperinflation of financial assets with money from the real economy - which is in turn being degraded to preserve a financial system that is struggling because of the massive size of shadow banking.
What if there just were lots, lots, lots, more Anglos? but micro/smaller than that one? And, no deposit insurance and minimal regulation.
Soo terribly risky. But still; would/is not this ‘real’ ‘capitalism’.
I’m done.