Tuesday, 17 June 2014

Mark Carney: somebody else who is clinically insane

Our cuckoo Canuck, writing in yesterday's FT:

As progress has been made in reforming the global banking system and as risk appetite returns to financial markets, wider attention has begun to focus on shadow banking.

That focus is not new for policy makers. Reform of shadow banking – the extension of credit from entities and activities outside the regular banking system – has been a core part of the Group of 20’s agenda to overhaul the global financial system since the 2009 Pittsburgh summit, when, in response to the crisis, leaders established the Financial Stability Board. The aim has been to deliver a transparent, resilient, sustainable source of market-based financing for real economies…


There follow endless iterations of buzz words like "opacity", "transparency", "misaligned incentives", "leverage" and "liquidity", you know the score.

But take it from me, there is no "shadow banking system". What he is actually referring to is all the "money market funds" (and hedge funds and so on) who bought the securitised mortgage assets from the banks, which in crude terms you could view as "money market funds lending banks money".

Those money market funds appear to the the bogeymen here, the ones to blame for the house price bubble and bust and so on. But in the real world, those wicked funds did not go round lending money to the man in the street, to businesses or to mortgage borrowers, they were created by normal banks doing securitisation in the first place. There was demand for such funds (to buy up banks toxic crap) and supply arose to meet demand.

Nobody asked the banks to do securitisation, it was not forced on them. And even if the funds involved on the other side are secretive and do not publish their own financial statements (why on earth should they? do you have to make public how much you have on deposit at the bank?) then so what? The normal banking system knows what the "shadow banking" system's total assets are, because their total assets are all the toxic crap which the normal banks sold them in the first place.

To sum up, the banking system itself knows perfectly well how much they have got on deposit and from whom, there is no vast unknown "shadow banking system" and Carney is just picking on a meme started by Gordon Brown and others to try and shift the blame away from themselves.

As ever, the question is, does Carney really believe in all this voodoo crap; is he deluded enough to think that he can persuade other people to believe in it; or is he merely deluded enough to think that he can get away with pretending to believe in it, even though nobody else believes it?

6 comments:

Dinero said...

I think the term shadow bank means institutions that advance credit, increase liquidiy, and deposits, but dont comply with bank regs and regulatory oversight. Shadow as in accompany not shadow as in secret. Just bad jargon.

I see your point that "the banking system itself knows perfectly well how much they have got on deposit and from whom"

So - Banks already risk weight their assets so maybe they could risk weight their deposits to, in terms of risk of the deposit being withdrawn on a case by case basis.

Bayard said...

IS that insane as in the definition of insanity attributed to Einstein: "doing the same thing over and over again in the hope of a different result"?

"The normal banking system knows what the "shadow banking" system's total assets are, because their total assets are all the toxic crap which the normal banks sold them in the first place."

Which reminds me of the argument going around before the invasion of Iraq: "We know Saddam Hussein has WMDs because we sold them to him in the first place".

Rich Tee said...

The term "shadow banking" does seem a bit left-wing, a more subtle version of "bash the bankers".

In my stockbroker's list SIPP of funds the Money Market funds are classified as the lowest risk, 1 or 2 out of 7, compare that to the FTSE 100 funds which are typically classified 5 or 6 out of 7.

As the chap in the BBC article on the subject says, they are regulated and comply with the regulation, so what is the problem?

paulc156 said...

"in response to the crisis, leaders established the Financial Stability Board"

That was one bold step for banking oversight in our times. The 'Financial Stability Board' replaced the 'Financial Stability Forum' which was in turn set up in 1999 to...and I quote;
"promote international financial stability". tee hee

Mark Wadsworth said...

Din you have to read the articles. "Shadow bank" is used to refer to lots of different things (none of which are banks in any way shape or form, shadow or otherwise), but what you say they are is not on the list.

B, to be fair, they get the same result every time because they want the same result, which is them getting away with it.

RT, to my mind "bond funds" own corporate bonds (i.e. lend to proper companies as well as banks) and "Money Market Funds" place money on deposit with banks (or buy bank bonds i.e. lend to banks).

PC, excellent spot, thanks for that.

Graeme said...

isn't it all about trying to slink away from the need to value these "assets"? Once you have flogged them to a shadow bank, then the valuation becomes their problem,. as it were...