Dear Reader,
Yesterday we breached the holy temple of modern central banking… and dynamited the false foundations that hold the edifice upright.
We revealed that monetary policy itself is a vast fiction.
There is simply no money in it.
We likewise revealed that central banks themselves are largely irrelevancies.
They exert far less gravity upon the monetary system than commonly thought.
The shouts, whistles and carrying-ons of the central banks signify nothing.
Yet we abandoned you with a question:
If the central banks are not central to monetary policy… who or what is central to monetary policy?
That is, who implements actual monetary policy?
We seek our answer in the “shadows.”
The Shadow Banking System
I refer to the shadow banking system.
The shadow banking system?
That is the deeply interconnected network of banking institutions that operate outside direct control of central banks.
They include the large banks and their offshore annexes.
This shadow banking system extends through Europe, the Caribbean and Asia… the world over.
Yet this shadow banking system hides in shadow, leaving only traces of its activity… as a skillful thief leaves only traces of his crime.
Only a properly trained sleuth can sniff them out.
Mr. Jeffrey Snider is one such sleuth.
He has donned his gumshoes and reached for his magnifying glass… in quest of the shadow banking system.
From whom:
- No one can directly observe this global [shadow banking] system, what is actually the world’s reserve currency. First of all, it is primarily based offshore from everywhere, therefore outside of official recognition. There are no direct statistics. The term “shadow” is, in this case, perfectly appropriate.
When the Shadow Banking System Took Form
Let us descend deeper into the shadows… and widen our investigation of this twilit banking underworld.
The United States dollar is the coin of this shadowy realm.
The system cast its first shadows in the 1950s and ’60s — after Bretton Woods crowned the dollar king of the international monetary system:
- Through the 1960s, the [shadow banking] system created new U.S. dollar money supply out of thin air… with no backing by gold or by physical cash issued by the U.S. Treasury…
- The [shadow banking] system evolved outside of the Fed… [It was a] market operating entirely outside of the U.S. banking system and therefore without U.S. regulation…
- The world needs dollars for the purposes of a global reserve currency. It gets them from this [shadow banking] system.
The shadows expanded through the 1980s, ’90s… into the early aughts.
And beneath notice… like a cat on tiptoe… the shadow banking system shouldered the central banks out of the international monetary system. Snider:
“The global money system moved on without central banks bothering to notice.”
The Origins of the Great Financial Crisis
Whence do asset bubbles emerge, asks Snider? From the shadows of course— including the United States housing bubble:
Snider:
- The reason we got asset bubbles in both the stock market and the housing market in the United States was the fact that the [shadow banking] system was growing exponentially at those time periods. In other words, the shadow system was creating both the liquidity as well as the credit resources for those things to actually happen…
- It was essentially a self-contained system that operated beyond the reach of everybody around the world…
- All of this was taking place in a place that wasn’t supposed to exist. So it was an enormous hidden, misunderstood, misplaced banking system, misplaced monetary system, that was just waiting to be a big problem.
- And it’s not coincidence… that we see this major inflection, especially in stocks and housing in the United States around 1995. Because that is when the [shadow banking] system… really started to fully mature into its final state…
Don’t Just Blame the Greedy Wall Street Bankers
This Snider fellow argues that the 2008 crisis — for example — was not merely a housing crisis. It was rather a crisis of the shadow banking system:
- The Great Financial Crisis was laid at the doorstep of subprime, a bunch of greedy Wall Street bankers insufficiently regulated to have not known any better.
- That was just a symptom of the first. The housing bubble itself was more than housing. What was going on in the shadows wasn’t bounded by national borders or geography… The Great Financial Crisis was a [shadow banking] event, nothing less.
- So what we’re describing here is almost an entire massive complete system… that existed offshore and wholesale, in the shadows, because there was no regulatory authority… no government authority over the conduct of this system. It was essentially a self-contained system that operated beyond the reach of everybody.
Can you expect the Federal Reserve to patch the system, to wrest some order from this lawless jungle?
Must I ask?
The Federal Reserve Has No Answers
The Federal Reserve has no idea what it takes to fix the broken monetary system (they can’t even get the simplest part right)… All these central bankers did was prove they had, and have, no answers.
But why no fix? And why is the Federal Reserve so incurably botched?:
- As far as economists are concerned, the U.S. economy is a closed system. In other words, it has its own money supply, there are trade linkages to foreign sources, but monetarily there isn’t supposed to be much transit between the U.S. and outside the U.S. [The shadow banking system is beyond] the orthodox framework of understanding how all of these things work…
- Officials never saw it that way and still don’t; they were, and are, incapable of such a realization…
- It’s (a monetary problem) that the Federal Reserve, so long as it persists in believing that the United States is a closed system, and that the Federal Reserve is at the center of the U.S. money supply, will never be able to fix.
Thus concludes our disquisition into the shadow banking system.
If you seek a firmer grasp of today’s financial and economic system — its booms, its busts, its lunacies — do not look to the Federal Reserve.
Peer instead into the shadows.
The shadows hold the answers — even if you do not like those answers.
Regards,
Brian Maher
for Freedom Financial News
