Shadow Banking Ensures That If One Falls, They All Will

“Talk About Moral Hazard!”

What amazes me is not the idea that in some quarters there are murmurings of “blanket” FDIC insurance for all deposits. It is the fact that no one has sounded the alarm that even contemplating such a move is in fact, yet another indication of a monetary system gone mad!

The information proliferating online would be funny were not all of this so serious. Former Fed official and FDIC official, Thomas Hoenig, once again spews his opinion. As quoted in an NPR piece titled, “Will FDIC’s move to cover uninsured deposits set a risky precedent?” Hoenig says, "Depositors no longer have to be aware of the condition of the bank because they know or they have some confidence that they will be paid off, even if they're uninsured. A banker can take greater risk because they can easily raise deposits if people don't worry about whether they're going to get paid back or not." DUH!

What slays me is that this very same Thomas Hoenig was co-author of a 2012 paper titled, “Restructuring the Banking System to Improve Safety & Soundness.” In short, the paper called for the separation of commercial banks from investment banks. There would be a firewall between the two with commercial banks reverting to traditional economic values aimed at protecting the public from the shadow banking system and its inherent risks. Best of all there would be no government safety net for the investment banks. This plan was a viable, workable solution which, once written, was shelved. From where I sat, Hoenig never raised it in interviews nor was he ever asked about it.

Read about how those who offered real reforms within the financial industry over the last 40 years have been silenced, or in Hoenig’s case, self-censored. Hoenig’s handwringing is disingenuous at best!

And just like in the 80s when the Fed signaled it would come to the rescue of troubled financial institutions, U.S. Treasury Secretary, Janet Yellen, ever so subtly signals that yes, another bailout would be considered when a bank failure "is deemed to create systemic risk, which I think of as the risk of a contagious bank run...we are likely to invoke the systemic risk exception, which permits the FDIC to protect all depositors, and that would be a case-by-case determination." This is crazy. The shadow banking system by its very nature ensures that if one large bank falls they will “all fall down.” That’s how interconnected they are.

What she says next sounds good even though it is delusional: “Our goal as policymakers is to build a financial system that can provide core financial services in both good and bad times. Macroprudential policy is not aimed at preventing external shocks nor eliminating all volatility in the financial system. Rather, macroprudential policy aims to make the financial system more resilient to external shocks – so the system can dampen, not amplify, their consequences for American households and businesses. We also aim to prevent the financial system itself from becoming a source of shocks – like it was in 2008.”

Baying at the moon!

Learn about the shadow banking system in my book,?“Repo Madness: A Simpleton’s Guide to the Street’s Wicked Ways.”?It is available on?Amazon?and?Barnes & Noble.