http://smirkingchimp.com/thread/mike-whitney/36713/a-beginners-guide-to-shadow-banking-financial-crisis-and-repoWhat if I told you that the financial crisis could be explained in just two words? Would you believe me?
It's true, and oddly enough, neither of the words is "subprime".
So, what are the words?
Bank run. The financial crisis was actually a run on the banking system. Only it wasn't a run in the usual sense of the word where jittery depositors line up on the street waiting to withdraw their savings, but a run on the shadow banking system where traditional banks get their funding via short-term loans in what's called the "repo market". (short for "repurchase agreement") The shadow banking system has become a critical part of the infrastructure of the modern financial system. It provides a way for banks to move credit risk off their balance sheets, thus reducing the amount of capital they need to support their operations. The banks argue that this new system has made credit cheaper for borrowers which, in turn, generates more activity and growth in the economy. But, of course, the risks are much greater too, as we can see from trillions of dollars that were lost following the meltdown of 2008. These risks cannot be contained as long as shadow banks remain unregulated.
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