Shadow Bank Runs

In the article below economist Tyler Cowen points out that we have done nothing whatever to address one of the biggest problems that hit the financial system in 2008: the shadow bank run and threat of more such runs. For example, at that time it became clear that there would be a run on some money market funds. The government stepped in and temporarily guaranteed them, but since then has largely ignored the problem.

Can the government guarantee all the institutions that are involved in lending, not just the banks? That is no solution at all. It will just lead to more “moral hazard,” a system that leaves profits with government supporters while foisting losses on taxpayers.

The real solution is twofold. First the doctrine of “too big too fail” must be repudiated once and for all. And the repudiation must be for real. The Dodd-Frank Act pretended to end it while actually extending and supporting it. Second the world needs to go back to the roots of banking and institute 100% reserve banking in place of the current fractional reserve banking system that allows banks to create and destroy money at will and in the process destabilize the financial system. The issues surrounding fractional reserve banking are covered in greater length in Are the Rich Necessary, published in 2007.

Click here for the article.