My latest 15 minute interview on the subject of the super rich (Ultra High Net Worth Individuals) and their shadow banks is available at:
The following is a short introduction to the interview posted on the Voice of Russia Radio US Edition station:
Super Rich and Their Shadow Banks: a Growing Threat to Economic Stability
By David Kerans
WASHINGTON (VR)— Unregulated financial institutions or “shadow banks” which cater to the world’s super rich are becoming so potent as to present serious threats to economic stability around the globe, as even the mainstream financial press is now acknowledging.
However, the agility of the shadow banking sector (think investment banks, private equity funds, money market funds, REITs, etc.) more or less precludes effective scrutiny from government regulators, let alone proper control. Moreover, the relative weight of the shadow banks is growing quickly, thanks to the spiraling concentration of wealth among the super-rich. In the US alone, for example, high net worth individuals (with tens of millions of investment capital each) shot from $24 trillion in 2009 to $46 trillion in 2013.
Huge and expanding liquidity pools in the shadow banking system create booms and busts around the globe or in certain investment categories, by flooding attractive investment targets and then evacuating them, leaving governments, central banks, and taxpayers to pick up the pieces.
The upshot, as economist and St. Mary’s College Professor Jack Rasmus insists, is a serious and growing threat to economic stability, a threat that central banks can do little to control. Of course central banks can still exercise some control over the money supply and economic stability by setting prime interest rates and enforcing capital controls over traditional banks. But central bank infusions of liquidity since the recession began in 2008 have fueled rapid growth in the shadow banking sector, and made the world financial system increasingly less stable (traditional banks deployed the easy credit with shadow banks, where their returns were best).
The danger from the flourishing shadow banking sector is all the more serious, points out Rasmus, because these institutions are so lopsided in deploying their capital towards short-term, speculative ends. Investment in real productive assets has therefore languished, making the economy all the more susceptible to a crash when the speculative money retreats.
The retreat is not far off, according to Rasmus: “We’re going to find, I predict, when the Fed starts raising interest rates, if the Bank of England doesn’t start doing it first, we’re going to see this phenomenon within the next year, I think, with so much debt and short-term investing out there, as rates rise, it may precipitate defaults quicker than people think. I think it won’t take much of an interest rate increase to destabilize the financial investment structure once again.”
Solutions to the hypertrophy of the shadow banking sector are within reach of policy makers. Rasmus advocates establishing a public banking system that can loan money to productive, real economy enterprises, at the cost of capital (as per the successful North Dakota model, for instance, which Green Party candidate for California State Treasurer Ellen Brown explained to Radio VR in a recent interview). Real economic growth would then pull some of the speculative capital into productive use.
The odds Washington or London will pursue such sensible policies are approximately zero, however.
Read more: http://voiceofrussia.com/us/news/2014_06_25/Super-Rich-and-Their-Shadow-Banks-a-Growing-Threat-to-Economic-Stability-6134/