The shadow banking system and the new phase of the money manager capitalism

The conventional definition of the shadow banking system (SBS) put forward by economists of the Federal Reserve and endorsed by the Financial Stability Board and the International Monetary Fund is based on the mainstream view of banks as mere financial intermediaries. On the contrary, this article proposes a post Keynesian approach of the SBS that focuses on the banks’ key role of creating money ex nihilo, highlighted by Schumpeter, Keynes, and their followers, such as Minsky. The hypothesis argued here is that on the threshold of the twenty-first century a new phase of money manager capitalism emerged, in which many money managers along with other nonbanking financial institutions became members of the SBS as they took part in credit risk withdrawals from banks’ balance sheets. This was done through financial innovations (securitization and credit derivatives) that allowed banks to remove these risks from their balance sheets and, in turn, to grant increasing amounts of credit. Yet, by globally multiplying and redistributing the risks present in the system to a variety of financial institutions, they were responsible for the transformation of a classic credit crunch (wherein the sum of potential losses corresponding to loans with low collateral is known), into a systemic financial crisis in the international arena.