The political economy of Shadow Banking

Abstract

This article examines several elements of economic theory regarding money and banks through the recent history of the shadow banking system (SBS). It argues that the global financial panic of 2007- 2009 has forced the mainstream position to jettison some of its axioms regarding money, banking, and crises, while still maintaining others. Specifically, the claims of neoliberal doctrine that banks cannot create money out of nothing and that they cannot create crises, have been rejected by prominent members of the financial community and have been proven false by the growth and collapse of the SBS.  The current Great Crisis can be therefore understood as both a crisis of the SBS at its operational heart, and also the neoliberal theory that convinced regulators to allow the SBS to exist.