Good article! Since we are piling on I thought I would add this to the mix. Here are some of the debates occurring a Jackson Hole this weekend.
“News from Jackson Hole: Saddle up ma, it’s a shadow banking run”
“According to Axel Weber, the German Bundesbank chief, the current financial crisis bears all the hallmarks of a bank-run. You know the kind of thing – frustrated savers scrambling to cash in their flimflam paper at the Western Union for its value in gold. Something like that anyway. Weber told an audience at Jackson Hole:
What we are seeing is basically what we see underlying all banking crises
In his analysis, markets, just as in the 19th century, are currently prey to a spiralling liquidity crisis created as investor confidence drops and everyone rushes to get their chips off the table.
The difference is that this time, it’s not a run on the banks. Instead, noted Weber, the current liquidity storm is being weathered by unregulated financial institutions – hedge funds, banking conduits, SIVs and such like. It is what Paul McCulley, managing director of Pimco, has termed a “run on the shadow banking system”.
This is problematic then, for regulators like the Fed, which were created in the 19th century to deal with liquidity crises in the actual banking sector. Whereas banking crises in the past could be cooled by – in Ben Bernanke’s subtly crafted words – “a helicopter load of money”, that avenue is closed, because central banks are prohibited from lending to the unregulated institutions behind the current storm. The liquidity central bankers have injected into the system so far has been poorly targeted and hasn’t run to where it’s actually needed.”
