In a recent primary debate, Hillary Clinton suggested that risks in the financial system are now concentrated in ‘shadow banks’. I do not like this terminology. The so-called ‘shadow banking system’ is the very core of the US financial system. It is where money is manufactured and the price and quantity of credit determined. We shall use more neutral terms such as ‘the market-based credit system’ or when the intent is clear, simply as ‘the modern system’ instead. In this essay, my goal is to demystify the system for the reader. In what follows, we shall describe the core institutions and key working parts of the modern system. Readers interested in understanding the system in greater detail should begin with the works of Pozsar, Mehrling and Adrian (see references at the bottom); as well as the
How the US Market-Based Credit System Works
How the US Market-Based Credit System Works
How the US Market-Based Credit System Works
In a recent primary debate, Hillary Clinton suggested that risks in the financial system are now concentrated in ‘shadow banks’. I do not like this terminology. The so-called ‘shadow banking system’ is the very core of the US financial system. It is where money is manufactured and the price and quantity of credit determined. We shall use more neutral terms such as ‘the market-based credit system’ or when the intent is clear, simply as ‘the modern system’ instead. In this essay, my goal is to demystify the system for the reader. In what follows, we shall describe the core institutions and key working parts of the modern system. Readers interested in understanding the system in greater detail should begin with the works of Pozsar, Mehrling and Adrian (see references at the bottom); as well as the