Friday, June 1, 2012

Dave Altig — What is shadow banking?

In getting to the essence of what the future of shadow banking will (or should) be, I think it is instructive to consider a set of questions that were posed at the conference by Washington University professor Phil Dybvig. I'm highlighting three of his five questions here:

"1. Is creation of liquidity by banks surplus liquidity in the economy or does it serve a useful economic purpose?

"2. How about creation of liquidity by the shadow banking sector? Was it surplus? Did it represent liquidity banks could have provided?...

"5. If there was too much liquidity in the economy, why? Some people have argued that it was because of too much stimulus and the government kept interest rates too low (and perhaps the Chinese government had a role as well as the US government). I don't want to take a side on these claims, but it is an important empirical question whether the explosion of the huge shadow banking sector was a distortion that was an unintended side effect of policy or whether it is an essential feature of a healthy economy."
Read it at FRB Atlanta | Macroblog
What is shadow banking?
by Dave Altig, executive vice president and research director at the Atlanta Fed
(h/t Mark Thoma)

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