Anastasia Nesvetailova — Shadow banking, or why black holes are important in the global financial system

The shadow banking sector is now integral to the global financial system. Its architects are constantly seeking to evade oversight and control through the use of offshore accounting and forbidding complexity. The regulatory reforms that followed the 2007-8 crisis are bound to be tested.

Our Kingdom — politics and liberty in Britain
Shadow banking, or why black holes are important in the global financial system
Anastasia Nesvetailova

There is no effective way to regulate or prohibit shadow banking other than at the margin. The only effective option is to let the financial system collapse,  nationalizing the insolvent firms as the US did in the case of General Motors and  providing the needed fiscal support to the real economy to keep it from being affected by low demand. 

There is no substitute for liquidation in capitalism, and governments have the power to let insolvent firms go under if it steps in and makes up the shortfall during any sort-out period, while nationalizing those firms that are too big to fail. They can be sold off to new equity holders after the crisis has passed and new management can take the reins. The US did that with GM, and it should have done it with financial institutions that were also insolvent, cramming debt down to equity and assuming the equity of the former equity holders.