A fascinating piece from FT Alphaville about shadow banking, which all of us have a hard time trying to pin down accurately, citing a paper by Edward Kane, a professor at Boston College. I have written about it before as a sector that is able to extract the benefits from society – notably the social safety net that ultimately backstops them when things go wrong – while conforming to none of the responsibilities that should flow from those benefits. They are the ones that have escaped the social contract.
The Kane paper strikes a chord with me because it compares the behaviour of shadow banking to that of small children, a subject with which I have been delightedly, exhaustedly familiar since the birth of my first child five years ago.
“Children who recognize this reflex and refuse to be bound by parental rules may pursue either of two paths: defiant disobedience or creative avoidance.”
The shadow bankers, Kane argues, pursue the path of avoidance, rather than outright disobedience (in my experience, they start to get particularly good at it from about age four).
“Avoidance differs from outright evasion by respecting the words of a command, even as the intent of the command is at least partially frustrated. The avoider has a lawyerlike or playful perspective on rules that differs from the criminal mindset of the nonupright, undisciplinable child. An evader is unruly. An avoider is a resourceful escape artist. . . “
The whole article is great fun, and apt too.
Meanwhile, for shadow banking wonks, FT Alphaville has another couple of tables that suggests the U.S. shadow banking sector has declined significantly since 2008. But that is just one measure – as the article notes, other measures see the sector much, much bigger than this.