May 23 2012

Shadow banking as Ponzi finance: new research

Posted by: Nick Shaxson in: Thoughts

From Tax Research, on a presentation made at a conference in Copenhagen:

Perhaps most interesting was the contention from Anastasia Nesvetailova from City University who argued we’re seeing a real change in capitalism itself, although she was not alone. Once we assumed (maybe even knew) that capitalism was structured around the idea of trade, where the idea was that value was added within the process of creating, transformation and exchange. But that may no longer be where global capitalism sees much of its return arising; the whole shadow banking structure of repo markets, securities lending and securitisation may actually be all about capturing a synthetic profit that may redistribute wealth (as I am sure it does) but where in fact the whole process is, as Minsky would have it, a giant Ponzi scheme which is not only not zero sum but is actually destructive.

This is a serious charge with implications that make the Greek crisis seem like a storm in a teacup. (More accurately, the Greek crisis is just one manifestation of this much bigger secular trend, it seems.)

So where is the shadow banking sector located? Well,

“the EU shadow banking sector – centred more on the City of London, Luxembourg, the Netherlands and Ireland – may be worth $20 trillion or more.”

Take a look at this, in more detail, in a Greek context, and in pictures, here. Put this in the wildly overflowing ‘more research is needed’ box.

Nesvetailova had a paper on this in 2008, and others have done research in this broad area, and she told me this morning that there is a major update coming out in the Review of Radical Political Economics later this year. She sent me a draft copy which is fascinating, though I don’t have permission to quote from it yet; I will ask and will comment further if and when I get permission.

I and others have compiled a trove of analysis on the links between tax havens and the financial crisis, with plenty of attention to the shadow banking sector.

2 comments so far

Faringdon 5th May, 2012 9.53 am

Yes. Exactly. So manufacturing, in Western countries anyway, is falling and we are all dependent on either working for “service industries”, or welfare, for the growing millions without work. We have been dependent on capitalism (the mercantile/trading/industrial variety) for so long that this one (“synthetic/funny money”) is very frightening.

Is it a return to serfdom? The only jobs will be serving the super-rich.

How can this possibly play out without a mass collapse? Greece is just the messenger.

Jeremy Leaman 5th May, 2012 1.46 pm

Two economists, closely associated with the Bank of England – Martin Weale and Andrew Haldane – have published some very interesting data concerning the destruction of value prior to 2008 (Weale) and as a result of the collapse of Ponzi-capitalism since then (Haldane). Most telling is Martin Weale’s simple exposition of the development of the ratio of national ‘wealth’ (capital stock, savings and net real foreign assets) to GDP in the UK since 1920. It shows a halving of the ratio between 1922 to 1945 (from just under 4.0 to just over 2.0), followed by a slow recovery up to 1980 (to 3.3), after which there is a marked decline again to 2005, where the ratio is even lower than at the end of the Second World War. The implication – not acknowledged by Weale – is that the advent of the neo-liberal paradigm and its eager apprentice, shadow banking and Ponzi-style hyper-leveraging, have weakened the real basis for sustainable real accumulation, even before the recent and irretrievable loss of real capital. What is so extraordinary, is that policy elites and the academic economists advising them after 1980 did not spot the paradox of a rising profits ratio and a declining investments ratio in all advanced economies, nor the dangers inherent in the massive diversion of corporate reserves into the self-referential circuits of casino capitalism. It is arguably the most grotesque example of The Emperor’s New Clothes in modern economic history.

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