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The 75 Trillion Dollar Shadow Banking System Is In Danger Of Collapsing

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Shadow Banking System - Public DomainKeep an eye on the shadow banking system – it is about to be shaken to the core.  According to the Financial Stability Board, the size of the global shadow banking system has reached an astounding 75 trillion dollars.  It has approximately tripled in size since 2002.  In the U.S. alone, the size of the shadow banking system is approximately 24 trillion dollars.  At this point, shadow banking assets in the United States are even greater than those of conventional banks.  These shadow banks are largely unregulated, but governments around the world have been extremely hesitant to crack down on them because these nonbank lenders have helped fuel economic growth.  But in the end, we will all likely pay a very great price for allowing these exceedingly reckless financial institutions to run wild.

If you are not familiar with the “shadow banking system”, the following is a pretty good definition from investing answers.com

The shadow banking system (or shadow financial system) is a network of financial institutions comprised of non-depository banks — e.g., investment banks, structured investment vehicles (SIVs), conduits, hedge funds, non-bank financial institutions and money market funds.

How it works/Example:

Shadow banking institutions generally serve as intermediaries between investors and borrowers, providing credit and capital for investors, institutional investors, and corporations, and profiting from fees and/or from the arbitrage in interest rates.

Because shadow banking institutions don’t receive traditional deposits like a depository bank, they have escaped most regulatory limits and laws imposed on the traditional banking system. Members are able to operate without being subject to regulatory oversight for unregulated activities. An example of an unregulated activity is a credit default swap (CDS).

These institutions are extremely dangerous because they are highly leveraged and they are behaving very recklessly.  They played a major role during the financial crisis of 2008, and even the New York Fed admits that shadow banking has “increased the fragility of the entire financial system”…

The current financial crisis has highlighted the growing importance of the “shadow banking system,” which grew out of the securitization of assets and the integration of banking with capital market developments. This trend has been most pronounced in the United States, but it has had a profound influence on the global financial system. In a market-based financial system, banking and capital market developments are inseparable: Funding conditions are closely tied to fluctuations in the leverage of market-based financial intermediaries. Growth in the balance sheets of these intermediaries provides a sense of the availability of credit, while contractions of their balance sheets have tended to precede the onset of financial crises. Securitization was intended as a way to transfer credit risk to those better able to absorb losses, but instead it increased the fragility of the entire financial system by allowing banks and other intermediaries to “leverage up” by buying one another’s securities.

Over the past decade, shadow banking has become a truly worldwide phenomenon, and thus it is a major threat to the entire global financial system.  In China, shadow banking has been growing by leaps and bounds, but this has the authorities deeply concerned.  In fact, according to Bloomberg one top Chinese regulator has referred to shadow banking as a “Ponzi scheme”…

Their growth had caused the man who is now China’s top securities regulator to label the off-balance-sheet products a “Ponzi scheme,” because banks have to sell more each month to pay off those that are maturing.

And what happens to all Ponzi schemes eventually?

In the end, they always collapse.

And when this 75 trillion dollar Ponzi scheme collapses, the global devastation that it will cause will be absolutely unprecedented.

Bond expert Bill Gross, who is intimately familiar with the shadow banking system, has just come out with a major warning about the lack of liquidity in the shadow banking system…

Mutual funds, hedge funds, and ETFs, are part of the “shadow banking system” where these modern “banks” are not required to maintain reserves or even emergency levels of cash. Since they in effect now are the market, a rush for liquidity on the part of the investing public, whether they be individuals in 401Ks or institutional pension funds and insurance companies, would find the “market” selling to itself with the Federal Reserve severely limited in its ability to provide assistance.

As far as shadow banking is concerned, everything is just fine as long as markets just keep going up and up and up.

But once they start falling, the whole system can start falling apart very rapidly.  Here is more from Bill Gross on what might cause a “run on the shadow banks” in the near future…

Long used to the inevitability of capital gains, investors and markets have not been tested during a stretch of time when prices go down and policymakers’ hands are tied to perform their historical function of buyer of last resort. It’s then that liquidity will be tested.

And what might precipitate such a “run on the shadow banks”?

1) A central bank mistake leading to lower bond prices and a stronger dollar.

2) Greece, and if so, the inevitable aftermath of default/restructuring leading to additional concerns for Eurozone peripherals.

3) China – “a riddle wrapped in a mystery, inside an enigma”. It is the “mystery meat” of economic sandwiches – you never know what’s in there. Credit has expanded more rapidly in recent years than any major economy in history, a sure warning sign.

4) Emerging market crisis – dollar denominated debt/overinvestment/commodity orientation – take your pick of potential culprits.

5) Geopolitical risks – too numerous to mention and too sensitive to print.

6) A butterfly’s wing – chaos theory suggests that a small change in “non-linear systems” could result in large changes elsewhere. Call this kooky, but in a levered financial system, small changes can upset the status quo. Keep that butterfly net handy.

Should that moment occur, a cold rather than a hot shower may be an investor’s reward and the view will be something less than “gorgeous”. So what to do? Hold an appropriate amount of cash so that panic selling for you is off the table.

In order to avoid a shadow banking crisis, what we need is for global financial markets to stabilize and to resume their upward trends.

If stocks and bonds start crashing, which is precisely what I have projected will happen during the last half of 2015, the shadow banking system is going to come under an extreme amount of stress.  If the coming global financial crisis is even half as bad as I believe it is going to be, there is no way that the shadow banking system is going to hold up.

So let’s hope that the financial devastation that we have seen so far this week is not a preview of things to come.  The global financial system has been transformed into a delicately balanced pyramid of glass that is not designed to handle turbulent times.  We should have never allowed the shadow banks to run wild like this, but we did, and now in just a short while we are going to get to witness a financial implosion unlike anything the world has ever seen before.

  • Willpower

    This is it. Followed this for five years and this is the iceberg that triggers the derivatives crash. By September 13 I think the dollar will be at a 50 percent devaluation. That’s why these trade deals. Jade helm

    • Horiboyable .

      I think the dollar will rise. The collapse will begin is beginning in Europe and SOP is for investors to flee for safety in the US$ which will cause it to rise and then you will see some fun. All those cheap US$ loans in the emerging markets will not be looking so cheap.

  • Jacques

    Willpower, it should, but folks have been saying this for years. The prediction business is very, very tough.

  • Mike Smithy

    Reminiscent of the savings and loan scandal of the early 1980 and the rules that allowed them to run reckless and loose. However, the fallout will be unlike anything the world has ever seen.

  • Lone Patriot

    Prepare now while there is still time.

    • Horiboyable .

      I began back in 2011

    • nobody

      Prepare for what? A longer agony?

      • K

        How sad, it seems your desire, is to give up without a fight.

        • nobody

          Why prepare for a longer agony when you can flee for safety? I’ve already prepared a secondary residence next to my father’s house in Europe. If you prefer staying here and dying a slow death that’s your right, i prefer to flee and live.

          • poof

            Europe as a safe haven? Where do you live now? Cambodia?

          • nobody

            Even in the worst case possible Europe is a better place to live than US at its best. And i know that because i’ve experienced it personally.

      • Cluez Jones

        Just commit suicide. Weak fools like yourself won’t last anyway.

        • nobody

          Why should i follow you to my demise when i can simply leave when it no longer suits me? Maybe because i can think far ahead and see what’s gonna come and you can’t?

    • Lenny Brooklyn

      The 2nd Amendment is KEY. That is why they want to disarm you. Fight against this at every level you can.

      Bring folks to the range…family first…your intent should be to get as many folks inoculated against the anti gun propaganda.

      • Mike Smithy

        In addition, resist any mandate by the government to register your weapons because it is the first step in confiscation.

      • Bubba

        Bring your young daughters to the range so they can shoot more supervisors. Teach them violence from a young age so they are prepared for highschool angst.

      • Tj Sanchez

        no disarming been going for 7 years, you are like fighting an invisible enemy. get real.

        • Jodee Meyer

          Just wait, Obama WILL order gun confiscation when he declqres nqtion wide martial law. Than you’ll be eating your words

          • Tj Sanchez

            its now sept and almost oct. no such thing will happen. I will make sure you eat your words. lol just stop being paranoid and the same thing with this 75 trillion dollar shadow banking system. that is something else NOT connected with the banking system.

    • Mondobeyondo

      There isn’t much time left, unfortunately. This whole financial situation is about to fall apart like a $20 suit.

      • A Friend

        Now that’s funny. Like a $20.00 suit. :)

  • Bill

    There is a inextinguishable fuse burning, ready to ignite the mother of all disasters.

    • nobody

      No, the only question that is worth asking is how powerful is the main explosive. My guess is that it’s just a damp firecracker, as always. Some guys will lose all, some guys will get richer, as always.

  • Alwaystomorrow

    The Economic Collapse Blog Has Issued A RED ALERT For The Last Six Months Of 2015

    Published 6/25/2015
    186 days until 12/31/2015.

    For fun, lets do a count down every day until the end of 2015 and see just what happens.

    • Simon

      And if the warning turns out to be correct, should we expect to see your daily posting turn to apologies and admittance of your error in judgment?

      Or will we just not hear from you anymore?

      • rmc9

        …I vote for the latter…

      • Don’t feed the troll…

    • Steve

      Please Live in REALITY

    • Ouida Gabriel

      I accepted your challenge yesterday. I dont believe I heard back from you. Are you just going to post this everyday without discussion?

      • Alwaystomorrow

        The discussion can begin January 1, 2016.

        • Ouida Gabriel

          Good to know. It is a countdown.

  • corey

    They say, don’t fight the fed. The fed will hold off the next recession like a dam holding back water. The fed wants to engineer the next Great Moderation, a long period of growth and no recession. They will print as much as needed.

    • rat28

      We have to thank Fed for containing every crisis since 2009 that every naysayer was predicting. Fed consists of people with the best brain.. Arm chair critics do not know how the modern world financial markets work.. Bernanke , the best depression scholar has devised every monetary tools to deal with a financial crisis.

      • RagingVoiceOfReason

        Translation: “People with more brains than you are going to make sure everything is OK.”

        Go ahead and tell yourself that.

        • nobody

          No need to tell himself anything, he just needs to look at the news and the Fed’s decisions.

    • Mike Smithy

      The next recession? We never left the last recession.

      • CharlesH

        You’re totally right – we NEVER got out of the “Great Recession” which means we are literally in a slow grinding and sliding downward depression. Shhhhh not too loud though, don’t want to wake up the natives.

      • Mondobeyondo

        You speak the truth, Mike.

        • Mike Smithy

          It’s good to know you are still around Mondo.

        • Mark Koslosky

          House of cards run by idiots…..

  • TR

    Everyone make sure to vote for Republicans & Democrats because this would never have been allowed to happen on their watch.

    Ron White: “You can’t fix stupid.” Surely he was talking about the voters.

  • JailBanksters

    All good things come to an end, well good for it’s Creators.
    What’s even scarier, once it collapses, the same people that caused the collapse are still going to be in charge and will just create another monetary system not based on fantasy paper but based on fantasy computer bits.

  • Horiboyable .

    You have destroyed yourselves.

    At the close of the Constitutional Convention of 1787, Franklin was queried as he left Independence Hall on the final day of deliberation. In the notes of Dr. James McHenry, one of Maryland’s delegates to the Convention, a lady asked Dr. Franklin “Well Doctor what have we got, a republic or a monarchy.” Franklin replied, “A republic . . . if you can keep it.”

  • Avner

    Have you been paying attention? Currency swaps and petro chemicals for other currencies is going on right now. The dollar is already undermined, people like the posters above you continue to smoke the crack.

    I’ll gladly sell them a roll of bathroom tissue for an once of silver or whatever possessions they hold dear once it goes down, because you know full well they aren’t preparing in the slightest.

  • Black

    yeah, sure

  • df NJ

    When I commute to work, on 287 within a 15 mile stretch, I estimated about a million cars sipping away on gasoline on their way to work during my time driving. So my problem with the idea of a financial collapse is it seems absolutely against the interests of the people who derive all their power from the status quo. It seems to me if the bankers somehow bring down the economy preventing the sale and distribution of gasoline it would be a “national security” emergency. I would imagine secret and non-secret military forces would get involved and it would not end well for the people responsible for the collapse of the status quo.

  • rentslave

    Hopefully,this won’t happen until 2017,when it can blamed on Hillary.The Democrats will get slaughtered in 2018 and 2020,giving the GOP the permanent Roosevelt style majorities needed to untangle this Gordian knot.

    • Gay Veteran

      ROFLOL, republicans=democrats

      • df NJ

        I don’t think Hillary will win the nomination. Just like in 2008 the mud will start to stick. And this time around there’s a lot more mud.

        Bernie Sanders populist rhetoric will be threat to candidates on both sides. The way you become a leader is find a parade and step in front of it!

        I don’t think Republicans appreciating the swelling anger minimum wage voters are having.

        • Gay Veteran

          if Bernie Sanders proves to be a threat then he will be eliminated

        • Mike Smithy

          I am not convinced that Hillary supporters care how much mud sticks to her. They have already made up their feeble minds despite the allegations of criminal conduct and the numerous instances of professional misconduct.

          • A Friend

            Yes. A lot of people vote on name recognition only. And, another problem. For some reason a lot of Americans wistfully look back on Bill’s time in office fondly. As if we had a good situation back then. All was well. Economy was fab. Dancing in the streets, birds singing. All was happy. And a lot of people will hope she’ll be a repeat of that and the sad story is that that’s so far from the truth. I say no way.

        • DANA

          Minimum wage isn’t the problem, it was never meant to support a family or individual at a substantial level. It’s primarily for high school/college students, and low skilled workers. What we need are better jobs in this country and elected officials who care about the American worker instead of all this global nonsense.

  • Gay Veteran

    Russia is selling gas and oil to China for yuans, not dollars

  • Ben Swinson

    If they wouldn’t have let big bankers take over our money supply and take us off the gold standard this never could have happened. I started really looking at this in 2005 after seeing signs that there was going to be a housing problem and in 2006 I started preparing .. this horror story is just beginning …

  • underaged

    OK Michael, whatever you say. And by the way – the world has just shrugged off the ‘My Big Greek Default’. Might want to think about changing that button alert back to yellow. Darn!

  • Ben Swinson

    Michael, and Underaged can keep putting his faith in the politicians … I’m going to keep putting my faith in thousands of years of economic history.

    • underaged

      Politics and economics go hand in hand, inseparable, regardless of the political system. I have faith in both and neither at the same time – it’s human nature.

      • Ben Swinson

        When I look at anyone economist or politicians I always do the same thing .. I look at their past performance because it dictates their future performance …. and if they’re constantly wrong I kind of lose my faith in them …. and they haven’t been just wrong they’ve been disastrously wrong and if you don believe that look at just the last 40 years of our economy …

      • Ben Swinson

        And when you said Politic’s and economics go hand in hand your right .. but you forgot to add Fraud and Corruption ..

  • Gay Veteran

    nothing, the point being that more and more international transactions are NOT using dollars

  • Patriot Alice

    WE are not allowing anything. It’s happening whether we like it or not. Since 2009 these article warnings, living in fear about the end of the world, Armageddon coming any minute. Please go live your life, and whatever will be, will be. The future is not ours to see, what will be, will be!

    • Flippah

      Ha!

  • CharlesH

    The more I read and listen – the more I’m convinced that we’re absolutely doomed. When – not if – this entire system collapses, I can’t imagine the pain, suffering, needless deaths and mass chaos that will occur. It’s unbelievable. I’ve prepared somewhat for myself but when I think of most others – wow – it’s scary as hell.

    • rdrev

      Prophecy or Word of
      Knowledge!
      by
      C. Morton Pate

      Feb. 17,1974

      I, the Lord your God come quickly.
      As my judgment will be regarding your Nation, when it abandons Israel.
      Beginning 7 days there after and being complete 7 months there after.

  • Mondobeyondo

    Ladies and gentlemen, fasten your seat belts and assume the crash position…

  • Ben Swinson

    “If ever again our nation stumbles upon unfunded paper, it shall surely be like death to our body politic. This country will crash.” – George Washington

  • Shawn Severing

    TOGETHER WE STAND DIVIDED WE FALL . PREPARE WHILE YOU CAN

  • GetReal4U2

    get ready…September approaches quickly…

  • NoBrainer

    They won’t crash anything without having a plan to own it all after it does. I think uniting the US with Canada and Mexico is the plan. Then they control all 3 with cheap labor and all the industry. That is their Idea of world dominance. Since Hiroshima and Nagasaki, they have been blowing up country’s and putting in their industries….. Granted it does boost their economy, and they do get cheap labor for a product they sell back to their labor force and abroad. They are closer to and use the resources of the country they are….. welll….. occupying. The money is funneled to the execs. and share holders.. and back to the US….. welll…. kinda.

  • Bruce Keller

    It’s the shmijubileetah!

  • ejhr

    Why wouldn’t the government institute a Debt Jubilee? It would just wipe all the derivatives market, all the unregulated deals, which are, all said and done, just wagers. The uber wealthy would fight it but when the SHTF time comes they will be powerless to stop it.
    Steve Keen thinks there should be a debt jubilee for private debt as well.

  • LWZRGHT

    Kurt Vonnegut had a term for this. “Microsecond arbitrage.” The sell prices on market orders are going to be absurd, and someone with his account nanoseconds away from the street’s computers is going to make a lot of money.

  • landofaahs CIAmAPatriot2

    If people understood what their government has in store for them, they would hit the streets. But they won’t believe it until they see it and then it will be too late. Our government and most of it’s leaders actually despise the public and feel disgust that they even have to run for office. How do I know this? Because a prominent Senator complained about having to put up with tourists.

  • Richard Walker

    Please provide reference for quote from the Bible….” I, the Lord your God come quickly.
    As my judgment will be regarding your Nation, when it abandons Israel.
    Beginning 7 days there after and being complete 7 months there after.” I’d like to share it

  • Tj Sanchez

    you all watch too much hollywood movies, get a life!

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