Saturday, November 05, 2011

The Way Out of Shadow Banks by Louis Evan Palmer

Various individuals in various financial institutions decided they wanted to make a lot of money and that the traditional means of doing that in banking, for example by taking deposits and making loans, was not good enough. So they stepped out of the normal regulated banking system and setup their own unregulated shadow banking system. This presented society with a rigged system in that we have ineffective governance over an increasingly large segment of financial transactions and the associated dollar value.

It seems that the biggest thing going on was selling an asset (like a house) a number of times. It might have looked different but it was the same house, or fraction of that house, being sold and resold. Some of the purchasers might have thought their piece of paper or electronic entry in a broker's system was an asset but they found out differently when the house of cards started to collapse. It was revealed to be nothing more than a chain of liens where only the lien that had an actual claim on the asset was worth anything and that value held up only as long as the asset held up. If you sold the same house ten times to ten different people you would be charged with fraud. If you package it up in obscure financial jargon and do the same thing, you're a genius and you get very rich.

Off-book shadow banking should be taxed as speculation. The funds should be strictly segregated from normal banking monies. A hit in the shadow bank should not affect normal banking. It must be easy and transparent to see the shadow bank transactions and to highlight the demarcation between it and normal banking. The place in the queue for the shadow banks must be at the rear. Everyone else gets paid before the shadow bank does. Their claims can be nullified and repudiated within the regular bankruptcy process. Things like an ABS, CDO, MBS or SLO are last in line and likely to have no payout if there are problems.

Trying to bring the shadow banks into the fold of normal banking is a mistake. The main function of shadow banks is facilitate excessive leverage and casino captialism. They are a sophisticated fraud that has to be stamped out through taxation, regulation and no payouts during any bankruptcy process.

The Way Out of Shadow Banks, Louis Evan Palmer, The Way It Can Be,

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Copyright 2011 Evan Palmer lives in Ontario Canada. His short stories have appeared in numerous publications.