Do Shadow Banks Create Money? ‘Financialisation’ and the Monetary Circuit

Abstract

The rise of the shadow banking system is viewed through the theoretical lens of Graziani's Monetary Theory of Production. Graziani's categories of ‘initial finance’ and ‘final finance’ are used to analyse the new forms of credit created in the shadow banking sector. It is argued that the accumulation of leverage in the shadow banking system and the creation of credit money by the traditional banking sector are symbiotic processes. While Graziani's triangular debtor‐bank‐creditor relationship remains central, the circuit operates in a perverse form in which household debt is stored on the balance sheets of shadow banks, allowing the banking system to break the historical connection between money creation and productive activity.

Critical macro-finance, Post Keynesian monetary theory and emerging economies

“…Whereas traditionally Post Keynesians have highlighted money's unique ability to store value in the presence of fundamental uncertainty, from a Minskyan perspective, money is the universal unit of account and medium that can settle society-wide obligations denominated in that unit. In a monetary production economy, all the key economic functions are denominated and settled in money terms: wages, taxes, and in particular, debt obligations (see also Michell, 2017). The object that liquidates contractual commitments denominated in the unit of account is money, and for this reason it is 'liquid', i.e., its return is a pure liquidity premium.…”

A Taxonomy of Liquidity

“…Closely related to price-protection is the concept of "information insensitivity" (Cochrane 2014;Dang, Gorton and Holmström 2012), which refers to debt instruments of sufficient credit quality that almost full payoffs can be expected in all future states of nature, thereby removing the need for investors to uncover any private information about the underlying obligor. Not all money-claims can be used as a medium of exchange (Michell 2017), but their near perfect market liquidity is their distinguishing feature and inasmuch as the shadow banking was able to create these instruments then this appears to be a form of liquidity creation.…”

Measuring finance for the economy and finance for finance

“…The emphasis is on the ability of the whole international financial sector not only to create new credit, but also to control, direct and allocate the quantity and value of the financial wealth (including the existing assets inherited from the past). Moreover, even from a circuitist viewpoint, non-bank institutions can be interpreted as symbiotic to the banking system in creating a liquid short-term store of wealth that can be considered as near-monies (Michell, 2017). A second perplexity might arise from readers who adopt the viewpoint of the Modern Money Theory (MMT).…”