Shadow banking | Marketplace Whiteboard

The shadow banking system is a key component of the U.S. economy, but the financial crisis has frozen it solid. Paddy Hirsch explains what shadow banking is and why it's important enough to warrant its own bailout, called the Term Asset-Backed Securities Loan Facility, or TALF. #ShadowBanking #MarketplaceAPM #Whiteboard
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[@lichtundliebe999]

The "good" bank creates money from nothing and lends it to the client. This is called book money.

[@dboy6400]

@richard mccann Fractional Reserve Banking.

[@riyadhf1rdausehh]

well, this suddenly appeared in my KZbin recommendation.. i sense something huge is coming, youtube gave a warning.

[@MegaLangosta]

This disaster has been cooking since at least the 1970s.

[@MegaLangosta]

@lil gucci The real question is, how long can they keep faking it? I'm so amazed and disgusted at how far it's gone, I've almost given up on trying to predict when.

[@bobmar9239]

This is a very old video. Does it even apply? And why does it show up now when are feeds? KZbin is messed up.

[@gavva2010]

I think you're right, & I don't think we're gna need to wait long to see it happen. By the end of June, by my calcs. Get your £$ off the markets, ppl.

[@thedarkdragon1437]

that moment when you get it during corona virus outbreak lol

[@hardwaybets]

Your way of explaining these concepts is exceptionally good! I have enjoyed several of your videos...

[@cia1819]

You're great, man. Very concise and clear. These are things that aren't taught to the laypeople and being on myself, i appreciate the level in which you've presented these seemingly complex ideas.

[@answersquestioned]

The moment you turned to the camera, after drawing hair on Bruce, I gathered it was a self-portrait. And thank you for the clear explanation, mr. Hirsch

[@nfpk]

Posting these videos is a great idea. I'm really interested in these possible solutions and theories brought forward and love to keep updated. Marketplace definitely provides that for me. Thanks!

[@shpensive]

Incorrect description of traditional banking: banks don't lend deposits, loans create deposits.

[@arjaysmithjr9083]

Does this guy really believe his own bullshit? I hope not. I think he's watched "It's a Wonderful Life" once too often. Turn off the TV!

[@superchuck3259]

Banks don't lend out their deposits. They lend out fractional reserve dollars based on 30-100 times what is on deposit. So the bank pays the deposit person on 1,000 @ 2% 20 bucks a year. But the bank can lend out up to 100,000 @ 4% thus making 4,000 bucks gross proceeds. This works great so long as the 100k is paid back without defaults. but say 3%, or 3,000 of the 100k defaults. This still leaves the bank 4000 - 3000 or 1000 net minus paying 20 in interest, so still making 980 profit. Yeah, this is just an example, but do you see the huge advantage banks have in printing/creating money!

[@romusa9204]

@@superchuck3259 you got it right

[@brucesanborn7484]

Where does the money come from for those" loans"?Deposits?

[@superchuck3259]

@@brucesanborn7484 Not really. Loans are based off of assets. So if you have a house, you can borrow cash against it. The money comes out of thin air, it is a right of a bank to create money thru fractional reserve lending. Could a bank loan money against stock assets, sure, it is called Margin lending. So the escrow account for your home is enough deposit to secure the entire loaned out money from the home.

[@InstTaxSolutionsLLC]

The shadow banking system has indeed become a significant part of the economy. Great job in explaining how this system works.

[@raphael52]

Just found your videos. Excellent presentation. Excellent explanation. Definitely subscribed and liked.

[@Arginine88]

Thanks for the free education, I never heard the whole process that way.

[@trellend]

He's not completely correct here, when you get a loan, the money (check book) is created from thin air, just an accounting entry. The banks do not loan customers deposits, although they use the deposits to meet the reserve requirements, how ever low those may be. I'm not sure about the shadow banking side and the origination of money from them, but with banks, it isn't what it seems.

[@vajliakduke6231]

On the credit creation, yes, i think you're right. About shadow bank, i think his simplified explanation is good.

[@Acid31337]

How did you know that back then? Even now there is not many sources of information that describe credit creation right

[@jonswanson7766]

It seems that banks don't lend, rather they purchase securities, the loan contract is a security with the signature and your obligation to pay. These are often sold off and bundled into MBS

[@JohnKyleSutton]

This was a great explanation! Thank you so much 🙏

[@MrSupernova111]

Excellent explanation of the traditional bank versus the shadow banking system. Thank you!

[@suryarout8225]

thanks.. Marketplace APM...So informative.

[@mikki7522]

Great explanation, and very good game theory analysis :)

[@aspectoflife]

very conceptual by the examples,thanks

[@matteomasini7073]

Thank you for this video , you are an incredibile professor, your way to explain the shadow economy was pretty clear 😁

[@benjaminbailey6383]

Great video.... Quick and easy explanation video.....

[@rnunezc.4575]

Excellent explanation, thanks

[@Chhaylin]

Thank you very much for the explanation. You really made my day. I have even less confidence in the economic revival now.

[@philpaule472]

Really like the videos. Very informative

[@davidalen9279]

clear explanation. thank you.

[@Fsp01]

great lesson. thanks

[@mikem.6765]

Thankyou for posting this information

[@abc-mn1yi]

Hey Paddy, love these videos - What determines whether a bank is a regulated bank or a shadow bank and why aren't shadow banks regulated with safety nets etc?

[@Rays_Bad_Decisions]

The safety net is a government bail out and financial reserve requirements. Most banks don't follow those anyways. That's why they need to be bailed out. He also makes no mention of fractional reserve lending...

[@farogatolimjonova9566]

very well-explained (much better than confusing textbooks)

[@shyi1242]

Terrific demonstration!

[@ransielgalme8097]

........excellent presentation.......thank you

[@davidalen9279]

excellent. thank you sir.

[@percobalano394]

Thank u. this helps me with my report next week!

[@kangal1999]

beltane3, I worked for a major Bank, we could not book both principal & int pmt as income. Audit will fail us. Principal was booked as assets. Interest, late charge fee, NSF fee etc were booked as income. This was true for GL. Even for the regulatory SALT reporting we had book Principal under asset. I know where u are pointing to, the bear stearns, Merrils, Lehmans of the world did leverage based on future interest receipts. When that stopped due to housing market collapse they collapsed.

[@waikikiman007]

I have watch a few of your videos so far and they have been pretty good. But this one is totally misleading and inaccurate. Firstly Commercial banks do not lend savers money ( as u referred it to the "traditional way") they do not act as intermediaries. They lend money that is created out of thin air by a process called double entry book keeping. Shadow Banks do lend money the "traditional way" but they can also create it. They can then Securitize these loan agreements and resell them. But commercial banks also can sell their loan contracts to investment banks who do exactly the same thing. This is what lead to the 2007 financial crises whereby, primarily, Mortgages were sold to investment banks that then Securitize them and sold them on to 'investors'

[@franciscoferreiracarmo4397]

Yes... this is the point that is "missing" in your prentation....

[@franciscoferreiracarmo4397]

Yes... this is the point that is "missing" in your prentation....

[@noseltda4685]

Shadow banking ia what traditional banking should be..banking propaganda video

[@trendinvestor2893]

They do not lend money out of thin air. And you do not understand the concept of double-entry bookkeeping (accounting).

[@onetwothree4148]

@@trendinvestor2893 how is the fed money not created out of thin air?

[@Kangroo11]

amazing and very informative and ditto happening in INDIA.

[@shonsimpkins3915]

Two questions: Are shadow banks allowed to lend using fractional reserve like regular banks? Is this a result of dismantling Glass - Steagall protections for the regulation and prohibitions on speculative investing in banking?

[@brendastephenson3679]

Thank you, good information

[@EvanderSmart]

2:30 Would definitely be more accurate and educational to explain how the bank (only one way) makes money by including how Fractional Reserve Banking works. In effect, the money Bruce deposited is kept at the bank, but the bank can then make 9X that amount on their books to loan out to other, at 10%. And the interest rate they lend out is 1% or less. So assume they make 9% nine times, if they made the same loan amounts/terms in the future.

[@scottdavidson7543]

Modern money mechanics

[@BYENZER]

9X?? NO. Currently 43X is the NORM.

[@kennethwong580]

great explanation !

[@Tweetogreggieb59]

2 thumbs up good and reliable content From this host consistently videos recommended.

[@worldfamous260dewitt]

Well explained.

[@josevanreyes]

Excellent, explanation

[@hsiewayn]

good video, hope that more people can watch it

[@jacobblair6941]

This man was so ahead of his time

[@prandi2008]

Hello, could u guys share some refferences about shasow banking? any article or stuff? I would thank u a lot.

[@wghost1]

Very interesting indeed

[@robertcliffort2354]

Great videos clip.

[@YuSuck]

The 20 year old student driving a new Audi on a lease and paying for it on a weekend job is the signal something is about to go plop.

[@nobertstanel9428]

Thank You.

[@VasQuezadilla]

@tavit8 money creation in that article is in the sense of money supply, which is controlled by the Fed in two ways: money printing and reserve requirements. This is how the money supply is manipulated. Just to emphasize: this is controlled by the Fed, NOT commercial banks.

[@Fox12120]

thanks this video was great !! but didnt you miss a point regarding the subprime defaults that occurred that made the shadow banking system crash ?

[@chester2581]

Top content sir !

[@elro5899]

banks dont loan their depositors money,it only the collateral. they loan new money thats why there is inflation. its bad content pretends to be good.

[@Mike9201984]

This video could be classified as part of the “horror” genre.

[@JasonCtutorials]

wow your very good teacher. Cheers on your accent.

[@johnaugsburger6192]

Thanks

[@kdcruz75]

the bank places the mortgage instrumentincl. promissory note,on the asset side,as a debit entry) does it not have to create a credit entry AS PER DOUBLE ENTRY ACCOUNTING..does the FED then underwrite this (ie the bank pays the premium of 0.10%) so that the bank can now write a cheque on that liability entry to the buyer of the 'loan' ie EXTENSION of credit ( banks doc dont mention the word loan)like a check one writes from a deposit as the authorised signature , shifting laibilty to another bank

[@VasQuezadilla]

@tavit8 thats lowering the reserve ratio. Money already deposited that used to be kept in reserve is now free to lend. They do not make money out of thin air... However, the Fed prints money, but banks still have to pay an interest rate to borrow from the Fed...

[@tavit8]

@SnappyTertle yes. it's called fractional reserve banking, go look it up.

[@GRYL180]

"People have to borrow money to buy things" That's the problem right there because a debt based economy cannot sustain itself for very long.

[@kentheengineer592]

Liquidity Transformation

[@MrSupernova111]

Great video! Some people don't understand shadow banks are not depository banks so they are not regulated the same way as banks - hence shadow bank. According to wikipedia the assets of these shadow banks in 2007 was $4 trillion and the depository banks was $6 trillion. Hopefully with the new regulation and accounting rules this mess can be prevented in the future.

[@tavit8]

@SnappyTertle which part is false? Why don't you explain to me your interpretation of fractional reserve banking and money creation...

[@nickcollins7568]

You have completely missed the process of explaining fractional reserve banking where the banks lend out currency that doesn't really exist which the banks create out of thin air and then charge interest on. Nice little earner on something that doesn't really exist!!!

[@FrostyAUT]

You don't really understand how money works, do you?

[@katczinsky]

@@FrostyAUT hes right actually When loans get paid back, this destroys that new money. The thing is that they can create loans out of loans

[@GSD-]

FrostyAUT Yeah he does. And if you think otherwise, comment something more substantive

[@earlpierce2586]

@@FrostyAUT actually money is created when people make loans.. it's not borrowed from someone's saving. The Bank of England has confirmed this, as well as many economic experts.

[@FrostyAUT]

​@@earlpierce2586 Alan Greenspan said, shortly before the great financial crisis, that they had "figured out" economics because there was no sign of a crash. In my eyes, the Bank of England is just as "trustworthy". Also explain to me what keeps banks from simply lending INFINITE sums of money to anyone who needs it? I'll tell you what. There's such a thing as Basel 3 capital requirements.

[@rigoletto68]

House prices will continue to fall for years. I read in June, 2011 the FHA was still giving almost zero down loans ...at the same time millions of people are not paying their mortgages anymore since banks are not foreclosing. There is no end in sight to real estates free fall at this point until the system starts to correct and that has barely begun. Paddy should have a weekly PBS show. People would definitely watch it.

[@rdc323]

what about the banks that operate in fiscal paradises such as Panama or Switzerland.

[@AlexSanchez-mb9nh]

isn't this the same as mortgage backed securities / derivatives?

[@MrWashraf]

Regular banking system also do securitieze their loans.

[@oleg6517]

Yes, and that is the reason why i could find and see how the speaker of the video is trying to manipulate. He is a bad gue.

[@superchuck3259]

@@oleg6517 Yep, banks do fractional lending, they are not just making 8%. They are lending tons of money they don't have and collecting interest on it!

[@Smokingb0b]

Sorry Paddy, you know quite well the bank in this case creates the money out of thin air, NOT using deposit money.

[@se7ensnakes]

You are not exactly right. Banks tender promissory notes that people sign. So if there is no one signing promissory note there is no new money created. When a promissory note is paid off the money supply contracts. There is no fractional reserve lending. There is no mulitiplicity effect. Banks are just using signed promissory notes as cash because people do not know the worth

[@daustin14441]

I thought that was an interesting omission too🤔

[@droopypie]

what about credit unions - where do they fit in?

[@TheJimmyKrazy]

Paddy for president!

[@rexdeodium]

That is a common misunderstanding. The way that they "create" money, is by lending it to someone, while the depositor still regards that money as his own.

[@mattiassedin9769]

I would recomend a search on Prof Richard Werner and Prof Steve Keen on this subject.

[@franciscoferreiracarmo4397]

Excuse me Sir.... but there is a point that is missing in your presentation... banks leverage the deposits to make them become loans. In Brazil this leverage is around 11:1. I don't know how much it is in the US right now, but before the 2008 crisis I believe it was around 33:1!!!! So let's just pick 10:1 as a reasonable number.... If you pay 2% for a deposit but multiply this money 10 times and them land it to people at 10%, your spread is 98%. No surprise pension funds and other investors go to the "shadow", being this dark the light. Please correct me if I am wrong. By no way I am against banks. I just believe it is extremely healthy for the economy that they have an strong competition.

[@vincenttheo8841]

You actually have the causality wrong. Banks first make loans and then find sufficient deposits (i.e. reserves) by either attracting more deposits from the public or borrowing from the Fed or from other banks. This is precisely why it is difficult for the Fed to target a money supply level and the reason the Fed has given up targeting money supply since the 80s.

[@franciscoferreiracarmo4397]

@@vincenttheo8841 Thanks. I will have to study the subject deeper. The little I know is about the Brazilian law, here you need to have the deposits to start a bank and the loans.

[@Rays_Bad_Decisions]

Because of fractional reserve banking at 1-10 that 8% is actually an 80% profit because it give out ten loans. Or more likey 1-30 is how your banks reserves are actually spread so it's like a 240% profit from every dollar deposited...

[@tavit8]

@SnappyTertle fractional reserve banking means that for every dollar of deposits the banks only have to hold a certain portion in reserves. If I deposit $10 at a bank and they are obligated to keep 10% as reserves, they can lend out $9 to you by simply crediting your account. That $9 was created out of thin air and if we both went to the bank to withdraw the $19 ($10 real money + $9 new money)... it wouldn't be there because it doesn't exist...

[@VasQuezadilla]

@tavit8 the reserve ratio is not a means of money creation...it is simply used to limit the amount of money that can be lent out. A bank's purpose is to serve as an intermediary for people that want to deposit (save/lend) money and people who want to borrow money. It uses the money from deposits to fund people that want to borrow. Interest rates are used to "pay" for the service of providing liquidity. Banks (other than the Fed) do not create money, just provide liquidity.

[@Riverdale270]

Haha I'm starting to love how these video's end... Now I'm even preparing for it. No but these video's are great. Very clear. But I'm always wondering about those toxic assets... howcome an AAA bond from Nationwide gets to be toxic so quickly? Did the people that have to pay back those loans suddenly lose alot of money or their job or what happened?

[@beltane3]

How can you book principal as an addition to assets without considering those payments 'income'? When a loan is created, a negotiable instrument is created,an asset, out of thin air. My point is the principal payments received,regardless of accounting gimicks, are really income to the banks. They are in receipt of money they really never had before.That is income. Audit would fail you because this is supposed to be hidden. I assume prinicpal payments are used to offset the recorded loan balance.

[@nahomebekele7480]

I just watched the big short summarized in 10min

[@zofe]

Repossessions are the key!

[@walid7885]

Shadow banking is something else.

[@MrWashraf]

Traditional banks are also do securitization.

[@326sailingships]

You forgot all about Bruce. Regardless of which bank or financial institution he has he still must fulfill his contract. Bruce doesn't care about any institution's financial difficulties once he has a contract. Bruce's only obligation is to pay what he contractually owes.

[@leos8019]

Ahhh, good old financial fuckery. Thanks for reminding me how much I miss the Glass-Steagall Act and other vulture-repelling monetary policies!

[@LouFromShelbyMI]

Read Micheal Lewis' "The Big Short" that does not use the term shadow bank but does describe the same process and the larger debacle that resulted from the allowed deregulation and lack of oversight from the SEC

[@TheBarrwen]

When you call government regulation a saftey net its misleading. The money the government gives to the bank is taxed off others. It should never come to that. Regulators should have stiff penalties that discourage predatory banking but it doesn't. Even after 08.

[@marlonmay9316]

How do the shadow banking get its asset to make loans ??

[@leegreen6523]

Do credit unions count as a shadow bank?

[@jjtopp99]

@tavit8 Yes, it is called Fractional Reserve Lending. Typically required "reserves" (savings deposits, etc) are around 3% (during "normal" times). Think about that. In essence, it means the banking system generates one helluva lot of inflation via their loan creation system. But I sense you already know all this tavit. This is more for those not "in the know".

[@Dewdaahman]

when I asked mortgage "servicers" where the money came from for me to borrow to buy my house and they were always referred to as "investors.."

[@tavit8]

@SnappyTertle no. you're just wrong. go read the article on 'money creation' on wikipedia... it's very simple: 1) money creation by the central bank and 2) money creation through the fractional reserve system.

[@wmc9722]

There are BANKS and then there are NON-BANKS that are in the business of lending money. Becoming a BANK, getting a charter to be able to become a US BANK, is a really big deal. It's an area of business that is highly regulated and also it is a privilege to get (or buy into getting) a charter. There are many regulations that go along with being a US BANK and there are many benefits as well. BANKS operate in the world of Modern Money Mechanics. Do a search and you will find a lot out there to describe the basic process of money creation in a fractional reserve banking system. Bank Reserves and Deposit Expansion are important parts of what we think of as regular banks, those places you go to make a deposit and to get money out of their ATM. "Modern Money Mechanics" was a booklet published and distributed by the Federal Reserve Bank of Chicago, originally written by Dorothy M. Nichols in May 1961. Described as a "workbook on bank reserves and deposit expansion", the text offers a detailed description of the basic process of money creation in a fractional reserve banking system. The approach taken illustrates the changes in bank balance sheets that occur when deposits in banks change as a result of monetary action by the Federal Reserve System. The publication originally was written by Dorothy M. Nichols in May 1961. Recently (in 2019) one person decided to increase his cash position and went to a bank where he has a solid history and borrowed $250,000.00 at 3.5% interest. This same amount of money was offered from a 'non-bank bank for 9% interest, sufice to say, much more expensive. That said, NON-BANKS serve society overall as they are structured differently. They can take more risks hence they can lend money to a larger number of people than can traditional banks. NON-BANKS do not take deposits in the same manner that regular banks do. Non-Banks often have investors who are promised a 'return on' their money. Many people who cannot get a loan at a traditional bank WILL BE APPROVED for the same loan at a NON-BANK BANK and the cost of the loan will likely be more. Different standards, different rates. NON-BANK BANKS, also referred to as SHADOW BANKS, do not get to create money through the fractional reserve system. Typically the term 'bank' is not to be used by non-banks, those who operate in the 'shadow'. This review is very rough and I learned more about the entire subject in writing it. Please look at more of what Paddy has and also look at Investopedia. These are great sources for all of us as we navigate our way forward.

[@VasQuezadilla]

@tavit8 true...but you are forgetting interest rates...that is how I would "pay" for my $9. If it got to the point where people were withdrawing more than the bank had to give out, interest rates would fluctuate (supply and demand) to prevent this. In the case where this were to happen (bank runs out of cash), the bank borrows money from the Fed (banks cannot print money), paying interest to the Fed.

[@Bosniake]

Shadow baning has no safty net? Great! Thats the way banking should be!

[@nillejoslin]

Like Hong Kong and Liechtenstein where the government cannot rescue banks. Therefore they are more conservative and solid.

[@tempusfugit3635]

There’s an interesting set of arguments for free banking, but as a matter of sociological fact, people tend to not like losing all their money in runs. In the end, they’ll trade some freedom and price discovery for security and deposit insurance.

[@marlonmoore5000]

Yeah man you just completely left out the fractional reserve portion of banking. How 🤷🏿‍♂️?

[@hrvojemikulcic7074]

Pa zasto obicna banka ne zove poslodavca direktno na telefon dali klijent ima ugovor o radu na neodređeno ili određeno!?Teško da ce bankarstvo iz sjene stalno imati visoke kamate na obicne papire koji nemaju temelja u zlatu ili srebru!?

[@tavit8]

@SnappyTertle the fed regulates the banks by changing the reserve requirements, yes, but the banks are the ones who decide to lend and when you lend without backing that money with 100% of reserves you are creating money.

[@TheBarrwen]

Maybe no saftey net would act as an incentive to not screw up.

[@WillyWanka]

Fractional reserves?

[@deepmultani925]

Thank you!

[@rdalbis57]

What laws are under Shadow Banks?

[@CandyPinkcake]

Bruce looks great for a stick figure

[@MirageScience]

man your videos explain alot but the most important thing is that our money represents debt and the fed creates all the money which they lend out at interest which can only be payed back by other money they lent out at interest.