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Really seems like Wall Street is in love with the term "shadow banking", because it implies "can't regulate it". Yet we know exactly who the participants are,

Really seems like Wall Street is in love with the term "shadow banking", because it implies "can't regulate it". Yet we know exactly who the participants are, the types of firms, and their practices. Step 1 to better regulation of creative rent seeking is to stop treating it like it's nebulous.

lbotos 7y ago
Isn't the root of the problem this: > To fund all this loan-making, the shadow banks have turned to insurance companies, pension funds, university endowments and wealthy investors, offering them a chance to buy into a diversified pool of loans that offer returns ranging from 6 percent to 13 percent, depending on the level of risk they are willing to assume. If some hedge funds and "wealthy investors" want to take on risky investments that are "unregulated" I'm all for it. Would you agree the risks for systemic collapse come in when it's straddled onto say insurance companies or pension funds?
- belorn 7y ago
  The root issue of credit card bubbles is not that hedge funds and investors may loose on risky investments, but that those same investors are so interconnected with society that society has to bail them out if they end up loosing it all.
  - dd36 7y ago
    Also that the executives can bail before it gets too bad.
- bastawhiz 7y ago
  What shape would the regulation for the latter look like? Should policy holders or pensioners have the ability to veto these investments? I don't want someone to lose their pension over a poor investment by a greedy fund manager. But I also can't think of how you'd draw a line where the investment is "too risky", or rather "too high of a risk to justify the effects on the persons who would be affected if the investment fell through".
  - skybrian 7y ago
    In principle, it seems like it would be pretty easy to limit pensions to a short list of conventional investments specified by a regulator, such as the sort of thing normally allowed in a 401k. The line would be fairly arbitrary but I don't see why that would make it particularly hard to implement?
  - aaronblohowiak 7y ago
    Sounds like you want defined contribution not defined benefit retirement
- r00fus 7y ago
  Systemic risk. If everyone is making riskier bets for a significant, then those who do right may be outcompetes for long enough that they go by the wayside while the risk-takers dominate. Then when the “black swan” comes the risk averse are already gone. Oh and the system is full of TBTF entities.
- TuringNYC 7y ago
  Hedge funds usually manage other people’s money in addition to their own, in fact, pension money is the most common source of other money that hedge funds manage.
- dnautics 7y ago
  I think we have to dig deeper. Why exactly is it that people have to rely on pension funds or put their assets into mutual funds to retire safely?
jasode 7y ago
>Really seems like Wall Street is in love with the term "shadow banking", Actually, the hedge fund and private equity fund people hate that term because it implies something nefarious is happening. In reality, the new post-2008 crisis bank regulations in both Europe and USA to ensure stability causes a new phenomenon to emerge: Non-banks lending money to companies that banks are not allowed to lend to. Every economist and financial regulator knows this became a side-effect of the more stringent financial regulations. So the "too big to fail" banks will still lend millions to big companies like Microsoft and Apple, but the $50m companies are too small and too risky to bother with. Look how these "shadow" lending transactions keep emerging... - a billion dollar pension fund is woefully short of its obligations to pensioners and needs a higher yield on its money. Buying safe US T-bills that yield 1% interest is not enough. They need to look at alternative asset classes that gets them in that ~8% range. - a medium-size company needs $50 million loan to expand its business and is willing to pay a higher interest rate than 1% T-Bills. (That makes sense since the company doesn't have the same credit worthiness as the US Government.) - If the pension fund (needing to put their money to work) and the company (needing a loan) can match up with each other, they can help each other's goals. But the pension fund isn't in the business of analyzing credit risk or providing loans directly. Likewise, the owner of the company doesn't have the time to fly all over the country and meet with 100 different pension fund officers. That's where middlemen like private equity come in. They're the ones with the staff of credit analysts. The "back office" of the private equity fund that analyzes a company's credit worthiness does much of the same work that the credit analysts at JP Morgan, Bank of America, Wells Fargo, etc did. They become the "shadow bank". Of course, they also charge management fees and a % of the profits for their "financial intermediary" services. The middle market's underlying need for credit never disappeared. The new bank regulations just inevitably shifted the loan transactions to a different set of players.
- wrong_variable 7y ago
  Thanks for that explanation, I have been so confused with the term "shadow banking" - it makes perfect sense now.
- Despegar 7y ago
  The shadow banking is fine. The taxpayer isn't responsible if a PE fund engaged in direct lending to the middle market loses all their money. But shadow banking can and should be scrutinized, and potentially regulated, if there are systemic risks that will lead to the taxpayer being on the hook once again. If it's just isolated private actors losing money it doesn't matter.
all2 7y ago
I've seen the term "rent seeking" used a few times here on HN, and I have no idea what it means. For those curious: Rent-seeking happens when a person or business uses their position or resources to get some additional benefit from the government. The most common occurrence is when a company or industry lobbies the government to receive special subsidies, grants, and tariff protection. The term "rent" in economics means receiving a payment that is over the costs involved in the production of the item or keeping the item in service. These actions do not produce any benefit for the community-at-large but only redistribute taxpayer's resources.[0] [0] https://www.investopedia.com/terms/r/rentseeking.asp https://www.investopedia.com/terms/r/rentseeking.asp
- refurb 7y ago
  On HN “rent seeking” has a broader meaning of “making money in a way I don’t like”.
- wavefunction 7y ago
  That's a very government centric definition but I prefer: >Rent-seeking is an attempt to obtain economic rent (i.e., the portion of income paid to a factor of production in excess of what is needed to keep it employed in its current use) by manipulating the social or political environment in which economic activities occur, rather than by creating new wealth. The important bit in rent-seeking is "rather than creating new wealth."
- coolgeek 7y ago
  As wavefunction notes, that is at best a very narrow definition. Here is Wikipedia's: "Rent-seeking is a concept in public choice theory as well as in economics, that involves seeking to increase one's share of existing wealth without creating new wealth. Rent-seeking results in reduced economic efficiency through misallocation of resources, reduced wealth-creation, lost government revenue, heightened income inequality, and potential national decline." https://en.wikipedia.org/wiki/Rent-seeking https://en.wikipedia.org/wiki/Rent-seeking

lbotos 7y ago

Isn't the root of the problem this: > To fund all this loan-making, the shadow banks have turned to insurance companies, pension funds, university endowments and wealthy investors, offering them a chance to buy into a diversified pool of loans that offer returns ranging from 6 percent to 13 percent, depending on the level of risk they are willing to assume. If some hedge funds and "wealthy investors" want to take on risky investments that are "unregulated" I'm all for it. Would you agree the risks for systemic collapse come in when it's straddled onto say insurance companies or pension funds?

belorn 7y ago
The root issue of credit card bubbles is not that hedge funds and investors may loose on risky investments, but that those same investors are so interconnected with society that society has to bail them out if they end up loosing it all.
- dd36 7y ago
  Also that the executives can bail before it gets too bad.
bastawhiz 7y ago
What shape would the regulation for the latter look like? Should policy holders or pensioners have the ability to veto these investments? I don't want someone to lose their pension over a poor investment by a greedy fund manager. But I also can't think of how you'd draw a line where the investment is "too risky", or rather "too high of a risk to justify the effects on the persons who would be affected if the investment fell through".
- skybrian 7y ago
  In principle, it seems like it would be pretty easy to limit pensions to a short list of conventional investments specified by a regulator, such as the sort of thing normally allowed in a 401k. The line would be fairly arbitrary but I don't see why that would make it particularly hard to implement?
- aaronblohowiak 7y ago
  Sounds like you want defined contribution not defined benefit retirement
r00fus 7y ago
Systemic risk. If everyone is making riskier bets for a significant, then those who do right may be outcompetes for long enough that they go by the wayside while the risk-takers dominate. Then when the “black swan” comes the risk averse are already gone. Oh and the system is full of TBTF entities.
TuringNYC 7y ago
Hedge funds usually manage other people’s money in addition to their own, in fact, pension money is the most common source of other money that hedge funds manage.
dnautics 7y ago
I think we have to dig deeper. Why exactly is it that people have to rely on pension funds or put their assets into mutual funds to retire safely?

jasode 7y ago

>Really seems like Wall Street is in love with the term "shadow banking", Actually, the hedge fund and private equity fund people hate that term because it implies something nefarious is happening. In reality, the new post-2008 crisis bank regulations in both Europe and USA to ensure stability causes a new phenomenon to emerge: Non-banks lending money to companies that banks are not allowed to lend to. Every economist and financial regulator knows this became a side-effect of the more stringent financial regulations. So the "too big to fail" banks will still lend millions to big companies like Microsoft and Apple, but the $50m companies are too small and too risky to bother with. Look how these "shadow" lending transactions keep emerging... - a billion dollar pension fund is woefully short of its obligations to pensioners and needs a higher yield on its money. Buying safe US T-bills that yield 1% interest is not enough. They need to look at alternative asset classes that gets them in that ~8% range. - a medium-size company needs $50 million loan to expand its business and is willing to pay a higher interest rate than 1% T-Bills. (That makes sense since the company doesn't have the same credit worthiness as the US Government.) - If the pension fund (needing to put their money to work) and the company (needing a loan) can match up with each other, they can help each other's goals. But the pension fund isn't in the business of analyzing credit risk or providing loans directly. Likewise, the owner of the company doesn't have the time to fly all over the country and meet with 100 different pension fund officers. That's where middlemen like private equity come in. They're the ones with the staff of credit analysts. The "back office" of the private equity fund that analyzes a company's credit worthiness does much of the same work that the credit analysts at JP Morgan, Bank of America, Wells Fargo, etc did. They become the "shadow bank". Of course, they also charge management fees and a % of the profits for their "financial intermediary" services. The middle market's underlying need for credit never disappeared. The new bank regulations just inevitably shifted the loan transactions to a different set of players.

wrong_variable 7y ago
Thanks for that explanation, I have been so confused with the term "shadow banking" - it makes perfect sense now.
Despegar 7y ago
The shadow banking is fine. The taxpayer isn't responsible if a PE fund engaged in direct lending to the middle market loses all their money. But shadow banking can and should be scrutinized, and potentially regulated, if there are systemic risks that will lead to the taxpayer being on the hook once again. If it's just isolated private actors losing money it doesn't matter.

all2 7y ago

I've seen the term "rent seeking" used a few times here on HN, and I have no idea what it means. For those curious: Rent-seeking happens when a person or business uses their position or resources to get some additional benefit from the government. The most common occurrence is when a company or industry lobbies the government to receive special subsidies, grants, and tariff protection. The term "rent" in economics means receiving a payment that is over the costs involved in the production of the item or keeping the item in service. These actions do not produce any benefit for the community-at-large but only redistribute taxpayer's resources.[0] [0] https://www.investopedia.com/terms/r/rentseeking.asp https://www.investopedia.com/terms/r/rentseeking.asp

refurb 7y ago
On HN “rent seeking” has a broader meaning of “making money in a way I don’t like”.
wavefunction 7y ago
That's a very government centric definition but I prefer: >Rent-seeking is an attempt to obtain economic rent (i.e., the portion of income paid to a factor of production in excess of what is needed to keep it employed in its current use) by manipulating the social or political environment in which economic activities occur, rather than by creating new wealth. The important bit in rent-seeking is "rather than creating new wealth."
coolgeek 7y ago
As wavefunction notes, that is at best a very narrow definition. Here is Wikipedia's: "Rent-seeking is a concept in public choice theory as well as in economics, that involves seeking to increase one's share of existing wealth without creating new wealth. Rent-seeking results in reduced economic efficiency through misallocation of resources, reduced wealth-creation, lost government revenue, heightened income inequality, and potential national decline." https://en.wikipedia.org/wiki/Rent-seeking https://en.wikipedia.org/wiki/Rent-seeking