Shadow Banking: The Once and Future Economic Apocalypse

Cool Zone Media.

Welcome to it could happen here podcasts where a bunch of incredibly convoluted and very silly financial instruments to shore the entire world economy. I am your host, Bia Wong, and with me today is someone who does not spend all of her time deep in the bowels of arcane bullshit written by different Federal Reserve boards, and that is Maldy Conger, who is the host of the absolutely delightful I mean, okay, I guess this is a who is really winning here kind of christ in terms of the things.

Research, Yeah, you spent a lot of time reading stuff written by Federal Reserve guys. I read a lot of stuff written by guys who want to kill the Federal Reserve guys.

Yeah.

I still don't know what the Federal Reserve is, and I'm not gonna find out.

You know, I don't actually think knowing what Federal Reserve is somehow.

It doesn't change anything.

And I don't think it's actually relevant to this app I mean it kind of. It's obviously it's relevant to everything.

But means to say is the reason I'm here is because I don't know what the economy is, and at this point, I'm afraid to find out.

And unfortunately your worst fears are happening.

Don't worry. By the end of this I will not understand.

I am going to attempt to explain the economy, and by by the economy, I mean shadow banking. Yeah.

Also, before before I go into this, though, you should, you should listen to Weird Little Guys. It is It's it's really good. I like it all my friends really like it.

Thank you.

Yeah, it's somehow a nice comma kind of relaxing show about neo Nazis.

So that's very chill vibes. Yeah for a show about guys who are trying to like blow up school bus.

Yes, yep.

So all right, you know I'm reading this. I'm looking over the script.

Miraculously this isn't a wait hold on, I think I cut the part.

Where people blew up school buses.

There was legitimately a segment in here that I might put back in or someone blows up a school bus.

But what a crossover event.

Oh boy, oh boy, the Saudi is really good at that shit. It turns out, uh okay, okay, But let let's get back to the topic at hand, which is what is shadow banking, and why does it matter to all of us people who live in the normal real world and not in fake finance world.

Does it have anything to do with shadow wolves? Unfortately, note what about shadow facts?

Sadly, actually, there probably is a connection between the financing for the Lord of the Rings movies and shadow banking.

I'm just too tired to work it right now.

I've dragged us off track. We haven't even gotten on track yet. What is shadow bank?

Okay, so the good news, the good news this is this is the first it's not the last piece of good news. We're gonna ge this episode, but come the definition used by most non academics is actually not that bad.

There's a pretty good.

It's very wishy washy because it's a congressional report and so it's specifically not supposed to be taking a stance in either direction on anything, because it's it's the Congressional Review Office, and they're supposed to be neutral, et cetera,

So it's banking that doesn't involve a bank. Yeah, canceled, I'm out. I'm out already.

Yes.

And they don't mean like me loaning you twenty dollars, no, no, no, of course not. They just mean unregulated banking. Oh yeah, which you can't legally call banking.

I mean you actually can't legally call it banking. It's just things get weird really quickly.

I mean, I'm not a bank understander, but I know, at least in Virginia, you can't incorporate a business that has the word bank in the title unless you are legally a bank, because that's like misleading.

Yeah, I don't think they can legally call themselves a bank, but I guess you can call it banking activity.

That's stupid in a matter already.

Yes. Oh, you're going to get so much more mad by the end of this. So the base definition is it's not that complicated, right, It's something that does banking stuff that is legally not a bank, you know, And so we could talk about what kinds of things is this, right, it's like private equity firms, it's hedge funds, it's venture capital firms.

So it's like evil stuff that ruins the world for no reason except for like ten guys make money. Yeah.

But it's also you know, pension funds. It's like insurance companies. It's sovereign wealth funds, business development companies, repot markets, broker dealers, special investment vehicles, securitization vehicles, money market mutual funds, assay backed commercial paper conduits.

Hey thing, bud. Most of those things you just said to me are fake and they make me upset.

It's really bad.

Sovereign wealth funds. Shut up, that's not that's nothing. I still you know, all these all these things are just like different ways of saying like you're poor and you're gonna die.

Yeah.

I mean, the funny thing is sovereign wealth fund is like kind of a less fake one in that it's like fake, Hey, this is like a fake. It's the well, it's like this is the Kingdom of Saudi Arabia has pooled all of the money it's gotten from. It's like horrific crimes and put them together into one giant thing, and that's a sovereign wealth fund.

Oh so it's good, it's what you mean.

No, I am a notable. There is, by the way, a camp of people who believe that sovereign wealth funds are like a social list thing and that you could use them to do socialism.

I'm going to jump out the window.

I think this is so stupid. Yeah, this is we haven't even gotten into the nightmare stuff. So remember I was talking about the Financial Stability Board definition in that congressional report right where it's like, okay, this is a bank that does non banking stuff or a non bank that does banking stuff.

Sorry, oh, I guess we should say I guess we forgot to say at the top. The reason you're explaining shadow banking to me is because we saw an article last week that what those those not banks were putting a stop on withdrawals from their not banks and I didn't know what that meant.

Yeah, that's amazingly this this is so convoluted.

We're not even going to get to that this week.

Right, But like that's that's why we're explaining that's why, right, there's like, yeah, there's like there was like a mini bank run going on with these like shadow banks, no stop banks. Yeah, so we're going to get into how that can happen and why. But but before we get there, we need to talk about all, right, to get a sense of the complexity of this. Right, the Congressional report, like the accepted terminology for this is not shadow banks, it.

Is, right, that can't be their official name. That's not their government name.

No, it's it's non bank financial intermediation.

Now what the fuck is that?

And this is where this episode goes completely off the rails because the components of what count as intermediation are so complicated. I am not going to try to describe it until literally the end of this.

I mean, is it like what is Venmo officially? Really? Venmo's not a bank, but it provides like financial services.

Actually, I it by.

Because it's because it's like a financial intermediary.

Right, Yeah, it might technically be a non bank. I don't know what the regulatory structure is.

It's not legally about Yeah, I think I think that technically is one score one for Molie.

Yeah, but okay, so this is this is gonna get really bad. Okay. So when I first started researching this episode, right, the first thing that I click on is is the Federal Reserves of how the shadow banking sector works compared to the nomal banking sector. Molly, you have seen this because I posted it as a joke in our group chat. This chart.

I have like a very very large, like it is like a big, normal ass size monitor that I like to do my work on. I had to zoom in to three hundred and eighty percent just to make out the letters that label the boxes on this chart. If you want to read it, you have to zoom into five hundred percent.

That doesn't seem like a well made chart.

No, here's the thing, it's actually really good. It's just this complicated. I learned later from a paper by Copenhagen Business School professor Odny Helga Daughter. We're gonna come back to Hellga Daughter's work a lot in this episode, but I learned from from her because she has also experienced seeing this same chart and going what the is this

Oh that makes sense, like meeting style. But like we're we're on easel.

Yeah right, But like again, this is this is a diagram that he's just labeling the parts of the system and making and making like a line that shows how stuff moves through it.

I guess I still don't know what we're talking about.

Yeah, so this is what we're going to get into in a second. But first we have to talk about something even more bleak, which is that. Oh yeah, by the way, these like non banking bank things like these like all these like venture capital firms, all these hedge funds, all these fucking weird, ghoulish banks that are off banks. Uh. Yeah, they have twice as many assets than the regular banking system.

Oh that doesn't seem good.

Oh it's about to get worse. It's about to get worse, Molly.

That's that's like saying I keep seventy percent of the food in my house outside on the porch, like it goes in the fridge.

Oh oh, oh, it's so bad, it's so bad.

So okay, there's a pretty good congressional report that I was talking about earlier that has this terrifying quote quote. As of twenty twenty three, the broad measured total financial assets and narrow measure assets at nbfisis.

Is the shadow banks.

Reached eighty five point seven trillion dollars and twenty two point two trillion dollars, respectively in the United States.

But that's more than our GDP.

That's almost three times our GDP.

So that's a fake amount of money. Yes, that's not real.

At all, but it kind of is. Right, These compared to total financial assets of thirty one point one trillion dollars at banks in the same period. So again this is this is almost three times our GDP in assets that they manage or control.

So where does the money live?

In a whole bunch of unbelievably calm, eluded bullshit like combinations of like loans and real estate and stuff like that real money.

So like, okay, imagine this is schoolhouse rock and instead of the singing bill, you're like a dollar bill, Like where are you we are about to explain this where does the money live?

Yeah?

So okay, okay, we're we are about one huge paragraphs away from getting to this or like one paragraph Okay, So the other thing that's very important about this, and this is something Mollie was kind of touching out the beginning to get the appen So maybe I should have opened with this. Yeah, these people, these are the people who blew up the economy in two thousand and eight.

Yeah, because they're making stuff up.

Yeah, it's so, it's so bullshit, Molly, You're gonna get so mad.

If this is Calvin Ball, fuck you I win.

Yeah, it literally is. It's nonsense. It's gibberish. They're doing fucking betting markets with the entire world economy.

Oh yeah, we can all do that now.

Yeah, it's fun. It's like we now have the power to do the shit that destroyed the world economy in two thousand and eight. So that The thing about shadow banking, and the reason why it's complicated to explain is that it's a catch all term for like a million types of.

Institutions that do different things.

Right, the commonality they have is that they're all not regulated by the banking regulations.

Right, It's like, we found a way to do financial crime that's not illegal because they forgot to make this illegal.

Yeah, and you know, but but the thing is it's so embedded into the system that, like the US debt working is dependent on the shadow banks buying it.

Like I don't believe in that either, So I'm good.

Oh it's so fake, Molly.

I'm not even going to attempt to explain what an overnight repo purchases to you, because it's the fakest thing I've ever seen. Where they make one trillion dollars exist overnight and then it stops existing at the end of the night.

It's incredible.

I love how much of the economy is based on guys just imagining stuff and agreeing on the thing they imagined and then trading their imaginary tokens like this is fucking Pog's.

Yep, this is this, this, this is this is unfortunately what what our entire world is based on. It's so fun. Oh god, Okay, So what is actually shadow banking?

I've given you.

Like the broadest definition possible, which is like it again, it's the it's doing bank ship without being a bank. But let's go back to the beginning of the term, which is where most people tend to start or get to eventually. This is from an IMF paper quote. The term shadow bank was coined by economist Paul mccolly at a two thousand and seven speech at the Annual Financial Symposium hosted by the Kansas City Federal Reserve Bank in

They're financing loans with other loans.

Yeah, we're gonna so from from from a not bank.

Yeah, but the big loan is from a real bank, and then the little loan is from a fake bank. Give me none of the money is read.

Hold on, hold on, Okay, we're going to get there. We're going to explain this in terms of burgers. It's going to be okay.

I believe in us perfect, perfect, Yes.

But the other thing he describes is, and this is from Helga daughter quote in the speech, he describes shadow banking as the whole alphabet soup of leveraged up investment conduits, vehicles, and structures. So what he's talking about specifically is these are the guys who blew up the economy two does eight like these specifically, this is what he's talking about, right, These are the people who took a mortgage and then did a bunch of bullshit to it, and what's called

That's what he's talking about. He's talking about the.

Banks that are not banks, the shadow banks that did all of this bullshit to turn like someone's mortgage into a fucking thing you could bet on.

So selling debt is like selling the idea of future money. Yeah, and then sometimes that future money doesn't come.

Yeah, so it doesn't exist.

So okay, I will say, you do not need to understand this yet, because we haven't.

We still have not already the actual explanation.

I'm never going to.

I believe in us. We can do this. It's not that bad, Okay.

I'm not torturing your on purpose.

I'm just no, it's okay, I believe in you. So I want to mention that I'm very indebted here to the paper I mentioned earlier from Copenhagen Business School professor Adny Helga Daughter who wrote of she wrote a very good simplified explanation of this in her Review of International Political Economy article called Banking Upside Down the Implicit Politics

Can I understand this? So I'm drawing on.

A lot of her stuff for the first part of this explanation, but I am I've turned it into burgers.

So I'll do my best. I'm being very brave.

Okay.

So a shadow bank, right, it's something that does banking shit.

That's not a bank. So what do I mean by banking shit?

That was my next question. Yes, I think we need to start with what is a bank? Yes?

So first, so okay, okay, and this is this is this is where we're starting here.

What does a bank do?

I put my money in it and they hold it for me.

So no, actually, and this is the interesting part.

No, they do stuff with it. Oh yeah, they're holding onto the promise of my money.

Yeah, so okay, let's let's just let's just look at this for a second. So okay, So regular people give them money to store in the bank.

This is called a deposit.

The bank takes your money and loans it out right and uses that to make more money. This is how it pays you interest, right, is that it's it's taking your money and it's loaning it out to other people. It's buying things with it.

That part I understand.

Yeah, and this is obviously a cartoon image. And I know there's gonna be econ people who are gonna be mad at me. Look, if you understand, why.

Are they listening to this? If you already know what this means, go away. This isn't for you. I'm not humiliating myself for your entertainment, Like.

For the political economy people here.

When I say stuff that might that's like technically kind of fuzzy.

It's for me the podcast idiot.

Yeah, like you you understand this, Like I work at the level of Hamburgers here, so like we have to do some abstractions.

So okay, the important thing for our purposes.

Right, is that there's two things here, right, There's like the deposits, the money you give them, and then there's the loans, right, and these operates on different timelines. Right.

You can take the deposit.

Out at any time, least in theory, but they can't get the money from the loan back at any time.

Right now, This is like one of the critical things of.

What a bank is is is this timeline thing. Right. It turns your your money, which you can take out at any time, into a different kind of thing, this loan, which can't be taken out immediately, right, and then they use that to make money. So this is called maturity transformation. This is a very simple concept they have made very complicated. This is one of the core aspects of that definition I was talking about earlier. This is one of the four things in it. But you now understand this. It's

Oh, I don't think it works the other way.

Yeah, it's gonna go so badly. It's so badly.

I don't know about bank, but just generally speaking, like in terms of time and like how like material reality works. I don't think it works the other way.

It's it's not great. It's not great, Molly, it's not great. Okay, So okay. There is, however, a problem here, right, which is what happens if everyone tries to get their short term money back at the same time.

I only can't, yeah, right, because you have deposit insurance.

Yeah right, because the banks aren't holding short term cash. What they're holding is long term loans, and those loans like you can't pay someone alone. Well okay, Actually, this entire the crux of this episode is they find that they did do that.

Yeah, yes, and it blew up the entire world economy.

But if but if I wanted forty thousand dollars out of my if I had a checking out with forty thousand dollars in it, yeah, and they gave me my neighbor's mortgage as a prompt. That would worked for me.

That would have worked for no fuck that, No, no, no, you need you need, you need, you need something that can buy a burger, and they're not giving you that. So okay, this is very very bad. If people try to do this, it is called a bank run. It is not good, it's bad. Yeah, And so this this blew up the entire world economy so many goddamn times

Works, right, Like, and it's insured by the government.

Yeah, I think the government will give you your money back if if the bank goes under up to like a certain amount of dollars ensured. Yep, this is this this that's that's what that means, right, the government will give you your money back.

But also there's a there's a trade off to this.

So this is a massive benefit for the banks, right the fact the fact that if they go under, all of their assets will be repaid by the government. It's a it's a massive benefit for them because it means that putting your money in the bank.

Is like safe.

Yeah, I love that for me, right, Yeah.

It's good.

Now, the cost to the banks is that the Feds get to see their balance sheet, right, the Feds get to see what they're doing with their fucking money, and they get to make sure that these banks aren't doing insane shit.

Okay, that makes sense because they're insurance.

Yeah, and that like they're not doing like unbelievably risky awful ship. And also that they're actually holding enough money to be able to pay people out right.

Okay, so far, so good. I wait, I understand bank.

Yeah. Now shadow banking boldly asked the question, Okay, but what if you did all of the banking backwards, no one had access to the books, and the government will only pay you back if the entire world economy looks like it's going to die.

I feel like at that point the government should just just step back.

And here's the thing.

Here's the thing, right I I I yeah, Like I'm so down with this, like yeah, I don't know, fuck it, Like every single one of your motherfuckers is gonna pay this off by working as a barista for thirty years, like fuck you. But the government was like, nah, we want like we want capitalism to keep working.

Make every hedge fund manager work at a waffle house.

Yeah, fuck them.

Okay, I'm gonna say something and then I'm gonna make a disclaim. So the kind of shadow banks that did two thousand and eight work in the opposite direction. They start with debt, they take that debt, and they turn that debt into like cash, right.

Can I do that?

No?

Does that work for me at mid No?

So okay, And I also want to mention there's a bunch of other kinds of shadow banks. The kind of shadow bank that's going under right now is not really this. The kind of shadow bank that's like exploding right now is a kind of shadow bank that's like what if a bank that wasn't a bank gave a completely unregulated loan with secret terms to a corporation, And that's the

So, okay, you take that, right. You start off with a mortgage.

Okay, so this mortgagees pay out over the extremely long term, right, but you want to be able to trade this mortgage for cash, right, And this.

Is a process called securitization.

Turning this mortgage into something you can sell for cash, is making it into what's called a security. So now what happens right when his packaged is into a security when there's a securitization process, and then like the regular bank, the regular bank sends the mortgage to the shadow bank, and the shadow bank like does like stuff and turns

Right, Okay, so the real bank is involved. The real bank is involved.

Yes, oh yes, the real bank is making so much money off of this is this is why two thousand and eight happened because Wells.

Fargo did this with everybody's mortgage.

Oh yeah, yeah, okay.

Because I couldn't figure out because you said this is aw two doosy name, and I was like, I thought, Wells Fargo did that. That's a real bank. Oh, a real bank was shadow banking.

The real bank figured out a way to sell their mortgages.

And it's gonna get much worse as we go through this.

But that's what causes this, right, is like turning is turning these mortgages into these like securities and like these like collateralized debt obligations and these like special packaged bullshit that you could sell to someone. So the way I would describe this is it's like, do you know how a bond works?

Honestly, Mia, I do not.

Okay, let's let's do this. We can we can do this. Okay.

So the the kind of bond that you are normally likely to encounter is a government bond. Yeah, okay, So you you pay the government money to buy the bond, and what the bond says is at a certain point in time, you hand it back to the government and they pay you more money.

Right, It's like a promise for later.

Yeah. Right, So it's it's basically a.

Loan, but it's a loan in a form where like the government's technically like selling it and and and then the other thing about bonds, right is if you hand the bond to someone else, well okay, I mean this is technically bear bonds, but like you can you can then give the bond to someone else and now and now if they give it back to the government, they get the money in like ten years. They get the money right, right, Okay, I get that, and you can

That's not as like secured as like a government bond. Because if I had one hundred dollars government, like, if I have a one hundred dollars Bearers bond, I know for a fact on the date on the bond, it's gonna be worth one hundred dollars.

Yeah, they're gonna pay out right.

But if it's a mortgage market, the government's gonna pay it. But like the mortgage, the company has them work. That's not Yep, that's not real. That's not money. Nope, yep, that's like that's a that's a promise. But like my hand, it's behind my back.

Yeah, it's it's a shit show.

And this whole process is the largest sort of I'm not sure if it's actually the largest that I would need to actually yet I've never I haven't seen in death breakdown sectorially, but like.

None of this is real. You could just say whatever.

This this is one of the most important kind of shadow banks because in order to turn this mortgage into security, the moment you do that, you do this by creating what's called a special purpose vehicle, or someone else creates one. It's called a special purpose vehicle. Yeah, it's it's a nightmare. It's a nightmare.

I'm gonna put this mortgage on a roller coaster.

Yeah, it's fucking ridiculous. Right, it's a special purpose vehicle. Is it does a loopy loop.

But the moment you create one of these that the moment you create one of these like security mortgages, right, that's a shadow bank.

If you've created a shadow bank.

Right, because that's not real banking. That's shadow bank.

Yep, Because because you're creating another entity that is not a bank that's doing the banking stuff.

I thought that the banking and the shadow banking were like separate things, right, because it's shadow it's like they're doing non think.

They're all in.

If the bank is the shadow banking, I would I'm stupid, but I would call that.

A This is this is another thing that costs two thousand and eight because a bunch of what was is a crime. Because our country is run by the bourgeoisie. Molly, that that's why it's not a crime.

You're just telling me this for the first time.

Yeah, it's bad. So what what what happened? What happened in two thousand and eight. One of the things that happened, right, is so all of these regulators are supposed to be looking at the balance sheets of these companies.

But they're hiding stuff off the book.

Yeah, they were hiding these things in these like special purpose vehicles, like in these like shadow banks.

They didn't open the trunks on the special purpose vehicles.

Yeah, so no one could see the fucking dead bodies in the trunks of the vehicles because they weren't on the balance sheet that like the government had access to.

What's the point of the balance sheet if you don't put the whole balance on it.

I'm fucking I don't know. And this is like legitimately when when when you read the accounts of like why shadow Making Us exploded, by the way it's exploded in two thousand and eight, it's like way bigger and exploded.

Like in popularity or like exploded as in like distrubularity.

There's so much, there's so much more, there's so much more of it.

Because also because it went so well, it went so well in two thousand and eight, and now.

Because here's the thing, after two thousand and eight, we got like a little tiny bit of banking regulation, and the banks lost their fucking minds, and so more and more money went into all of these unhid shadow making things.

Okay, but so like when a toddler has a tantrum, you don't give them a billion dollars.

When the shadow banks went under, these things were not backed by the government.

The government bailed them out anyways.

Yeah, they didn't have to do that.

Nope.

So they really they learned their lesson. They really learned their lesson this time.

Yeah, Like they bailed out these banks and they fucking sold you out, and like you know, like and one of the things that I think people have forgotten was there's this thing called robocalls. During the Obama administration, right, part of how the financial recovery happened was that all these banks would like go to courthouses, right, and they would just repossess mortgages on mass oh.

And they had like a robot that was like signed it.

It would just sign like a blank check sign off on all of these mortgages that were supposed to be underwater. And they would just steal people's houses, people who were on top of their payments. People who like to know money, they would just take their houses. And this happened on mass And this is like how the banks recovered. Was they stole everyone's houses. And that's a crime, right, it should have been a crime, like it was illegal. It didn't matter though.

Because everything you're describing to me as a crime.

It's so nightmarish. Well, it's here's the thing, most of this of them describing is not a crime. This was actually a crime. But why isn't nobody in jail because Barack Obama went up in front of these people and said, I am the only thing standing between you and the guillotines. I'm pretty sure that's a direct quote.

And why didn't he bring the guillotine with him?

Because he wants the capitalist system to continue.

Question, I'm just upset.

It's not good. Okay, So let let's go. Let's get you another question that you asked, which is why why would you do this? Why would you do this.

To make money?

Yes, but it's actually more complicated than that.

Oh okay. So on the one hand, these assets, you know, a mortgage does make make more money than just putting your money in the bank. Right, that's like the basis of banking is that they can use your money that's sitting in the bank and getting interest, and then they make more money by spending it elsewhere.

But so they're just doing this because they hate us, not just to make money.

No, there is an actual explanation.

There's a third reason.

So then why would you ever have your money in a bank or like buy something like safe like government bonds you can sell really quickly, right, Why would you ever want that? And the reason why is something called liquidity?

Right. You want to be able to spend the money, yes, rather than wait thirty years for it to get paid back.

Yes.

Liquidity is just how easy is it to turn whatever you own into cash?

Right? For real money? Because most of it we're talking about is not money, it's the idea of money.

Yes, So liquidity is literally it's the burger test, Right, can you buy a burger with this?

Can I eat this?

Money? Is like the most liquid asset, right, because you can you can? You can turn this into a burger.

Right. So liquidity is the only part of this that's actually money. Everything else is not money.

Yeah. Well, liquidity is the measure of how money is it? Basically like how easy is it to turn this into burger.

Is this a special vehicle securitization that's not real, Mia.

No, it's fake as shit. Right, this is not that complicated, right if you if it's like like you can you can buy a burger with ten dollars, Yeah, right, that's liquid.

Actually you kind of can't these days.

I know.

I look, I look, I imagine a world where you can buy a burger for ten dollars.

Imagine imagine a burger.

Yes, imagine a burger that's purchasable.

Now, what you can't buy a burger with is like the ten bucks that a guy you work with owes you for buying him a burger.

Depends on how well you know the burger guy.

Yeah, but that's that's where things get bad. Yeah, right now, the thing is right, right, So the ten bucks the guy you work with, like you not liquid. You don't have the money in your hands, and if you want to get it from him, you have to like go ask him for the money, and maybe he has ten bucks and maybe he doesn't, right, at which point you can't get your ten dollars back until he has the money.

That but then ten dollars that I'm theoretically owed is an asset, though I have not a debt. Yes, okay, yes, that's stupid.

Now loans loans are not liquid assets, right, And they're not liquid assets because you can't get the money back like immediately.

So I don't have ten dollars I can spend, but on paper, I do have ten theoretical dollars.

Yeah, right. And this is also like most of what billionaire money is, hey, correct, Like most of their money is like in like a stock or some shit or like it's weird fake money.

Like theoretically they could access this amount of money, but they don't have it. Yeah, it's not real.

Now okay, but there is this question, so why why would you keep your money in fake money instead of real money? And the answer is that it gives you more money back because say you're an asshole, right, and you're charging interest on your coworker for that burg.

Right, So that ten dollars is actually worth more than ten dollars money. So the ten dollars that I don't have is theoretically worth well.

You're worth more. Yeah, it's worth more than the money that you do have.

I can get cheese on the burger, yes.

Right, And this is this is like the fundamental thing of the banking system. Like one of them is that ill liquid assets or like assets that you that aren't money are worth more than money.

I guess like when I put a small amount of my savings into a CD, that's what I'm doing, except normal style they're doing it weird. Yeah, basically because that's like an I liquid asset that I'm I'm I'm trading the ability to access that liquidity for the potential of more money later.

Wait, so when you say do you mean like a like a physical like a disc, like a CD.

No, a CD like at the bank, Like yeah, yeah, like the investment product.

Yeah sure, yeah, yes, Sorry.

I was like, no, I'm not talking about buying compact disc.

I would just leave at five am.

This time. It's investing me I ever heard of?

Wow, there's actually a.

Really an annoying thing researching this episode because there's like, so CDOs are like a type of loan that we'll kind of get you in a bit. But there's also a tech position called cdo. It's like chief something.

Officer, stookie officer who cares.

Yeah, whatever the fuck, right, But like when you're trying to search for stuff. That's like about CDOs, right, the other one keeps coming up. I hate it.

Okay, okay, locking in, locking in, right, lock and load.

Now, what if you both want into more money and also the ability to buy a burger?

I guess I would uh probably break one of Carl's fingers. This is the guy that owes me the ten dollars, Carl.

Yeah, but even then it's hard to even that's like, this is too hard for these people.

I would go to Carl's house and kick him out of it.

Well. Yeah, but the other thing is like, you are not very rich, okay these people. If you are really really rich, I am talking like billionaires, maybe like high high class multimillionaires.

Well, you can go to a shadow bank.

Oh right, you can get a loan based on the loan.

No, well you're saying, so the thing is that you have money, right, but you want to turn your money into more money, like you have like an actual cash right, like you are you are, for example, a pension fund. No, you have a shit ton of cash. Or imagine imagine a pension fund.

Right.

This is okay. This is also really hard because it used to be easier to explain this because like we used to live in a world where people had pension funds and had mortgages, and now we no longer have pension funds or mortgages.

I live in an apartment, and I will always live in an apartment.

Yeah, no, and so still okay, So like imagine imagine a pension fund, right, you you have a shit ton of money from your members paying into the fund, but it's cash.

You need to turn that cash into more money.

But also you're a pension fund, so you constantly have to take money back out in order to pay the people who are retiring to pay old rifle.

Yeah.

And this is also a thing that like, you know, if you're just like a rich person, sometimes you want your a lot of times you want your money in assets that are like you can you can turn back into real money, but also make you wish a ton of money. Right.

They need to sort of revolve a little bit theyd be like yeah, I don't know, like a jello like partially liquid.

Yeah, and this is this is what the shadow banks do, right, because the thing that you can buy is one of those mortgages they've turned into like a security. Right, you can go buy someone else's debt huh. But because it's a magic security now. And these are called mortgage backed securities. And again, if you're to remember, yeah, anything about anything about two thousand and eight, that's what blew up the whole economy, is these mortgage back securities.

Yeah, I've heard of that because it was bad, yep, terrible idea. And so we're still doing that.

Oh yeah, it's good. Cool, I mean it's less specifically, the mortgage back ones are less bad. So they started doing it with like commercial retail loans, which is incredible, great, so that's really fun. They're also doing with other unhidd shit that we're gonna do like next episode. And what these people are really buying aren't just these like you're not buying like one person's mortgage, right right.

They're like pooled and like bundled.

Yeah, yeah, they.

Like they bundle them all together, and then you you buy the rights to a percentage of the pool.

It's not like when you sponsor like an elephant in Africa or something, and they send you a picture of like a specific element, or they don't send you They doesnt't to do a picture of the family you're arming. No, these are the Joneses you own their fucking house.

Yeah, it's it's it's it's it's a it's a shit show.

No, well, I mean eventually you might have to go figure out who that is because you like own whatever the fuck percentage of like the mortgages or whatever. But like, okay, so these are these are just like someone else's debt that you're buying, and that the people who can do this are you know, people who have billions of dollars. It's not you, the listener. And by the way, if you the listener have billions of dollars lying around for some reason.

Can I have some please?

Yes, please, please.

Give me some of them so I can house like literally every trans woman and like transperson, I can. I can do it, Like, please give me your billions of dollars so I can I can achieve this goal. But like we're talking about you know, like like the Pension Fund of California, We're talking about mega corporations, insurance companies, the kinds of things I can actually buy these.

Like you know. Now, this is where we get to one of the other problems, which is that.

These things are not insured.

So yeah, what do you.

Do in order to try to make it less risky. What do you get if you can't pay the loan back? And this is what's called collateral.

I don't know, swift punch of the nuts.

Oh no, they take your house, right, Yes, that's supposed to be the thing, so okay. The way that like shadow banking loans tend to work is that they they have collateral, right, so you you give them something or or it's either you give them something directly or it's like if you promise to give them the thing.

Yeah, and giving it to them directly is.

Like a repo market thing. We're not really going to get into those right now, but this does. That's like, that's also a kind of shadow bank. But there's a problem, right, which is what if the thing that you're paying, you're paying as collateral, Like what if your house becomes worthless? And what if what if Molly.

And it's completely uninsured and there's no way to fix it because I don't even have anything to give.

You now now, Molly, what if And this is purely hypothetical, it could never happen in the real world, Molly, But what if somehow someone someone decided to use the same house as collateral for multiple different securities.

Well, that could never go wrong.

What if, Mollie, they made a word for this that is so complicated, I am not going to attempt to read it on the show. What if, Molly, what.

Is it in German or something?

No, it's like it's just like this, It's like the it's like the length of my head. It's like hyper hyper something bullshit. Like I refuse to say it because it is just.

Like a completely like financed goal bullshit term they made up.

So but the point of the point of collateral is that you can use it to pay off the loan if you default one. And so that literally won't work more than once because once I eat the burger, Once I eat the burger, it's bond.

Yep. And this is one of the things that happened in two thousand years.

I can't promise I can't promise ten guys my burger now, Molly.

Here's the amazing thing here, right, because but the advantage for these companies, right is like, if you're the bank that has the mortgage, suddenly you can spin your mortgage off into like multiple securities that you can sell.

Right, It's worth ten times more and that's great for you.

Yes, and comma, comma. We we haven't even Okay, I just I just described to the sister where these people are promising the same house to most old people. This isn't even the extremely unfathomably reckless ingredy ships. No it is, Oh it is, but it's not the worst of it.

Oh good?

Okay, So do you remember that quote from when I was giving the first definition of shadow banking? Right, Like, I gave this quote from the guy who invented the term where he called it quote the whole alphabet soup of leveraged up investment, conduits, vehicles, and structures. Right, So we've kind of talked about the conduits, vehicles and structures, right, those are all of the shadow banks that like make the things, right.

I love the conduits, vehicles, and structures. Yeah, all the acronyms.

But what does leveraged up mean?

Now?

Okay?

In this case, it means that a bunch of these banks have taken out a shit ton of like risky, high interest loans in order to buy more of these fucking mortgages because they think they can make more money off of it.

So they took out they took out loans to buy these unsecured securities.

The regular ass banks were doing this.

Yeah, they they went into debt to buy more of these shitty mortgages.

So they took out loans to buy what are essentially unsecured.

Loves yep, because I thought it would make them more money.

But there's no money involved. Money.

It is about to get so much worse, right, so I okay, So sticking with leveraging for a second. Right, you might have actually heard of something called a leveraged buyout.

I have heard those words, and then I stopped listening.

Yeah, so shere's the thing.

Leverage buyouts are something that actually happens in the real world that does fuck you directly, which is a whole bunch of companies that used to be like normalized companies like died because venture capital firms, you, by the way, are also shadow banks. Oh did this right? They came in tactically speaking, they did it through like risky bond purchases, but basically they did a bunch of high interest loans and then they go buy a company.

And then they like strip it for parts, and.

Then they try to raise the stock price of the company. Yeah, and then the river parts sell everything and get out right, that's what a leverage buyout is. These people are sort of are doing kind of a version of that, but like they're they're taking on this debt in order to like buy fucking shitty underwater mortgages.

Because they look like they're making so much money.

They're taking on real debt to buy hypothetical debt.

Oh, it's about to get so much worse.

That doesn't seem like a good idea, so not to.

Get so much worse. So that's what like the leveraged part of that.

I don't even know how you do that in burgers, I don't know.

You're going into debt to like buy the promise of burgers in the future so you can sell those future burgers.

Yeah, but burgers are real. The thing we're not talking about a real thing at all.

Well, they're technically, technically speaking. Somewhere at the bottom of this is mortgages. However, Comma, we're about to get into a kind of asset where there isn't anything behind it. This is where.

The really really truly unhing shit starts.

It hasn't, which is that these companies figured out a way to bet on whether these mortgages were going to fail or not.

That's so tight, Mia, I fucking love that. I love it.

Yes, yeah, By the way, I kindatsize enough. How how unhinge?

This is the mechanism they're using to do this is called a credit default swap.

Oh, I've heard that phrase.

This was supposed to be how they did insurance. Their mechanism for doing insurance on all of these insane loans they were doing was originally like, Okay, I'm gonna you're I don't know. So you have a you have a bank, right, the bank has given out a risky loan. So this bank goes to another bank they shouldn't do that, and they say, hey, if this person actually pays the loan back, I will pay you money.

Okay, so the other so the other bank is like taking a gamble here.

Yeah.

So so the other bank that's giving out the loan right gets money if the loan goes under, So in theory they're sort of like insured against the risk.

They call it like hedging.

There like so likes like So theoretically it's less bad from them because now even if the loan goes under, they still get money back from that other bank. So the other bank is just bookie yeah, and the other bank is betting that they are going to get it, so then and if the loan does get paid, then that bank makes money.

And this is legal for everyone to do. Yep, this is real banking or shadow bank. This is real bank.

Didn't know this is technically actually.

No, this is actually both both of them do this.

Technically speaking, the instrument like like the actual like credit default swap or whatever, is made by the shadow banks, but then they're brought by the regular banks.

I'm starting to think that the bank starts the shadow banks and then all of this is just fake and bad.

Like so here's the thing.

Here's the thing about these systems, right, is that, like a lot of the original literature on it was considering them separate. But it's like no, like the regular banks are making their own shadow banks do these things. They're all involved in these assets. They're also investing in the shadow banks, which is the problem we're having right now.

It's like it's the same guy. He just like turns his chair around at his desk and he's like, now I'm shadow bank Todd.

Yeah. Well, and sometimes it's that sometimes they're legitimately is other entities they work with, but yeah, but there's still.

It's still a bank engaging. So it's like all these are non banking practices. Yeah, but the bank is doing it well.

But here's the thing.

The important part for that though, is that like the non bank also can do this with other non banks.

Even better even Yeah, right, once we're once we're talking about chadow banking, Like the real bank should not be in the room, like go home, Wells Fargo, you don't belong here, you're drunk.

No, but like they're funding all of this, right, If the real.

Bank is involved with the shadow banking, that means like I can't opt out of being involved in this because they hit my money.

Yeah, you know what we were talking about that at the top that like so some of these like bank banks had to like stop their withdrawals.

Oh yeah, one of those, by the way, was JP Morgan.

But that's a real bank. Yep. They're involved in the shadow banking shit, so they they are exposed to when they're like fucking seven hundred million dollar loon to like a fucking actually went home.

Which one was the seven hundred million.

Dollar I think a seven hundred million dollar loan that went under was the one that was to a subprime auto loan company.

That's a bad investment.

It evil.

It's so, why am I trusting all of my money that I have in this world? I'm letting this guy hold on to it, who's obviously not good with fucking money.

Well, because the FDIC is ensuring it.

Why are you in charge of Why are you in charge of having the money? You obviously don't make great financial decisions because you invested seven hundred million dollars in subprime auto loans.

So, Mollie, this, this is the This is the point where we need to bring debt the first five thousand years back into this and emphasize the extent to which the financial class has always been deeply connected to the military, and why has always been deconnected to war financing.

I'm starting to realize that this is all very bad.

It's very bad.

It's all very bad.

And this is this is to some extent why right like part part of what right wing conspiracism about the financial system is is that like these people are, like like the right wiggers, like these people are there's like a baseline level of anti semitism, like in the US right because it is a is a Christian society that

And I still understand why that's legal.

Yeah, well, all of these right wing conspiracies do is they look at that shit and they go, oh, well it was the Jews and it's like but no, like fuck off, like these are all no, it was the band and the other thing. And this is actually a really important thing that's not well understood here is that like the actual people who run these fucking banks and the people who work at them are all fucking white Christian dipshits.

This is like a really really like persistent issue.

That everyone fucking has, which is that like one of one of the great successes of anti Semitism was like creating the image of the banker as a Jewish person. And no, they're not the bay Like I fucking went to school with these people. They're all a bunch of fucking white frat bros. They're fucking white Christian frat bros. Oh right, you University of Chicago.

You have a degree in economics in the University of Chicago.

No fact, I have an anthropology degree, Thank you very much. I took a not a fucking fake degree, like the stupid econ bullshit.

I would say, that's actually so evil to study economics. It's so hidio Picago, you probably met some of the most evil people.

On the most I was just like in a dorm with them. Okay, so but you saw that I know all these people. Yeah, and like it is not it is not a bunch of Jewish people. It's it's a bunch of Christian frat bros. Like that's like the thing

I mean, the Mormons have a huge hedge.

Fund yep, yep, yep, yep, yep.

Yeah, So, like the what is it? I read an article about the Hedge Fund that the Mormons operate like they have their like best and brightest finance bros. Like, you know, Mormons do their to your if you're really good at finance your mission, that you don't have to go to South America and like tell people about the Book of Mormon. You can work at the Hedge Fund as a mission.

It's a nightmare.

I'm doing a hedge funds for God.

Yep.

That's ASA's a shadow bank by the way, yep, it's great.

So okay, okay, coming back to this again, right, so we're talking about like what causes two thousand and eight and how do these shadow banks like do this? And the answer is that they've turned all of these mortgages into these like fake securities they can trade, right, they package them all together and they find out something really crucial, which is that if they throw a bunch of loans that they obviously know are going to fail together and

Are, and they figure out about that.

Yeah, and they figure out that they can send a bunch of really shitty bonds. But if they package enough shitty bonds together, they could send them to the regulators, and the regulators would have would evaluate some of them as being good, and then you could sell the good ones to your pension fund because I thought it was a good bond and it made money. That's just lie.

I'm putting all of these boys in time out. I'm gonna put them in the bottom.

Of a pit so evil.

And they start they start doing these, making these like even more complicated instruments right where. Now what they're what they're selling to you isn't just the package of mortgages. They're also selling you the credit default swaps with the loan. So theoretically, what's happening is like they've created an instrument that, regardless of what happens to the loan, you make money.

That's not how anything works. No, it's bullshit.

It's so obviously bullshit.

I'm made of this fake thing where no matter what happens, I get rich. That's cool. I would love to do that.

Yeah, And nobody was like, wait, well, I mean sometime a couple of people were, but like, like, people didn't just be like wait, hold on, no, obviously you can't make an asset that makes money regardless of whether the thing fails or not.

I invented a money machine, Like that's fucking ridiculous.

And then eventually yeah, it was like, no, they ran out of fucking mortgages.

You know.

One of the ways that the blame for this was deflected onto regular people was that they blamed the banks or like they blamed regular people for like not being able to pay the mortgages. But the thing is, by the time you get to the point where you're like packaging all that, you're betting on the mortgages. Right, if you're a bank, even if you're the regular bank, you don't make money off of like someone paying their mortgage back.

You make money on betting on the mortgages.

So you're incentivized to just keep giving out loans you know won't happen because you can sell those loans off to some other dipshit and then you and then you can bet on those loans that they're going to fail and you can make money.

And that's how you make your money because you're.

You're not a bank anymore. You're a bookie who's cheating.

Yep.

I don't think that's good Mia.

No, this was the entire fucking financial system. We just let these people stay in power.

And I'm just supposed to just continue living my life like this.

I don't know why looking at this and then and then learning that all of these.

People got fucking bailed up by the government and none of them went to prison.

And do they know they're cheating liars who are faking and making it up? Or are they like so high on their own supply they're like They're like, no, bro, no, but this is totally gonna work. It's totally gonna work.

Well, here's the thing. Some of them know and some of them don't.

Because some of them believe that this is cool.

Yeah, like some some of them legitimately thought that this was just going to work.

Forefft, Like, do they believe their negative money, backed by other fake money, backed by the idea of promises of fake money. They think that's money.

Yeah, yep, well thought was gonna work.

It's not.

It's not.

Nope, And it turned out to not be any fucking money, and it blew up again, like entire countries, countries were buying these, they went bankrupt.

So like this is less real than a board ape, nft. And that's really saying something. It's it's astonishing because at least the at least I can look at least I can look at the picture of the monkey. I can't look at.

This no, like it like you can't look at the bet you're making on whether and whether monkey go down, Like.

It's like like all my apes gone.

Yeah, but it's suppressing because the entire world is just this Now.

It's a shit the banks were doing where you're betting on whether mortgage would a feel, but now it's your betting on whether like what day we're going to drop a bomb on.

A run, Like nothing is real and everything is gambling.

Yeah yeah, And this is you know, what I would call a sort of terminal crisis stage of capitalism where alike.

Because everything is so divorced from any material reality, from any good or service, Like.

There is a limit to which you can run an entire economy that is purely based on gambling.

Like, they're just there's a limit and we're going to hit it. Really so that's God.

That's got to break, right.

Yeah, yeah, it's going to break. It's good to break spectacularly.

However, Comma, I do have.

Good news for you.

You don't, I do.

I have good news you now actually understand what non bank financial intermediation is.

No, I don't.

I'm going to walk you through it. You actually do.

So, I'm going to quote the IMS definition of non bank financial intermediation. Quote all entities outside the regulated banking system that perform the core banking functions credit intermediation, that is taking money from savers and letting it to borrowers. The four key aspects of intermediation are maturity, transformation. We know this one, right, This is this is what the bank does.

The loan gets older. Yeah yeah, you gets paid back over time.

Yeah, well it's you you turn your short term thing into a long term investment, or you.

Do the opposite.

Opposite, it's not good.

They're both kind of a disaster, but like yeah, yeah, no, the opposite is kind of how we got.

Into this mess. There's liquidity transformation, which we know this too.

It's turned turning money into a thing that's not money.

Yeah, or turning not money into a thing you can buy burger with.

Okay, yeah, we got this.

Leverage we also know.

This, which is you go into a bunch of debt to buy something else. And then there's credit risk transfer, which we know that one too. It's the betting market. We're supposedly swapping the risk by both of you two are now betting on whether this thing is going to fail.

So it sounds like even just like regular banking is kind of just gambling now.

Yep, yep, yep.

Well and it's fun too. So this is the thing that you used to be talked about more and isn't now. But like most of like like the world's corporations are also basically this now, like this has been a thing for a while. It's like the auto manufacturers don't make their money off of cars, I mean they sort of do. They make some money off cars, or like most of what they make their money off of is like the forward finance company, which is like the auto loans thing.

So, like, I don't think that's a good idea.

That's that's what capitalism is.

So everything, everything is fully reliant on this like.

Stupid gambling bullshit.

Emperor is wearing no clothes. Economy yep. And if anybody, if anybody points out that none of this is connected to a material reality, everything falls apart.

Well, here's the thing.

The thing that solves everything for falling apart is that the one thing you can do with your money is turn it into gun. Now I'm listening, and that's what stops of falling apart, right, because now I'm listening. And this is also a sort of graverism. But it's like behind every bank is a man with a gun because the reason that this money is even sort of real is that the bank can like you, like the police will come get you.

Right, like men with guns will appear, and that coerce you to pay shit.

Right.

But what if what if instead of burger we bought gun?

You know, Like this is what is broadly referred to as the revolution is it is broadly considered a negative by the financial sector. It is broadly considered a positive by everyone the fuck else.

Okay, that's not true.

It's not considered a positive by like, I guess, the people who own regular businesses. And this is like this shit that like, you know, it was kind of less unhinged back then, but like if you go read the.

People who were like doing this shit in like the early nineteen hundreds, if you read the writing, it's all them being like, oh yeah, no, by the way, like a bunch of banks just like turned the entire Ottoman empire into like a debt peon, and now their entire economy is just dedicated to paying off these fucking loans. And this is like hideously fucking evil. Like they're all complaining about the same shit.

And the important lesson we learned from that, The important lesson we learned from that was to do it more more oh yeah, yeah yeah, to invent increasingly more complicated ways of doing that.

Yeah. And like this this is why the term third world is a slur, because because instead of being a political movement, because those the countries in the political movement that was called the Third World movement, all of their economies got fucking annihilated because they had these like loans whose interest rate could change, and the US jacked up all the interest rates and so suddenly their loans were like like the amount you had to like pay on

Happened to them.

This This is why a whole bunch of Latin America is like this too, Like it was like why there's so much sort of like writing systemic poverty is that the economies were entirely transformed into machines to like pay back these fucking debts taken out by these dictators.

This is the whole fucking economy now.

And you know, there's other shadow banks that do other kind of completely unhand shit, right And I've been focusing this week on like specifically the kind that blew up the economy in two thousand and eight, But there's another kind that's like blowing up the economy right now, which is called private credit, which is I mentioned this briefly earlier, but private credit is and these like unregulated companies that are not banks give out unregulated loans with unknown terms

Oh and that's a great investment. It's great, you know, because much much like a mortgage, there's a real physical thing like a house involved, Right, it's not just vibes.

Oh yeah, oh molly molly.

They those motherfuckers. I'm gonna talk about this a bit.

I might have had just run on for this part of it too, just because like ED does this all the time. But like those motherfuckers out there selling securities that are backed by fucking graphics cards, like at least the more I can't believe I'm fucking saying this, but like at least the mortgage backed securities, like there was a house you could steal to get your money back graphics cards ball.

All my apes aren't my oh my apes are gone.

Like there's other ones that like it's it's so bad, it's just bad. But that's for another time, because it is late as fuck and we are out of here. Mollie. Thank you, Thank you for sitting and enduring an hour of you knowing what a shadow bank is.

Now I almost know what a bank is. I'm still working on the rest of it, but I think I'm getting closer.

I believe in you. I think we've made for a progress today.

I don't know.

Now you can kind of understand what's going on.

When this sector explodes again in like two weeks.

You'll have to explain it to me again.

Then I will be happy to.

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