Reply #68: Regulating the Shadow Banking System

[Demeter]

http://ineteconomics.org/blog/money-view/regulating-the-shadow-banking-ystem

The problem with Dodd-Frank, and with Basel III as well, is that they start with the banking system, not the shadow banking system....OTC derivatives reform is at the very center of any attempt seriously to engage with the problem of regulating the shadow banking system. We learned in the crisis that, under modern conditions, central banks serve as dealer of last resort, essentially backstopping the key market-making function of security dealers. But what about normal times?

The Federal Reserve Act of 1913 created the Fed as a democratically accountable analogue to the former private lender of last resort, J. P. Morgan, and his club of New York bankers. The issue of the current day is how to create a similarly accountable alternative to the club of New York dealers. This is the subtext of current debate about moving derivatives trading to central counterparty clearinghouses or exchanges.