Fed Attempts Power Grab Over ‘Shadow Banking’ Industry

October 08, 2013

Hasn't the Federal Reserve done enough harm already?


[This article previously appeared on BullionVault.com and is republished here with permission.]


It’s telling when every story you read in the papers gives you a headache and makes you ask: What's the agenda?

I can't help asking that question while reading the article titled "Shadow Loans Sound New Alarm" in the Oct. 6 Wall Street Journal.

Before I began reading it, I felt I knew what its intent would be: more control by the federal government, and less freedom for the private economy to serve consumers, householders and businesses as they would wish.

Once again, the Federal Reserve Bank—which has since its inception 100 years ago been a poor controller of banking practices and even poorer at policing banking entities—wants to expand its portfolio of lending institutions that it regulates and supports. These latest targets are those known as "shadow banking businesses."

What that term actually reflects is businesses that lend money without any banking regulations. Of course, that doesn't mean they are unregulated. This "shadow banking sector" is regulated by all the normal business rules and regulations. We're talking about micro-lenders, pawnshops, auto lending and any other form of lending that may not be directly controlled by the banking system.

Ask yourself why, in the last six months, you keep reading that the Federal Reserve Bank is concerned about shadow loans. Could it be the fact that all the quantitative easing—an $85 billion monthly injection of capital into the banking system—has not resurrected lending from the official banking sector?

Could it be that it wants to bring shadow banking under its umbrella so that it can claim that these loans are being made through the support of the Fed banking system? Or is it just another power grab?

The WSJ article states there is $1 trillion in this shadow lending sector. The New York Fed is quoted as saying "much of this money is being lent under loose conditions." It goes on to state that "the deterioration in loan underwriting has come hand-in-hand with an increased presence of retail investors in the leverage loan market."

If these businesses are unregulated, how is it that the New York Fed has any idea about their lending practices? Moreover, why does it concern the New York Fed at all, anyway?

First, I believe the Fed, the leader of the organized banking concerns, does not like competition. Secondly, it’s losing business to the competition, so it wants to bring it under its umbrella to stifle it. I can't see any other reason for the Fed’s concern.

What if these "shadow lending" businesses did have problems with their loans? The simple answer is that they would go bankrupt. They are not part of the banking system, they should not be bailed out and there should not be any public money injected to help private lending institutions. So, simply put, it is not in the Fed's hands.

So the Fed bringing these types of organizations under its umbrella would only undermine these already-functioning lending institutions in the public domain. The Federal Deposit Insurance Corporation (FDIC), which exists to support and regulate the banking institutions in essence increases the risk to both lender and depositor, because it creates the ability to work with lower capital basis versus reserves, with the FDIC underwriting the risk of collapse.

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