Twofish's Blog

May 30, 2009

Notes on Gillian Tett’s book Fools Gold

Filed under: academia, finance — twofish @ 7:19 pm

Got it on back order.  From the interview it looks like one of the best books out there…..

Something that Gillian Tett makes more clear is that most people outside of banking think that the “shadow banking system” is some secretive thing that is a small part of the system, whereas in fact that “shadow banking system” is bigger than the “non-shadow banking system.” If you get a mortgage, a credit card, auto loan, commercial business loan, or any credit at all, the money that you got came from the “shadow banking system” rather than the “non-shadow banking system.”

The “shadow banking system” needs to be regulated because it *is* the banking system, and it really can’t be shut down, because there really is no “non-shadow banking system” any more. People in banking don’t talk much about the non-shadow system not because it is some deep dark secret, but rather because it’s like the air or the clouds. You see it every day that you don’t think about it.

Part of the reason the shadow system is rather poorly regulated is that throughout the 2000’s, there was this idea that government was the problem rather than the solution, and any sort of government intervention with business was bad, so routing everything through this other banking system was a good thing. Over time, the shadow banking system would prove to be so much better than the traditional one, that the traditional system would fade away.

The fact that this just didn’t work probably became obvious the day after Lehman died. I’m willing to bet that no one at the US Treasury had the slightest idea that if Lehman died, that AIG would go under, because there was just no one keeping track of who had what risk.



  1. hmm.. interesting.. shadow system.. uhoh, no emoticons? :gasp:

    interesting though, as it being interesting to you too, is perhaps the reason you took the time to write about this…

    this whole concept.. definitely something to file away. 🙂

    Comment by Eme — June 1, 2009 @ 4:47 am

  2. i had trouble reading Fool’s Gold because tett mirrors the habit of so many in the finance industry of gushing constantly about how “smart” these financial engineers are…everyone’s “brilliant”, etc. they may be bright people, but i suspect that there are plenty of bright people running around, and what distinguishes those who rise from those who don’t relates as much to personality and orientation as it does to intelligence. i agree with nassim taleb, who is conscious of the limitations of his ability, and that of others, to understand what is happening at any given moment.

    the book generally, to the point i’ve gotten in it, also seems to accept the thesis that securitization is a potentially good thing gone wrong, and that the problem is that those using it behaved imprudently. this notion is itself related to the idea that speculation is good if it part of a system that lowers funding costs for productive enterprises. my own prejudiced view is that keynes was correct when he argued that speculation per se **is** the problem, and that the ultimate cost to a productive economy of too much speculation is disaster, and by too much let’s take an arbitrary number, say, 5% of total financial actiivty. compare that number to simon johnson’s reporting, in his great atlantic monthly piece entitled The Quiet Coup, that in the 2000’s, the finance industry garnered 41% of U.S. corporate profits…

    Comment by dadelson — January 7, 2010 @ 10:33 pm

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