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Jesup, IA | My quick read of this is that since so much of the economy is now handled through the shadow banking system, that our "reserves for losses", or in their words, "high quality collateral" is just too small in relation to the risk of the system.
The Fed is always supposed to have enough high quality collateral to bail us out of AIG, Lehman, GM, or so it seems.
In the classic movie "It's a Wonderful Life" Jimmy Stewart had a run on his bank when everybody bolted for the door. The problem was that the deposits were tied up in home mortgages, business loans, etc, and he simply didn't have enough cash for a big wave of withdrawals. He has some cash, but he had to ask people to just ask for what they needed or else he would have run out of "high quality collateral" and the bank would have failed.
Same way for the shadow banking activity. Hedge Funds securitize assets and take them off balance sheet, maybe even mask some of the risk with Credit Default Swaps (ask Iceland how that worked when they needed their cash back). Their balance sheets look small, but the risk is there. What if the economy has a big hiccup? Like 9/11 or a Syrian War that causes a flight to cash. Can the system get liquid fast enough? Did we really understand the risk in these Shadow Banks that work just like regulated banks in regards to the money multiplyer and velocity of money?
Back to putting it in farming terms. You are a big, big farm. You don't have a lot of land, but you have a big line of equipment (all rented) and you have lots of big cash rent to pay on multi-year leases. It doesn't show on your balance sheet, but if you don't have a crop to pay the bills, it's just as big of deal to come up with cash to meet your obligations as having a big (visible) operating note at the bank to pay.
Edited by Ben Riensche 8/27/2013 19:19
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Some banking help please
