Shadow money and the public money supply: the impact of the 2007–2009 financial crisis on the monetary system

ABSTRACT

This article explores the effects of the political reactions to the 2007–2009 financial crisis on the monetary system. It chimes in with the view that shadow banks create ‘shadow money’, i.e. private substitutes for bank deposits. The article analyses how the three main forms of shadow money – money market fund shares, overnight repurchase agreements and asset-backed commercial papers – were affected by the short-term government intervention and medium-term regulation during and after the 2007–2009 financial crisis in the United States. The analysis reveals that the measures taken between 2007 and 2014 integrated some shadow money forms in the public money supply. In the year after the Lehman collapse, the initially private shadow money supply was either publicly backstopped or de-monetised as it had broken par to bank deposits. The public backstops took on the form of emergency facilities established by the Federal Reserve and guarantees proclaimed by the Treasury. Those backstops imply that the public institutional framework to protect bank deposits was extended to some forms of shadow money during the crisis. This tendency has continued in post-crisis regulation. Accordingly, the 2007–2009 financial crisis has triggered a paradigmatic change in the monetary system, attributable to the political decisions of US authorities.

KEYWORDS:

• Shadow banking
• ABCPs
• repurchase agreements
• money market fund shares
• Federal Reserve
• Treasury
• reverse repo facility
• crisis intervention
• financial regulation
• functionalism

Acknowledgments

I wish to thank Anastasia Nesvetailova, Stefano Pagliari and Perry Mehrling for their support and insightful comments on this research project. Benjamin Braun, Armin Haas, Giovanni Mangraviti, William Oliver, Hannah Petersen, Hanna Pfeifer, Lukas Rudolph, Andrei Sandu, Maria Schweinberger, Kilian Spandler, Matthias Thiemann and Jens van 't Klooster have read and reviewed drafts of this paper at various stages, for which I am very grateful. Earlier versions have been presented at the 27th Annual Conference of the European Association for Evolutionary Political Economy in Genoa, the 57th Annual Meeting of the International Studies Association in Atlanta, the workshop ‘Public and/or private money’ at the University of Cambridge, and various seminars at City, University of London. I thank all participants for the feedback I have received. Finally, I wish to thank the three anonymous reviewers. The remaining errors are naturally my own.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1. The notion of public control over the money supply must not be confused with the monetarist assumption that central banks have the policy tools to implement a targeted growth rate of a monetary aggregate. Instead, as argued in Section 2, public control is understood here as public institutions assuming responsibility for protecting par convertibility vis-à-vis higher ranking money forms.

2. Other terms for SPVs that are legally different but functionally equivalent are ‘Structured Purpose Vehicles’, ‘Special Investment Vehicles’, ‘ABCP conduits’ or ‘ABCP programmes’.

3. How to conceptualize repos is debated within the shadow money literature. The perspective suggested here stresses the role of repos as IOUs to emphasize their characteristic as credit money in analogy to deposits, treats collateral as secondary, and studies how repo issuers are backstopped in a crisis. In contrast, Gabor and Vestergaard (2016) place crucial emphasis on the collateral exchange in a repo transaction and focus on provisions by the central bank and the Treasury to backstop collateral value in a crisis (cf. Gabor 2016; cf. Interviews 2 and 3).

4. The description of the empirical money matrix rests upon the categorization of Pozsar (2014) but adds ABCPs to the picture and leaves out Treasury liabilities whose property as credit money is contested (see Ricks 2016 as well as Gabor and Vestergaard 2016 for a detailed discussion of contemporary credit money forms and hierarchies).

5. After Lehman's collapse, public authorities adopted measures to support the securitisation channel of shadow banking. Those involved emergency liquidity facilities such as the money market investor funding facility (MMIFF), the commercial paper funding facility (CPFF) and the term asset-backed securities loan facility (TALF) (see e.g. FOMC 2008; FRBNY 2008; FRBNY 2009a; FRBNY 2009b). However, those facilities did not primarily affect the ABCP market as ABCPs had already lost their relevance at that point (Mehrling 2011).

Additional information

Funding

This work was supported by the European Union's Horizon 2020 research and innovation programme via its funding for the project Distributed Global Financial Systems for Society (DOLFINS) [grant number 640772].

Notes on contributors

Steffen Murau

Steffen Murau is a PhD candidate at the Department of International Politics at City, University of London, and a doctoral research fellow at City Political Economy Research Centre (CITYPERC). He works as a researcher at the Institute for Advanced Sustainability Studies (IASS) in Potsdam, Germany, where he contributes to the EU Horizon 2020 project Distributed Global Financial Systems for Society (DOLFINS). His research interests include monetary theory, shadow banking, the international monetary system and the European Monetary Union.