In the old days, if you needed money you went to a bank. They might loan you money for your home, your car, or your business based on an interest rate slightly higher than the net paid out for deposits. They made their money on the “spread” between the two, matching up assets they had with liabilities (like you) outstanding. It was a quiet, conservative life. It was boring.
Today, most loans wind up not being held by banks in anything like the traditional sense. Nearly all liabilities are packaged up and sold to a “shadow banking” system where people buy these “asset backed securities” and make money based on the float. It’s a more flexible system that allows nearly all risk to be offloaded onto investors – who bear it as a system. It’s good for the borrower, it’s good for the bank – but the risk is held by the investment world as a whole.
That “brittleness” is the bane of the modern financial world – and the future. How we learn to manage it is the future of finance and the difference between a world that is stable and reliable or capricious and impossible to understand.
Avast, ye dogs! So you live on a small rock with no resources and a pretty hard life. Ships loaded with treasure go past all the time, hardly protected by anything other than a navy which you can spot over the horizon. What do you do? For big hunks of the Caribbean and many other parts of the world, the answer for many was to turn to piracy, or at least turn a blind eye to it. Rich nations could afford to give a little bit to the cause and, as long as the gunships were far away, life was pretty easy.
Those were the good old days.
Some tiny nations that used to be havens for pirates have found a new, more lucrative way of making a living out of nuthin’. Rather than prey on the wealthy, they help hide their wealth – not under the “X” on a treasure map, but in a real bank operated far from prying eyes (and taxing ledgers). An estimated $32 trillion (as of 2010) is hidden away in the tiny nations on the fringes of civilization. It’s an issue which is becoming as hot as the Caribbean sun in most of the developed world, especially the UK. But what can be done about it?