Shadow Banking as Network Finance

Abstract

In 2007/08, when the world faced one of the greatest financial crises in history, almost no one among economists, bankers, or government officials anywhere had seen this one coming. Why? It was not just the optimism prevailing after so many years of a Goldilocks economy or the orthodoxy’s blind spot when it comes to finance in their models. More troubling was the fact that the crisis had exploded underground, in the part of the plumbing system of the economy that was hidden even from the professionals’ eyes. Now that we have put this traumatic experience behind us and enjoy the fruits of a (finally) solid recovery, we still must wonder whether such a hit out of the blue can recur. Or have we learned enough about the last crisis and the locus of its origination not to repeat the same mistakes?