The Credit Bubble Bulletin was launched in 1999 when I was convinced finance had fundamentally changed – and that this ongoing transformation was appreciated neither by policymakers nor market participants. It was out with bank-dominated lending and in with market-based Credit – securitizations, the government-sponsored enterprises (GSEs), “Wall Street finance,” the “repo” market, derivatives and highly-levered hedge funds. Throughout history, Credit has proved inherently unstable. This new Credit was instability on steroids – spawning serial booms and busts at home and abroad.
I argued for an update to old banking “deposit multiplier” analysis – where one bank creates a deposit as it makes a new loan; with this new money then deposited in a second bank; where bank B then has funds for a new loan (the amount of their new deposit less reserve requirements); where this new money makes its way to Bank C to fund yet another loan (the newest deposit less reserve requirements). For centuries, post-Bubble post-mortem would invariably fault the instability of “fractional reserve banking.” The booms were magical, while the subsequent busts spawned panics and calamitous Bank Runs.
I argued back in 1999 of a dangerous new “infinite multiplier effect” – where contemporary “money” (electronic debits and Credits) moves around the system creating unfettered “money” and Credit expansion and associated Bubbles. This analysis, of course, was fiercely rebuked. It was not until Paul McCulley in 2007 coined the term “shadow banking” that people began taking notice. By then it was too late.