The Politics of Shadow Money: Security Structures, Money Creation and Unconventional Central Banking

Abstract

In the years since the financial crisis, and for the first time in the history of central banks, the Federal Reserve has been pursuing monetary policies which allow shadow banks to access its reserves. The paper examines these policies in an analysis based on the concept of security structure. The aim is to facilitate a better understanding of complex public and private institutional arrangements which convert specific credit claims into money or enable them to approximate or simulate the money-form. As the financial crisis reached its peak in September 2008, the Federal Reserve was not able to contain the impact precisely because the security structure existing at the time between banks and the Fed did not extend to the shadow banking system, which had meanwhile become the backbone of the global financial system. To address this situation, the Fed initiated new security structures that were specifically designed to also give players in the shadow banking system access to liquidity and collateral. The concept ‘security structure' serves as an analytical tool to explore dynamic forms of safety and liquidity generation and to distinguish between credit expansion and money creation. It also helps to differentiate between three qualitatively different stages of security: central bank money, quasi-money and shadow money. In this way, it foregrounds the politics of money creation and the new role of the shadow banking system.

Keywords: Unconventional monetary policies; money politics; money creation; shadow banking system; repurchase agreements; liquidity; global financial crisis