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We now know that things that aren't called banks can nonetheless generate banking crises, and that the Fed needs to carry out bank-type rescues on their behalf.
We now know that banks have created other entities not called banks and outsourced money creation (through credit) to them, thereby depriving the central bank of control over monetary policy.
It follows that hedge funds, special investment vehicles and so on need bank-type regulation. In particular, they need to be required to have adequate capital.
Why are banks regulated? Because they are allowed to create money through credit via fractional reserve banking. How did it happen that banks were allowed to outsource this function to unregulated entities? Where the regulators asleep at the wheel or complicit?

One of the things that is needed is a crackdown on "off-balance" items and specifically to make it so that a bank can sell a loan only to another (regulated) bank, not to some unregulated off-balance-sheet entity. Or perhaps we need a complete overhaul of the money system, but don't hold your breath for that one.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes

by Migeru (migeru at eurotrib dot com) on Tue May 6th, 2008 at 06:56:35 AM EST

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