Macro N Cheese

Back in 2018, Steve invited Robert Hockett to come on to talk about shadow banking and explain its role in the 2008 financial crisis. We’re bringing back this interview because shadow banks are still around and people still have a hard time grasping exactly what they do. This is partly because many don’t understand what banks themselves actually do. The popular vision is that banks borrow and lend and that they make loans based on what they have in the vault; we MMTers know that they make loans based on profitability.  Banks are policed with a view to their liquidity risk, while shadow banks are behaving the same way, without the policing.    In order for us to unpack this issue, we need to know the meaning of “endogenous” and “exogenous” money. Bob defines endogenous as the credit-money generated by private banks and lending institutions, while exogenous is the sovereign element, created by the Fed or central bank. As in most cases, there’s always an element of public involvement in the p