Proposals For The Regulation Of Shadow Banking Postscript

Short term investors are extremely risk-adverse. They demand two things at minimum – ready access to and the safety of their principal. When risk unexpectedly emerges they become nervous, always on the verge of a flight to safety. As we have seen, a large enough flight can turn into a stampede which can cause significant collateral damage.

In the 30's the risk posed by bank runs was finally tamed by the adoption of the financial safety net for bank deposits. This was not adopted for reasons of altruism, that government was somehow responsible for safeguarding the deposits of widows and orphans and should protect them from risk. Rather it was a pragmatic solution to the risk of bank runs which had the potential to damage the general economy.