Recurrent Financial Crises and the U.S. Federal Reserve: Bubbles and Blisters

Area of Science:

• Financial Economics
• Monetary Policy
• Market Regulation

Background:

• The U.S. Federal Reserve's control over the money supply is diminishing due to the rise of unregulated 'shadow' banks.
• Shadow banks engage in high-risk credit offerings, leading to instability and bank runs.
• Commercial banks are increasingly adopting shadow banking practices due to competitive pressures.

Purpose of the Study:

• To analyze the structural changes in the financial system driven by shadow banking.
• To investigate the impact of derivatives markets on commodity prices and financial stability.
• To assess the implications of increased speculative activity for the banking system.

Main Methods:

• Analysis of financial institution structures and activities.
• Examination of the role of derivatives markets in price determination.
• Assessment of the relationship between speculative trading and financial system stability.

Main Results:

• The distinction between traditional commercial banks and shadow banks has become blurred.
• Derivatives markets now exert significant influence over financial futures and commodity prices, indicating oligopolistic power.
• Increased speculative activity has led to higher commodity prices, greater price volatility, and systemic financial instability.

Conclusions:

• The convergence of banking and shadow banking practices, coupled with dominant derivatives markets, has created an unstable financial environment.
• Unchecked speculation in futures markets poses a systemic risk, contributing to bank runs and financial bubbles.
• Regulatory oversight is needed to address the risks associated with modern financial market structures and speculative activities.