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

The U.S. Federal Reserve now controls a part of the money supply, but other financial institutions, called the 'shadow' banks, issue a growing amount of the money supply, which remains outside the control of the U.S. Federal Reserve. Being unregulated, these shadow banks operate by offering highly risky amounts of credit, leading to lack of confidence and consequent run on such banks. However, due to competition with the shadow banks, the commercial banks have undergone structural change and are themselves engaged in trading the same financial assets as traded by the shadow banks. Hence the distinction between banks and shadow banks is now moot. Consequently, almost all large financial institutions operate like the shadow banks, and now are heavily engaged in speculative derivative futures trades. The second structural change is that the derivatives market now dominates the prices not only of financial futures but also the prices of all traded commodities, soft and hard, demonstrating oligopolistic market power. The unchecked growth of speculative activity in the futures markets has raised commodity prices and also increased price volatility. This in turn has rendered the entire financial system including the banking system to become unstable, leading to bank runs and financial 'bubbles.'