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Shadow Banking In The United States And China :What Are The Risks?

Marshall D. Nickles    
Jeffrey Schieberl    


This paper addresses the concern the authors have regarding the speculative nature of shadow banking in the United States and China in particular. There appears to be ample evidence that shadow banking in the United States was a major contributor to the speculation that led up to the 2008 - 2010 financial crisis. The same type of speculation was also responsible for the U.S. stock market collapse of 1929. During the 1930s the Glass-Steagall Act was enacted to address the potential conflict of interest between commercial and investment banking activities. This Act was altered in the 1990s by a majority vote in Congress. Some believe that this partial gutting of the Glass-Steagall Act contributed to Americas unregulated shadow banking activities and real estate speculation that followed. At present Chinas shadow banking sector is following a similar speculative path that the United States did about seven years ago. A difference is that Chinas commercial and shadow banking systems are absent of many of the mechanisms that allowed the U.S. to regulate its way out of Americas financial crisis. This paper compares past and current U.S. and Chinese shadow banking activities and draws conclusions relative to certain sectors in the Chinese economy that are overheated and primed for economic difficulties that could have global implications.