Nonbank financials, which also include insurance companies, pension funds and the like, have grown 61% to $185 trillion. Traditional bank assets have increased 35% to $148 trillion during the same period.
A lot of this is sandbox, automatic portfolio adjustment. But all of it is out of the central bankers eyes, so what the official stats say will be subject to greater revisions later. The excess reserves could be out in shadow banking while sitting in non interest bearing cash accounts. These numbers represent pre-covid, and the split has grown wider.
But the Fed is stuck. It can raise IOER and recover some of that, but then Treasury loses the Fed tax. If the Fed keeps collecting taxes for Treasury, the shadow banking system will continue to grow. Who will collect taxes for all the stuff we bought?
I connect the dots. I do not stop at my priors and invent some magical force. If I had philosophy I would say, great, competitive open banking. But pragmatically, central banking is not going completely away. So the sudden loss in market share needs a balance. Powell cannot keep losing market share and still be treasuries taxer of last resort. Eventually Congress has to prepare budgets, but under the current system they lose the ability to predict taxes.
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