"The birth of the Shadow Banking System required that capitalists be able to come up with an asset – which actually for shadow bankers is a liability – that was perceived by the public as just as good as a bank deposit. Remember, the public has an ex-ante demand for something that trades on demand at par. Therefore, shadow bankers had to be able to persuade the public that its asset – which is actually the shadow banker’s liability – was just as good as the real thing. If they could do that, then they could have one whale of a good time.
That asset – which, again, is the bank’s liability – needed, in Gary Gorton’s terms, to be characterized by “informational insensitivity,” meaning that the holder didn’t need to do any due diligence, just taking it on faith that this asset could be converted at par on demand. And, in fact, money market mutual fund shares achieved that status. With one small exception prior to the Reserve Primary Fund breaking the buck, they always traded at par. And if there was any danger they wouldn’t trade at par, the sponsor would step in and buy out any dodgy asset at par. So, essentially, the money market mutual fund industry was at the very core of the growth of the Shadow Banking System".
That asset – which, again, is the bank’s liability – needed, in Gary Gorton’s terms, to be characterized by “informational insensitivity,” meaning that the holder didn’t need to do any due diligence, just taking it on faith that this asset could be converted at par on demand. And, in fact, money market mutual fund shares achieved that status. With one small exception prior to the Reserve Primary Fund breaking the buck, they always traded at par. And if there was any danger they wouldn’t trade at par, the sponsor would step in and buy out any dodgy asset at par. So, essentially, the money market mutual fund industry was at the very core of the growth of the Shadow Banking System".
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