We have short memories. Not long ago, the Internet spawned a rush to invest in everything that would help out the money rich / time poor generation. Crash. This year we have seen both sides of a similar coin. First, the three F’s (Fuel; Food and Finance) and scarcity driving inflation. And now. Crash and deflation. Not bad for six months! Maybe this is just a levelling back to what things are really worth. One thing is for certain, the informal economy is not the only place for “shadow” financial arrangements.
The shadow banking system in the Formal Economy is run by those bonus heroes of recent years – hedge funds and other such financial instruments geared to cut risk up into ever smaller packages. Why shadow? Because these Banks are not regulated like other Banks; they are not required to hold reserves or be covered by heavy default insurance. In fact, borrowers and investors could bypass these strictures and such expense to make their stellar returns. Picture a trapeze artist walking a wire strung up between two tall buildings in, say, Dubai – without a safety net.
So, when it emerged in 2006 that homes in the US were suddenly overvalued by over 50%, a steady adjustment picked up momentum. This wiped out roughly $7 billion of value for the home owners and, crucially, $1 billion for the investors who had bought into these new fangled financial “products”. With no insurance cover or safety net to fall back on the shadow banking system from the formal economy collapsed and triggered a domino effect all over the banking system. The rest, as they say, is history.
As we look at the informal economy, recent events should give us pause for reflection. Recently I asked a friend who works in the City – “What is the difference between a Hedge Fund Manager and, someone offering financial services in the Informal Economy?” Answer – the size of the bonus.