RESEARCH

In the fifth chapter of my dissertation, I seek to explain the decline of the New Deal banking regulatory regime and the origins of the shadow banking system in the 1940s and 1950s. 

Abstract- The shadow banking system--the largely unregulated, “wholesale” banking system that has been layered on top of the insured commercial banking system--played a central role in intensifying the 2007 housing market collapse into a financial crisis that nearly brought the world economy to a halt (Blyth 2013; Tooze 2018; Braun and Gabor 2020; Menand 2022). Existing scholarship emphasizes the process of “regulatory arbitrage” by lawyers and bankers in the 1970s in the creation of money market mutual funds and the market for asset backed commercial paper--common examples of the shadow banking system (Murau 2017; Thiemann 2018). However, I argue that the system’s origins are better placed in the late 1940s and early 1950s with the creation of the “repurchase agreement” (repo) by the Federal Reserve. While the Fed acknowledged that the repo market posed a threat to financial stability, it allowed the federal government to borrow cheaply, financing early Cold War deficits, partially due to pressure by the Truman administration.