US Government Debt Different - Finance Department - University of ...

Zoltan Pozsar 354A Macro View of ShadowBanking: Do T-Bill Shortages Posea New Triffin Dilemma?Zoltan PozsarThe public safety net that has been embracing the U.S. banking systemsince the early 1900s has been tailored to retail cash investors,or depositors. The safety net made deposits “sticky” and the bankingsystem less prone to runs. Institutional cash investors were not meantto benefit from this safety net, however. This was fine until the aggregatevolume of cash balances managed by institutional cash investorsgrew to a size where runs by them could be destabilizing.At its core, the U.S. financial crisis of 2007-09 was much more thana subprime mortgage crisis. It revealed the Achilles heel of the dollarbasedinternational monetary system: namely, that for institutionalinvestors the world over, the bulk of short-term dollar balances representuninsured private claims on banks. In other words, prior tothe crisis the dollar-based international monetary system was an uninsuredprivate system, without any official backstops.Of the funding base of the entire system, only “onshore” U.S. retaildepositors were insured and everyone else was uninsured, effectivelystill living under conditions that existed before the creationof the Federal Reserve System and the FDIC. The financial crisis