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

38 A Macro View of Shadow Banking: Do T-Bill Shortages Pose a New Triffi n Dilemma?At a macro level the system was stretched between the two extremesof this product spectrum. Institutional cash investors’ demand forgovernment guaranteed instruments was significant. However, thesupply of these instruments outpaced demand for them by nearly$2.5 trillion by the summer of 2007 (see Figure 3-1). On the otherhand, institutional cash investors had only limited appetite for unsecured,uninsured instruments. The shadow banking system arose tofill the gap between the inelastic (and insufficient) supply of governmentguaranteed instruments and the inelastic (and limited) demandfor unsecured, uninsured instruments via the issuance of secured,privately guaranteed instruments. The security of these instrumentscame from the collateral backing them and the associated credit, liquidityand par value guarantees were provided by AAA rated banksand insurers. According to this view, the rise of shadow banking wasa substitution problem between government guaranteed and privatelyguaranteed claims.Figure 3-1 Filling the T-bills shortage with secured short-term debtSource: Pozsar (2011)Although the supply of shadow bank liabilities looks pro-cyclical, itis misleading to assume that this means wholesale funding itself—or more precisely, demand from institutional providers of wholesale