Shadow Banking and the Rise of the Petite Bourgeoisie

The Association of Financial Markets in Europe says that EU SMEs are too dependent on banks for their credit in comparison to their US competitors.


The securitisation of household debt was revealed, examined and then blamed for the subprime crisis that hit the US and then the world economy in 2007-8. Banks were creating large volumes of mortgage backed securities and distributing them onto bond markets which bought them up without knowing what the liabilities were.  The recognition of just how widespread this activity was led to the liquidity crisis that sank Lehman’s Bros.  Yet it is exactly this process that the EU Commission has proposed to reflate the EU economy. ECB President Draghi says it will address the spread in SME credit between core and periphery countries in the EU. Commission President Junker says it will kick start the EU economy using private money guaranteed by public funds. The Association of Financial Markets in Europe (AFME) says that EU SMEs are too dependent on banks for their credit in comparison to their US competitors.   So why risk this strategy? No study has demonstrated that securitization is more efficient in allocating resources than other forms of financial intermediation because the fee structures are opaque and the mechanisms for originating debt based collateral remain poorly known.  Yet it is exactly these “misaligned incentives” and “information asymmetries” that were identified as needing effective regulation for a safe market in SME Asset Backed Securities (ABS) to emerge. 

Blaming financial/global/neo liberal capital is unsatisfactory as it renders opposition impossible while misunderstanding the breadth of support for cheap money (Kastner 2014).  In this paper I argue that the rise in shadow banking was a response to the credit requirements of the petit bourgeoisie. During the late 1970s and early 1980 small businesses began to be seen less as a threat to social stability and more as an asset to national economic policy making.  This political reconstruction of the petit bourgeoisie was present at the national and continental levels, in Thatcherite Britain and the Single Market Programme.  Rehabilitated as “SMEs” new forms of political representation replaced democratic channels while economic management was abdicated for the market.  While the political transition was broadly accommodated the transition of the financial system was some way behind with a credit crunch in the early 1990s in the UK signalling a gap between the political ambition for an enterprise economy and the capacity of financial institutions to deliver cheap credit on a massive scale.  Originate and distribute systems possible with credit scoring technologies in the early 1990s achieved scale economies with bank mergers and financial market integration in the late 1990s. These became highly profitable when linked to the demand for diversified debt products in financial markets in the early 2000s (Dymski & Perez 2015). The origin of the destabilising system of shadow banking was therefore as much in response to securing an unstable political compromise with the petit bourgeoisie as it was to the domination of financial markets.

MA and PhD researchers most welcome. There will be an opportunity for networking after the talk.