This is the Cato Daily Podcast for Monday, June 7, 2010.

I'm Caleb Brown.

The luminous bills to reform the financial sector are floating around Capitol Hill,

and they'd reform lots of things but it's

not clear they'll fix some of the key problems contributing to the financial

crisis. Peter Van Doren editor of Regulation magazine in a new feature in the magazine

says some new research indicates one key reform to fix some of those

troubling incentives that triggered the crisis

may be deftly avoided by congressional reformers.

Let me define Shadow Banking by first defining traditional banking and then defining shadow banking as its successor.

In traditional banking there's something called

depositors and they have CDs and savings accounts and checking accounts and

those so-called certainly in the case of checking and savings accounts,

there's a called demand deposits because you can, you have the right to get them at any

note, you know, immediately you don't have to give notice.

For CDs of course you do have to, you're in for a year or two years, whatever the term of the

CD is. And in turn the bank takes those demand deposits and lends them out and that's part of the miracle of banking. It's called duration duration mismatch i.e. money that is not actually put down for a long term

checking accounts and savings accounts in turn funds loans that are long term, be they five year, ten year,

or 30 year mortgages funded by money that can actually leave the next day.

So in a regulated banking system, entries restricted. Charters are granted by the government.

And then in turn, there's also deposit insurance since the Depression to try to induce depositors never to run, never to leave the bank with that short-term money that they could if they wanted to leave, because if everyone tries to leave the bank at the same time then the

money isn't there because it's actually loaned out.

...