Credit Markets/The Fed & The Cornell Fraternity Scene Act Almost Exactly The Same

Cornell’s greek scene has seen some tragic events in the last few years including the death of multiple students due to drinking/hazing and drug abuse.

It’s safe to say the fraternity scene has gone overboard/a bit out of control — and while the university regulates and watches over the greek scene, it’s impossible for them to catch everything…

In response, Cornell has been doing its best to increase scrutiny, and even push many of the fraternities off campus and “out of business.” A number of fraternities have, indeed, been kicked off campus and have been completely shut down.

But just because there are less fraternities, it doesn’t mean kids are going to drink less or do fewer drugs. Instead, they are just going to start doing them off campus and in the private homes of students.

The problem is that while drinking and drug usage was at least being done under the imperfect oversight of Cornell, the activity hasn’t stopped, it’s just moved.

It’s moving into an un-regulated environment: “the non-greek frat scene.” Or the “Shadow Fraternity Scene.”

Like Cornell University, the Fed has over reacted and moved the problem to a riskier place instead of eliminating the problem

Post 2008 the fed has started regulating banks so heavily that it’s become unattractive for them to remain in certain credit markets. Shadow Banks have started taking over much of the leveraged lending markets, and the problem is that these shadow banks don’t face many of the same regulations bank holding companies do.

It’s not like people don’t want to issue high yielding credit, and it’s not like borrowers don’t need working capital — the market still exists, it’s just moved into a new, less heavily regulated area.

By making the traditional banking system so unattractive for lenders, the Fed has successfully pushed much of the risker asset classes to institutions that face loose regulation.

The problem hasn’t gone away, it’s just moved.