Let's go through it slowly. The commercial banks were regulated. The government guaranteed their deposits. Savers who wanted to not have to worry about making sure that their money wasn't going to vanish and who were inertial in their behavior put their money into commercial banks. Regulators watched the leverage of commercial banks. And commercial banks--with their massive retail savings deposits--have for the most part come through this all right.
The last sentence is not meant to be a joke. Yet it is far from reality-based. To the extent that the banks "came through" this, it is with a great deal of assistance from the taxpayers.
The non-commercial banks--those that did not have large retail banking deposits, did not have government guarantees, and were left less tightly regulated--have, by contrast, flamed out almost to an entity newly reincorporated as a bank holding company. Countrywide. Bear Stearns. Other hot money-financed mortgage lenders too numerous to name. Fannie Mae. Freddie Mac. Lehman. Merrill Lynch. AIG.
I had no idea that Freddie Mac and Fannie Mae were part of the unregulated "shadow banking system." Mark Thoma does not classify them as such. Instead, he says that they "followed" the evil shadow bankers into the den of subprime iniquity. Kind of like the kid who gets caught with illicit substances 'cause he ran with the wrong crowd.
Just for the record, Freddie Mac and Fannie Mae were regulated. Maybe not strongly enough (Congress was very good at emasculating their regulator), but they were regulated.
The position that the financial system was brought down by the "shadow banking sector" is widely held, particularly in Washington. However, it is not an impregnable position. An alternative point of view is that there were serious bank regulatory failures, and I encourage readers to check out this piece in the National Journal to see more specifics.
From the Editors: In the last few days, Atlantic Biz has taken on the issue of the shadow banking system and its role in the financial crisis, and created something of a fracas! The debate begins with Prof. Mark Thoma's Washington Post op-ed (here), which argued that the financial crisis began in the shadow banking system. Our Dr. Manhattan takes issue with that conclusion here. Prof. Thoma responds in the comments to say it did too begin in shadow banking system (and takes the fight back to his home blog here). Prof. Brad DeLong tags in for Thoma and pulls no punches when he announces that "the Atlantic Monthly crashes and burns" here. Charles Davi emerges from the flames here to state unequivocally that the shadow banking system did not cause the financial crisis.