Wednesday, January 12, 2011

Thank You Andrew Haldane

Your humble blogger would like to thank Andrew Haldane of the Bank of England for putting a value on asset-level transparency for both financial institutions and the products they produce.

As discussed on NakedCapitalism,
In a March 2010 paper, he compared the banking industry to the auto industry, in that they both produced pollutants: for cars, exhaust fumes; for bank, systemic risk. While economists were claiming that the losses to the US government on various rescues would be $100 billion ([Yves Smith] ahem, must have left out Freddie and Fannie in that tally), it ignores the broader costs (unemployment, business failures, reduced government services, particularly at the state and municipal level). His calculation of the world wide costs:
….these losses are multiples of the static costs, lying anywhere between one and five times annual GDP. Put in money terms, that is an output loss equivalent to between $60 trillion and $200 trillion for the world economy and between £1.8 trillion and £7.4 trillion for the UK. 
Yves Smith then goes on to relate the cost of systemic risk to transparency. [emphasis added]
... opacity, leverage, and moral hazard are not accidental byproducts of otherwise salutary innovations; they are the direct intent of the [financial firms'] innovations. No one was at the major capital markets firms was celebrated for creating markets to connect borrowers and savers transparently and with low risk. After all, efficient markets produce minimal profits. They were instead rewarded for making sure no one, the regulators, the press, the community at large, could see and understand what they were doing.
As laid out in the FDR framework,  the government's role in the financial markets is to insure transparency and not to endorse specific investments.

Clearly the financial industry will balk at the cost of providing investors access to all useful, relevant asset-level information in an appropriate, timely manner.  However, this cost is orders of magnitude less than the cost of not having transparency quantified by Andrew Haldane.  As a result, there is no legitimate reason remaining for governments not to require asset-level data for both financial institutions and the products they produce.

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