The crisis has shown that economic performance ought to be judged in terms of risks as well as quantities. In pure quantity terms, gross domestic product growth in the US, Britain or Spain was robust in the years up to the crisis. But adjusted for risk, these countries’ records were considerably less good.
Just as sophisticated fund managers have long measured their performance by some version of the Sharpe ratio – returns divided by the risks taken to generate them – so policy makers must learn to risk-adjust macroeconomic performance.
If risk is important, the case for a data revolution seems clear....The case for a data revolution is clear. The revolution is the return to providing the data to all market participants and not just the financial regulators.
The trouble is that harvesting good data is no small challenge....This is a point your humble blogger has been making since before the financial crisis began. Banks make money from opacity so they fight providing good data tooth and nail. Financial regulators have an information monopoly and they are reluctant to give it up.
In a thoughtful paper, three proponents of a neo-Kuznets revolution – Markus Brunnermeier, Gary Gorton and Arvind Krishnamurthy – suggest a different way of tackling the data gap.
Rather than asking dozens of unfocused questions, regulators should ask financial companies to estimate how they would fare under various stress scenarios: a change in one-year loan rates, a panic in the repo market, or some combination of such shocks.
But this approach presumes that companies can calculate the answers. In practice, a shock in one corner of the system can generate aftershocks in unexpected places. How is a bank or hedge fund supposed to pinpoint its expected losses in the face of such feedbacks?Actually, this proposal is nothing more than a red herring not to require transparency.
Market participants do not care how a financial company thinks it will fare under various stress scenarios. What market participants care is to have all the useful, relevant information so the market participants can independently assess the financial companies under stress scenarios that the market participant chooses.
This is why we need transparency and not the complexity and opacity currently being provided by the financial regulators.