Monday, December 26, 2011

Steve Randy Waldman — "Why is finance so complex?"

Finance has always been complex. More precisely it has always been opaque, and complexity is a means of rationalizing opacity in societies that pretend to transparency. Opacity is absolutely essential to modern finance. It is a feature not a bug until we radically change the way we mobilize economic risk-bearing. The core purpose of status quo finance is to coax people into accepting risks that they would not, if fully informed, consent to bear.
[emphasis added]
Why is finance so complex?
by Steve Randy Waldman

The clear case was recently in the lead up to the financial crisis when complex products of "innovation in financial engineering" were given stamps of AAA approval by complicit rating agencies and foisted off as "reducing risk by spreading it" when in fact they were magnifying system risk. Private communication such as emails reveal that the originators knew of the actual situation when they were doing this. See the voluminous work of Prof. William K. Black on operation of financial institutions as "control frauds by their CEOs

We see much the same attitude and practice at the Federal Reserve. Powerful insiders in the financial sector are often not only informed in advance about policy decisions but also permitted to shape them behind the veil. Is this in the public interest. Should it be opaque even to Congress? Is this necessary for "political independence." When does "political independence" conflict with democratic principles. When does "political independence" serve privilege?

I think that we can compare opacity in finance with secrecy in government. As the release of the material collected by Wikileaks, including that provided by Bradley Manning, goes to show, much government opacity and secrecy are simply covers for what is illegal or would be embarrassing, rather than being vital not national security. Would the country be willing to bear the risks and costs of domestic and foreign policy if they knew the underlying truth? Secrecy and opacity are often simply a means of control.

SRW brings up some excellent points. I think he has put his finger on an essential issue that needs to be addressed. Here is my comment over at Interfluidity.
What I am chiefly concerned about in lack of transparency is not only implications fo risk and risk-taking, but also lack of trust in institutions. The “need” for lack of transparency, ranging from opacity resulting from complexification and to mandated secrecy, betray lack of trust in the basic institutions underlying the great themes our this era, liberal democracy and free market capitalism, neither of which can exist without transparency. So is “progress” a justifiable tradeoff, or do we have to admit that “liberal democracy” and “free market capitalism” are empty slogans and the stuff of children’s stories, which do not reflect reality? It seems to me that this is close to the basis of the upheaval of the developed world is now undergoing as its principle institutions are being called into question, not only the financial sector and the Federal Reserve, but “democratic” governments subject to elite capture, and, indeed, capitalism itself as the preferred life-support system. Indeed, the revelations subsequent to the invasion of Iraq on “fixed intelligence” and the more recently the Wikileaks material shows that a great of the lack of transparency in government was for expediency rather than national security requirements. It does not seem to me that Jesuitical argument really works in any of these cases, due to unintended consequences. While such consequences may be unintended, they are not unexpected. Once truth is suppressed, illusion and hypocrisy grow. Little while lies sprout into the Big Lie. (link)

No comments: