http://koppanyvarga.wordpress.com/2008/12/02/financial-system-fix-it-with-empowering/
How to fix the financial system by introducing radical openness?
Poor Alan Greenspan - he seems to be the dumbest person on the planet. To trust that the Internet would make the financial markets safer and more transparent? What a naïve idea!
Yet, he is right. The Internet is capable to make the world safer. It can bring more transparency, but can't chase away the shadow of secrets alone. And that is exactly why he is wrong trusting the Internet to do the job alone.
However, strengthening the regulatory structure, introducing tons of new legislation, setting up new monitoring agencies is the wrong answer to our problems. It does nothing more than slowing the economy even more down.
Is there a way out?
Yes, and Paul Kedrosky is very close in this article. He suggests, we should have some more light on the scene. We need a financial dashboard, and access to the IMs between the traders. That is right. But we need much more.
Radical openness
What we really need is wiping out alltogether the secrets in the financial system. You can not build a healthy industry on secrets. It only helps to hide incompetency, hybris and greed.
So what next?
Obligate the financial service providers to make ALL relevant information generally available, real-time. Things like the IMs (even better: send them on twitter); all data they give to rating firms, auditors and state agencies; minutes of board meetings (even broadcast them online); all background studies and calculations.
While legislation takes some time, this policy can be introduced instantly at companies bailed out.
This would lower the barriers of entry into the industry of analyzing and rating financial products. Empowering startups to proliferate in this field will - in turn - change the behaviour also the incumbent players. And this would reinstate trust and sincerity in the financial system. Funny words? Yes, and this one shows again, how ill our system really is in its present form.
The First Disaster Of The Internet Age
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At the same time, in making information free, the Internet has buried us in data, keeping most people from seeing the building credit storm. Rather than turning the world into a global village of empowered investors, the resulting data fog helped some Wall Street wiseguys hijack the global economy as easily as playing videogames—with instant messages and trillions of dollars in complex derivatives.
The dotcom crash of 2000 and 2001 may have involved Internet stocks, but the underlying cause was old-fashioned "irrational exuberance" (at least Green-span got that one right). It was a kind of adolescence period for the Internet. Now, by contrast, we are in the midst of the first financial crisis of the mature Internet age—a crisis caused in large part by the tightly coupled technologies that now undergird the financial system and our society as a whole.
The fiasco raises important questions about how to regulate financial markets. If information is freely available, does that mean the onus is no longer on Wall Streeters to tell the rest of us what's going on? What role do regulators play in keeping tabs on all these complex financial shenanigans?
The Internet has made it possible for anybody with an online brokerage account and a broadband connection to become a global investor, but with that freedom has come a great responsibility: to know what you're doing without relying on government oversight. And in a world where our ability to trade exotic financial instruments vastly exceeds our ability to understand and value them, that is a very dangerous thing indeed. It behooves us to pause and take a look at the forces that led us here, and what we might do to prevent another occurrence.
The information was out there, and this problem had been building for years, so why did no one notice? Part of the problem is that the relevant data, while available on the Web, is spread around in a zillion places. You can go to Yahoo Finance to check the recent share price of Wal-Mart, its market capitalization and its current sales. There is no one free place where you can do the same thing across subprime mortgages, asset-backed securities, credit swaps and all the other arcana inherent in taking the temperature of modern global markets. Instead, you have to wander from site to site, sort of like building a jigsaw puzzle from disguised pieces strewn around an entire city. It is part treasure hunt and part puzzle-building.
That's not the end of the problems. Information about financial time bombs, like derivatives, is veiled in acronyms that make you want to gouge your eyes out. (Consider two different measures of the performance of mortgage securities: ABX.HE.AA.06-2 and ABX.HE.AA.06-1—such lovely and lyrical names!) There is an entire language required to understand this new generation of financial technologies, from credit default swaps to collateralized debt obligations to residential mortgage-backed securities, not to mention the corresponding three- and four-letter abbreviations. There's also data on current account deficits and yield spreads. Most people, faced with this tsunami of data, do the only rational thing: they give up.
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