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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The trouble with giving up, however, is that the world goes on without you. And one of the obligations of being a citizen in a free society is vigilance—watching what is happening in your neighborhood, whether it's financial or physical. A lack of regulatory oversight certainly played a role in the current crisis, but over-relying on regulators is a dangerous practice. Citizens need to take responsibility. Apathy and indifference in the face of a complex and fast-changing world is a path to ruin.
Nevertheless, if the Internet's data smog has bludgeoned the average consumer into indifference, it has also enabled traders to act more swiftly and decisively. Traders, bankers and financial engineers have built up the mental shortcuts needed to keep track of a hundred credit default swap spreads, or 10 favorite bonds to watch, or myriad structured-mortgage finance product prices. This generation of bankers is the first to be truly Web aware, and they use the technology to the maximum. That's meant lower costs and faster trading, but it has also helped aid and abet the current crisis. We have used the Internet and modern communications technologies to create a shadow-banking system, an unregulated lending network that was, by 2007, as large as the traditional banking system. It is now shrinking, but its remnants must be dragged into the light, with over-the-counter derivatives pushed onto central clearinghouses.
Consider that many unregulated financial transactions are carried out over instant messaging. Want to set up a $100-million credit default swap on the bank of your choice? No problem. Just IM a few trader friends at other hedge funds or banks, propose the idea, and then seal the deal with whoever likes your terms. No phone conversations, no messy paperwork, just a few quick messages and it's done. This kind of easy access to peers has turned trading into a high-stakes, low-documentation videogame, and in doing so it has encouraged and facilitated many risky behaviors, like having too many overlapping trades to keep straight. "I bought credit protection on Wells Fargo, and sold it on AIG, so I'm now hedged! Or did I do both twice and accidentally double up? Ooooh!" By some estimates close to a trillion dollars in credit default swaps out there were created electronically and are now undocumented and little understood. Think of them as virtual Post-it notes somewhere in the ether, waiting for someone to notice.
The trend toward treating derivatives as a cross between gossip and videogames is insidious. Trivial conversations over instant messaging can mutate into trades. Everything gets flattened, with chatter about the weather right alongside setting up a $100 million default swap. What matters when everything looks the same and is bookended with a happy face?
In recent months most firms have raced to get this derivatives mess under control. Company CEOs and boards have all read the stories about there being in excess of $50 trillion in credit default swaps out there, and they are in blind panics to understand their financial risks. They rightly see it as a race between them getting their derivative exposure straight, and owing billions on defaulting companies to which they are overexposed because of ill-hedged swaps. While it would make for boring television, the race is terrifying as hell if you're part of it.
While the Web reduces economy-wracking derivatives to the level of a quick IM chat about baseball, it also allows people to find and support one another, whether they are history buffs or financial engineers. Just as it's easier to find fellow fans of the Flying Banana, it is easy to find someone who can quickly steer you through creating a collateralized debt obligation. Just head on over to the forums at financial engineering sites like Wilmott.com. Run by Paul Wilmott, a smart and savvy quantitative finance guru, the site's forums have long been a hotbed of discussions about engineering financial instruments. Back in 2005, when swaps were newer and really booming, if you wanted to get in on the action you could just post a message there and wham, within hours, if not minutes, you'd have a host of people steering you to working papers, resources and all the latest information on building your own bomb. There's nothing wrong with hosting an online discussion forum about finance. But without the help of forums and related resources, most of which never really see the light of day, the credit innovations (and I use that word advisedly) that helped spur the current crisis would never have gotten off the ground so quickly.
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