It's Not Liquidity Or Solvency That's The Problem: It's Transparency
from the a-lack-of-information dept
Last month, in writing about the financial crisis, I tried walking through the root causes of how the financial crisis happened and how to prevent it from happening again -- and the point I kept coming back to was the lack of transparency. It wasn't (as some people want to claim) "greed" or a "lack of regulation" that caused the problem, but bad information (though, some might blame that on greed and a lack of regulation). Aaron deOliveira points out that some folks are noticing the same thing, suggesting that the real problem these days isn't a lack of liquidity in the markets, but a significant lack in reliable information. People just don't know how much things are worth, and that's a huge problem.Last week, on the always excellent Planet Money podcast, there was a discussion about what money really is. Many people think that it's a hard representation of value, but it's not. As the podcast noted, money is a relationship. Take a listen to fully understand what this means, but it's exactly right. Money is merely a relationship of trust between certain parties that enables trade. If I trust this piece of paper is worth a certain amount, I can do business with you. If I don't trust that the paper or trinket you hand me is actually worth anything, then I will not do business with you, and your "money" is not money at all.
The problem that we're experiencing today is that, due to a lack of clear and trustworthy information out there, no one is quite sure what anything is worth, and that makes any sort of trade difficult. Money only works when there's a trusting relationship, and you only get that sort of trusting relationship when there is a reasonable flow of information to the parties involved, such that they're confident that what they have (or what they're trading for) has value. The problem over the last few months (or, for some, years) is this realization that the information they had was bad, and they could not trust it, and thus, the "relationship" that made thing valuable disappeared. Without this trust, plenty of things that do have value are being severely undervalued, because there's no (or very little) credible information, and that's leading to panic, because no one is sure what anything might actually be worth.
So, once again, we're back to the situation where we were before: the answer should be more information, more widely distributed in a much more open fashion. We should all be demanding significantly more transparency both from corporations on any sort of investment they put forth as well as from the government who is shoveling dollars -- but not information -- into the market to try to deal with the problem. But, until it gets more information into the market, then the trust will not be regained, and the dollars they throw into the market will merely decrease in value, because there are not enough relationships built on trustworthy information.
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Filed Under: financial crisis, information, transparency
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Did anyone every stop to wonder why stocks have any value at all? I mean they pay $1 dividend on a $70 stock thus giving a whopping 1.4% return! So why is the stock worth $70 with such a measly return? Oh, because it might go up to $80. But then it would have a 1.25% return! So as the price goes up, my return goes down? Huh!? But wait, the company will make record profits this year so the price of the stock will go up! But wait, I will probably only get a few more pennies of dividend for this record profit so why is the price going up again? Gambling plain and simple.
If stock prices were based on anything real, such as the dividend, there would be no wild swings in the markets. But since most of the stock price is based on the gamble the next sucker will pay more for it than I did, it can swing wildly when lots of suckers enter or exit the market.
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Correct.
Spoken like a true genius.
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XML for financial derivatives
Make issuers fully describe their offerings in machine-readable form - all the way down to the individual borrowers or assets.
See this blog posting for a fuller discussion.
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Good Piece!
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Re: Good Piece!
Reminds me of a feedback loop at the last concert I attended. Ouch, my ears!
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false value is a real issue
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Re: false value is a real issue
How do you suggest that situation would be dealt with? And would it really be better than the alternative? Maybe something in the middle - try to keep home prices fairly stable, not rising and not crashing.
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What really backs currency
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Quantity vs Quality
The problem has never been lack of information, the problem has always been lack of trustworthy information.
I have a feeling that all these demands for “greater transparency” will end up being trivially satisfied by deluging everybody with a flood of reports and updates and blog postings and things that don’t leave anybody the wiser.
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> "greed" or a "lack of regulation" that
> caused the problem, but bad information
> (though, some might blame that
> on greed and a lack of regulation).
um, it _was_ greed.
and the "bad" information was "bad" because
the greedy people willingly closed their eyes.
they _knew_ those home prices were inflated.
they _knew_ the people who got the loans that
they were giving out couldn't afford to repay 'em.
they _knew_ those "variable rate mortgages" were
time-bombs that would be exploding down the line.
they _knew_ all of that, and yet they continued with
their "business as usual" approach because they are
greedy, and their business was making them rich...
so as long as they could package up these bad loans
and sell them off to each other, buy them back, and
sell them off again -- each time at a price that was
even more inflated -- they were happy to do that...
and why not? they extracted a "profit" every time!
so they did it to the point that the imaginary value
of those packages exceeded their _actual_ value by
_hundreds_of_billions_of_dollars_. nearly a trillion.
and they knew they could do it because they knew
that _we_ would suffer (from loss of our pensions)
before _they_ would suffer. (they still have all the
money they extracted with their criminal scheme.
and now they're in line for public money as well!)
this isn't new, either. it's essentially an update of
the savings-and-loan scandal of just 20 years ago.
this wasn't an accident, or just "bad" information.
it was a willful theft from the public treasury, and
the only reason it came down when it did, and as
quickly as it did, is because the perpetrators knew
that barack obama would blow the whistle on their
bullshit.
-bowerbird
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Now we need the other 299,999,999 people to get their heads out of their rectums.
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you assume
i do it because i _want_to_ control my linebreaks. i also don't care
whether you -- or anyone -- wants to read my comments or not...
-bowerbird
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re: false value is a real issue
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Re: re: false value is a real issue
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Re: Re: re: false value is a real issue
What a strange statement. Why "should" cars be cheaper?
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Great Points
A complete overhaul of our social, educational, commercial, governmental, and religious institutions is the only thing that can save us.
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Stop explaining a start rolling people in tar and feathers like the good old days. You know, back when America wasn't a country of turds.
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Information is only good if we use it
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Information is only good if we use it
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Ooops
A bit off topic, information can also be used as a tool of manipulation. The government has being dicking with the markets with 'information'. Higher than expected GDP estimates (that was down graded 2 weeks later), or the 'start' date of the recession is kicked back to dec. 2007 when they have been in denial for most of 2008. are examples of how the government uses information to manipulate market confidence.
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NOW YOU SEE IT AND NOW YOU DON'T
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Err??
I think what you meant to say was that transparency is one of the factors for which there is a realistic goal. You can't defeat greed, and regulation isn't really necessary if things are truly transparent.
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greed & degregulation are at the root
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Re: greed & degregulation are at the root
I disagree. The amount of greedy people in the world hasn't changed, and this impacted a lot more than greedy people. The *problem* was the lack of transparency made it so the non-greedy people were convinced they were investing in non-risky assets, when the reality was quite different.
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all of the above & then some
That lack of education, coupled with peoples' inherent quest for more, bigger, best (aka personal greed) fueled by those selling their goods, whatever they may be, being fueled by their own personal greed starts the cycle. It is, by its very nature, self replicating and self sustaining. Add in the financiers and their personal greeds and you have just caused the whole "system" to accelerate toward eventual meltdown, which doesn't end - only pauses until once it has reached the point of total collapse and no one has anything any longer, someone gets the idea that he wants what little someone else has and devises a plan to acquire it by some means of trade, thus rekindling the process.
W.C. Fields once said, "There's a sucker born every minute."
So, unless you want to be part of the meltdown, become self aware. Live within your means and quit listening to the "snake oil" salesmen who relentlessly tempt you to excesses you don't need. All too many people enter into financial obligations of major consequence with WAY TOO LITTLE information and NO research into how it will effect them in the long run. Arm yourself with knowledge before making any transaction, ESPECIALLY large ones and step out of the cycle. Remember also, that there will be people making copious amounts of monet through this readjustment period. With adequate information and common sense, you could as well.
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Re: all of the above & then some
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Re: Re: all of the above & then some
Actually, they were quoting David Hannum, not Barnum.
http://www.historybuff.com/library/refbarnum.html
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Curse you, Mike, for making me read!!!
Transparency would not have prevented this issue. Everyone knows there are risks involved with anything having long term investments. Homeowners know the risk of losing their home. Banks know the risk of homeowners foreclosing. Stock owners know the risk of the market.
Where's the lack of transparency everyone's talking about?
I've yet to see any proof disclosure wasn't present on any transaction causing the meltdown.
The notion sellers didn't disclose to buyers doesn't excuse the buyer from being stupid as to not know what they're buying.
In the mortgage world, loan sellers didn't hide anything. Regardless of the types of loans, buyers knew the loans were mortgages which carries an inherent risk. From there, the chain continues.
The chain breaks, when and only when, buyers discover what they bought was not what they were told.
This is fraud by the seller.
Fraud is done by those who are greedy.
All this fraud was done legally, so regulation wasn't warranted despite all the warning signs to the contrary.
Now, everyone suffers. Bailouts commence. Those too stupid to understand what they were buying get a second chance to fuck it up again.
Regulation is set to come to prevent meltdowns in the future, but with so many loopholes, it's impossible until the next meltdown comes.
The only thing transparent in this mess is watching families all over the world having difficulty trying to keep everything they've worked hard for while those who put them in this situation get bailed out.
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Re: Curse you, Mike, for making me read!!!
Whoa. On this, you are very, very, very, very wrong.
The problem, if you read the details, was that people DID NOT know the LEVEL of risk. They understood there was risk, but the amount of risk was misrepresented repeatedly. CDOs made up of the lowest tranches of other CDOs yet rated as AAA? That's a lack of transparency.
Muni's told that their buying bonds, but are really buying insurance on those bonds? That's a lack of transparency
Banks hedging against each other with CDSs over and over again, such that the actual risk is totally hidden? That's a lack of transparency.
Twinrova, you have a way of jumping to conclusions. Claiming that all risk is equal is simply wrong.
Even today, the people who are holding toxic assets have no clue what's in them. That's a major lack of transparency.
All this fraud was done legally
Uh. You can't do fraud legally. Check the definition of fraud.
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Trust
We still don't have a good word to describe what is missing in Cameroon and in poor countries across the world. But we are starting to understand what it is. Some people call it "social capital," or maybe "trust."
from: http://www.reason.com/news/show/33258.html
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