As we approach the tenth anniversary of the start of the Great Financial Crisis, central bankers in their role as financial regulators have claimed victory and said a crisis won’t happen again.
And why are they so sure of this?
According to the Bank of England’s Mark Carney,
We have fixed the issues that caused the last crisis. They were fundamental and deep-seated, which is why it was such a major job.
Since the necessary condition for a financial crisis is opacity, permit me a quick check to see if the large opaque segments of the financial system that were ground zero for the financial crisis have been made transparent.
Let’s start with the infamous opaque, toxic subprime mortgage-backed securities. Has anything happened in structured finance to end the opacity of these and similar securities?
No. The SEC issued a revised disclosure rule for these securities, but this rule provides less transparency than existed pre-2007. The rule actually makes it harder for the owners of these securities to know how the underlying collateral is performing. Investors appear to recognize this as the market for new private label mortgage-backed securities is virtually non-existent despite almost a decade of central bank lead zero interest rate policies.
Let’s move on to what the Bank of England’s Andrew Haldane called the black-box banks. Has anything happened to end the opacity of these banks?
No. Central banks running annual stress tests and saying the banks can survive financial armageddon doesn’t improve transparency. All this does is create the moral obligation to use taxpayer funds to bailout investors in these banks in the future.
Let’s conclude with the market for derivatives. Has anything happened to end the opacity of this market?
No. Investors still have no idea who is holding the risks of trillions of dollars worth of derivatives and therefore have no way to assert market discipline and restrain risk taking by individual firms in this market.
But the central bankers in their role as financial regulators tell us there is no need to worry about the ongoing presence of opacity in the global financial system. Why?
Because the regulators are scanning the global financial system for risks that might trigger a financial crisis.
Pardon me if I don’t find this comforting. After all, this same set of central bankers didn’t see the Great Financial Crisis coming even after it hit.
Perhaps more importantly, why are they putting themselves in a position where if they fail to see the risk which causes the next financial crisis, we have a crisis?
Since the financial regulators either have no interest in or are not up to the task of dealing with opacity in the global financial system, the Transparency Label Initiative is stepping into this regulatory void and doing what it can to prevent a future financial crisis.