At the launch of a book which concluded the loss of trust in Economists and Bankers is permanent, the Bank of England’s Chief Economist, Andy Haldane, was asked to name the most untrustworthy thing he has ever done. He offered up:
It is not always and everywhere the case that greater openness and transparency is a good thing. And that’s certainly true in my world.
Had we been fully open and fully transparent about what was going on during the financial crisis, it would, let me tell you, have been a lot, lot worse. That would have been [like] shouting ‘fire’ in the theatre.
However bad it was, it would have caused an even greater haemorrhaging in confidence and even greater collateral damage for savers and borrowers. Sometimes, you have to be a bit selective. You have to be a bit secretive….
But there are times when too much information can make a bad situation worse and the crisis was quite a good example of that.
Does that make me less trustworthy, having now admit to it? I hope not. But does that mean we sometimes have to be selective in what we say? I think almost certainly, yes.
One of the lessons of the financial crisis is individuals trained as Economists do not actually know how our financial system is designed or the role transparency plays in this design.
While I have longed admired Mr. Haldane as an Economist, his statement reveals he too suffers from this deficit.
It is this lack of knowledge while claiming to be an expert that is at the heart of why Economists aren’t trusted. I will give Mr. Haldane credit for recognizing this could be a problem:
All experts were likely to get things wrong and it’s not so much about whether you fail, because you will, as much as how you fail. An honest mistake is usually forgiven — not immediately, but eventually. A mistake that’s not admitted to, the public smell that really quickly, they don’t forgive that. And they’re right, actually, not to.”
Since the financial crisis began, Economists, particularly central bankers, haven’t admitted to getting anything wrong or making any mistakes. Just look at the first quote from Mr. Haldane.
If they are to be believed, the Japanese Model for responding to a financial crisis is superior to the Swedish Model. The former socializes the banks’ losses, results in decades of economic malaise and social unrest with ever widening economic inequality as well as lets bankers continue to collect their bonuses. The latter makes bank investors absorb the losses, results in rapid economic recovery and sends bankers to jail.
Heck, the economics profession has even doubled down on defending the indefensible and embraced lying to the Queen of England in response to her asking why economists didn’t see the crisis coming. Lead by Paul Krugman, some portion of the profession argued no one could expect them to predict the date a crisis would start. She didn’t ask them to predict the date. Another portion of the profession argued for “we are a bunch of bright people who could never have imagined a crisis could happen”. Apparently any study of the Great Depression was missing from their education.
Of course, the honest answer was in all of the then existing economic theories, financial crises comes from sunspots (see Bank Runs, Sunspots and the Information Matrix).
The public has figured out Economists lied to the Queen and don’t have a theory, let alone a story, to explain why the financial crisis occurred. The lack of trust in Economists and central bankers reflect this.
Regular readers know the starting point for Economists and central bankers regaining trust is the Information Matrix. A matrix that wasn’t in the Econ 101 textbooks the current generation of central bankers and Economists used, but that solves many of the problems they are wrestling with today. Problems like where do financial crises come from? Where does trust in the financial system come from? Why central banks saying black box banks passed a stress test does not promote confidence in the financial system? How do we end Too Big to Fail?
|Does Seller Know What They Are Selling?|
|Does Buyer Know What They are Buying?||Yes||No|
|Yes||Perfect Information||Antique Dealer Problem|
|No||Lemon Problem||Blind Betting|
If you had to build a financial system, which quadrant of the Information Matrix would you build it in. I think we can all agree it would be the Perfect Information quadrant. It just so happens this is also the only quadrant where Economic and Finance theories actually work.
The global financial system was designed around the need for information in this quadrant. The Congressional Oversight Panel described how this was achieved:
From the time they were introduced at the federal level in the early 1930s, disclosure and reporting requirements have constituted a defining feature of American securities regulation (and of global financial regulation more generally).
President Franklin Roosevelt himself explained in April 1933 that although the federal government should never be seen as endorsing or promoting a private security, there was ―’an obligation upon us to insist that every issue of new securities to be sold in interstate commerce be accompanied by full publicity and information and that no essentially important element attending the issue shall be concealed from the buying public.’
It is the government’s responsibility to make sure nothing is hidden from investors.
The failure to adhere to this responsibility is effectively what Mr. Haldane claims as his most untrustworthy action. But then he claims doing so worked out for the better. A claim that apparently hasn’t withstood the Public’s smell test.
Equally importantly, the government is given a thou shalt not commandment. It should never be seen as endorsing or promoting a private security. What exactly is the announcement of the bank stress test results if not this endorsement?
Why shouldn’t the government endorse an investment? Because it creates the moral obligation to bail out investors from losses on this investment. Hmmm…. can we say Too Big to Fail.
Now remember Andy’s comment about being selective in what is said so as not to make the situation worse. How could anyone trust the central bank’s reported stress test results give an accurate portrayal of the banks tested?
According to Mr. Haldane, central banks covered up for the banks in 2008/2009. What would make anyone think central banks are not covering up for the banks today?
In addition, remember Andy’s comment on experts are wrong on occasion. That pretty much sums up why relying on central bank lead macro-prudential regulation to prevent a financial crisis is a terrible idea. When these experts who didn’t see the last crisis coming fail, and as Andy said, eventually they will fail, a financial crisis follows.
As Andy, Economists and central bankers are finding out, once you chose to deceive and not tell the whole truth, that is the end of your being considered trustworthy.