A decade after the opacity driven Great Financial Crisis began, the only significant theoretical insight into opacity has been the Information Matrix (the Matrix adds the missing piece to the foundation of Economics) and the only significant action taken to address opacity in the financial system has been the Transparency Label Initiative (the Initiative turns opacity into an asset class).

In case you think I am just talking my book of business, let’s take a quick trip back to the financial crisis and look at the areas of the global financial system that suffered significant stress.  Remember, these were the segments where everyone was wondering what losses were hiding there.  These segments prominently featured the banks, including shadow banks, and structured finance.

What did these segments of the global financial system have in common?  They were and still are opaque.  Despite a tremendous amount of sound and fury, the regulators have managed not to transform these segments so they are now transparent.

Wait a second!  What about bank stress tests?  Beyond annually renewing the pledge to use taxpayer funds to bailout the banks, the stress tests don’t increase the banks’ transparency.   Before and after the stress test results are announced, investors don’t know what the banks’ current exposures are.  If you don’t know a bank’s current exposures, you are not in a position where you can assess the risk and solvency of a bank.  Before you object to this statement, consider there is a reason bank examiners look at current exposures and not what was on the balance sheet 6 months ago.

Wait a second!  The stability of global financial system has been greatly enhanced including new macro-prudential regulators and increases in bank capital requirements.  It is possible two fundamentally flawed ideas coming together will enhance stability, but that is a really bad bet to take.

The Information Matrix shows financial crises originate in the Blind Betting quadrant.  It is here investors bet on opaque securities based solely on a story Wall Street tells.  When the story is called into doubt, these securities plunge in value.  There are no “facts” to create a logical stopping point in the price drop other than zero.  Given this is where financial crises come from, what are the macro prudential regulators doing to bring transparency to this area?  Nothing.  Instead, like the drunk who is looking for his car keys under the street light because that is where the light is, macro prudential regulators are looking for risk in many of the transparent parts of the global financial system.

During the acute phase of the Great Financial Crisis, bank regulators showed they are unwilling to use bank capital to absorb losses.  Their refusal was driven by the concern a decline in bank capital would signal there were problems at the banks and this would make the crisis worse.  There is no reason starting from higher capital levels should end this concern.  To make matters worse, everyone knows bank capital is an accounting construct.  As a result, it is meaningless.  I keep wonders what part of a “larger meaningless number” is still meaningless regulators and Economists don’t understand.