Perhaps the peak of PhD Economist Derp occurred when several Nobel prize winning Economists publicly calling for the creation of the Office of Financial Research (OFR).  These Economists were a Who’s Who of the Economists who created much of the theoretical framework for modern finance.  They asserted OFR would operate like the weather service.  It would warn regulators about potential risks to the financial system so these risks could be addressed before a financial crisis occurred.

What a shining example of complete PhD Economist Derp as it completely ignores how the global financial system is designed and where financial crises come from!

Bank lobbyists recognized OFR for what it really was.  A chance to use the Dodd-Frank Act to bury the idea of restoring transparency to the opaque corners of the global financial system.  In effect, OFR was where the bank lobbyists sent transparency to die.

A recent Wall Street Journal article by Ryan Tracy looks at how and why OFR has accomplished virtually nothing.

To say this was predictable is an understatement.

Not only did I predict it, but I said this would happen when I engaged in dozens of conversations with the individuals who were actively promoting OFR.  One of my reasons for developing the Information Matrix was to show these individuals why their design of OFR doomed it to failure.

Information Matrix

Regular readers know financial crises emerge from the Blind Betting quadrant of the Information Matrix.  It is in this quadrant the value of securities is based on a story told by Wall Street.  Investors can Trust this story, but because of the lack of disclosure they cannot Verify the story.  As a result, when the story is called into doubt, there is no logical stopping place in the downward valuation of these securities other than zero.  Investors know this.  They respond by engaging in “bank runs” to try to get their money out when the story is called into doubt.  It is these “bank runs” financial regulators see as a financial crisis.

The mission of OFR is to scan the global financial system and identify risks that could result in “bank runs” that threaten the stability of the financial system.  How exactly is OFR suppose to scan the Blind Betting quadrant?  How is it suppose to identify the risks hiding in the opaque investments that make up the opaque corners of the global financial system?

It cannot.  There is simply no way for OFR to perform this task.

What OFR can do is play the role of the drunk looking for lost car keys under the street light because that is where the light is.

One of the reasons for starting the Transparency Label Initiative was to “help” OFR succeed.  While OFR cannot see the buildup of risk in the financial system, if it used the Initiative’s labels it would be able to see the buildup of securities where the risk is hidden.  This would dramatically improve its ability to warn about risks that threaten financial stability.