Since the beginning of the acute phase of the Great Financial Crisis, people like the Pope have championed restoring transparency across the global financial system, but not individuals with PhDs in Economics or Finance.

Why?

Could it be these PhDs have never been exposed to it throughout their academic training?

In Transparency Games, I described using Amazon’s search function to look at the best selling introductory Economic textbooks.  None of them discussed transparency or the idea opacity was the ultimate market failure.

This finding didn’t come as a surprise to me.  The Information Matrix doesn’t appear in any of these textbooks.

Information Matrix

Without the Information Matrix, Econ 101 professors are left without a theory for where financial crises come from other than sunspots.  They are also left without an explanation for why the global financial system is designed the way it is and how transparency prevents financial crises.  Finally, Econ 101 professor are left without an explanation for how to respond to financial crises caused by Wall Street’s preference for selling opaque high margin securities.

But what about Finance 101?

The popular Finance 101 textbooks also don’t include the Information Matrix.  There is a whole lot of discussion about the securities market line and the capital asset pricing model, but very little discussion on what information an investor needs to be able to know what they own.  For the most part, the textbooks assume transparency.

When I talk about the Information Matrix with Econ 101 professors, they tell me it should be taught in Finance 101.  When I talk about the Information Matrix with Finance 101 professors, they tell me it should be taught in Econ 101.

Not surprisingly, it isn’t taught in either class.  But if it isn’t taught in the introductory classes, when is it taught?

Never.

Transparency has fallen into an academic black hole.

It shows.  There are countless peer reviewed articles in Economic and Finance journals that would never make it through the review process if the PhDs understood transparency.  A classic example of this is Gary Gorton’s work on informationally insensitive debt.  This debt doesn’t exist because of how the global financial system is designed.  Underlying the design is an explicit tradeoff.  Investors get disclosure of the information they need to know what they own and in turn they are responsible for all losses on their investment exposures.  As a result, all debt is sensitive to information.