Opacity in the financial system has given rise to the return of populism.

In early 2009, the Committee to Save the Banks decided to “lie” about the condition of the Too Big to Fail banks.  In their own words, they subjected these banks to “rigorous” stress tests and pronounced them capable of surviving financial armageddon.

Everyone suspected this was a lie, but the opacity of the banks prevented anyone from knowing how big a lie it was.  In any event, the lie was overlooked at the time because Mr. Bernanke also announced the Treasury would put in as much capital as was needed to keep the banks solvent.

Several years later in one of his final speeches as Fed Chairman, Ben Bernanke acknowledged the lie.  He said at the time of the first stress test, the Fed did not have the information it needed to know if the banks passed the stress test let alone if they were solvent or not.  Instead, the Fed relied on the bankers self-serving assurances they passed and were solvent.  Mr. Bernanke did not see any problem with lying about the condition of the banks because he saw the stress tests as helping to end the acute stage of the global financial crisis.

Mr. Bernanke then went on to say the Fed still didn’t have the necessary information.  By implication, he and the Fed had continued lying when they announced the results of all the stress tests made prior to his speech.

A decade later this policy of lying about the condition of the financial system has shown a nasty side effect.  It has contributed to the rise of populism.

Stanford professor Anat Admati explained the linkage between lying and populism.

Despite reforms put in place after crises, bankers, politicians, and regulators consistently overstate the system’s health and the effectiveness of new rules…. As it stands, poorly-designed regulation continues to allow the largest institutions to borrow on privileged terms and remain opaque…

Shorter: everyone knows the government is lying and the bankers are personally benefitting as a result.  The absence of transparency means the bankers can continue to engage in misbehavior behind a veil of opacity and do so with government support.

The dysfunction of governance and policy is among the reasons that ordinary people are currently turning away from capitalism as a system. This situation fuels polarisation that can enable populist demagogues to manipulate public anger away from these issues.

Shorter: ordinary people are justifiably mad the financial system was changed to protect the bankers.  Ordinary people are looking for someone to end Wall Street’s business model of fraud and hold the bankers responsible for their misbehavior.

The Bush Administration didn’t do it.  The Obama Administration didn’t do it.  In fact, the Obama Administration made the situation worse.  It created Too Big to Jail when it came to bankers at the big banks.  It allowed millions of foreclosures to occur rather than force mortgages to be written down to the greater of what the borrower could afford or a third party would pay for the real estate.  Many of these foreclosures involved fraud on the part of the lender.

For ordinary people, this was made even worse by the PhD Economists.

Economic analyses do not always help if, as is often the case, they are obscure or seem to justify the system.

Justifying a system that post the decision by the Committee to Save the Banks has at its heart lying by the regulators about the condition of the financial system.

No wonder people are mad.  Nobody likes to be lied to particularly when it allows the bankers to take advantage of them.

Considering the PhD Economists failed to see the financial crisis coming, they were and still are quite vocal about what should be done in response to the crisis.  Yet none of their commentary has called out Mr. Bernanke or his successors for lying about the condition of the financial system.

Instead, much of their commentary has focused on unhelpful obscure analyses like how requiring banks to have more capital would have prevented the need for taxpayer bailouts or would prevent another financial crisis. Ordinary people recognize this might be true in theory, but it most definitely won’t be true in practice.  Ordinary people know no regulator is going to require opaque banks to take losses (reduce their book capital) if the regulator thinks doing so will make the financial crisis worse.  See the treatment of the Too Big to Fail banks during the acute phase of the Great Recession for proof of this.

One of the reasons I have pushed for requiring the banks to provide transparency is it ends the Fed’s lying about the condition of the banks.  When everyone can reproduce the Fed’s stress test (or conduct their own), the Fed would be called out immediately if it lied.  Hence, it will stop.

A second reason is transparency puts teeth into all the regulations.  When everyone can see if the regulations are being enforced or not, regulators enforce the regulations and bankers are held accountable for their misbehavior.  This deprives populism of a significant source of anger it needs to thrive.