As I was reading Noah Smith’s excellent review of Richard Bookstaber’s The End of Theory, I realized every shortfall he finds with the book doesn’t apply to the Information Matrix or my efforts to restore transparency to the global financial system.

My experience is the Priesthood of the PhDs absolutely doesn’t want to hear why Economics failed or what needs to be added to their models from anyone who isn’t a PhD Economist.

It has taken the Priesthood of the PhDs a decade to finally discover, as Ben Bernanke observed, financial panics are important.  At the same time, the Priesthood lavishes praise on the recently released A Crisis of Beliefs:  Investor Psychology and Financial Fragility.

What the heck is wrong with the Priesthood?

The Information Matrix was introduced years ago!  It explains financial fragility, panics and investor psychology!  A simple Google search brings it up!  Why hasn’t the Priesthood of the PhDs already adopted it?  But I am getting ahead of how my efforts avoided every shortfall except one….

Noah begins his book critique with

it is about why macroeconomic theory was so unhelpful before, during, and after the financial crisis of 2008, and what might be done to fix it.

2017 seems like a bit late for such a book to come out.

I wrote a book, Transparency Games, that came out in early 2015.  The book brought together what I had given speeches on and written blog posts about since before the start of the Great Financial Crisis on August 9, 2007.

During the early 2000s, as the problems that would soon cause the financial crisis built up, it would have been helpful to have a book warning that macroeconomic theory was ignoring finance ….

My speeches and blog posts (see here) did in fact point out macroeconomic theory was ignoring finance.  I explained how Economists were assuming transparency existed throughout the global financial system and had confirmed this assumption using the flawed Efficient Market Hypothesis.

In 2008, as the system collapsed, policymakers could have used a book warning them not to rely too heavily on macro models to guide them through the crisis.

Again, I gave speeches and wrote posts on not only why policymakers shouldn’t rely on macro models, but what the right response to the financial crisis should be given the design of the global financial system.

In 2009 through 2012, as Western economies struggled to recover from the Great Recession, it would have been nice to have a book discussing why macro models offered few ideas for how to jump-start the economy.

Here too I wrote numerous posts explaining how to respond to the financial crisis (use the Swedish Model rather than Japanese Model).

As near as I can tell, the Priesthood of the PhDs wasn’t listening.  By the way, this includes Noah Smith.  Nowhere in his book review do you get the slightest sense Mr. Smith says to himself: “wait a minute, have I had any interaction with someone who had done the very things I think are missing in the book?”

In case you are wondering, Noah and I have had many interactions on Twitter.  However, because I am not a member of the Priesthood, the interactions were easily “forgotten”.

Anyhow, back to Noah’s critique.

the topic of how macro models failed—and how they did not—is a rich and interesting one. The most serious problem was the almost total omission of the financial sector.

Actually, the most serious problem was the omission of the Information Matrix.

Why?

It allows a 6 year old to understand how to prevent a crisis from occurring in the first place and how to respond if a crisis does occur.

Mr. Smith points out the overwhelming need for the Information Matrix.

The Information Matrix offers the theory to kill the other theories.  It effectively rewrites the foundation for much of Economics.

Unfortunately, rather than admit their ignorance, the Priesthood of the PhDs is still trying to convince themselves they know how the world works.  Hence, they reject a better path to wisdom.

The fact is

Information Matrix

	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

people like a good story.  This is true whether the investment Wall Street is telling them the story about is in the Perfect Information quadrant or in the Blind Betting quadrant.

The key difference between investments in the two quadrants is in the Perfect Information quadrant investors can Trust, but Verify Wall Street’s story.  In the Blind Betting quadrant, opacity (the absence of the necessary information) prevents investors from being able to verify Wall Street’s story.

Whether the story can be verified or not results in a vastly different response when Wall Street’s story is called into doubt.  For Mr. Bernanke, the cause of the valuation story being called into doubt is “news”.

In the Perfect Information quadrant, the story can be verified and the doubt generated by the news dismissed.

In the Blind Betting quadrant, the story cannot be verified.  Not only is the doubt generated by the news not dismissed, but the logical follow-up question arises:  is the investment worth anything?  This too cannot be verified.  Investors recognize this and, as behavioral economics suggests, naturally panic.  The result is a classic bank “run” to get their money back.