In 2008, trust in the financial markets, the reporting of news and our political system was shattered.  There is only one proven solution for fixing this problem and restoring trust: transparency.

Why?  With transparency, we can Trust the stories we are told by Wall Street or our government, but more importantly we can then Verify these stories are true.

In the climatic scene of A Few Good Men, Jack Nicholson’s character Colonel Jessup states

You can’t handle the truth.

What makes this quote memorable is everyone knows underlying our financial markets, our news reporting and our system of government is the very quaint notion we can handle the truth.

Unfortunately, since 2008, the truth and the effort to disclose the truth has been in incredibly short supply.

In 2008, the Committee to Save the Banks made the decision to save the banks rather than the 9.3 million homeowners who would ultimately go into foreclosure.  In order to save the banks, the members of the Committee (Hank Paulson, Tim Geithner and Ben Bernanke) offered up a false narrative about the crisis and the options available for addressing this crisis.

Where was the financial press when this false narrative was offered up?  Was it busy digging out the facts* so we could know if this narrative was true or false?  No.  It was busy repeating the narrative.

In fact, it is so ingrained in the financial press to repeat the Committee’s false narrative rather than dig out the facts that it continues to do so a decade after trust was shattered.

An example of facts the financial press has ignored:  Nobel prize winning economist Paul Krugman has written about how in examining the Great Financial Crisis it is clear it was the automatic stabilizer programs that prevented a second Great Depression.  Yet the financial press continues repeating the narrative saving the banks was necessary to prevent a second Great Depression.  Hmmm….

Another example of this failure to dig out the facts is the refusal  to ask the question did the US banks really need to be saved?  By design, every existing bank needs the US, but the US doesn’t need any particular one of its existing banks.  Do we really need Goldman or JP Morgan or Citi or Bank of America or …. ?  No!  If they were gone, both new and existing banks would emerge to service their customers.  Has the financial press taken the time to discover this fact in a decade?  No!

A final example of this failure to dig out the facts is the refusal to ask the question would we really have had to nationalize the banks if we didn’t bail them out?  By design, the combination of deposit insurance and the Fed as a lender of last resorts meant these insolvent institutions could have continued to operate and support the real economy indefinitely.  Without nationalizing them, they could have been wound down.  Has the financial press taken the time to discover this fact in a decade?  No!

Given the financial media’s willingness to continue its unquestioning promotion of the Committee’s false narrative about the financial crisis, one can completely understand why the media is now subjected to the “fake news” attack.  The reality is this claim is true.

But this post is not just about the failure of the financial press to do its job of looking for and disclosing the facts so a narrative can be verified or shown to be false.  It is also about how transparency is needed to restore trust.

Consider how policymakers responded to the financial crises with a blizzard of new prescriptive regulations.  There is no doubt regulation is now more extensive and intrusive.  There is no doubt these new regulations have been good for the financial regulatory complex.

Have these regulations restored trust in the financial system?

No.  The financial crisis and the policy response exploded the myth smart people can work out the right answers.  PhD Economists tend to be very smart.  Yet a decade after the crisis, they still don’t have a model to describe why the Great Financial Crisis occurred that actually explains the earthquake along the opacity fault line in the global financial system.  If you cannot explain why the earthquake happened, how likely is it the policies you push will actually address the underlying problem?  Not very.

There is substantial doubt as to whether these regulations are effective or if they will even be enforced.  For example, central bankers run stress tests and proclaim the banks can withstand financial armageddon.  Yet, the same central bankers resist any effort to have the banks disclose the information necessary so the market can confirm the results of these stress tests.  The market knows to be wary any time you cannot verify a story.

More importantly, everyone realizes the bank bailouts and new rules are really a “trust me” solution offered by governments and their financial regulators to the issue of trust and confidence.  However, people have lost trust and confidence not just in the banks, but in these very same governments and financial regulators.  Why?  Not only did they not prevent the financial crisis, the government and the financial regulators sided with the bankers who caused the crisis in pursuing a response to the crisis.

Regular readers know regulations are not a substitute for transparency.  Transparency is the foundation for trust and confidence in the financial system.  When investors have the information they need, they trust their assessment of this information (note: investors also trust the assessment if it is done by a third party expert they hire).  This trust reflects itself in trust and confidence in the financial system.

Restoring trust in the financial system is the first step to restoring trust in governments too.

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* Tweet on the role of journalists

Verified account 21h21 hours ago

Indira Lakshmanan Retweeted NBC News

Unfortunately, this has been entirely absent from the financial press since the acute phase of the Great Financial Crisis began in 2008.