MIT’s Kristin Forbes and Harvard’s Kenneth Rogoff recently observed risk has migrated beyond the regulatory perimeter into the shadows of the global financial system and it is from the shadows the next financial crisis will originate (see here and here).

Did these two stumble across the Information Matrix and its explanation of how financial crises always originate out of the shadows (aka, the Blind Betting quadrant)?  It certainly cannot be ruled out.

What is clear is both of them struggle with which financial entities are transparent and which fall into the shadows.

This is particularly true when it comes to the banks.  Both argue the banks are more transparent and safer.  Since banks are as opaque today as they were in 2008, there is no reason to believe this is true (fact:  unless you can assess a bank’s current exposures, you have no idea how much risk it is taking).

As for risk migrating to the shadows, the problem isn’t the level of risk, but the fact this risk is hidden and therefore not properly priced by the market.

Interestingly, neither calls for bringing tranparency to the shadows of the global financial system so the market can limit its exposure to these blind bets.  Instead, both want more regulation.  Pretending the regulators who didn’t see the last crisis coming will see the next crisis coming and take steps to head it off.