Have you ever wondered why shortly after the acute phase of the Great Financial Crisis ended transparency wasn’t restored to the opaque sectors of the global financial system at the heart of the crisis?  Power!

Power, as defined by international political economist Susan Strange, includes access to finance and the ability to craft the narrative for interpreting events.  In 2008, Wall Street had both and as a result was in a position to block the restoration of transparency.

As a recent Boston Review article put it,

power asymmetries shape our contemporary economy. …  “under conditions of perfect competition and information, there is no scope for power.”

This is a very important point.  In the Perfect Information quadrant of the Information Matrix, there is no scope for Wall Street’s power.  It is only in this quadrant Wall Street is the servant of the markets and not its master.

By creating opaque Blind Betting quadrant securities (like structured finance or bank debt and equity), Wall Street becomes powerful.  After all, these securities are valued based on stories Wall Street tells as there is no way to verify if the stories are true or not.

But asymmetries between different groups abound: who has the upper hand in bargaining for wages and employment; who has market power and who gets to compete; who can move across borders and who is stuck at home; who can evade taxation and who cannot; who gets to set the agenda of trade agreements and who is excluded; who can vote and who is effectively disenfranchised. Some of these asymmetries are traditional political imbalances; others are power imbalances that naturally occur in the market due to informational asymmetries or barriers to entry.

Please note in the financial markets opacity and informational asymmetries don’t always arise naturally.  Wall Street recognizes it makes more money selling high margin, opaque securities than it does selling low margin, transparent securities.  Hence, Wall Street has an incentive to create opacity and informational asymmetries.

Policies that counter such asymmetries make sense not only from a distributional standpoint but also for improving aggregate economic performance.

One such policy is disclosure.  In the 1930s, transparency was introduced into the global financial system so investors could know what they owned.  The result was improved aggregate economic performance for the next seven plus decades.

As for the Economics profession, Mrs. Strange’s definition of power and the policies it supports are difficult to fit into the Economists’ mathematical models.  In addition, as Jayati Ghosh noted,

It is no secret that mainstream economics has operated in the service of power. John Kenneth Galbraith noted in 1973 that establishment economics had become the “invaluable ally of those whose exercise of power depends on an acquiescent public.” If anything, economists’ embrace of that role has grown stronger since then. But it has also made the subject less relevant and reduced its legitimacy and credibility. Economists are no longer seen by much of the public to be asking the right questions or seeking to answer them with integrity.

This is easily seen as the Economics profession has ignored call for policies like the restoration of transparency across the opaque sectors of the global financial system that reduce power.

As a result, Economists have shown themselves to be members of the Opacity Protection Team.

The Opacity Protection Team is the classic embodiment of Mrs. Strange’s power.  Despite the fact bankers were responsible for the financial crisis, they were able to resist the return of transparency to the global financial system and a dramatic decline in both their financial and political power.