Since the Great Financial Crisis began on August 9, 2007, global policymakers have demonstrated you can have Democracy or Financial Opacity, but you cannot have both.

Unfortunately, global policymakers continually chose Financial Opacity.

How does financial opacity undermine Democracy?

Financial opacity made possible the fiscal and monetary policies that have been pursued over the last decade plus in response to the Great Financial Crisis.  These policies rewrote the New Deal social contract for the benefit of the 1% and bankers (recall the expression privatizing the gains and socializing the losses).  These policies benefitted the 1% by dramatically increasing inequality (stated goal of zero interest rate policies was to boost financial asset prices and trigger the trickle down effect).  Finally, these policies demonstrated to the 99% the system is rigged against them and for the 1%/bankers.  The ongoing resentment of the 99% is a natural reaction to these policies and is fueling the rise of Populism and a desire to get rid of the current system (out with Democracy and in with Autocrats).

How did financial opacity make possible these toxic policies?

Opacity allowed policymakers to save the banks by “foaming the runway” so loan losses would be taken over time.  This single act demonstrated the extent to which policymakers willingly rewrote the New Deal social contract and undermined Democracy.

Under the New Deal designed financial system, banks need the country they are headquartered in, but that country doesn’t need any of its existing banks.  So saving existing banks is suppose to be a non-starter as a policy response.

Part of foaming the runway was the government lying about the true condition of the banks.  Bernanke and Geithner would say they didn’t lie, but chose their words carefully when describing the stress test results.  Their semantics game makes no difference.  By misrepresenting the true condition of the banks, they undermined the legitimacy of government and Democracy.

I understand the message they wanted sent was invest in the banks.  However, this message violated the common sense rule governments are never suppose to make investment recommendations.  Doing so creates the moral obligation to bailout investors who invest by relying on the government’s recommendation.

The role for government under this common sense rule is to ensure investors have all the information they need to know what they own.  Of course, providing this disclosure definitely would have worked against the goal of saving the banks.

Foaming the runway included blaming the borrower for taking on more debt than they could afford.  Under the New Deal social contract, both the borrower and the lender had responsibilities.  The borrower was responsible for trying in good faith to repay the loan.  The lender was responsible for not lending out more than the borrower could afford to repay (there is a reason lenders ask for information from the borrower).  Reinforcing the responsibility of limiting how much the borrower can borrow, the lender was also held responsible for all losses on their loans.

But in 2008, the policymakers threw the existing New Deal social contract out the window and substituted a new contract.  Under this contract, lenders aren’t responsible for their bad lending decisions, but borrowers are responsible for taking on more debt than they can afford to repay.  (Excuse me, but it is nuts to think the vast majority of borrowers know how much debt they can afford to repay.  Student loans are a classic example of this.  Knowing how much you can afford to repay requires knowing both what job and what salary you are going to have after graduating from college.  Information the borrower could not possibly have when they take out the loans.)

Finally, saying the lenders aren’t responsible allowed policymakers to protect the bankers from going to jail even when they engaged in fraud.

Virtually every action the policymakers have taken since the crisis began has rewritten the social contract to the detriment of the 99% and undermined Democracy.

Consider what would have happened if there had been transparency.

Market participants would have seen who was holding the losses and treated the banks holding these losses as if the losses had been recognized.  So delaying recognition of the losses would have served no useful purpose.  At the same time, bankers would have been held accountable for breaking the law.

Today, policymakers still face a choice between Democracy and Financial Opacity.  If they want Democracy, transparency has to be restored to the financial system.