It may be that “a few bad apples” got the ball rolling on what has turned into a massive international financial disaster. Or, it may be that a few bad apples got their names in lights, while the entire system conspired unwittingly in a spectacular collapse. Either way, the best expression of the problem might be to say that markets have stopped working, in part, because they have been comprehensively modified to stop working like markets.
With capital vanishing, nearly $7 trillion in stock losses in just a few months, and banks refusing to lend even the tens of billions they were given precisely to lubricate the lending process, we are facing a crisis of confidence and an inability to conceptualize shared interest. The idea that self-interest motivates markets somehow developed, irresponsibly, into the idea that self-interest is more important than the functionality of market dynamics.
With ever-larger banking interests concentrating power in fewer and fewer hands, they also began to rely on mystical assumptions about the wealth-generating power of certain financial risks. The obscurity of those financial gambles, the need to believe in their power of wealth-expansion, allowed financial institutions to use questionable deals, with even more questionable projected rates of return, to paper-over already measurable under-performance, both in their own businesses and in the markets generally.
The underlying problem in the system —which allowed banking institutions to hide bad debt in bundled assets, and resell it to trading partners who may not have been given full disclosure on the unsustainable nature of much of the underlying debt— is transparency. A fierce individualist ideology led to a convenient clouding over of the reporting mechanisms intended to make financial institutions more ethical, more stable, and more useful to those outside their walls.
One of the major innovations that could take place —either by collaborative effort now in a time of crisis, or over time, as everyday operators within markets work to adopt the most intelligent organizational tools— would be a vast network of open information, regarding the management of investment funds, securitized loan holdings, and lending practices at a given institution.
This system need not reveal any personal private information about individual investors or bank customers, but would be made available to the public so that the maximum possible amount of information be searchable for anyone wishing to vet the claims of in-house analysts. Part of the goal would be to facilitate the proliferation of new smart-reporting economic databases, and to allow competing points of view on the most complex investment-backup schemes to have an open hearing, as based on credible information.
One of the side-effects of this sort of banking transparency network would be to reduce the motivation for wrongdoing, be it small manipulations or distortions on a grand scale, because by its nature, the system would privilege the more reliable sources of information. Banks with better reporting would be considered superior institutions, in terms of viability and therefore smart investment choices. Grandiose claims would be far less relevant, because they would be measured by their truthfulness, not their dimension.
For many reasons, this may seem like pie in the sky; for one: we don’t know what sort of computing technology could do the work necessary to parse such large volumes of information in a timely fashion. But computer speeds are accelerating rapidly, with the Roadrunner super-computer at Los Alamos achieving petaflop speeds—one thousand trillion calculations per second—and nano-chemical computing on the horizon, potentially magnifying the processing power of traditional microprocessors by thousands or even millions of times.
And, that’s still without touching on the controversial topic of quantum computing, in which everyday substances—like 12 ounces of coffee—can be turned into massive computational neural nets capable of working out problems that require trillions of calculations instantly. The complications there are too many to go into at present, and there is no reliable quantum computer that can be applied to something with so many legal implications as a banking system, at the moment, but the work is ongoing.
Cloud computing may be the first major speed-related improvement that can allow the beginnings of a true banking transparency network. This is a major undertaking, and will require a daunting philosophical shift for many in the financial industry, but armed with computers working at thousands of times today’s computers’ top speeds, spread out over a dispersed cloud-computing network, it would be possible to optimize processing speed, memory allocation, memory recall, informational back-up, time-keeping and matrix cross-referencing.
Bringing all those functions into a central reporting scheme, to make the transparency network a staple of financial regulation, that requires little aggressive intervention but provides significant meat for economists and analysts to chew on, and incentivizes the truth-telling component of in-house reports, could yield a major revolution in financial services and in the stability of banking institutions.
A secondary benefit from this system would be the ability of journalists to judge what sort of projects are getting traction at what institutions — for instance, is hypothetical Bank Q investing heavily in renewable resources, while volatility in the oil sector is hurting some of its competitors?
The openness of the information would be a way of allowing the private sector to actually police private banks, without that “voluntary due diligence” being a joke compared to blood-and-guts regulation. Stability, innovation, long-term thinking, would all be elevated by such a process, as markets begin to organize themselves around more reliable information and more complex, but verifiable, calculations of actual worth, investment strategy and wealth-creation.
No longer would major banks complain that they cannot get behind needed investments —like green infrastructure— because key analysts or their rivals won’t understand it and will portray them as dubious actors. Their financial credentials will be on display and verifiable, and they will not be tempted to or required by circumstance to concoct grossly irresponsible fictions to substantiate their claims about messianic speculation schemes. Such frauds will not only be hard to hide, they will be obviously counter-productive from the outset.
Hard work on projects worth completing will be a better measure of financial wisdom, and the mystique of markets might again be found in their functionality, not in their metaphysics.
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Originally published as part of The Hot Spring’s Quipu Economic Forum
The Poet Economist 