Saturday, December 06, 2008

Unusual Suggestions: Radical Transparency


These quirky missives about “what I’d do if president” are mere droplets in a tidal wave pouring from columnists, sages, bloggers and citizens.  So what’s special?  These proposals - ranging from economics to domestic and foreign affairs, to politics - were chosen to be unusual, different... even weird. It's a promise, or I’ll eat my hat. (Part of a 12/08 series of “unusual suggestions for America and the Obama Administration.”)

Suggestion #3:  Ensure that  world money flows can no longer be invisible.
Our present economic calamity has many roots.  Here are just a few.

- The surge of U.S. “sub-prime” mortgages, spurred by both easy credit and bankers who forgot their basic business -- close management of lending.

- Lax regulation of financial “innovators” -- starting in the City of London -- who turned “investment products” into a huge pyramid of grotesquely leveraged wagers and counter-wagers, only tenuously connected to the real world... leading envious financiers elsewhere to lobby for a chance to join the fun.

- A U.S. leadership caste that frittered away the reserves we would need to save, against harder times, because of a dogmatic belief -- despite relentless disproof -- that deficits lead to balanced budgets and that a lavishly subsidized aristocracy will naturally invest and manage well.

- A sixty year worldwide assumption that the American consumer can forever propel economic growth, while saving nothing at all.

- A world system that’s supposedly based on open markets, filled with knowledgeable producers, consumers and policy makers who make rational decisions -- but where, in fact, nobody even knows how much money there is, where it is, or even who owns much of the planet’s wealth.

The last of these factors may be the least discussed, but it goes to our core assumptions about capitalism.  Even the libertarian, Nobel-winning economist F. Hayek said that markets without information-openness will be lethally compromised. The poor worker and middle class investor and company manager can only strike their “best-deals” if they know what’s going on.  And when that implicit contract fails, capitalism loses any moral basis, whatsoever.

In order for either governmental or capitalist solutions to work, the clouds of needless secrecy simply have to part.  Opposing this is not a matter of “left” or “right,” but of dangerous hypocrisy.  It is mendacious (though human) to proclaim fealty to markets, while shrouding what others need to know, in order to play the same game.

Of course, you would expect this stance from the author of The Transparent Society.  So let’s be clear that I’m not attacking intellectual property or the basic confidentiality that businesses need, to operate.

Still, consider. Right now the world’s governments are under pressure to create a new structure of regulations and regulators -- a “new Bretton Woods” -- to supervise international finance. Perhaps even a nascent World SEC or World Fed. 

This is only the latest step in a trend -- a creeping ratchet toward backdoor Planetary Government -- that may be necessary for a tightly interlocked 21st century world... but the process certainly merits a lot more open and skeptical discussion than it is getting. Left unexamined, it may lead to the worst possible combination -- deteriorated national sovereignty and competence, plus a bureaucratic “world government” that is both overweening and unaccountable.

Above all, those who object to such planetwide regulation must offer an alternative. And there is only one that would empower markets to “police themselves.”  Especially now that the "trust us" CEO clade has proved utterly untrustworthy.
Far greater levels of transparency.

Might this extend to a consensus decision to find out, at long last, who actually owns what, all over the globe?

Or to trace corporate management so that responsibility (the ‘buck’) actually stops at real people?

Or for America to call-in its paper currency for responsible replacement, as every other nation has done?

Or to list, in detail, who has benefited most during the gilded first decade of the Twenty-First Century... the Naughtie Oughties? Or even to require -- in exchange for any bailout money -- the kind of open books that any lender would require, as part of due diligence?

These would be denounced as radical ideas, of course.  But note, there is nothing inherently socialistic or confiscatory about any of them. Or indeed, any move toward simple transparency.  In fact, the resulting boon in recovered tax revenues -- from evaders alone -- might allow tax rates on legitimate individuals and enterprises to fall. A win-win of staggering magnitude.

Any American administration that is serious about the future must make transparency -- even somewhat radical transparency -- a paramount goal.



Followup:

Transparency International does tremendously important work, helping shine sunlight patches of malignant corruption all over the world. By some estimates, graft may slice away a quarter of potential economic progress -- and much more in parts of the developing world. TI publishes an annual Perceptions of Corruption index that highlights which countries are perceived by outsiders as getting -- or desperately needing -- clean government... and where they don’t.

This year's list covers 180 countries and autonomous territories, with the country considered "cleanest" ranking first, and the country perceived as most corrupt placing 180th. It finds Denmark, New Zealand, and Sweden in a three-way tie for the cleanest reputations, with Singapore just behind. Somalia beats Iraq and Burma for the worst. The United States ties with Japan and Belgium for an unremarkable 18th place,* just below Ireland and the United Kingdom and just above St. Lucia, Barbados, and Chile.

A scan of this list should convince any reader that the whole world would benefit, if this matter got top priority. Let there be no doubt that it will be difficult. Just witness the chaos in Mexico, where a brave administration is attempting to wean its bureaucrats and police and other public servants off a generations-old tradition of mordita graft and omerto silence. And this is just a taste of what might happen, if the world's true money interests were ever to fear light shining upon them. It is going to be really hard.

But it is the one thing that might ensure civilization through the middle of the 21st Century.


Continue to the next suggestion in this series...

16 comments:

B. Dewhirst said...

This is where you should have brought up invading Switzerland et al. again, right when governments need those tax revenues the most.

David McCabe said...

Recommended books on world government? Thanks.

JackRing said...

The value of money is not in its quantity but in its velocity and route. If money flow is visible then what is there to govern, thus who needs a President?

Of course you could start by making the President's money flow visible.

Duncan Cairncross said...

Absolutely - this is the way forwards
We NEED to know who owns everything

This would clarify a ton and also get the third world rolling

Alex Tolley said...

Brin: "The poor worker and middle class investor and company manager can only strike their “best-deals” if they know what’s going on. And when that implicit contract fails, capitalism loses any moral basis, whatsoever."

Perhaps is is about time that everyone in a company is aware of what everyone else is earning? This might at last make pay inequality start to disappear, especially between men and women. It would also expose the crony deals for favored employees and everyone could see the overpaid deadwood employees who get by using political skills. It would help prevent the usual game playing by managers at annual review times who pretend that you are getting a special raise of X% above the average when no such thing is happening at all. No doubt there are many downsides to full compensation transparency, but in my experience, these are often bogeymen raised to ensure the status quo that allows more control of employees at all levels.

Woozle said...

Several weeks ago, I brought up the idea of "transparentizing" corporate money flows (as a preventative measure for this sort of mess) at a small family gathering where one family member is a tax accountant by trade.

The family member in question objected to the idea, apparently due to the practical impossibility of consolidating data across all the different accounting programs currently in use (including some very high-end specialized software upon which large companies depend heavily), each of which uses its own proprietary file/data format and whose authors have no financial incentive to support alternative formats (see vendor lock-in).

I tried to propose that a little pressure from above -- perhaps by requiring that US corporations (at least), or corporations doing over a certain volume of business in the US, be required to deliver their accounting data (not just report documents and summaries) electronically in some kind of standard format -- but the conversation got derailed at that point, so I wasn't able to determine whether he thought this was a good idea.

(Vendor lock-in ought to be illegal, IMHO, but I'm not sure how one would go about legislating this without causing worse side-effects.)

Woozle said...

Oh, and VDARE -- whose intense anti-immigrant stance I dislike but which sometimes talks sense on other issues -- seems to be thinking along similar lines. (I just noticed this entirely by accident, clicking on a different feed than the one I meant to look at.)

Tony Fisk said...

Send Obama a copy of Semler's book 'Maverick' or 'the Seven Day Weekend'?

Semco sounds like an 'interesting place': Open accounts. Complete wage transparency and assessments. You set your own work hours and salary (the flip side being that the rest of the team decides whether or not they can afford you on the budget they've got)

Woozle: you don't need to tell me about proprietary accounting systems! I have been struggling with one for a couple of years. It's vendor happens to share a name with a local quick-setting cement company. I'm not sure which version we have.

Enterik said...

As a risk-averse, expected utility-maximizer, I can say that the market choices I experience seem explicitly designed to obscure any sense of information richness I seek to accrete.

For example, it seems that as soon as Consumer Reports has published the results of an extensive comparison of various models, the producers change the model numbers and discontinue the CR value choice. I am left to ponder the meaning of model numbers that seem close, but as consumer reports often demonstrates assuming comparability is a misguiding notion.

[/rant]

Woozle said...

Enterik: The slight changing of model numbers has been a problem for at least a couple of decades; I remember running into that same annoying practice (after having used CR to research a product) with regard to audio equipment (cassette recorders and such) in the early 1980s, and repeatedly thereafter.

Bizarre that they would discontinue the top choice, though. Are they simply unaware of CR's choice, or does CR have so little influence on the marketplace that it's more important to keep the model numbers changing? And, really, why is it so important to do that? Are there good reasons for it, or just some meme that has been passed down from marketing expert to marketing expert since time immemorial?

Anonymous said...

Transparency can't but help wherever it is applied. There were a few business improvement ideas in the past that encouraged transparency with employees, and most results showed benefit to all parties.

Can't help but point to this example of bottom to top transparency:

http://www.youtube.com/watch?v=m3Fu4YVH8nA&eurl=http://www.theagitator.com/

Gilmoure said...

Looks like the medical industry could use some oversight as well.

Weak Oversight Lets Bad Hospitals Stay Open

occam's comic said...

My advice to Obama,
Kill broadcast TV and radio, in Jan 2010 and replace it with a free (to the user) broadband wireless internet. This does three things
one it puts broadcast TV and radio programing into its rightful place, a part of the internet on equal footing with rest of the internet.
Two, it stimulates the economy in the short run and transforms it in the medium run.
Three, it marks the beginning of a new stage in social evolution in which every person has access at all times to an internet that is ever growing in capabilities.

Robert said...

As part of my job abstracting articles, I just came across a smoking gun for the current financial mess we're in: second-lien loans. I'm reading through this "Financial Executives" article from 2006 and at the very end it mentions how the failure of a couple hedge funds and a recession could cause a market shakedown. Sort of like what we've been witnessing, true?

So much for blaming poor minority homeowners for this mess. The article is "Second-Lien Lending Rides a Gusher" by Jeffrey Marshall in the September 2006 issue of Financial Executive magazine.

Rob H.

Anonymous said...

Sorry, but this is absurd. David Brin is often insightful, but when he starts discussing econmics, it's time to tune out.

The problem with the global financial meltdown wasn't transparency. The information was all right there out in the open in the balance sheets on all the loans and in all the corporate statements, just as it was with Enron.

The problem was that the financial boys had created debt instruments so phenomenally complex that no one could understand them. And I mean no one. You folks do realize who was creating all these new-fangled CDOs and CDSs, don't you? Underemployed ex-particle physicists. Some of the smartest and most mathematically sophisticated brains in the world got hired by Wall Street in the 1990s to create this stuff, and absolutely no one could understand what these new-fangled derivatives would do under extreme financial conditions. No one. These world-class physicists and mathematicians created financial instruments of such staggering complexity that their interactions passed far beyond human understanding.

That's the problem. It's not theft, or fraud, or some giant scam...the credit rating agencies genuinely believed that only 5% of mortgage holders would default. Why? Because the collaterized debts had been sliced up and reallocated and balanced with options in such complex and sophisticated ways, that everyone thought they were safe.

"How could anyone possibly believe that?" you ask.

Simple.

Take a look at the insurance industry. There's some finite chance that a 757 with 350 passengers on board will crash into an apartment building, killing hundreds of people and causing many millions of dollars of damage. (A figher jet just crashed into a house in San Diego, so this stuff does happen, albeit infrequently.) But 757 flights take off every day, despite the fact that occasionally, passenger jets DO crash. The risk is divided up and balanced out, with the primary life insurance company and the primary property insurance company distributing its risk via reisurance, so that the risk is chopped up and divided out and spread around to the point where even if a 757 does crash, it won't destroy the insurance companies and won't put the airline into bankruptcy.

Banks and mortgage companies merely did the same thing with their CDSs and CDOs. Now, mind you, I'm not defending what they did -- it was delusional and foolish and ultimately based on very poor understanding of statistics and risk assessment, and founded on a drastic misunderstandng of the feed-forward loops possible in complex systems. But I'm pointing out that the global financial meltdown wasn't caused by mustachio-twirling villains who plotted to rob the innocent populace and get away with the loot before everything crashed.

The financial meltdown was caused by world-class math whizzes and financial geniuses who created a system so complex it ultimately blew up.

Essentially, what happened is the same thing as Microsoft Vista. That OS is a trash. It crashes on bootup. It's so complex it doesn't work. But Microsoft didn't set out to create a worthless unusably complex crash-prone piece-of-junk operating system. The OS just spiralled out of control and got so complex that it became unworkable, and regularlly blackscreens and dies on you.

Same deal with the global financial system.

Now, you may say, "But surely it was unethical for mortgage companies not to realize the risk involved."

Here's the problem with that claim -- we all carry on in the face of immense crazy risks, and we do it every day. In fact, many millions of us do far worse than the mortgage companies and banks did.

Example: Florida.

Take a look at the stats on the 1930 hurricane that hit Florida. It was a monster. It devastated the state. And we're overdue for another hurricane of that magnitude, especially with global warming. Yet millions of people ahve built fabulous amounts of expensive property in Florida...and when that monster hurricane hits (and it's overdue), there will be so many hundreds of billions -- perhaps trillions! -- of dollars of property damage, that whole swaths of the American insurance industry will go broke. A huge part of the Florida landscape will turn into New Orleans after katrina... there just won't be money to rebuild. It's totally irrespnsible. It's crazy. It's unethical. Yet...millions of people have built expensive homes and commercial properties smack dab in the path of a new monster hurricane, that we know will hit FL someday soon.

So why isn't anyone raising a hue and cry?

Example 2: San Francisco.

Take a look at photos of the 1906 San Francisco earthquake. There's even film online of the fire afterwards! I looks like Hiroshima after the A-bomb.

We know Frisco is overdue for a monster quake. We know a Big One will hit...sometime soon, too, most probably within our lifetimes. We're overdue for a huge Frisco quake.

Yet millions of people continue to build and live there, and we as a society blithely ignore the inevitable onrushing catastrophe in the ruins of what will be some of the most expensive charred cinders in a wasteland formerly known as "San Francisco."

Folks, it's human nature. That's what I'm saying. Human beings are very poor at dealing with statistics. Show someone a statistical probability that eventually some huge calamity will wipe out all their gains, and if that same person makes small gains every day with no obvious indication of catastrophe...it's just human nature to keep on tempting fate, to keep on doing what you're dong despite the statistics.

We do it every day, with examples like San Francisco and Florida, and that's why so many bankers and mortgage companies did the exact same thing with subprime loans and CDSs and CDOs and all the rest of that stuff.

Sorry, Brin, but the answer isn't transparency. The system was plenty transparent, just like Enron. The fact is that Enron published everything it did. Lack of transparency wasn't the problem at all. The problem was that clever people created interacting feedback loops of financial instrumetns so complex that no one, absoltely no one, could possible understand their interactions...

...And then everyone took a look at the cumulative statistical probability that someday, somehow, it would all eventually blow up in a giant financial meltdown, and people did what they always do in such circumstances: they shrugged and said, "Well, hasn't happened yet."

It's tempting to blame the financiers and quants and mortgage repackagers, but the reality remains that we live amid a plethora of statistical probabilities that horrible but statistically unlikely things will happen to us. We fly on jet planes, we drive in cars, we live in condos on the Florida coast, we visit San Francisco...and we know it's technically possible that our plane could crash or that a head-on collision with another car woudl decapitate us, or that another 1930-type monster hurricane would slam into Florida this year, or that The Big Quake could level Frisco...

...But we ignore those statistical certainties. We know a giant monster quake will level Frisco. It's just a matter of time.

Yet everyone ignores the danger.

Why?

Are people evil? Is there a giant conspiracy? Is everyone plotting to destroy Frisco? Is it a huge plan to steal lots of money, a plot by Frisco land developers?

No, it's just human nature. We know Frisco will get levelled by a Big Quake eventually, and probably soon...yet we ignore that certainty and keep on living our lives, ignoring the certainty that Frisco will someday soon get turned into a burning field of rubble.

Just as everyone ignored the onrushing certainty of eventual financial collapse in the subprime mess, and just as everyone today drives around in their Hummer with nary a worry in the world, now that gas prices have plummeted back down below $2 per gallon.

It's human nature. And more transparency won't help. We know the stats on a Frisco earthquake just as we know the stats on a FL giant hurricane, just as every knew the stats on the subprime mortgage mess. Humans just don't think the way statistics require us to think in order to deal with them. We see a statistic that says "sometime in the next 20 years, you will suffer a catastrophic loss, but the probability it will happen today is 1 in 10,000" and we shrug. We just ignore it. It's human nature.

Woozle said...

Anonymous: "The problem with the global financial meltdown wasn't transparency. The information was all right there out in the open in the balance sheets on all the loans and in all the corporate statements..."

You're totally missing the point.

The point is not that transparency will help us understand these financial instruments -- although I'd place a small bet that I could, given sufficient transparency.

The point is that transparency would help us spot when things are getting too complicated to be safe. The problem with the balance sheets and statements is that the details are not all there; all that is there is what the corporation is claiming.

Did you have a point to make, beyond that? Let me know if I should read the rest of the essay.