From: Jurriaan Bendien (adsl675281@TISCALI.NL)
Date: Wed Oct 17 2007 - 13:25:41 EDT
Previously, I pointed out that the sub-prime crisis was in dollar terms not sufficient to generate a recession, contrary to unresearched Marxist impressionism spread in the leftist press, which predicts seven recessions out of every one that actually happens. Mr Bernanke agrees with me, and notes explicitly: "The U.S. subprime mortgage market is small relative to the enormous scale of global financial markets". http://www.federalreserve.gov/newsevents/speech/bernanke20071015a.htm But he goes on to ask: "So why was the impact of subprime developments on the markets apparently so large?" His answer is that: "To some extent, the outsized effects of the subprime mortgage problems on financial markets may have reflected broader concerns that problems in the U.S. housing market might restrain overall economic growth. But the developments in subprime were perhaps more a trigger than a fundamental cause of the financial turmoil. The episode led investors to become more uncertain about valuations of a range of complex or opaque structured credit products, not just those backed by subprime mortgages. They also reacted to market developments by increasing their assessment of the risks associated with a number of assets and, to some degree, by reducing their willingness to take on risk more generally." In other words, the sub-prime crisis fueled anxieties which, for the moment, reduced confidence among financiers, which impacted on the trade in securities among other things. This is true, and I noted its conservative effects in what I said previously. However, Mr Bernanke thinks there may be a happy ending: "To be sure, these developments may well lead to a healthier financial system in the medium to long term: Increased investor scrutiny of structured credit products is likely to lead to greater transparency in these products and more rigor in the credit-rating process. And greater caution on the part of investors seems appropriate given the very narrow spreads and the loosening in some underwriting standards seen before the recent episode began. In the shorter term, however, these developments do imply a greater measure of financial restraint on economic growth as credit becomes more expensive and difficult to obtain. http://www.federalreserve.gov/newsevents/speech/bernanke20071015a.htm The problem there is that, with growing financial intermediation, you simply cannot tell anymore where the money is coming from or where it is going, or what prices and valuations really should apply. Growing financial intermediation means that the relationship between producer and consumer, buyer and seller, becomes more opaque and less transparent. "Today, "way less than half" of all securities trade on exchanges with readily available price information, according to Goldman Sachs Group Inc. analyst Daniel Harris. More and more securities are priced by dealers who don't publish quotes. As a result, money managers can no longer gauge with certainty the value of some assets in mutual funds, hedge funds and other investment vehicles -- a process known as marking to market. An official at the Securities and Exchange Commission said recently that some bond mutual funds might be using outdated or unrealistic prices to value their portfolios." (Pulliam, Susan, Randall Smith and Michael Siconolf. "U.S. Investors Face An Age of Murky Pricing: Values of Securities Tougher to Pin Down." Wall Street Journal (12 October 2007): p. A 1. (cited by Michael Perelman) Better to be safe than sorry, so, "Over the weekend, the Treasury hosted talks to help a group of banks set up a $100 billion fund to buy troubled assets in exchange for new short-term debt. The banks hope to have the fund up and running within 90 days. According to people familiar with the matter, the Treasury hopes the plan, which could be announced as early as this morning, will jump-start demand for commercial paper, which froze up this summer amid the credit crunch that roiled global financial markets." (Rescue Readied By Banks Is Bet To Spur Market By Carrick Mollenkamp, Deborah Solomon and Robin Sidel, Wall Street Journal October 15, 2007; Page A1)." (cited by Marvin Gandall). ($100 billion, though a very substantial sum, is still not very large, relative to aggregate debt structure. It is especially a "confidence-assurance" exercise. It remains true though that, as I said in the Brenner debate, the state nowadays is unable to bail out all capitalists in a severe credit crisis, and therefore, the cooperation of private financial institutions is absolutely necessary, beyond any confidence-building). Meantime, the AFL-CIO for its part is establishing a telephone helpline in the US for workers with mortgages. Why? "Nearly half of homeowners with adjustable rate mortgages don't know exactly how they work, according to a national survey released Monday by the AFL-CIO. Three-fourths also couldn't say what their new monthly mortgage payments will be after their interest rate resets, in the survey of 500 homeowners who took adjustable rate mortgages from 2002 to 2006. "We decided to take a look at how people are feeling and what they understand, and you can see from the survey they don't understand a lot," said Scott Treibitz, spokesman for the labor union, which also announced a financial help line for members of any union troubled about their mortgages." http://news.tradingcharts.com/futures/4/5/99237854.html What happened to the utility-optimising, rationally self-interested economic actors and "consumer sovereignity" here? Well, the point is really this. The dubious mortgages are being sold not "despite lack of transparency", but because of lack of transparency. If there was transparency, they would not be sold, or sold less. The sellers therefore have no particular vested interest in transparency (actually, in many states it takes only a small investment to be licensed to sell mortgages, so almost anyone with the gift of the gab could enter this business to make money). That is really the weakness in Mr Bernanke's analysis. He believes that greater market transparency benefits all market actors, and that if you have more competition, transparency will increase. But in reality it is the lack of it, that enables cruddy products to be sold at all. What is missing in Mr Bernanke's theory, is any notion of systemically opposed social and material interests, who have a stake in witholding relevant information (even for the sake of not upsetting "market confidence"). Why is the notion of "transparency" used at all, instead of simply saying "a true and fair statement of the situation"? The reason is, that competitive capitalist private enterprise cannot exist without "business secrets", and is ultimately incompatible with a free sharing of information, never mind telling the truth. But there is more to it. If something is transparent, you can see through it. But this says nothing about what it actually is, that you see, that is a matter of interpretation. The concept of transparency therefore contains an ambiguity, insofar as you can in principle supply all legally relevant information, but in a way that specific users will not understand it anyway, because they don't grasp the meaning of it. In other words, transparency is not simply dependent on, or the responsibility of, the supplier of information, but requires also the user's interpretive skills, as noted in discussions about virtual reality. It is therefore never possible to prove definitely that transparency is sufficient or achieved, except by reference to users/consumers who currently "say" it is sufficient. That is just to say, that the concept of transparency is itself opaque, because "when is transparency really transparent"?. It is debatable, and can rarely be definitively resolved. The real reason for the popularity of the concept of "transparency" is, because it conveniently straddles a contradiction between "business secrets" and "user-friendly marketing information", which enables you to go anywhere with the concept. You can always say, that sufficient transparency existed, or that insufficient transparency existed, that just depends on your point of view. In turn, that neatly lets us off the hook from any discussion about what would be a "fair deal" in the given situation - a discussion that would require a specification of interests, rights and duties in that situation. In summary, if the interests of economic actors coincided, resulting in efficient co-operation, all would be transparent. It is precisely because those interests do not coincide, that matters are not transparent. Jurriaan
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