Complexity, Opacity, and Permanent Crisis
posted by Frank Pasquale
Finance crises have baffled recently. Jon Corzine says he has no idea where hundreds of millions of dollars in MF Global money went. Judge Rakoff says the proposed SEC-Citi settlement would whitewash the megabank’s wrongdoing:
An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous . . . . In any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth.
And Sheila Bair suggests that we are still in the dark about critical aspects of the financial system:
Credit exposure reports are essential to make sure regulators understand crucial inter-relationships between distress at one institution and its potential to cause major losses at other institutions. This type of information was missing during the crisis. I know that many members of [Congress] heard the same arguments that I heard during the crisis — that bailouts were necessary or the “entire system” would come down.
But we never really had good, detailed information about the derivatives counterparties, bondholders, and others who we were ultimately benefiting from the bailouts and why they needed protecting. For those concerned about the potential “domino” effect of a large bank failure, it is essential not only to identify, understand, and monitor these exposures but also to limit them in advance to contain any possible contagion. I would urge the FDIC and FRB to complete this final piece of the living will rule as soon as possible.
I could give dozens of other examples of frustration at black box finance. The critical issue now is to realize that the opacity is not simply a natural feature of contemporary political economy, but persists by design to serve certain ends. Adam Haslett, author of the excellent novel Union Atlantic, has a smart essay in this vein:
One of the . . . effects of this dramatic rise of finance capitalism has been to steadily erode the general public’s ability to understand how the modern economy actually functions. Most people can understand what political forces are at play when a union demands higher wages and a company resists, citing foreign competition. We can choose which politician to vote for based on the position they take in such a conflict and have a reasonable sense of whose interests we are supporting by so doing.
But what happens when a politician says we must lend billions of dollars to undercapitalized banks or indebted countries in order to provide liquidity to the financial system, and if we don’t we will enter a depression or blow up the euro? The content, let alone the truth, of such a proposition is hard for most people to assess. . . .
And so people get angry: They get angry at bankers, at politicians, at entire countries for not budgeting more carefully, and at the press for failing to explain what’s going on in such a way that they can understand where their interests actually lie. Which brings us to our current moment. In the United States the bleak economy and the increasingly oligarchic division of wealth have led to protests on a scale not seen since the 1960s. . . .
It is little comfort to be able to step back and see that this crisis is part of a much broader and endemic instability in Western capitalism that continues to redistribute wealth upward, weaken democratic institutions, and concentrate power in the hands of the few. But it is this larger force, not the daily ups and downs of the current troubles, that will continue to shape our lives for decades. Even if we cannot at present see a path to reversing this force, we can at least endeavor to understand it more clearly.
The response to these protests could be a new New Deal, or a ratcheted-up security presence of drones and integration of “suspect” protester status into a burgeoning reputation industry. (As one of the commenters on an earlier post of mine said, apropos of the 5000 or so protesters arrested already: see how easy it is to get a job when you have an arrest record.) It gets harder by the day to imagine other paths back to order.