It's Not Liquidity Or Solvency That's The Problem: It's Transparency
from the a-lack-of-information dept
Last month, in writing about the financial crisis, I tried walking through the root causes of how the financial crisis happened and how to prevent it from happening again — and the point I kept coming back to was the lack of transparency. It wasn’t (as some people want to claim) “greed” or a “lack of regulation” that caused the problem, but bad information (though, some might blame that on greed and a lack of regulation). Aaron deOliveira points out that some folks are noticing the same thing, suggesting that the real problem these days isn’t a lack of liquidity in the markets, but a significant lack in reliable information. People just don’t know how much things are worth, and that’s a huge problem.
Last week, on the always excellent Planet Money podcast, there was a discussion about what money really is. Many people think that it’s a hard representation of value, but it’s not. As the podcast noted, money is a relationship. Take a listen to fully understand what this means, but it’s exactly right. Money is merely a relationship of trust between certain parties that enables trade. If I trust this piece of paper is worth a certain amount, I can do business with you. If I don’t trust that the paper or trinket you hand me is actually worth anything, then I will not do business with you, and your “money” is not money at all.
The problem that we’re experiencing today is that, due to a lack of clear and trustworthy information out there, no one is quite sure what anything is worth, and that makes any sort of trade difficult. Money only works when there’s a trusting relationship, and you only get that sort of trusting relationship when there is a reasonable flow of information to the parties involved, such that they’re confident that what they have (or what they’re trading for) has value. The problem over the last few months (or, for some, years) is this realization that the information they had was bad, and they could not trust it, and thus, the “relationship” that made thing valuable disappeared. Without this trust, plenty of things that do have value are being severely undervalued, because there’s no (or very little) credible information, and that’s leading to panic, because no one is sure what anything might actually be worth.
So, once again, we’re back to the situation where we were before: the answer should be more information, more widely distributed in a much more open fashion. We should all be demanding significantly more transparency both from corporations on any sort of investment they put forth as well as from the government who is shoveling dollars — but not information — into the market to try to deal with the problem. But, until it gets more information into the market, then the trust will not be regained, and the dollars they throw into the market will merely decrease in value, because there are not enough relationships built on trustworthy information.