Will this website report the truth of the truth?
Ransangan Ekonomi
I doubt it.
Saturday March 28, 2009
Transparency creates opacity
THINK ASIAN
By ANDREW SHENG
CAN greater transparency prevent future crises? In October 1998, Bank of England Governor Mervyn King and I co-chaired the G22 Working Group on Transparency and Accountability to strengthen the international financial architecture. Today, the Group of 20 is also calling for greater transparency and regulatory reform. The International Monetary Fund (IMF) also calls for greater transparency.
Transparency refers to a process by which information about existing conditions, decisions and actions is made accessible, visible and understandable. The strange thing about this current crisis is that it happened in full transparency and completely in front of everyone.
After the Asian and dotcom crises, the reforms made in accounting and disclosure made information more accessible. If you go into their websites, you would find full information disclosed by Lehmans, AIG, the Fed, the Bank of England, European Central Bank and IMF warning about the risks, but the crisis still happened. Transparency is not about words, but action.
Everyone also agrees that the roots of the crisis are so complicated that almost no one understood where to begin to stop the crisis. So, there was plenty of information, but such information was not understandable. The financial derivatives such as CDOs, CDS and conduits were designed in a way that neither investors, the originating and selling banks or their financial regulators fully understood their complexity and toxicity. So would more rules on transparency help? I doubt it.
Who can argue for better sunshine policy, where information is readily available for people to judge for themselves whether they have made the right decisions?
Former Fed chairman Alan Greenspan puts it brilliantly when he said “if I turn out to be particularly clear, you’ve probably misunderstood what I’ve said.” As a public official, he made many public speeches, but he had to be vague, so no one will blame him for giving advice on whether the market is going up or down.
Notice he never said there was irrational exuberance in 1996 – he asked whether there was irrational exuberance and the market reacted negatively. Notice also that after he stepped down from public office, his comments in the press are very clear on what his views are and what his successor should be doing to clean up the mess.
The trouble with information is that we are not getting too little, but too much. We are all getting information overload because everyone wants more, but in practice, we do not know what to do with most of the information. With the legal requirement to have full disclosure, companies supported by their expensive lawyers learn how to disclose so much information and risks that they are responsible for nothing when anything goes wrong. Have you noticed that an IPO prospectus is getting thicker and thicker, the print is getting smaller and smaller and you are referred to a website where you can understand what is going on, if only you spend at least three days studying every single word and statistic? The truth will be buried in fine print, but only if you know how to find this.
Keynesian economist Hyman Minsky, whose theory about economic crises has finally gained acceptance, is famous for his dictum: Stability Creates Instability, meaning that a long period of financial stability creates conditions for instability that eventually erupt in financial crisis.
The Minsky Moment is the tipping point in the business cycle when the cash flow problems of businesses due to their speculative or Ponzi financing forces them to sell at losses, leading to a collapse in prices and huge illiquidity. Similarly, transparency can create opacity, in which more information is not necessary better.
We all know that negative information is the type that after we get such information, we probably know less than before. Cigarette cartons all print “Smoking Kills”, but people still smoke. Hence, information alone is not a solution.
Therefore, instead of making a complex system more complex, and adding more regulation to already complex rules, we should try to make things more simple and understandable. Over two thousand years ago, the Chinese Legalists philosopher/officials understood when they said that laws should be made easy to understand, easy to learn and easy to enforce.
Lots of professionals, including lawyers, love to make things very complicated so that they can make more money providing complex advice. I don’t have easy answers to solve the problem of better transparency, but I do know that it must begin with investor education.
And investor education can only be effective when the regulators and the businesses explain clearly and simply what the risks are and then practice what they promise.
As we all know, it is so much easier to write long essays that no one understands, so no one reads and pick faults. There is less accountability with complexity.
When everyone is responsible, no one is responsible. Thus, making things more simple would increase both transparency and accountability. But it is so much harder to make things simple. That also is a fact of life.
Datuk Seri Panglima Andrew Sheng is adjunct professor at Universiti Malaya, Kuala Lumpur, and Tsinghua University, Beijing. He has served as adviser and chief economist to Bank Negara, deputy chief executive of the Hong Kong Monetary Authority and chairman of the Hong Kong Securities and Futures Commission
Ransangan Ekonomi
I doubt it.
Saturday March 28, 2009
Transparency creates opacity
THINK ASIAN
By ANDREW SHENG
CAN greater transparency prevent future crises? In October 1998, Bank of England Governor Mervyn King and I co-chaired the G22 Working Group on Transparency and Accountability to strengthen the international financial architecture. Today, the Group of 20 is also calling for greater transparency and regulatory reform. The International Monetary Fund (IMF) also calls for greater transparency.
Transparency refers to a process by which information about existing conditions, decisions and actions is made accessible, visible and understandable. The strange thing about this current crisis is that it happened in full transparency and completely in front of everyone.
After the Asian and dotcom crises, the reforms made in accounting and disclosure made information more accessible. If you go into their websites, you would find full information disclosed by Lehmans, AIG, the Fed, the Bank of England, European Central Bank and IMF warning about the risks, but the crisis still happened. Transparency is not about words, but action.
Everyone also agrees that the roots of the crisis are so complicated that almost no one understood where to begin to stop the crisis. So, there was plenty of information, but such information was not understandable. The financial derivatives such as CDOs, CDS and conduits were designed in a way that neither investors, the originating and selling banks or their financial regulators fully understood their complexity and toxicity. So would more rules on transparency help? I doubt it.
Who can argue for better sunshine policy, where information is readily available for people to judge for themselves whether they have made the right decisions?
Former Fed chairman Alan Greenspan puts it brilliantly when he said “if I turn out to be particularly clear, you’ve probably misunderstood what I’ve said.” As a public official, he made many public speeches, but he had to be vague, so no one will blame him for giving advice on whether the market is going up or down.
Notice he never said there was irrational exuberance in 1996 – he asked whether there was irrational exuberance and the market reacted negatively. Notice also that after he stepped down from public office, his comments in the press are very clear on what his views are and what his successor should be doing to clean up the mess.
The trouble with information is that we are not getting too little, but too much. We are all getting information overload because everyone wants more, but in practice, we do not know what to do with most of the information. With the legal requirement to have full disclosure, companies supported by their expensive lawyers learn how to disclose so much information and risks that they are responsible for nothing when anything goes wrong. Have you noticed that an IPO prospectus is getting thicker and thicker, the print is getting smaller and smaller and you are referred to a website where you can understand what is going on, if only you spend at least three days studying every single word and statistic? The truth will be buried in fine print, but only if you know how to find this.
Keynesian economist Hyman Minsky, whose theory about economic crises has finally gained acceptance, is famous for his dictum: Stability Creates Instability, meaning that a long period of financial stability creates conditions for instability that eventually erupt in financial crisis.
The Minsky Moment is the tipping point in the business cycle when the cash flow problems of businesses due to their speculative or Ponzi financing forces them to sell at losses, leading to a collapse in prices and huge illiquidity. Similarly, transparency can create opacity, in which more information is not necessary better.
We all know that negative information is the type that after we get such information, we probably know less than before. Cigarette cartons all print “Smoking Kills”, but people still smoke. Hence, information alone is not a solution.
Therefore, instead of making a complex system more complex, and adding more regulation to already complex rules, we should try to make things more simple and understandable. Over two thousand years ago, the Chinese Legalists philosopher/officials understood when they said that laws should be made easy to understand, easy to learn and easy to enforce.
Lots of professionals, including lawyers, love to make things very complicated so that they can make more money providing complex advice. I don’t have easy answers to solve the problem of better transparency, but I do know that it must begin with investor education.
And investor education can only be effective when the regulators and the businesses explain clearly and simply what the risks are and then practice what they promise.
As we all know, it is so much easier to write long essays that no one understands, so no one reads and pick faults. There is less accountability with complexity.
When everyone is responsible, no one is responsible. Thus, making things more simple would increase both transparency and accountability. But it is so much harder to make things simple. That also is a fact of life.
Datuk Seri Panglima Andrew Sheng is adjunct professor at Universiti Malaya, Kuala Lumpur, and Tsinghua University, Beijing. He has served as adviser and chief economist to Bank Negara, deputy chief executive of the Hong Kong Monetary Authority and chairman of the Hong Kong Securities and Futures Commission