Opaque finance as social good

Steve Waldman of the blog interfluidity recently argued that opacity in the financial system is a feature, not a bug — only by convincing everyone that they won’t be the one holding the bag if things go south can the financial system ensure that the critical mass of investment necessary for economic grwoth will take place. Now he’s written a follow-up post responding to various criticisms and expanding on his points. It’s a disturbing and thought-provoking argument.

7 thoughts on “Opaque finance as social good

  1. Dunno; doesn’t the argument boil down to: this is the only way it could be done because if it was done a different way, that would be really different? The goat herding thing is where this weakness in the argument becomes really apparent, and not only because I’m fresh from reading Graeber’s Debt; when you boil the dilema down to status quo verus caricature of alternative, you’re not exactly setting yourself up to really consider alternatives. Giving the devil its due is one thing — and it’s an interesting set of posts — but it feels like any effort to consider doing without devils gets sabatoged from the get-go by that framing.

  2. I don’t think it’s as simple as that — he’s talking about the type of financial system that accompanies industrialization. There are other possibilities for how to arrange a financial system, but did the transparent ones ever promote something like industrialization? (As I recall, the most transparent system Graeber talks about is probably the one used by Islamic merchants, which was about mercantilism rather than actual production.)

  3. The transparent financial systems don’t support imperialism (hegemony), and the opaque ones are already post-industrialization. Gotta get your stages right.

    Been a century of work since Hobson and Hilferding.

  4. It all comes down to a “quis custodiet” problem. But dirty as it gets in practice, he presents reasonable-looking math for it. The trouble I see is that his Nash equilibria only obtain in the game he’s discussing — they don’t by any means demonstrate that it is a better game. The best strategy in a capital-based economy is universal investment, because it spreads both risk and profit. The second best is universal non-investment, which is a break-even point. Unequal investment always involves the investor’s loss. Call it “sunk costs.” But is the math right? Is this the game we’re actually in? Problem one is that the break-even equilibrium only exists in a capital-based economy in which nobody invests. Which is to say that it doesn’t exist — it breaks the game in practice. If nobody invests, the formal org does nothing, and dies. We revert to a different game — probably one without as large a role for the money abstraction. Problem two is that the universal investment equilibrium doesn’t exist, either — it is a hypothetical maximum that can only obtain in a system of all capable participants with discretionary income. So what we actually have is a game that resembles the “someone loses” squares — and badly.

  5. The government “social safety net” programs, like Social Security, would make a nice comparison. Consider: nobody invests, some win, some lose, because starting positions and environmental factors are unequal. Depending on the level of investment, if everybody invests, we approach a break-even equilibrium.

  6. The argument was nicely made, but I think that it is overdeterminative. That is, given that individuals have been shown to have systematic blindspots in their abilities to think about risk and probability, as well as other “irrationalities,” AND, the combination of information asymmetry and the often prohibitive transaction cost add-on to attempting to overcome it, it is just a fact that there is and always will be a fair amount of opacity in the financial system. We don’t really need to encourage it.

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