Transparency and the Fed
Transparency is a hallmark of modern capitalism, and Federal Reserve Chairman Ben Bernanke has made transparency a hallmark of his new regime. Yet among our leading financial institutions, opacity, not financial transparency, has been on the rise.</br></br>The combination -- increasingly opaque financial markets and increasingly transparent monetary policy -- has created a dangerous brew of financial excesses. Unless both trends are reversed, financial stability will remain elusive.</br></br>The explanation for increasingly opaque financial markets lies chiefly in securitization -- the conversion of non-marketable assets into marketable obligations -- which has accelerated dramatically in recent decades.</br></br>In theory, securitized markets are supposed to operate on the basis of accurate and readily available prices, the clear assessment of credit quality, and objective analyses of these obligations by rating agencies and those engaged in trading and underwriting them. These virtuous mechanisms presumably have been reinforced by a host of new credit instruments, especially financial derivatives that mitigate risk taking. Securitization also has been supported by a dazzling array of new quantitative analytical techniques that are capable, according to practitioners, of defining risk probability down to decimal point levels.</br></br>So what went wrong? In the broadest sense, the structural changes in the financial markets encouraged participants to become short-term oriented.