Open up financial system information and restore the trust, economists urge
Financial transparency paved the way to unprecedented global economic progress over the past century, but lately, the system seems to have taken a step backwards. Peruvian economist Hernando de Soto says the roots of the latest economic crisis and malaise not only stem from fear and greed, but also from lack of information. At the same time, noted analyst Robert Shiller made a call for more effective data collecting to provide greater clarity into the underpinnings of the economy.
As de Soto recently explained in BusinessWeek, over the past century, the world adopted a uniform set of standards and documents for handling finances -- such as contracts, deeds, financial statements, and registries -- to provide trust and transparency to finances.
However, de Soto believes, this openness has been eroded in recent years, thanks to "shadow markets"that have grown to huge proportions. Derivatives, interest-rate swaps, mortgage-backed securities and other hidden mechanisms have obscured financial transactions from public view.
The impact of this lack of transparency has been devastating to economic opportunity, de Soto says:
"In the U.S., trust has broken down between banks and subprime mortgage holders; between foreclosing agents and courts; between banks and their investors—even between banks and other banks. Overall, credit (from the Latin for 'trust') continues to flow steadily, but closer examination shows that nongovernment credit has contracted. Private lending has dropped 21 percent since 2007. Outstanding loans to small businesses dropped more than 6 percent over the past year, while lending to large businesses, measured in commercial loans of more than $1 million, fell nearly 9 percent."
To get economic activity back on track, de Soto says, it's important to move financial activity back to the light of day -- to the "rule-bound system of property rights, where facts can be established.... The rule of law is much more than a dull body of norms: It is a huge, thriving information and management system that filters and processes local data until it is transformed into facts organized in a way that allows us to infer if they hang together and make sense."
This is where robust data management and analytics plays a key role. The ability to monitor, track and act on data from a range of organizations, and apply predictive analytics to spot opportunities or head off disasters. However, the data needs to be accessible. And with good data that can be trusted, modeling is possible.
Shiller, for example, suggests in a New York Times opinion piece that economic forecasting could be as spot-on as hurricane forecasting has become in recent decades. Economic storm fronts -- such as the one that ravaged the economy starting in 2008, could be spotted and preventative measures -- or at least preparations -- made. As with hurricanes, such storms can be made predictable:
"Many [economic storms] can be, if the right questions are asked and we use new and better data. Hurricanes, for example, were once black-swan events. Now we can forecast their likely formation and path pretty well, enough to significantly reduce the loss of life. Such predictions are a crucial challenge in economics, too, and they are why data collection need not be a dull or a routine field. If done correctly, it can be very revealing. The Dodd-Frank Act of 2010 created a Financial Stability Oversight Council with a research arm, the Office of Financial Research, to help confront systemic risks. Perhaps these new organizations will improve our knowledge, mirroring the progress we have seen with hurricanes."
This post was originally published on Smartplanet.com