Jacqueline Best’-s The Limits of Transparency is carried by sensible concerns on the tension between efficiency and stability, the tension between promoting employment and stable money, and the political implications of seemingly neutral economic policy. However, while economists, market participants and academics will find much that is thought-provoking here, the book does not actually deliver a compelling critique of transparency.
Much more time is spent promoting institutional arrangements of “-constructive ambiguity”- (e.g. Bretton Woods) than pointing out short-falls with transparency. The problem is that what’-s being argued for under the aegis of “-ambiguity”- is just flexibility, mostly in the form of deferring decisions. (Not to mention that institutional arrangements can also become inflexible.) Clearly ambiguity is desirable when it manifests itself as flexibility, but this does not mean that ambiguity is desirable in and of itself. Best makes some pertinent observations (that are, for instance, relevant to CDS dynamics) but tries to wrap them up in a pleasingly ironic theory that alone threatens to undermine her conclusions. Early on, she tells us that she is “-drawing inspiration from both postmodernist and critical theoretical traditions.”- The thematic emphasis on ambiguity is no doubt influenced by such strains of thought, which stress “-the irreducibility of difference.”-
The early Bretton Woods regime is lauded for its ambiguity and “-continuous deferral”- of adjustments, and this points the the fundamental problem in the analysis. While active trading may increase short-term volatility, the author espouses a philosophy of deferral that is actually more dangerous and more at the cause of the financial crisis than active trading. Deferral of pricing creates the illusion of constancy where there is actually change, and enables longer-term booms and busts that are more pernicious and cause longer-lasting pain and dislocation than the “-intersubjective”- spirals the author warns against.
Take an example: traders push CDS prices up, causing the underlying entity’-s borrowing costs to rise, thus ensuring default. This “-intersubjective”- dynamic would not be possible were there not already a fundamental basis for concern over the entity’-s debt —- if the entity had not already irresponsibly deferred its obligations. Which problem is more fundamental? This of course is exactly what happened in the credit crisis, as banks refused to transparently price their holdings. “-Continuous deferral”- is a recipe for less frequent, perhaps, but almost certainly more intense explosions. Is this kind of deferral not at the heart of the impending entitlement crisis, another kind of “-off balance sheet”- debt? It doesn’-t matter if pricing will never have a perfect technical solution, you still try to price up to the point of ambiguity, which, as Best repeats, is always there anyway.
Lastly, the author holds out the Bretton Woods period as one of unsurpassed prosperity while ignoring the corresponding population boom and other factors contemporaneous with the currency regime. For their sake, Keynesians need to heed the demographic winds more closely.
[Originally posted to Amazon, 2/15/10.]