(This entry was originally posted on Jan. 5, 2011 on the Credit Slips website)
In the wake of the Wikileaks debacle, we have started to see some conversation in the editorial pages about whether transparency is always a good thing in internationa
l affairs. The point is that there are times when allowing the parties to talk in private may help to reach optimal outcomes for all sides. As we learn more about the personalities and motivations behind the leaks, also, the image of the whistleblower as the pure-hearted pursuer of truth and justice is getting a bit tarnished. It is a complicated issue, with room for reasonable people to disagree, but that in itself is news: it used to be that if you were against transparency you had to be for cronyism, corruption, and fraud, and in fact everybody everywhere felt compelled to assert that they were of course in favor of full public disclosure. Now we are not quite so sure.
I think that some of the heatlhy skepticism–or at least complexity of thought–about transparency that is coming into the public debate about foreign affairs also has a place in the conversation about the regulation of financial markets. Why?
• Transparency is too easy.
How many times, when faced with a difficult political choice between, say, siding with investors or siding with the financial institutions, have the politicians settled for simply demanding more disclosure to consumers? There is even a certain cynicism to this solution at times–research shows us that investors are often ill-equipped to digest the information that is handed to them in the name of transparency. And yet politicians get to say they took a stand in favor of the common good.
• Transparency isn’t all that transparent.
Goldman Sachs artfully exploited this insight when they dumped literally tons of documents at the doors of Congress in response for a request for information–“go ahead, be our guest..” and yet it might as well have been a truckload of manure, for all it was worth to Congress. The point here is that information alone is only valuable to those with the tools–that is, the resources to get the tools–to turn information into insight. As the sociologist of science Bruno Latour has put it, referring to the beautiful transparent glass building that houses to German Bundestag or parliament–itself a symbol of transparency in the political process–you can stare at it all day but somehow you don’t see anything at all.
• Transparency can do damage.
My own research among regulators has produced case after case in which an informal off-the-record conversation among representatives of the market and representatives of the state was able to avert disaster and reach a win-win result for each. Yet my research also shows very high levels of fear (even paranoia) among bureaucrats that informal contacts with market participants will expose them to charges of corruption or non-transparent behavior. So too often the less courageous of them opt to do nothing, rather than to stick their necks out and solve the problem, and potentially expose themselves to charges of inappropriate behavior. Now again, this is a complicated issue: I don’t deny for a second that some bureaucrats and market participants have at times exploited their informal relationships for personal gain so we have reason to demand transparency. However, the pro-transparency rhetoric goes too far where it suggests that any such contact is always motivated by naked self-interest. And the institutionalization of this position into policies that make all email correspondence, meeting records and so on a matter of public record has serious social costs as well as social benefits that deserve to be more carefully weighed as we think about the way forward in financial regulation.
Now again, all of these points are not mine alone: the anthropology and sociology of bureaucracy around the world has produced many examples now of how serious political harm, and the promotion of very questionable private interests has come to pass in the name of well-meaning transparency campaigns. This research suggests that transparency is not a simple good–that it has different costs and benefits in different situations, that we need to ask questions about whose interests transparency serves, and that if we value transparency there may be additional work to do to make it real and meaningful for all sectors of society.
My research has convinced me that a more effective financial regulation will require a new set of scripts for deep cooperation between regulators and market participants. It is the only way that regulators can get the information they need, and it is the only way that we can begin to get around the cat and mouse game in which as soon as the government proposes a rule market players look for a loophole. Yet regulators and market participants alike insist that a certain degree of privacy is necessary in order for each side to trust the other. How we carefully balance the costs and benefits of various institutional options, given this reality, is a complex, but interesting and important question.