Letter to FT

31 10 2008

Sir, With reference to the letter by Mr Min Liao (“Market transparency should increase – not fall” October 15 2008), I’am in complete argeenment with everything he said in his attempt to rebut John Eatwell and Robert Reoch’s (Letters, October 7 “Greater transparency’ will not reduce systemic risk”) highly questionable tenet: given the uncertainty that speculation amplifies, greater transparency cannot resolve the matter of asset-price volatility, panics and crashes, and that greater transparency might equally well exacerbate the situation.
And, by the way, Min Liao’s concluding stament: “Killing information asymmetry in the financial market by increasing transparency is a must. I agree it is more difficult to achieve in today’s innovative market, but it is still a must.” – seems to be in the good harmony with the modern mainstreem economics as well.
Eg, Luca Colombo and Gianluca Femminis in this much debatable field have just recently given an elegant additional proof to the reasoning that tranparency and quolty of public knolwedge should be increased:
“The public authority acts as a Stackelberg leader, who
optimally exploits the fact that an increase in the precision of
public information reduces the incentives for acquisition of
private information, thereby inducing socially valuable savings
of private resources. The negative welfare effect of the reduction
in the precision of private information is, in fact, more than
compensated by the corresponding cost-saving effect. Our
results show that a more precise public information is welfare
enhancing when the marginal cost of public information is not
higher than that of private information.” (Economic Letters. 100 (2008) 196-199).

And more importantly: in the modern economic design and implemetation mechanism teories (Nobel Price 2007) the incentives for truth-telling and sufficent public disclosure are the central issues. The same in the modern applied reforming of regulation of market rules, eg the reforming intiatives of Sir David Walker in the field of private equty (House of Commons. 2007. MINUTES OF EVIDENCE. TAKEN BEFORE TREASURY COMMITTEE – PRIVATE EQUITY – Tuesday 11 December 2007. SIR DAVID WALKER. Evidence heard in Public. Questions 1 – 75).

Sir, It is rather frightening that, Dr Geoffrey Ingham (Letters, October 17) has additionally demonstrated a questionable understanding in this field, especially of public information mechanism design of money and financial asset markets. He unfortunately reiterates with unfounded certainty the questionable reasoning: “…purchase of Waitrose’s rather expensive “East Anglian” potatoes is indeed based on price and quality information; but they are bought for their use value not their speculative exchange value.” Consequently, in Ingham’s view simply the purchase of a lottery ticket in the same supermarket should not be necessarily based on price and quality/utility information, as the lottery is connected with radical uncertainty and therefore with some kind of mythical speculative value, not for “use value”.
The funny thing is, that in this spring Estonian Riigikogu passed the Act 182 (12 March 2008) with the clause “1/1)” for giving to the central bank free hand for hiding from the public as much data as „necessary to avoid public threats to prices and financial stability”. It seems this act is just a case of an effort following Eatwell-Reoch’s recipe for regulators: “They must now abandon their belief in the tired trinity of greater transparency, more disclosure and better risk management by firms.”- having in mind – “One of the drivers of lemming-like behaviour has been the greater transparency …transparency means more firms share the same data and have access to the same procedural knowledge and even the same modelling, so it is not surprising they all do the same thing – sell, stop lending, hunker down and so on.” But, alas, it seem that lemming-like behaviour had been not as great here as it is now, in the case if this law of lessening transparency had not been implemented.

Ülo Ennuste, Professor, Tallinn University of Technology,
Tallinn, Estonia