Naive investors are a big market, even if there is no Naivete Index yet to help make the most of it. For now, an Opacity Index should do. America?s subprime credit crisis has global investors in a tizzy. Now that opaque derivatives have been stamped guilty, sounding sufficiently scientific about this hot new desirable called transparency could easily make for a runaway success. Not that Joel Kurtzman and Glenn Yago of the Milken Institute have not worked hard to put Global Edge together. They have. It takes quite some effort to quantify factors of Corruption, Legal and Enforcement effectiveness, Accounting transparency and Regulatory quality (CLEAR) to assign assorted economies neat little Opacity Index scores, neat enough to hold up as scorecards for the most dim-sighted to see. India gets 44, for example, on an ascending opacity scale of 1-100. Just 10 countries, among the 48 tabulated, are rated murkier.
Kurtzman and Yago are clear that opacity is bad. It is bad because it results in asymmetric information, mispriced risks, impaired markets and misallocated capital. It also evokes imagery that contrasts with Denmark?s (?as clean as new winter snow?). Heroically, Kurtzman and Yago resist using Greek symbols to impress readers, though they could easily have dropped the ?gamma risk? of a sudden turn in some economic chart, and then used astronomical observations from 29 March, 2003, say, to offer a graphic analogy of some sort. Instead, they do the next best thing. They compare their index with a celestial telescope?s focus knob. ?Atmospheric turbulence causes the romantic, but blurring, ?twinkle? that distorts observation. Economists and investors have not heretofore developed ways to counteract the financial and business counterparts to atmospheric turbulence of economic data.?
Okay, so the Index claims to offer clarity. It also tries to aid investment choices. Sure enough, Global Edge presents Israel, Malaysia, Thailand, Korea and Taiwan (?edge? economies) as clearer and better investment options than the ?Bric? four (Brazil, Russia, India and China). The input details of the Opacity Index form a familiar fret list too tedious to recount, with all the usual efforts to affix numbers on every little deterrent to doing business. By the time this book begins to turn intelligible and show some respect for actual markets as aggregators of opinion, it is already 147 pages too late. Kurtzman and Yago have cheerfully convinced themselves that the Opacity Index can relieve Ben Bernanke of his ?global savings glut? headache by directing dollars to the deserving.
Wake up. If the credit crisis has served as a reality intrusion, it is by shaking up some of the coziest of assumptions. Sure, the credit derivatives that blew up in investors? faces were dangerously opaque. But while rattled investors may expect an ?opacity premium? to henceforth restrain derivative complexity (by pricing the over-jumbled out of the market), it is still not altogether certain that transparency is invariably a good thing. Arguably, the pooling, hazing up and dispersal of default risk tends to grant credit access to an inclusively broad spectrum of society by obscuring judgment calls on the creditworthiness of individuals, some of whom may otherwise be pinpointed for usurious loans on account of past/profiling data. Do large lenders really need to spot Spartacus, so to speak? After all, the US Federal Reserve?s peculiar double-dip policy rate pattern this decade (predicted to assume a ?W? shape soon), a role of some significance, has been a function of macro concerns more than credit conditions on the ground.
At the core of the crisis has not been outright opacity, but the arbitrary assessment of risks and their prices at multiple levels of the global financial market. As trading narrowed, the secondary market for repackaged yields became a particular haven of second-guessed risks and asset valuations. Alas, as Keynes said, a beauty contest is a beauty contest, despite all claims to equitable objectivity.
That?s the nub of the story. Beware artificial risk gradations. Dishearteningly often, they are designed to impose usurious burdens on those who do not meet the specifications of perfection ordained by standard setters, who, like this book?s authors, are far from infallible. Such discernment is an edge enough.