The meltdown continues

When I started this blog, only a few weeks ago, the current financial crisis was barely beginning.  The blog is just a continuation of the rants round the kitchen table my friends and I have been having for years, and tt is tempting to argue that the financial meltdown could all have been avoided if only the world had listened to what we were saying. Tempting, but wrong.

We knew the meltdown was coming. It has been obvious to anyone who could do basic financial arithmetic that everything was badly out of kilter and a correction was coming. The Icelandic banks’ balance sheets were shot to pieces at the start of the year – and their juicy interest rates were a forlorn attempt to attract enough deposits to put them right. Smarter investors spotted the danger and stayed away, even with today’s inadequate transparency levels.

Transparency isn’t a panacea. Making good financial information available isn’t enough: it has to be read, in good time; and most people are too greedy and too lazy do so. There’s no point in opening the blinds if no one is going to look in, and the financial markets are driven by greed.

But one aspect of the meltdown has been the failure of the credit ratings agencies. Perhaps they could have done a better job, had they had transparent access to the raw financial data? Perhaps. But the way they get paid is all wrong. Who pays them? Ultimately, it’s the debt issuers – the organisations whose credit rating is being assessed.  This model is obviously broken.

Full financial transparency, however, does make an alternative credit rating model possible. Instead of using ratings agencies, software bots like Google’s web-crawler would constantly crawl the accounts of the world’s companies. There could be open-source and commercial bots, and it would be up to the user to choose which results to trust.  With open-book accounting, automated credit-crawlers could replace the ratings agencies and would probably do a better job.

This is something that the regulators need to consider for the future.

About these ads

2 comments so far

  1. Paul on

    Your comments about Open Book Accounting are right on with my thoughts of late. I really can’t think of a down side of it, other than people and corporations losing some privacy, but the benefit of a world with more balance and equality seem to out-weigh it immensely.

    Do you know of any resources on OBA – studies, implementations, etc?

  2. ejoftheweb on

    Paul: no, I don’t. The term “Open-book accounting” as currently used in the profession means something else – it’s usually a term used in joint-venture agreements, where the parties agree to share each other’s books; and the literature seems mostly to be about limiting what you disclose to your partners to as little as possible within the letter, but certainly not the spirit, of such clauses. And that’s just between partners: the very idea of exposing anything to customers, or the competition, is anathaema to the present culture of business. I’m deliberately appropriating the phrase to make it mean what it says.

    While thinking a bit more about how it would work, I realised that it changes the whole security model for organisations. Systems need to be carefully managed so as not to compromise personally-identifiable data. I’m trying to develop a Java API and class library which could be used to implement OBA inside a web-application: see http://boox.sourceforge.net/


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Follow

Get every new post delivered to your Inbox.

Join 113 other followers

%d bloggers like this: