Professor Becker and Judge Posner have posted an illuminating exchange of comments on their blog questioning the wisdom of the intervention of the U.S. Federal Reserve and other banks in increasing liquidity in the current credit crisis.
Judge Posner's citation to a 2005 Economist story regarding the housing boom probably reminds most of his readers of their awareness of the housing boom at that time. Savvy analysts began to question the financing of the housing boom back then, but one wonders if more information about the relatively opaque bond market (which includes the complex debt derivatives at the heart of the crisis) might have helped avert today's crisis.
Despite the power of the internet, the public has little access to information about mortgage-backed bonds and bond prices. This stands in contrast to stock price data and public company disclosures, which are widely available at low cost. Bond data resides in Bloomberg terminals and other proprietary databases that cost around $1500 per month per user.
Cheaper access to information about collateralized debt obligations, collateralized mortgage obligations, and other derivatives might have led to more rigorous study of these instruments in Congress, academia, the press, and trials and arbitrations. The costs of dissemination could be charged to industry participants who benefit from participating in these markets. These costs would seem nominal compared to the costs of imploding hedge funds, collapsing lenders, and central bank intervention. Saving the stock market from a steep decline and the economy from a recession would be icing on the cake.
In any event, most people agree that free flow of market information lies at the heart of free enterprise in general and the securities industry in particular. Meanwhile, astute observers question the rating agencies that awarded investment-grade designations to many debt instruments.
Yet even sophisticated investors have limited ability to scrutinize those ratings. Perhaps wider availability of bond price data and other metrics would have helped raise questions sooner.
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