My hope is that my modest contribution (Chapter 2.2, page 72) to a book published at the World Economic Forum in Davos entitled “Trust Meltdown: The Financial Industry Needs a Fundamental Restart” finds its way into enough reading stacks of enough of those in attendance to make a difference.
My chapter — “Transparency and Verification from a Regulator’s Perspective: Using XBRL to Restore Trust in Finance and Government” — is a disclosure-based alternative to the “Volcker Rule” to revert to more substantive regulatory interference in the asset-backed securities market. I propose structured disclosure of the sort accountants have used since the invention of double-entry bookkeeping to supply better information to the market about the latest highly-touted investment opportunities.
Will this be a magic bullet that magically restores economic health around the world? Of course not. But it’s the best idea I’ve seen to date about how to empower crowds — what my economics professors called markets in the last century — to evaluate particular investment opportunities. An excerpt:
After all, the most powerful form of market regulation is the price regulation that results when well-informed and willing buyers and sellers disagree on values of particular rights with respect to goods, services, and securities. The more information held by both sides, the more likely they will bargain to a sustainable price.
In other words, the madness of crowds may always be a problem, but better information holds the potential to restore sanity sooner and thus limit damages from madness.
“Structured finance,” using unstructured information, failed to achieve sustainable pricing. XBRL makes it possible to structure business information in the 21st century similar to how accounting standards made it possible to structure financial information in the 20th century. Anyone have any better ideas?
I’d welcome your comments on any of the topics covered in the book, from the foreword by Kofi Annan to the chapter on peer pressure by Robert Zoellick.