Transparency -- Another Disaster Shows Us How Important It Is
Transparency is often seen as a technical, often annoying part of municipal ethics. All those notices and agendas that have to be filed at the right time in the right place, all those document requests from the news media and opposition parties. Is all this really necessary for good government? Does it lower taxes, provide better services? Or is it just a pain in the neck?
Sometimes you need a big disaster – Enron, for example – for people to understand the cost of not acting ethically.
Well, we’ve just had another disaster, and once again transparency is at the center of it. This disaster is the subprime mortgage mess.
<a href="http://www.cityethics.org/node/361">Click here to read the rest of this blog entry.</a>
According to <a href="http://www.nytimes.com/2008/01/27/business/27subprime.html?_r=1&scp=1&s… article in the New York Times</a>, the transparency problem at the center of it is the failure of investment banks to pass on to credit rating agencies the reports of due diligence firms on the pools of loans the investment banks were selling (due diligence, or compliance, firms evaluate the quality of the loans that are pooled together). Without these reports, the credit rating agencies gave the loan pools AAA ratings. With the reports, the credit rating agencies would have been forced to blow the whistle on the whole thing, and the financial equivalent of an extreme sport would have come to a halt.
As in government, the players seemed (i) not to really want to know the risks they were taking and (ii) believed they could get away with hiding information or keeping their heads in the sand (and will anyone be fired or even have to return their bonuses for either not sending due diligence reports to credit agencies or, at credit agencies, for not asking for the reports?). They followed the rules, it appears, but not the spirit of transparency. They wanted to take certain risks and they knew that being transparent would not have just been a pain in the neck, but would have prevented them from making the transactions they wanted to make. In other words, they had a serious conflict of interest (the individuals’ and companies’ profits from making deals vs. the individuals’ and companies’ obligations to their customers, not to mention the world economy, that is, to all of us).
Transparency is like democracy. It makes everything more difficult, but it’s far better than the alternative. Democracy without transparency is not really democracy. The subprime mortgage disaster involved individuals and their companies hiding the risks they were taking, and doing their best to pass those hidden risks on. In government, an equivalent is writing contract specifications that guarantee that the contract goes to a friend. The contract is bid out (following the rules), but not really (ignoring the spirit of the rules). And the result is higher costs for taxpayers and a step down the road to kickbacks and a government based on coverups.
“At the heart of the subprime meltdown is the inability to get information,” the article quotes a mortgage consultant as saying. The need for people to be able to get information is at the heart of transparency laws. Without information, there is no responsible government nor any responsible voters. Ignoring the concept of transparency can undermine not only our economy, but also our democracy.
Transparency International and the United Nations have put together <a href="http://transparency.org/content/download/2265/13187/file/ti_un_toolkit… Toolkit</a> for local government transparency. Although intended for developing countries, it is an excellent introduction to the subject for developed countries, as well. It includes lots of lists and descriptions of essential approaches to local government transparency.