Banking Opacity in the service of an industrial economy.

There is an article up on Interfluidity which describes why opacity in Finance is a good thing. The argument in its simplest form is as follows

Financial systems help us humans overcome a collective action problem.  In "large scale" projects, it is effectively impossible for a single person to make valid judgements about the risks.  (Think of a power plant - nobody, but nobody understands all the moving parts.  How on earth is a barrista supposed to know whether the business plan for its construction is a valid one?).  

In this type of world there are actually 2 equilbria - one in which everybody automagically trusts that things will work, and you have an investment boom, and another in which nobody invests, and everybody stays poor (if only some people invest, there isn't enough momentum, and everybody loses out).  What Finance does is sell soft fraudulence, (or opacity), i.e., it tells everybody that

   a) they don't need to know how, but if they just give Finance their money, they'll make a profit

   b) not to worry, some other guy is going to lose money, but enough are going to make money that you will be taken care of

In essence, they resolve the collective action problem, resulting in only 1 equilibrium - the one where everybody invests.

In their own words

This is the business of banking. Opacity is not something that can be reformed away, because it is essential to banks’ economic function of mobilizing the risk-bearing capacity of people who, if fully informed, wouldn’t bear the risk. Societies that lack opaque, faintly fraudulent, financial systems fail to develop and prosper. Insufficient economic risks are taken to sustain growth and development. You can have opacity and an industrial economy, or you can have transparency and herd goats. 

I agree, somewhat, with the article, but I'd throw in an extra caveat.  I submit that there is a different equilibrium available too – the one that goes something like "in a world of honest people, the lone criminal will make a killing". The point being that the very opacity that is provided by banks is easily subverted into a different type of opacity, viz, where it is used to deliberately defraud people.

In essence, it doesnt matter how well intentioned Finance may be, somewhere there is going to be an Evil Bastard who reasons that

   a) There is a ton of money available here

   b) Nobody amongst the sheep really knows whats going on

   b) I can bend our internal rules (if there are any!) and make a killing

Once he (or she) has made a killing, others will look at this outcome, and realize that they are underperforming.  In essence, there is an all new equilibrium that develops around extending the opacity into a globally non-optimal equilibrium, i.e, one where Finance is operating for the Greater Good And Glory of Finance, and not of the economy. (Sound familiar?  It should...)