The purpose of money markets is to provide liquidity for individuals and firms. The cheapest way to do so is by using over-collateralised debt that obviates the need for price discovery. Without the need for price discovery the need for public transparency is much less. Opacity is a natural feature of money markets and can in some instances enhance liquidity, as I will argue later.
Pointer from Timothy Taylor. The theory that debt is used when the underlying assets are opaque is not quite new. My articulation of it owes a bit to the delegated monitoring idea of Doug Diamond.
The natural error for economists to make is to assume that bank creditors “see through” the bank to the underlying assets. What Diamond got me thinking is that the whole point of a debt contract is to ensure that the creditor does not have to see through the bank unless the bank gets into trouble. That is the insight that Holmstrom is re-discovering.