Economist Hernando de Soto is the author of the “The Other Path” and “The Mystery of Capital.” He has helped carry out property-reform programs for heads of state in about 20 countries.
We can’t start fixing things until we can get a handle on the toxic assets behind the financial crisis.
Imagine how I have felt watching my role models … wage a losing war against derivatives — which both Warren Buffet and George Soros have called “financial weapons of mass destruction” — without locating or counting them.
Let me offer just four of the many good reasons I could give for why “doing the math” — right now — is still the best strategy for halting the global economic meltdown threatening us.
First, the vultures I’ve talked to tell me that buying a significant amount of paper in the dark will take years. With information about derivatives not standardized and thousands of idiosyncratic bonds sold, resold and scattered helter-skelter all over the market, it will be difficult for any individual vulture to calculate their worth until someone locates and categorizes them. In fact, some derivative paper is so sloppily structured that banks have been unable to figure out the contents of their own portfolios, and U.S. courts continue to reject many foreclosures that are based on this kind of paper. So before we could really hand over the solution to the vultures, someone still would have to do the math.
And even while the vultures are, minimally, at work, the contamination will continue as this huge shadow economy of derivative paper infects everything it touches.
Consider that a mere 7% default on subprime paper — equivalent to maybe $1 trillion or $2 trillion — quickly contaminated other paper, creating a $50-trillion hole in the U.S. economy from losses in stocks, home values and revenues in less than one year.
By not counting and identifying derivatives one by one and drawing a legal boundary around each by means of the rules of property law (things such as registration, traceability and standardized identification), we are unable to protect every asset and every particular interest on that asset from contamination. The longer we wait to do the math, the worse it will get. And the more likely the anarchy of this shadow economy will spread.
In the world where I come from, it is the typical state of affairs. In fact, apart from the elite Westernized minority, most people’s assets are covered by paper that is endemically toxic: not recorded, not standardized, difficult to identify, hard to locate, its real value so opaque that ordinary people cannot build trust in each other or be trusted in global markets. In short, for shadow economies outside the U.S. and Europe, “credit crunch” and “meltdown” are chronic conditions. You don’t want to go there: It will wipe out your middle class, nurturing radical politics, class confrontation, violence, crime and massive drug production and narco-trafficking. (North Americans only know drug consumption; just wait until you see the supply side of the deal.)
Finally, you can’t continue the bailouts, monetary infusions and tax breaks because you will eventually run out of money — and still have little credit available. That is because the overwhelming amount of available credit is not made up of money but assets documented in property records such as fungible real estate titles, mortgages, bonds and derivatives, which have some of the financial attributes of money — what economists used to call “moneyness.” In fact, although there is only $13 trillion in cash notes and coins worldwide, there are hundreds of trillions of dollars in “property paper,” when moneyness is taken into account.
If you want to get credit flowing again, you must restore trust in paper as soon as possible. And that means measuring the assets, recording them, finding and purging those that are toxic and preventing future debasement of the paper — in essence, submitting it to property law just like all the other assets that we own and value.
Before we can get out of this recession, we need to concede that we just don’t have the right information. At present, the world of derivatives is devoid of useful facts and a structure from which we can extract the meaning, knowledge and confidence required to end the credit crunch.
And before anyone can get those facts, we have to do the math.
Something far more radical is needed, according to one renowned economist – who advises governments around the world – Bill Clinton and Vladimir Putin are said to be fans of his.
He is Hernando de Soto, who runs the Institute of Liberty and Democracy in Peru. He told Business Daily’s Lesley Curwen that the trouble is that the authorities don’t know the details of the investments in question, because they’re simply not collected centrally.
April 23, 2009
August 01, 2008
“Capitalism can be the engine by which the poor, set free in an open marketplace, can raise themselves from poverty. We must give them the tools. We ignore them at our peril.”
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