[Winstonm]

Renowned Peruvian economist Hernando de Soto has an intriguing piece about what has gone wrong in the world economy, explaining also what led to the financial crisis and why the underlying problems have yet to be addressed. http://www.businessw...27060634112.htm

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Over the past 20 years, Americans and Europeans have quietly gone about destroying these facts. The very systems that could have provided markets and governments with the means to understand the global financial crisis—and to prevent another one—are being eroded. Governments have allowed shadow markets to develop and reach a size beyond comprehension. Mortgages have been granted and recorded with such inattention that homeowners and banks often don't know and can't prove who owns their homes. In a few short decades the West undercut 150 years of legal reforms that made the global economy possible.

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Without standardization, the values of assets and relationships are so variable that they can't be used to guarantee credit, to generate mortgages and bundle them into securities, to represent them in shares to raise capital. Nor do they fit the standard slots required to enter global markets. That's why credit crunches and massive unemployment are chronic conditions for most people forced to operate in the informal economy. These are the ones you see protesting in the streets of Arab countries or living in tents surrounding Port-au-Prince. We know only too well that facts don't speak for themselves: They have to be constructed through legal processes and kept transparent. They have to be defended, too.

Unfortunately, when it comes to financial reforms and regulation our U.S. system has been hijacked by a small group of dogmatists who bark out their beliefs that markets self regulate and any attempt at regulation is un-American.

[whereagles]

I don't know if this is related to any know economic theory, but I've been noticing that "the market" and their tools (hedgies, derivatives, etc.) are just a way to channel wealth that is produced somewhere else into the hands of those dogmatists. They manage to end up with the lion's share of that wealth while producing next to zero, lol.

[kenberg]

I do learn things from the wc. I had never heard of Hernando de Soto, which is clearly my failing. A check at the Wikipedia not only shows him to be highly regarded by other economists but getting the following praise:
Bill Clinton , for example, called him "The world’s greatest living economist"
and
Ronald Reagan said, "De Soto and his colleagues have examined the only ladder for upward mobility. The free market is the other path to development and the one true path. It is the people’s path… it leads somewhere. It works."

How many economists have received praise from both Bill Clinton and Ronald Reagan?

Anyway, also from the wikipeddia http://en.wikipedia....o_de_Soto_Polar

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The main message of de Soto's work and writings is that no nation can have a strong market economy as long as most of its people remain on the outside just looking in. "The existence of such massive exclusion generates two parallel economies, legal and extra legal. An elite minority enjoys the economic benefits of the law and globalization, while the majority of entrepreneurs are stuck in poverty, where their assets –adding up to more than US$ 10 trillion worldwide– languish as Dead capital in the shadows of the law. To survive, to protect their assets, and to do as much business as possible, the extra legals create their own rules. But because these local arrangements are full of shortcomings and are not easily enforceable, the extralegals also create their own social, political and economic problems that affect the society at large.

He seems to be mostly concerned with the developing world but it all rings true with me. Most people aren't economists or philosophers, but they can recognize a rigged game when they see it and they adapt as best they can.


I'm not so sure DeSoto is arguing for a great deal of regulation, rather the regulation would be on an as needed basis to ensure transparency. The final paragraph of the cited article reads

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Mainly, though, it's a political challenge. Politicians must raise the financial crisis to commanding heights, where the entrenched institutional problems of a failing order can be addressed. Markets were never intended to be anarchic: It has always been government's role to police standards, weights and measures, and records, and not condone legalized sleight of hand in the shadows of the informal economy. To understand and repair one of mankind's greatest achievements—the creation of economic facts through public memory—is the stuff of nation-builders.

Recalling the praise DeSoto received from both Clinton and Reagen, maybe someone should ask, for example, Obama, Boehner, and Ryan what they think of his ideas.

[Winstonm]

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I'm not so sure DeSoto is arguing for a great deal of regulation

I don't think he is, and neither do I. Enough regulation to ensure transparency and market honesty along with strict enforcement of those regulatory rules appears a satisfactory solution.

There is a lesson here, I think, and a correlation.

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Knowing who owned and owed, and fixing that information in public records, made it possible for investors to infer value, take risks, and track results. The final product was a revolutionary form of knowledge: "economic facts."

Over the past 20 years, Americans and Europeans have quietly gone about destroying these facts.

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...when I asked American friends why Paulson had switched strategies and was injecting hundreds of billions of dollars into struggling financial institutions, I was told that there were so many idiosyncratic types of paper scattered around the world that no one had any clear idea of how many there were, where they were, how to value them, or who was holding the risk. These securities had slipped outside the recorded memory systems and were no longer easy to connect to the assets from which they had originally been derived. Oh, and their notional value was somewhere between $600 trillion and $700 trillion dollars, 10 times the annual production of the entire world.

[kenberg]

Perhaps the clearest indication of how screwed up things have become appeared as houses went into foreclosure. They can't even do that right. They sometimes don't know who holds the title, they can't, or don't, file correctly, they don't know what to do with the houses after they get them. The papers say the housing market is still weak. I can see how that might be.

[whereagles]

Well, you definitely need some regulation. Without it, the system tends to have periodic collapses; it's just a matter of time. This is not anyone's theory: it's just the facts I see.

[hrothgar]

whereagles, on 2011-May-01, 02:15, said:

They manage to end up with the lion's share of that wealth while producing next to zero, lol.

Risk management / Insurance dates back at least as far as the Code of Hammurabi.
I think its remarkably ignorant to claim that the value of something so pervasive throughout human society is "next to zero".

Risk management might not create tangible assets, but it is incredibly valuable.

[kenberg]

I very much like DeSoto's phrasing "It has always been government's role to police standards, weights and measures, and records, and not condone legalized sleight of hand in the shadows of the informal economy."

The idea that market forces will take care of the sleight of hand is perhaps not exactly wrong, but often we very much will not like the cure that the market provides. If it would be only the scammer, or maybe a small company, that went belly up we could tolerate it. But that's not necessarily the way it goes.

The problem of course is that regulation breeds an industry of people whose job is to get around regulation, subvert regulation, modify regulations to their selfish advantage, and so on. What we need from Republicans is an acknowledgement that market forces alone are not enough, what we need from Democrats is an acknowledgement that badly drawn regulations can do mare harm than good. People can be greedy and deceitful, regulations can be written badly, regulators can be incompetent and lazy. Yes Bernie Madoff is in jail, but it took a while.

Dealing well with human nature is a tough job.