Fascinating discussion in BusinessWeek from renowned Peruvian economist Hernando de Soto.
As we have discussed previously (here and here), de Soto has identified the property record keeping — he calls them “public memory systems” — as one of the major advantages of Western Capitalism. The recording, rule-bound, certified, and publicly accessible registries, titles, balance sheets, and statements of accounts, especially for land and houses — is how our system creates “economic facts.”
Various elements in our economy — Shadow banking systems, MERS, abdication of lending standards (i.e., no doc loans and origination fraud), Robosigners, mark-to-model accounting fraud, off balance sheet bank assets — have conspired to destroy those facts. These economic fact destroying gambits turned out to be prime underlying elements of the financial crisis.
Here is de Soto:
“During the second half of the 19th century, the world’s biggest economies endured a series of brutal recessions. At the time, most forms of reliable economic knowledge were organized within feudal, patrimonial, and tribal relationships. If you wanted to know who owned land or owed a debt, it was a fact recorded locally—and most likely shielded from outsiders. At the same time, the world was expanding. Travel between cities and countries became more common and global trade increased. The result was a huge rift between the old, fragmented social order and the needs of a rising, globalizing market economy.
To prevent the breakdown of industrial and commercial progress, hundreds of creative reformers concluded that the world needed a shared set of facts. Knowledge had to be gathered, organized, standardized, recorded, continually updated, and easily accessible—so that all players in the world’s widening markets could, in the words of France’s free-banking champion Charles Coquelin, “pick up the thousands of filaments that businesses are creating between themselves.”
The result was the invention of the first massive “public memory systems” to record and classify—in rule-bound, certified, and publicly accessible registries, titles, balance sheets, and statements of account—all the relevant knowledge available, whether intangible (stocks, commercial paper, deeds, ledgers, contracts, patents, companies, and promissory notes), or tangible (land, buildings, boats, machines, etc.). 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. 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.
The results are hardly surprising. In the U.S., trust has broken down between banks and subprime mortgage holders; between foreclosing agents and courts; between banks and their investors—even between banks and other banks. Overall, credit (from the Latin for “trust”) continues to flow steadily, but closer examination shows that nongovernment credit has contracted. Private lending has dropped 21 percent since 2007. Outstanding loans to small businesses dropped more than 6 percent over the past year, while lending to large businesses, measured in commercial loans of more than $1 million, fell nearly 9 percent.”
De Soto articulates where economics facts were “disappeared” by the players involved in six key areas:
1. Mortgage Bundling
2. Default Swaps
3. Exemptions to “mark-to-market” accounting standards.
4. Off-Balance-Sheet Accounting
5. Government Use of Swaps and Repo Markets
6. Rating Agencies
Astonishing. Go read the entire piece here.
Foreclosure Fraud Reveals Structural & Legal Crisis (October 5th, 2010)
Why Foreclosure Fraud Is So Dangerous to Property Rights (October 12th, 2010)
The Destruction of Economic Facts
Hernando de Soto
BusinessWeek April 28, 2011
Redonkulous: Production: Sehsucht GmbH Hamburg, Germany
William Alden writes in a Huffington Post liveblog entitled “Inflation Vs. Jobs”:
Bernanke’s argument about inflation isn’t consistent, economist Paul Krugman says.
The Fed’s asset-purchase strategy is partially intended to promote maximum unemployment, but some experts are concerned that it will ultimately spark inflation once the recovery takes hold and the system remains awash in liquidity. In this view, there’s a tradeoff between jobs and prices.
Bernanke, however, doesn’t take this view: He said in the press conference that core inflation, or, as Krugman says, “inflation inertia,” isn’t a concern — and that expansionary monetary policy doesn’t stoke these forces.
But then, Bernanke is also saying that any further expansion would risk provoking inflation, Krugman notes. He continues:
This doesn’t make any sense in terms of his own expressed economic framework. I think the only way to read it is to say that he has been intimidated by the inflationistas, and is looking for excuses not to act.
And I agree with Mr. Krugman when he writes today:
Also, [Bernanke's] assertions that the job market is “gradually improving” are suspect. Yes, the official unemployment rate has fallen. But this is the result less of job creation than of a fall in the labor force participation rate; the employment-population ratio has been flat:
And I like to look at the Gallup polling data as a possible check on the BLS data; no sign there that things have improved:
The Fed Has Intentionally Discouraged Banks From Lending
It’s true – as I pointed out in 2009 – that the Fed has purposefully been encouraging banks to deposit their excess reserves at the Fed (for a profit), rather than loan them out to Main Street:
The Federal Reserve is mandated by law to maximize employment. The relevant statute states:
The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.
However, PhD economist Dean Baker says:
The country now has almost 25 million people who are unemployed or underemployed as a result of the Fed’s disastrous policies. Millions of people are losing their homes and tens of millions are losing their life savings. The country is likely to lose more than $6 trillion in output ($20,000 per person) due to the Fed’s inept job performance.
The Fed could have stemmed the unemployment crisis by demanding that banks lend more as a condition to the various government assistance programs, but Mr. Bernanke failed to do so.
Ryan Grim argues that the Fed might have broken the law by letting unemployment rise in order to keep inflation low:
The Fed is mandated by law to maximize employment, but focuses on inflation — and “expected inflation” — at the expense of job creation. At its most recent meeting, board members bluntly stated that they feared banks might increase lending, which they worried could lead to inflation.
Board members expressed concern “that banks might seek to reduce appreciably their excess reserves as the economy improves by purchasing securities or by easing credit standards and expanding their lending substantially. Such a development, if not offset by Federal Reserve actions, could give additional impetus to spending and, potentially, to actual and expected inflation.” That summary was spotted by Naked Capitalism and is included in a summary of the minutes of the most recent meeting…
Suffering high unemployment in order to keep inflation low cuts against the Fed’s legal mandate. Or, to put it more bluntly, it may be illegal.
In fact, the unemployment situation is getting worse, and many leading economists say that – under Mr. Bernanke’s leadership – America is suffering a permanent destruction of jobs.For example, JPMorgan Chase’s Chief Economist Bruce Kasman told Bloomberg:
[We've had a] permanent destruction of hundreds of thousands of jobs in industries from housing to finance.
Category: Think Tank
Succinct summation of week’s events: Positives: 1) Bernanke in his press conference implicitly says, “party on wayne, party on garth” as the end of QE2 in no way means tightening soon to follow 2) UoM and Conference Board confidence #’s up a touch in April 3) New Home Sales a punk 300k but higher than…Read More
Here are the Dow Jones headlines: 15:52 29Apr11 DJN-DJ EU PAPER: LARGE PARTS OF BANK RESTRUCTURINGS YET TO COME 15:54 29Apr11 DJN-DJ EU: “DISTINCT VULNERABILITIES REMAIN” IN EU BANK SECTOR 15:55 29Apr11 DJN-DJ EU: ROLL-OVER RISK STILL PRESENT IN SOVEREIGN DEBT MARKETS 16:05 29Apr11 DJN-DJ EU: EXIT FROM GOVERNMENT BANK BAILOUTS MAY SPUR M&A WAVE…Read More
Yesterday we noted: Now that companies have to disclose to all at the same time, we believe their investor relations departments are masters at guiding analysts just below actual earnings. This way the companies “beat” expectations and get the positive press and accolades that come with it. Further, it seems that everyone is happy with…Read More
Austan Goolsbee, chairman of the White House Council of Economic Advisers, talks about today’s report showing the U.S. economy slowed more than forecast in the first quarter. Gross domestic product rose at a 1.8 percent annual rate from January through March after a 3.1 percent pace in the final three months of 2010, the Commerce Department said in Washington. Economists projected 2 percent growth, according to the median estimate in a Bloomberg News survey. Goolsbee speaks with Hans Nichols on Bloomberg Television’s “Bottom Line.”
autostart video after the jump