Hernando de Soto says this credit crisis is all about (a lack of) paper

I’m not sure that I entirely understand all the points Hernando de Soto makes in his op-ed piece in the WSJ today, but this one sure is intriguing:

If you think about it, everything of value we own travels on property paper. At the beginning of the decade there was about $100 trillion worth of property paper representing tangible goods such as land, buildings, and patents world-wide, and some $170 trillion representing ownership over such semiliquid assets as mortgages, stocks and bonds. Since then, however, aggressive financiers have manufactured what the Bank for International Settlements estimates to be $1 quadrillion worth of new derivatives (mortgage-backed securities, collateralized debt obligations, and credit default swaps) that have flooded the market.

These derivatives are the root of the credit crunch. Why? Unlike all other property paper, derivatives are not required by law to be recorded, continually tracked and tied to the assets they represent. Nobody knows precisely how many there are, where they are, and who is finally accountable for them. Thus, there is widespread fear that potential borrowers and recipients of capital with too many nonperforming derivatives will be unable to repay their loans. As trust in property paper breaks down it sets off a chain reaction, paralyzing credit and investment, which shrinks transactions and leads to a catastrophic drop in employment and in the value of everyone’s property.

Stocks Rally Further in Run-up to EU Summit

MOSCOW — Global stocks enjoyed one of their best days in weeks on Tuesday ahead of a summit of European leaders that’s expected to be dominated by calls to boost economic growth.

Europe remains the focus of attention across all financial markets in the run-up to the June 17 Greek election that could go a long way to determining the country’s membership of the euro as well as the future of the single currency zone.

bryanfromhouston

Justin,
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DeSoto knows that of which he speaks. Philippe Aghion, a Professor at Harvard has had several indepth discussions on the role of trust in the economy. Specifically, he has noted that trust in the market place along with a low-regulation environment has inspired great advances in Scandanavian countries for years despite their very high-marginal tax rates which many might argue are misguided.
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This is why I can’t for the life of me understand why people still refuse to talk about the real problem in government, in business, in banks, etc. You see, it is okay for Wall Street to make a gazillion dollars as long as it does not disturb the fundamental trust that the world has in the U.S. Back to that “full faith and credit” thing again. But what DeSoto is really getting at here is that the world is scared that the full faith and credit might not be enough to make good on all of these undisclosed, unknown contracts.
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Parsing from a great philosopher, “As we know, There are known knowns. There are things we know we know. We also know There are known unknowns. That is to say We know there are some things
We do not know. But there are also unknown unknowns, The ones we don’t know We don’t know.”
Right now, I think it is safe to say that we are still dealing with the later. It is hard to TRUST in that which you do not know that you do not know.
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To get Biblical, that would involve an element of FAITH. Defined as the substance of things hoped for yet not seen. What? Huh? I take leave at this point knowing it will be a long time before we have a recovery. People believe in what they see, feel and taste and hear….there is little if any TRUST in unknown unknowns.
peacelovekindness

That great philosopher of yours, bryanfromhouston, is the one KNOWN KNOWN in the White House Oval Office loop who had really ‘trigger-happily’ started this whole debacle-fiasco! In the first place, why the hell did former Defence Secretary Donald Rumsfeld (Mr ABB) and his nemesis, former Vice-President Dick Cheney (Mr Halliburton), had to resort to the stupidest ‘scavenger-like’ decision to pre-emptively attack Iraq (wasting billions of dollars in the process!).

The US-led ‘Coalition of the willing’ invasion of Iraq coupled with the unnecessary Afghan ‘terroristic’ strategic-policy of another great philosopher (whose famous philosophy: “Either you’re with us or you’re with the terrorists” and “Mission accomplished!” among others) was, and still is, the root of all evils that caused this never-ending global financial meltdown ‘Born in the USA’! Ggrrr..
bryanfromhouston

That was little g – great philosopher. You’re preaching to the choir brother.