Saturday, May 14, 2011

We Don't Even Know What to Fix

Hernando de soto
No, not that Hernando de Soto!
Hernando de Soto, author of a book I read about 8 years ago called The Mystery of Capital, makes the case that the financial crisis was due mainly to the increasing ability of the financial system to hide what it's doing.

Enron hid its collapse by moving its losses "off the books" to shell companies to make itself look much more profitable than it was.  Today, the financial system seems focused more than anything on making instruments like credit default swaps and complex derivatives that are profitable largely because they are so complicated that it's easy to make money from the people who, at least temporarily, don't understand them.

These activities add almost no value to the economy, but they did do a lot to cause a gigantic recession.  Despite all that, the financial reform bill Congress passed last year was modest at best, and even those gains are the target of massive efforts to roll them back.

I don't agree with de Soto that the housing price bubble didn't contribute to the collapse, but he makes a great case that the fact that the modern world just doesn't have much of a clue what's going on in the "shadow banking" system is a huge problem that is likely going to cause another meltdown in the future.


  1. How do we take steps toward real refom? Does there need to be an incentive that we haven't already seen (because apparently crashing the worlds economies isn't enough). Does there need to be overwhelming political pressure or a societal swing in our understanding of corporate morality?

  2. I think part of the tragedy of our current crisis is that because we didn't "hit bottom" with a full-blown depression, we weren't forced to learn the lessons we needed to. The Great Depression started near the beginning of President Hoover's term, so by the time the 1932 election came around, Americans clearly and emphatically blamed him and Republican policies for what had happened. With the one we're in now, it came near the end of President Bush's second term, so while people generally blame him for it, it didn't have the same period of time to really sink in, and Republicans have desperately avoided any responsibility, to the point of blocking efforts to even put on paper what the causes were.

    So, I think the only way this changes is if the same policies get us into another, probably even deeper, recession, Republicans way overreach and give voters other reasons to doubt their credibility, or we will just have to wait until the younger generation that understands this issue better than people who have far too much invested in their own ideologies to admit they were wrong, becomes an ever-larger share of people voting. How's that for a downer?