Hernando de Soto: Global Meltdown Rule No. 1: Do the math

As a Peruvian educated by British and American teachers, I learned never to embark on a major task without first “doing the math.” No more of that Latino “happy go lucky, trust your gut and say three Hail Marys” approach to life.

Without measurement, my teachers advised, I wouldn’t be able to identify and disentangle the very reality before my eyes. By doing the math, I would see order and coherence, the way things were organized; invisible relationships would come into view, and right behind order would come meaning, followed by confidence. Thanks to my Anglo-Saxon education, I learned the lesson: You cannot manage what you have not previously measured.

So imagine how I have felt watching my role models go to war over weapons of mass destruction that they never actually assessed, or now, watching them wage a losing war against derivatives….

Read it all.


Posted in * Economics, Politics, Economy, The 2009 Obama Administration Bank Bailout Plan, The Banking System/Sector, The Credit Freeze Crisis of Fall 2008/The Recession of 2007--, The U.S. Government, Treasury Secretary Timothy Geithner

8 comments on “Hernando de Soto: Global Meltdown Rule No. 1: Do the math

  1. Dilbertnomore says:

    Sr. de Sota has it entirely correct. Our current policy is akin to taking potshots at an elephant with a BB-gun and hoping for the best. Or at least seeking to capture political credit for the ‘sincerity’ of our miserable efforts. We have allowed ourselves to become a victim of the axiom, “Good politics is bad economics and vice-versa.”

    Elections (past, present and future – General and Primary) produce consequences. We are now very much living that fact. God help us since we seem to be unable or unwilling to help ourselves.

  2. Bart Hall (Kansas, USA) says:

    I would add that we shouldn’t be fooled by current appearances of improvement, as this is most probably but a temporary respite. In both 2010 and 2011 the dollar value of Alt-A and adjustable option mortgage resets is of roughly the same magnitude as that for sub-prime resets in 2007 and 2008.

    There remains a frightful quantity of deeply compromised and profoundly weak residential mortgage paper out there, bundled who-knows-how and lurking who-knows-where. That’s not even counting the rapidly growing detritus of heavily distressed commercial property mortgages for places like shopping centers that used to be full of shops offering goods and services people quickly decided they didn’t really need as soon as they actually had to pay for them.

    Finally, to build on one of De Soto’s major points … what groups in American political life stand to gain most from an evisceration of the middle class?

  3. Tired of Hypocrisy says:

    There’s a lot of thrashing around going on right now. It’s nice to hear a voice of sanity. We should measure twice and cut once.

  4. IchabodKunkleberry says:


    Although I liked the question which ended your comment, I would
    have liked it even more if you had gone on to answer it. The easy
    answer is, “the monied classes”, but that doesn’t begin to scrape
    the surface. Furthermore, the Chinese, who are sitting on boatloads
    of American money, could wade into the American politico-economic
    fray and chaos, possibly buying up cheaply American real estate and
    financial assets. I think they’ve used a similar ploy in Africa to
    secure access to natural resources. Was it Lenin who said that
    “when the time comes to hang the capitalists, they will be competing
    with each other to sell us the rope” ? Didn’t the Chinese also have
    a rather shadowy presence during the 1990’s in Clinton’s campaign
    for re-election ?

  5. Bart Hall (Kansas, USA) says:

    Note: I asked the [i]cui bono[/i] question in the specific context of *political* life.

    As a mental exercise, contemplate higher [i]income[/i] taxes as being an exclusionary tactic promoted by the self-appointed elite, a subset of the monied classes, [b]intended to block potential advancement of lesser folk by taxing away any gains from a really good year[/b], particularly as they have great difficulty exploiting numerous tax loopholes available to the more regularly affluent.

    At the lower ends of the middle class, who might wish to see them desperate and panicked? Think: Saul Alinsky’s advice to “rub raw the sores of discontent” to consolidate radical power.

  6. Craig Goodrich says:

    This is an excellent article by an excellent economist; one of my [url=http://home.hiwaay.net/~craigg/g4c/rant-Curly.htm]rants[/url] of a decade ago discussed his famous first book, [i]The Other Path[/i], which revolutionized economic thinking about the Third World.

    Before our “doing the math” translates automatically into a call for more regulation, since of course Beltway bureaucrats and politicians are much more clever about economics than Wall Street tycoons, let’s make sure we know what we are talking about; “derivatives” is a term that covers a very wide range of financial instruments, from straightforward wheat and steel futures to the madly complex documents de Soto is discussing. An interesting and brief (and upbeat; it was written long before the current meltdown) [url=http://husky1.stmarys.ca/~gye/derivativeshistory.pdf] article[/url] on the history of derivatives points out:[blockquote] To start we need to go back to the Bible. In Genesis Chapter 29, believed to be about the year 1700 B.C., Jacob purchased an option costing him seven years of labor that granted him the right to marry Laban’s daughter Rachel. His prospective father-in-law, however, reneged, perhaps making this not only the first derivative but the first default on a derivative. Laban required Jacob to marry his older daughter Leah. Jacob married Leah, but because he preferred Rachel, he purchased another option, requiring seven more years of labor, and finally married Rachel, bigamy being allowed in those days. Jacob ended up with two wives, twelve sons, who became the patriarchs of the twelve tribes of Israel, and a lot of domestic friction, which is not surprising. Some argue that Jacob really had forward contracts, which obligated him to the marriages but that does not matter. Jacob did derivatives, one way or the other. Around 580 B.C., Thales the Milesian purchased options on olive presses and made a fortune off of a bumper crop in olives. So derivatives were around before the time of Christ.

    … Interestingly, futures/options/derivatives trading was banned numerous times in Europe and Japan and even in the United States in the state of Illinois in 1867 though the law was quickly repealed. In 1874 the Chicago Mercantile Exchange’s predecessor, the Chicago Produce Exchange, was formed. It became the modern day Merc in 1919. Other exchanges had been popping up around the country and continued to do so.

    … Another significant event of the 1950s was the ban on onion futures. Onion futures do not seem particularly important, though that is probably because they were banned, and we do not hear much about them. But the significance is that a group of Michigan onion farmers, reportedly enlisting the aid of their congressman, a young Gerald Ford, succeeded in banning a specific commodity from futures trading. To this day, the law in effect says, “you can create futures contracts on anything but onions.”[/blockquote]

    Unfortunately, Fannie Mae — which was founded to “securitize” mortgages, effectively creating a new class of leveraged derivative with the assumption that the Government eliminated all downside risk — did not deal in onions…

    I strongly recommend the Wikipedia articles on “Derivatives (financial)” and “Fannie Mae”, for those who do not speak Finance as a mother tongue.

  7. rugbyplayingpriest says:

    The west has departed from its faith. It has replaced the love of God- consider the protestant work ethic which drove the American dream- or the strong Christian voice which runs through Europes history- with the love of mammon.

    And now the result is revealed. A culture that is morally, ethically, intellectually, spiritually and now financially BANKRUPT.

    The Empire has fallen. We can expect a generation of little rises amidst steady decline- as the death throws take hold. We then await the new Empire to rise.

    Bidders come to the fore: China, Brazil, MIddle East, Russia…global dominance is there for the taking. Having a firm set of beliefs my money is on the middle East.

    The good news is that none of this affects the promises of Christ, the joy of the family, the gift of friendship and the life of faith.

  8. tgs says:

    #7. It’s time to focus on a God given solution to this terrible mess we’ve created. I believe that the way to do that most effectively is through prayer. Prayer is the most powerful force in the universe and strong, consistent prayers will bring the best solution. Isn’t it time we Christians use this gift from God and have faith in it?