Hernando de Soto: The Destruction of Economic Facts(businessweek.com)
businessweek.com
Hernando de Soto: The Destruction of Economic Facts
http://www.businessweek.com/magazine/content/11_19/b4227060634112.htm
16 comments
The "shadow markets" in this article reminded me of the "shadow systems" we often run into in the business intelligence space. Except instead of rouge, hidden, and prone to error spreadsheets it's rouge markets. Because the logic is effecively hidden dishonest individuals can use their shadow spreadsheets to massage their numbers into an up and to the right shape. The same potential for abuse and accident exists in shadow markets but with the global economy on the line. Terrifying thought!
Full text: http://www.businessweek.com/print/magazine/content/11_19/b42...
(I'm tend to be annoyed that I have to read the first page of an article, only to find out that it stretches across multiple pages, then having to scroll up, find the print button, click it andthen having to scroll back down again to where I left off...)
(I'm tend to be annoyed that I have to read the first page of an article, only to find out that it stretches across multiple pages, then having to scroll up, find the print button, click it andthen having to scroll back down again to where I left off...)
Not directly related to the article, but something I've been thinking about.
In times past, we had a confusion between politics and church. The pope had a lot of weight to throw around, kings had an on-again, off-again relationship with him. Politics and state were intermingled, and the suggestion it didn't was either laughed at, or someone would try to kill you.
Then we had a series of social revolutions that created the idea of separation between church and state. This is now a strong principle, and supported by the man in the street.
The situation now: we have a confusion between banking and state. States hold themselves to be responsible for the state of the economy ostensibly because they care about you, but really because it's about power - to legislate things away, to win elections, to steer graft.
States participate in a complicated dance with the set of organisations that keep the world liquid through currency transfer, bonds and risk management.
This has created an environment of privilege backed by a couple of huge advantages: there are active monopolies on the way that bonds can be traded, and practical advantages to currency trading (you get edge by having flow, which is why the powers in FX are big banks) that cause it to trend towards oligarchy. Systemic risk creates moral hazard, an environment of privilege that attracts many of the best and brightest, just as the church once did.
Perhaps it doesn't have to be that way. What if we had a well-recognised separation between the extent of banking, and the reach of the state? What would Martin Luther say?
In times past, we had a confusion between politics and church. The pope had a lot of weight to throw around, kings had an on-again, off-again relationship with him. Politics and state were intermingled, and the suggestion it didn't was either laughed at, or someone would try to kill you.
Then we had a series of social revolutions that created the idea of separation between church and state. This is now a strong principle, and supported by the man in the street.
The situation now: we have a confusion between banking and state. States hold themselves to be responsible for the state of the economy ostensibly because they care about you, but really because it's about power - to legislate things away, to win elections, to steer graft.
States participate in a complicated dance with the set of organisations that keep the world liquid through currency transfer, bonds and risk management.
This has created an environment of privilege backed by a couple of huge advantages: there are active monopolies on the way that bonds can be traded, and practical advantages to currency trading (you get edge by having flow, which is why the powers in FX are big banks) that cause it to trend towards oligarchy. Systemic risk creates moral hazard, an environment of privilege that attracts many of the best and brightest, just as the church once did.
Perhaps it doesn't have to be that way. What if we had a well-recognised separation between the extent of banking, and the reach of the state? What would Martin Luther say?
In the case of the banks, their regulation by the state is a recent phenomenon, as is fiat money itself. So we can look at what happened before when banks were more independent. I'm no expert on the subject, but it doesn't seem all that attractive - as the article mentions, crashes and panics were a regular feature back then.
People had a healthy mistrust of banks and also means to store money outside them (precious metals). The bank panics didn't have lasting damage, recovery was fast and they didn't get bailed out by the government. Perhaps government control has mitigated against these little panics, but it set the stage for real meltdowns and slow recovery afterwards.
There are two distinct functions banks do: money storage and lending. These can be completely separate. You only need a money store for the convenience of not having to carry metal. Nowadays, you may want an electronic store as not to have to carry cash.
As for lending, that is a function much older than banks themselves. You don't need consumer deposits to lend money. Some banks do operate that way, but there should be a more clear distinction. We could have 'vault banks' and 'lender banks'.
Both 'vault banks' and 'lender banks', or combinations can operate in a free market.
There are two distinct functions banks do: money storage and lending. These can be completely separate. You only need a money store for the convenience of not having to carry metal. Nowadays, you may want an electronic store as not to have to carry cash.
As for lending, that is a function much older than banks themselves. You don't need consumer deposits to lend money. Some banks do operate that way, but there should be a more clear distinction. We could have 'vault banks' and 'lender banks'.
Both 'vault banks' and 'lender banks', or combinations can operate in a free market.
You can store currency or gold in various non-interest-bearing ways in the current free market. It isn't a very attractive option compared with banks, however as stored money (metal-backed or otherwise) that isn't lent or invested necessarily loses value on average, in the long term against currency that is.
we can look at what happened before when banks were more independent
Don't confuse correlation with causation. I think de Soto makes it clear that it wasn't the banks per se that caused friction back in the old days, but rather the lack of comprehensive, accurate, and accessible records.
Don't confuse correlation with causation. I think de Soto makes it clear that it wasn't the banks per se that caused friction back in the old days, but rather the lack of comprehensive, accurate, and accessible records.
There's always going to be winners and losers, bubbles and busts, but governments playing a role in monetary policy only exacerbates these problems. Recoveries come in spite of intervention in the economy, not as a result of it. See Rothbard's The Panic of 1819 for an example from the early days of these disastrous ideas: http://mises.org/resources/695
That does not seem to have changed.
> The importance of economic facts may not be obvious to Americans. "What does the fish know about the water in which it swims?" asked Albert Einstein.
Interesting how that water and fish story repeats itself...
Interesting how that water and fish story repeats itself...
It is a ridiculous analogy tho'. What do humans know about the air we breathe? Well quite a lot actually. What do humans know about the ground we walk on? Ditto.
And what did we know about air before the 1500s or so - for the last 50 millennia?
Without wanting to sound harsh, but we knew it existed and that one could not live without it.
From studying sediments and vegetation - quite a lot actually.
Is it really true that its not obvious to Americans? I think anyone even slightly tuned in to whats going on realizes that a lot of the problems now are based on a lack of proper information.
I'm skeptical about this working since rating agencies should, in addition to following formulaic rules, look for company specific pieces of information that would affect the rating, but its an interesting idea.