De Soto on the Real Cause of the Global Financial Mess

Peruvian economist, Hernando de Soto, has yet another insightful op-ed in the New York Times, this time dealing with the global financial crisis. In the opinion piece, de Soto explains that the United States and Europe have continually missed opportunities to enact real reforms that would pull the world out of this crisis. Instead of treating the “disease,” which he explains is the lack of knowledge of who owns what assets and therefore risks, lawmakers have focused mainly on the “symptoms”—faulty loans, the mortgage crisis, and rising unemployment.
De Soto explains:
Had those symptoms been the real cause of the crisis, “vulture capitalists” should have swept in by now. They should have spotted the signals that send knowledge of who is in trouble and — following the laws of supply and demand — picked up on the cheap the potentially lucrative remains of the nonperforming assets and transactions, correcting the deficiencies that led to them…
Mechanisms in the United States and Europe to record and signal the crucial knowledge that determines whether it is reasonable to grant private credit — who has the property rights over the assets, equity and liabilities, and therefore holds the risks, and what the opportunities are — are no longer reliable. The knowledge system is broken.
De Soto has spent a great deal of his life working with emerging markets to bring those working in the informal sectors of the economy into the formal economy by enacting the very reforms needed to fix much of what ails the current financial system. I encourage you to read the rest of the article here.