The Peruvian economist Hernando de Soto has offered a very interesting twist on the western financial crisis. To summarize, he argues that the problem in the developing world is the translation of real, physical, assets into trabeable paper. This allows the raising of capital through loans, which lubricates capitalist development. The west, he suggests, now has the opposite problem – it has allowed the growth of lots of paper that has no clear relationship with real assets.
In short – the developing world has lots of assets but not enough paper whereas the West has too much paper that has no assets.
What de Soto does not say – at least not in so many words – is that only governments can resolve both these problems.
In the developing world only governments can legitimize property rights in the land, buildings, businesses and machinery that fuels so much of the shadow economy. Historically, in the USA for example as de Soto demonstrated in his seminal book “The Mystery of Capital”, it was the state that established and protected the property rights that enabled capitalist development. Developing country governments need to do the same now.
Conversely, it is the escape from proper state regulation that has allowed western financial interests to create “paper” – so called derivatives – that bear only a passing relationship to real assets. So complex and distant from real assets are these instruments that they no longer have credibility, especially when a crisis of confidence hits. Governments need to step in to guarantee these “assets” when they tank because they have become “too big to fail” – but they, Governments, need to have stopped this position developing in the first place and in the future.
Hernando de Soto’s analysis has been adopted by the free-market right, but they fail to note the true import of his analysis – that it implies the need for Governments to regulate and establish clearly the relationship between capital and the paper that represents it, something only Governments can do.