Math to the Rescue
Sunday the renowned economist Hernando de Soto wrote an op-ed piece that appeared in the Los Angeles Times. De Soto is unquestionably one of the preeminent thinkers today, and his essay was a fine elucidation of what's really going on. The problem is, it is still a World perspective from a World operative. While I do admire de Soto and his work, there are still holes in his premise that only a Kingdom perspective can fill.
If I may, de Soto's piece is in the smaller font, and my comments are in the larger following each paragraph.
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.
What exactly is "the math"? Is it statistics, damn statistics, or the truth? Math is fine and I know he's certainly making the point that things should be valued veritably, but why is it when anyone says "Do the math" they achieve some kind of morally unimpeachable status from which they may make the definitive pronouncement about things?
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.
"The lesson" is very true, but the problem is this: Who's in charge of the "measuring"? It may reveal some of the facts of capital, but what is the truth about the capital? Just "doing the math" will not get what you say it will.
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 -- which both Warren Buffet and George Soros have called "financial weapons of mass destruction" -- without locating or counting them either.
Ahh, but derivatives can be counted. The issue is really whether or not they are veritably attached to some real asset. Even more significant is how feasible it is to call ivory-tower-dwellers the liars that they are? Who else would be expected to do that but other chummy ivory-tower-dwellers!
And, man, do those financial instruments need measuring: pooled, packaged and traded around the world, they are now the principal reason for today's massive credit contraction. The fear among financial institutions that potential borrowers and users of credit and capital could be burdened with so many nonperforming derivatives that they would be unable to repay their loans and protect their investments has plunged the global economy into a recession.
What, really, is the nature of this "fear"? Could it possibly be that anyone with any claim to anyone else's assets in some manner are asking this question: "Huh, I must have liars borrow for me to get a return, and, oh my, what happens if too many of them are exposed--what do I do?" Is this nothing other than the jaded fear that some other better exploiter may take the previously advantaged exploiters to the cleaners?
The Securities and Exchange Commission estimates that derivative paper is worth $596 trillion (10 times the value of total world production), while studies at the Bank for International Settlements in Basel, Switzerland, conclude that it could be twice as much -- $1.2 quadrillion. And exactly how many of those derivatives are actually nonperforming and would have to be surgically removed to stop their toxicity from spreading and destroying trust among creditors and investors? Nobody knows that for sure either. U.S. Treasury Secretary Timothy F. Geithner has set aside $1 trillion to assist in buying those toxic assets, but the SEC has guesstimated that there might be upward of $3 trillion worth.
Keep in mind the estimation of the value of the entire world's wealth is about $250 trillion. Given that value of derivatives is $1 quadrillion, does this mean that I can say a $25 million asset is worth $100 million and Treasury will give me $60 million for it? Hey, I'll sell it at a discount, after all, the economy what it is and all, you know.
With so much at stake, clearly an accurate accounting is in order. Once this paper is brought "into the sunshine," as former SEC Chairman Christopher Cox said at the beginning of the crisis, "money and credit will begin to flow again." Government has to assure that it is located, quantified and usefully categorized so that the market can again gauge risks and restore trust by isolating the toxic from the healthy paper.
What exactly is, I might ask, something that is "healthy" and something that is "toxic"? Who decides? Do the disgraced rating agencies still have a say? What about the investment firms? Is it based on observable inputs or unobservable inputs? Should asset valuation be mark-to-market or mark-to-mark? What about those financial math whizzes who ingeniously devised those derivatives-- err, um, oh yeah...
So what are we waiting for? Many worry about government meddling in the affairs of financial institutions. Some contend that Wall Street has Washington in its pocket; others suspect that the bankers are afraid that the numbers will be so high as to spark a run on their banks. And then there are those who still believe that the market will be able to sort it all out -- if we would just stand back and let the vulture capitalists dispose of the toxic stuff in their discreet and profitable ways.
De Soto blows out a few more candidates for the role of Decider. (After all, George Bush isn't around anymore to hold the mantle.) Should Washington decide? Nah, they're too busy enabling the liars. The banks? Nah, they're too afraid the truth about the lies will get out too much too fast. The market? Nah, too many liars trying to lie better than the other liars.
Let me offer just four of the many good reasons I could give for why "doing the math" -- right now -- is still the best strategy for halting the global economic meltdown threatening us.
So, hey! How about letting--ta-da!--the econometricians do the job! Hurrah! Let's see what de Soto's four-part solution is about.
First, the vultures I've talked to tell me that buying a significant amount of paper in the dark will take years. With information about derivatives not standardized and thousands of idiosyncratic bonds sold, resold and scattered helter-skelter all over the market, it will be difficult for any individual vulture to calculate their worth until someone locates and categorizes them. In fact, some derivative paper is so sloppily structured that banks have been unable to figure out the contents of their own portfolios, and U.S. courts continue to reject many foreclosures that are based on this kind of paper. So before we could really hand over the solution to the vultures, someone still would have to do the math.
Ohh-kay. Someone to do the math. Got that part. Never mind that the real issue is how many gargantuous institutionally sanctioned lies have virulently infected the entire system at every level, which is precisely what he just said there. "Hey! This guy's been shot eight times, he's got severe fractures from the car accident, and his major organs are riddled with cancer! Somebody get him a breath mint--stat!"
And even while the vultures are, minimally, at work, the contamination will continue as this huge shadow economy of derivative paper infects everything it touches. Consider that a mere 7% default on subprime paper -- equivalent to maybe $1 trillion or $2 trillion -- quickly contaminated other paper, creating a $50-trillion hole in the U.S. economy from losses in stocks, home values and revenues in less than one year. By not counting and identifying derivatives one by one and drawing a legal boundary around each by means of the rules of property law (things such as registration, traceability and standardized identification), we are unable to protect every asset and every particular interest on that asset from contamination. The longer we wait to do the math, the worse it will get. And the more likely the anarchy of this shadow economy will spread.
In other words, let's do the math right now or it'll be worse. Seems to me, though, that the institutional deceit has been going on for, oh, a few millennia or so. Take a peek at what economist pundits and scholars were saying at the time of the Great Depression, and before that the panics that occurred every twelve years or so, and before that every economic crisis in history. It was no different. Let's do this thing and that thing and do it right now or else. Ho-hum. World people doing World things.
In the world where I come from, it is the typical state of affairs. In fact, apart from the elite Westernized minority, most people's assets are covered by paper that is endemically toxic: not recorded, not standardized, difficult to identify, hard to locate, its real value so opaque that ordinary people cannot build trust in each other or be trusted in global markets. In short, for shadow economies outside the U.S. and Europe, "credit crunch" and "meltdown" are chronic conditions. You don't want to go there: It will wipe out your middle class, nurturing radical politics, class confrontation, violence, crime and massive drug production and narco-trafficking. (North Americans only know drug consumption; just wait until you see the supply side of the deal.)
And why don't people trust one another, in not just underdeveloped countries but pretty much everywhere? Hmm, seems like quite a lot of awful things having to do with one simple thing: the supremely shitty ways that people treat one another. But wait, we're going to get going on the math, there's the math, whew, good thing for the math.
Finally, you can't continue the bailouts, monetary infusions and tax breaks because you will eventually run out of money -- and still have little credit available. That is because the overwhelming amount of available credit is not made up of money but assets documented in property records such as fungible real estate titles, mortgages, bonds and derivatives, which have some of the financial attributes of money -- what economists used to call "moneyness." In fact, although there is only $13 trillion in cash notes and coins worldwide, there are hundreds of trillions of dollars in "property paper," when moneyness is taken into account.
To de Soto's credit, he gets deep into the profound thesis in his book The Mystery of Capital, which is basically that most people's capital is not on record in any meaningful form, and as such cannot be translated into real, live, actual stuff that leads to production that vibrantly improves people's standards of living. Thing is, this is not new. Jesus said if we'd just love another like we should, we have 100 times what the World offers.
If you want to get credit flowing again, you must restore trust in paper as soon as possible. And that means measuring the assets, recording them, finding and purging those that are toxic and preventing future debasement of the paper -- in essence, submitting it to property law just like all the other assets that we own and value.
And here is where we get the de Soto solution, which is none other than the woefully deficient tried-and-failed through the eons solution: The Law. Let's just get Caesar on this and it'll all be spiffy again. World inhabitants can be so short-sighted. Don't get me wrong, the law is great. It is great for exposing how wretched we behave toward one another. How about if we fled this body of death and trusted in Christ from Whom we'd actually have the capacity to value things accurately?
Before we can get out of this recession, we need to concede that we just don't have the right information. At present, the world of derivatives is devoid of useful facts and a structure from which we can extract the meaning, knowledge and confidence required to end the credit crunch.
And why don't you have the right information? Because no matter where you look in the World, you'll never find the One who'd be able to give you the real information you'd need.
And before anyone can get those facts, we have to do the math.
Math is fine, but to get to the truly meaningful facts, you need The Truth.
If I may, de Soto's piece is in the smaller font, and my comments are in the larger following each paragraph.
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.
What exactly is "the math"? Is it statistics, damn statistics, or the truth? Math is fine and I know he's certainly making the point that things should be valued veritably, but why is it when anyone says "Do the math" they achieve some kind of morally unimpeachable status from which they may make the definitive pronouncement about things?
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.
"The lesson" is very true, but the problem is this: Who's in charge of the "measuring"? It may reveal some of the facts of capital, but what is the truth about the capital? Just "doing the math" will not get what you say it will.
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 -- which both Warren Buffet and George Soros have called "financial weapons of mass destruction" -- without locating or counting them either.
Ahh, but derivatives can be counted. The issue is really whether or not they are veritably attached to some real asset. Even more significant is how feasible it is to call ivory-tower-dwellers the liars that they are? Who else would be expected to do that but other chummy ivory-tower-dwellers!
And, man, do those financial instruments need measuring: pooled, packaged and traded around the world, they are now the principal reason for today's massive credit contraction. The fear among financial institutions that potential borrowers and users of credit and capital could be burdened with so many nonperforming derivatives that they would be unable to repay their loans and protect their investments has plunged the global economy into a recession.
What, really, is the nature of this "fear"? Could it possibly be that anyone with any claim to anyone else's assets in some manner are asking this question: "Huh, I must have liars borrow for me to get a return, and, oh my, what happens if too many of them are exposed--what do I do?" Is this nothing other than the jaded fear that some other better exploiter may take the previously advantaged exploiters to the cleaners?
The Securities and Exchange Commission estimates that derivative paper is worth $596 trillion (10 times the value of total world production), while studies at the Bank for International Settlements in Basel, Switzerland, conclude that it could be twice as much -- $1.2 quadrillion. And exactly how many of those derivatives are actually nonperforming and would have to be surgically removed to stop their toxicity from spreading and destroying trust among creditors and investors? Nobody knows that for sure either. U.S. Treasury Secretary Timothy F. Geithner has set aside $1 trillion to assist in buying those toxic assets, but the SEC has guesstimated that there might be upward of $3 trillion worth.
Keep in mind the estimation of the value of the entire world's wealth is about $250 trillion. Given that value of derivatives is $1 quadrillion, does this mean that I can say a $25 million asset is worth $100 million and Treasury will give me $60 million for it? Hey, I'll sell it at a discount, after all, the economy what it is and all, you know.
With so much at stake, clearly an accurate accounting is in order. Once this paper is brought "into the sunshine," as former SEC Chairman Christopher Cox said at the beginning of the crisis, "money and credit will begin to flow again." Government has to assure that it is located, quantified and usefully categorized so that the market can again gauge risks and restore trust by isolating the toxic from the healthy paper.
What exactly is, I might ask, something that is "healthy" and something that is "toxic"? Who decides? Do the disgraced rating agencies still have a say? What about the investment firms? Is it based on observable inputs or unobservable inputs? Should asset valuation be mark-to-market or mark-to-mark? What about those financial math whizzes who ingeniously devised those derivatives-- err, um, oh yeah...
So what are we waiting for? Many worry about government meddling in the affairs of financial institutions. Some contend that Wall Street has Washington in its pocket; others suspect that the bankers are afraid that the numbers will be so high as to spark a run on their banks. And then there are those who still believe that the market will be able to sort it all out -- if we would just stand back and let the vulture capitalists dispose of the toxic stuff in their discreet and profitable ways.
De Soto blows out a few more candidates for the role of Decider. (After all, George Bush isn't around anymore to hold the mantle.) Should Washington decide? Nah, they're too busy enabling the liars. The banks? Nah, they're too afraid the truth about the lies will get out too much too fast. The market? Nah, too many liars trying to lie better than the other liars.
Let me offer just four of the many good reasons I could give for why "doing the math" -- right now -- is still the best strategy for halting the global economic meltdown threatening us.
So, hey! How about letting--ta-da!--the econometricians do the job! Hurrah! Let's see what de Soto's four-part solution is about.
First, the vultures I've talked to tell me that buying a significant amount of paper in the dark will take years. With information about derivatives not standardized and thousands of idiosyncratic bonds sold, resold and scattered helter-skelter all over the market, it will be difficult for any individual vulture to calculate their worth until someone locates and categorizes them. In fact, some derivative paper is so sloppily structured that banks have been unable to figure out the contents of their own portfolios, and U.S. courts continue to reject many foreclosures that are based on this kind of paper. So before we could really hand over the solution to the vultures, someone still would have to do the math.
Ohh-kay. Someone to do the math. Got that part. Never mind that the real issue is how many gargantuous institutionally sanctioned lies have virulently infected the entire system at every level, which is precisely what he just said there. "Hey! This guy's been shot eight times, he's got severe fractures from the car accident, and his major organs are riddled with cancer! Somebody get him a breath mint--stat!"
And even while the vultures are, minimally, at work, the contamination will continue as this huge shadow economy of derivative paper infects everything it touches. Consider that a mere 7% default on subprime paper -- equivalent to maybe $1 trillion or $2 trillion -- quickly contaminated other paper, creating a $50-trillion hole in the U.S. economy from losses in stocks, home values and revenues in less than one year. By not counting and identifying derivatives one by one and drawing a legal boundary around each by means of the rules of property law (things such as registration, traceability and standardized identification), we are unable to protect every asset and every particular interest on that asset from contamination. The longer we wait to do the math, the worse it will get. And the more likely the anarchy of this shadow economy will spread.
In other words, let's do the math right now or it'll be worse. Seems to me, though, that the institutional deceit has been going on for, oh, a few millennia or so. Take a peek at what economist pundits and scholars were saying at the time of the Great Depression, and before that the panics that occurred every twelve years or so, and before that every economic crisis in history. It was no different. Let's do this thing and that thing and do it right now or else. Ho-hum. World people doing World things.
In the world where I come from, it is the typical state of affairs. In fact, apart from the elite Westernized minority, most people's assets are covered by paper that is endemically toxic: not recorded, not standardized, difficult to identify, hard to locate, its real value so opaque that ordinary people cannot build trust in each other or be trusted in global markets. In short, for shadow economies outside the U.S. and Europe, "credit crunch" and "meltdown" are chronic conditions. You don't want to go there: It will wipe out your middle class, nurturing radical politics, class confrontation, violence, crime and massive drug production and narco-trafficking. (North Americans only know drug consumption; just wait until you see the supply side of the deal.)
And why don't people trust one another, in not just underdeveloped countries but pretty much everywhere? Hmm, seems like quite a lot of awful things having to do with one simple thing: the supremely shitty ways that people treat one another. But wait, we're going to get going on the math, there's the math, whew, good thing for the math.
Finally, you can't continue the bailouts, monetary infusions and tax breaks because you will eventually run out of money -- and still have little credit available. That is because the overwhelming amount of available credit is not made up of money but assets documented in property records such as fungible real estate titles, mortgages, bonds and derivatives, which have some of the financial attributes of money -- what economists used to call "moneyness." In fact, although there is only $13 trillion in cash notes and coins worldwide, there are hundreds of trillions of dollars in "property paper," when moneyness is taken into account.
To de Soto's credit, he gets deep into the profound thesis in his book The Mystery of Capital, which is basically that most people's capital is not on record in any meaningful form, and as such cannot be translated into real, live, actual stuff that leads to production that vibrantly improves people's standards of living. Thing is, this is not new. Jesus said if we'd just love another like we should, we have 100 times what the World offers.
If you want to get credit flowing again, you must restore trust in paper as soon as possible. And that means measuring the assets, recording them, finding and purging those that are toxic and preventing future debasement of the paper -- in essence, submitting it to property law just like all the other assets that we own and value.
And here is where we get the de Soto solution, which is none other than the woefully deficient tried-and-failed through the eons solution: The Law. Let's just get Caesar on this and it'll all be spiffy again. World inhabitants can be so short-sighted. Don't get me wrong, the law is great. It is great for exposing how wretched we behave toward one another. How about if we fled this body of death and trusted in Christ from Whom we'd actually have the capacity to value things accurately?
Before we can get out of this recession, we need to concede that we just don't have the right information. At present, the world of derivatives is devoid of useful facts and a structure from which we can extract the meaning, knowledge and confidence required to end the credit crunch.
And why don't you have the right information? Because no matter where you look in the World, you'll never find the One who'd be able to give you the real information you'd need.
And before anyone can get those facts, we have to do the math.
Math is fine, but to get to the truly meaningful facts, you need The Truth.
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