I am back from attending the American Bar Association International Law Section’s Annual Conference in Miami. I had the pleasure of meeting the country’s leading legal bloggers including Dan Harris of the China Law Blog. I look forward to the Section’s Spring meeting in New York and the next annual meeting in Paris, France. I hope to see some of you there!
The key note speaker of the conference was Dr. Hernando de Soto, who Bill Clinton has described as "the world’s greatest living economist." His explanation of the credit crisis left me spellbound. Frankly, I’m still trying to make sense of it all. His speech echoed his recent op-ed piece in the Wall Street Journal. Here is one of his most thought provoking quotes:
If you think about it, everything of value we own travels on property paper. At the beginning of the decade there was about $100 trillion worth of property paper representing tangible goods such as land, buildings, and patents world-wide, and some $170 trillion representing ownership over such semiliquid assets as mortgages, stocks and bonds. Since then, however, aggressive financiers have manufactured what the Bank for International Settlements estimates to be $1 quadrillion worth of new derivatives (mortgage-backed securities, collateralized debt obligations, and credit default swaps) that have flooded the market.
These derivatives are the root of the credit crunch. Why? Unlike all other property paper, derivatives are not required by law to be recorded, continually tracked and tied to the assets they represent. Nobody knows precisely how many there are, where they are, and who is finally accountable for them. Thus, there is widespread fear that potential borrowers and recipients of capital with too many nonperforming derivatives will be unable to repay their loans. As trust in property paper breaks down it sets off a chain reaction, paralyzing credit and investment, which shrinks transactions and leads to a catastrophic drop in employment and in the value of everyone’s property.
Whew. That’s some pretty deep analysis. What do you think?