One of the reasons that the American economy seemed to leap ahead in economic might (in years gone by obviously) was that we eventually created a system by which those looking to transact their daily business or choose investments in the pursuit of creating wealth knew they could go to specific places to find factual data about a government agency or maybe a company they were interested in investing in. Land registries, UCC filings, and reliable oversight agencies allowed the average American to infer certain truths without fear of being egregiously led astray.
It was this system of available information that separated the American economy from disasters like the Weimar Republic of the 1920s in Germany or Greece in today’s world. Things, as they say, are changing. Economist and not world explorer, Hernando de Soto, made this very point in a recent Business Week article.
De Soto pointed out six systems which are in real danger of failing.
1. Mortgages
Rather than adhering to well-established state law for recording land titles and mortgages, Wall Street created MERS and other end-runs around these procedures. The net result: thousands of wrongful foreclosures and clouded titles.
2. Credit Default Swaps
Not only did CDSs drive leverage to insane levels, they made it impossible to know who ultimately bears the risk and where it is (other than the taxpayer).
3. Exemptions
Starting with the suspension of “mark to market” accounting standards, it is now impossible to know a financial company’s true financial position. The only safe bet is that its assets are worth less than the numbers shown on the books, and that all of its liabilities are not included – which leads us to…
4. Off Balance Sheet Accounting.
More falsification of balance sheets – supposedly fixed by Sarbanes-Oxley after the Enron debacle, but not. As DeSoto puts it, “balance sheets cease being factual.”
5. Government Use of Swaps/Repo Markets
DeSoto cites the example of Greece playing games with the dollar/euro exchange rate, but TBTF banksters used this technique as well. Lehman, anyone?
6. Rating Agencies
Over-reliance on ratings based on covariance formulas was not a trustworthy substitute for facts.
It’s something to think about, hmm? Anyone out there believe the American Economy is going to be the driving force of the 21st century?
The Creating Wealth Team
Flickr / susivinh
