Hernando de Soto is president of the Institute for Liberty and Democracy (ILD)—headquartered in Lima, Peru—considered by The Economist as one of the two most important think tanks in the world. Currently, he is focused on designing and implementing capital formation programs to empower the poor in Africa, Asia, Latin America, the Middle East, and former Soviet nations. He also co-chaired the Commission on Legal Empowerment of the Poor, and currently serves as honorary co-chair on various boards and organizations, including the World Justice Project.
De Soto has served as an economist for the General Agreement on Tariffs and Trade, as president of the executive committee of the Copper Exporting Countries Organization (CIPEC), as CEO of Universal Engineering Corporation, as a principal of the Swiss Bank Corporation Consultant Group, and as a governor of Peru’s Central Reserve Bank.
De Soto has published two books about economic and political development, The Other Path and The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else.
Crisis from Derivatives
When US Treasury Secretary Henry Paulson initiated his Troubled Assets Relief Program (TARP) in the midst of the financial crisis in October 2008, most of us thought that the objective was to identify and weed out the nonperforming derivatives (the “troubled assets”) held by financial institutions so as to restore trust in the market.
Three weeks later, when I asked my friends in the US government why Paulson had switched his strategy to injecting hundreds of billions of dollars into struggling financial institutions, I was told that there were so many idiosyncratic types of paper scattered helter-skelter around the world that no one had any clear idea of how many there were, where they were, or who was finally accountable for them. So dispersed and jumbled up, these derivative securities were no longer connected to the assets that they had been originally derived from.
To me, this admission was shocking. But an even bigger shock was that my Western friends were not shocked.
Suddenly, I recognized that Western governments had allowed a massive shadow economy to grow up in the heart of Western democracies, crowding out their legal economies. I realized this was probably a turning point for Western civilization, which had beaten back its shadow economies to make way for the Industrial Revolution: many of the gains that they had made in the subsequent centuries were now slipping away.
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