In my last post, I praised Hernando de Soto’s proposal to improve business recordkeeping, or “economic facts.” Commenter A.J. Sutter responded that de Soto’s “notion of ‘economic facts’ itself represents a fallacious reification. Those ‘facts’ are constructed by social actors.” Sutter emphasizes the inevitably subjective, contingent aspects of accounting practices. He concludes that “rolling back some [accounting] innovations might be a good idea,” but “the recovery of some sort of ‘objectivity’ is not likely to be the result.”
He is in good company; consider, for instance, this dismissal of de Soto’s ideas from Annelise Riles’s profound and original book Collateral Knowledge: Legal Reasoning in the Global Financial Markets:
Contrary to De Soto’s simplistic claim that the very existence of registered property rights produces clarity and certainty about the delineation of powers and obligations (and hence that the only necessary reform of the financial markets is the creation of an adequate registration system for property in derivatives), most of property law is in fact about the enormous ambiguities that surround what powers and obligations flow from titled property ownership. If I own a piece of land, does that mean I have a right to build a factory on it that billows smoke onto neighboring property? If I own a shopping mall, does that mean I have the right to exclude protesters from demonstrating there? . . . As Duncan Kennedy and Frank Michelman pointed out . . . [in 1980], formal property law increases certainty for some that reduces it for others; it increases certainty about some expectations but decreases certainty about others. The real issue is whose certainty do you want to maximize, and about what. (164-65)
Both Sutter and Riles are right to criticize anyone who thinks the only, or even the major, “necessary reform of the financial markets is the creation of an adequate registration system for property in derivatives.” It is naive to think that, if only we had more information, the crisis could have been avoided. To take but one of many possible examples: even if the analysts at the rating agencies had done far more due diligence on the quality of the loans behind the residential mortgage-backed securities that were sliced and bundled into collateralized debt obligations, they still could have come up with some rationale for a AAA rating. Many understood what was going on, but “danced while the music was playing.” To the willfully blind, the naive, or the dense, virtually any arrangement can seem opaque.