THE CRUNCH WAS A FUNCTION OF CREDITOR OPACITY, NOT DEBTOR INABILITY TO PAY:

Shining a Light On Shadow Economies: Hernando de Soto, champion of the poor, applies his insights about asset transparency to bastions of wealth. (Elisabeth Eaves, 11.26.09, Forbes Magazine)

The Peruvian economist Hernando De Soto is famous for championing property rights as an antipoverty measure. If a poor family living in a São Paulo or Manila slum could only get a deed to their living quarters, he argued, they could borrow against it to buy, say, a sewing machine. De Soto, 68, takes that message to heads of state, and he takes it out into the countryside. In recent months he has spent time in the remote Amazon jungle, talking to indigenous tribes about land ownership.

He might not, then, seem like the most obvious source of insight for what ails developed countries. But there is a connection, he insists, between the financial crisis of wealthy nations and the crisis of poverty everywhere else. The solution in both cases is transparency. Make the values of assets transparent, he says, and economies get better.

The idea that propelled De Soto onto the stage of development economics was that capitalism wasn't working for the poor because, lacking property rights, they couldn't accumulate capital. A resident of a Lima shantytown, though he might have lived on a plot for decades, had no right to sell it or borrow against it, thanks to a legal system that made it nearly impossible to obtain a clear title. Researchers working with De Soto discovered that it took 728 steps to obtain title to a piece of state-owned land in Peru. The result is that in most of the Third World, people, quite rationally, decide to operate in the shadow economy. [...]

U.S. banks went beyond simply lending to unworthy creditors. The increase in the number and kind of derivative contracts--including some, like credit default swaps, that were traded over the counter rather than on exchanges--created a new kind of shadow economy, De Soto argues. "It reminds me of the way we used to navigate on the coast of Peru," he says. He explained that you'd have close-in sailors navigating by keeping an eye on the coast, then farther-out sailors who navigated by watching the boats that were watching the coast, and so on. "Somehow you got very far away from the coast."

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• Q&A: Economist De Soto Warns of 'Huge Problems Coming' in Property Crisis (blogs.wsj.com)

Posted by Orrin Judd at November 27, 2009 6:33 AM