Alex Tabarrok picks up an interesting post by Hernando de Soto:
....The enormous amount of derivatives that had poured into the market—there are close to $600 trillion of these papers around—are also not recorded in a global or centralized manner, or in a manner that allows you to begin to quantify them. [Former SEC Chairman Christopher] Cox thought that maybe the toxic part of all of these assets was $1 trillion to $2 trillion. [Treasury Secretary Timothy] Geithner told us there's maybe $3 trillion or $4 trillion. Nobody really knows, so in a way [they've created an] informal or shadow economy. This unidentified paper is the source of uncertainty and the credit contraction.
...That shadow hopefully is a temporary condition in the United States and in Western Europe. And it might pass in a year or 10 years, but it will pass. That passing condition that's occurring now in developed countries, that's a chronic condition in developing countries. We're always chronically in credit crunches—because you don't know who owns what, nobody dares lend to somebody else. Bringing the law to emerging markets is possibly the most important measure that can be taken to help these countries become rich.
De Soto has been studying informal economies and arguing for a conversion to documented property for some time. I can definitely see how it applies here and for me at least our economic troubles make developing world troubles a bit easier to understand. The main critique I've seen of his approach is that just making arrangements official can just result in the poor being ripped off as property is developed. That said, I do definitely believe the argument that this is really a necessary step. I think the trick to do it right is to figure out what informal and political protections the participants in the informal economy now use and try to figure out how to maintain or improve upon those in the transition. I'm sure de Soto is looking into those issues as well, I just don't want anyone thinking that this is a silver bullet.
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