The Wall Street favela

Noted development economist Hernando de Soto thinks Wall Street is backsliding into the informal economy of Third World slums.

Is this

Credit

reverting in a way to this?

The famous Peruvian development economist Hernando de Soto thinks so. He has argued – and shown in practice – that clear and publicly recorded and legally enforced property rights are a key to ending poverty. Now he offers this robust and now mainstream theory to explain the financial crisis of the rich countries (h/t Frank Pasquale):

Over the past 20 years, Americans and Europeans have quietly gone about destroying these [economic] facts. The very systems that could have provided markets and governments with the means to understand the global financial crisis—and to prevent another one—are being eroded. Governments have allowed shadow markets to develop and reach a size beyond comprehension. Mortgages have been granted and recorded with such inattention that homeowners and banks often don’t know and can’t prove who owns their homes. In a few short decades the West undercut 150 years of legal reforms that made the global economy possible.

De Soto is an important and experienced voice, and one that is should be [correction, see comments] difficult for conservatives to ignore.

I think he’s on to something. The fair and traditional price for state enforcement of private contracts is the partial loss of their privacy and idiosyncrasy into a public and structured institutional memory. Absent this, freedom’s just another word for everything to lose.

Author: James Wimberley

James Wimberley (b. 1946, an Englishman raised in the Channel Islands. three adult children) is a former career international bureaucrat with the Council of Europe in Strasbourg. His main achievements there were the Lisbon Convention on recognition of qualifications and the Kosovo law on school education. He retired in 2006 to a little white house in Andalucia, His first wife Patricia Morris died in 2009 after a long illness. He remarried in 2011. to the former Brazilian TV actress Lu Mendonça. The cat overlords are now three. I suppose I've been invited to join real scholars on the list because my skills, acquired in a decade of technical assistance work in eastern Europe, include being able to ask faux-naïf questions like the exotic Persians and Chinese of eighteenth-century philosophical fiction. So I'm quite comfortable in the role of country-cousin blogger with a European perspective. The other specialised skill I learnt was making toasts with a moral in the course of drunken Caucasian banquets. I'm open to expenses-paid offers to retell Noah the great Armenian and Columbus, the orange, and university reform in Georgia. James Wimberley's occasional publications on the web

13 thoughts on “The Wall Street favela

  1. Law is about resolving conflict, and the law establishes “facts” of the kind De Soto notices, only where the law must resolve conflict between two parties with legally legitimate claims against the other. The “facts” are being destroyed to the extent that unchecked Power is destroying the conflict, by destroying the legitimacy of one set of parties or interests. Peons had no rights landowners had to respect; that’s why they had no institutional capacity to claim property rights. American citizens have no rights a multinational business corporation is bound to respect; and their property and related rights are just a good-bye. It is just a detail in a general pattern, in which the American People no longer exercise any political control over a government, completely unresponsive to their needs and desires, because it is controlled by large banks and business corporations and a handful of the uber-wealthy.

  2. Corporations will continue to use the law to resolve conflict among themselves. So, to apply the question to a picture of Wall Street misses the mark completely. There, the law continues. But, someone, who has a credit card with one of those banks doesn’t have a “contract” with the bank, in the old common law sense of an agreement; the bank dictates the terms unilaterally, and may not even need to give notice! Someone with student loan debt with one of those institutions may not have any rights to discharge the debt under bankruptcy, just as a homeowner with mortgage on her primary residence has no such rights. A stockholder or consumer or employee harmed by those corporations may have no effective right to sue one of those corporations under a broad range of circumstances, but the corporations can certainly sue each other.

  3. Bruce: It’s true that the law offers reasonable parity of arms within Wall Street and corporate America and a stacked deck between them and the working stiff. It always has. There is however more to the story than inequality between rich and poor. The new opacity has made transactions untrustworthy even within the magic circle: as when Goldman Sachs was betting for the default of securities it was selling to another bank. The mechanics of the collapse were initially within this circle. The new reality is that the rigged craps game will continue but the losers will be bailed out by you and me, for ever.

  4. James: “De Soto is an important and experienced voice, and one that’s difficult for conservatives to ignore. ”

    Um, have you noticed ‘conservatives’ in the US for the past few decades?

  5. Barry: Pasquale says “de Soto has long been a hero of conservative property rights groups”. Isn’t there a meme that “you don’t need to give foreign aid, just fix the property rights and all will be OK”? Mind you, these are relatively reality-based and grown-up positions, the sort you could expect from Bruce Bartlett, and his wing of the GOP is in hiding. So I call touché.

  6. James: It’s arguably even worse than you suggest by alluding to Goldman’s fraud. When you “just” have massive fraud, there’s still somewhere an underlying fact pattern that equally-armed legal adversaries can be in a position to uncover. Here, thanks to the utter failure to observe due diligence and forms of legal transactions — compounded by the tax-evasion scam that was MERS — in many cases there effectively is no underlying fact pattern to uncover. The paper has been shredded (if it existed at all), the computerized records demonstrably bear only a coincidental relation to what actually happened, and the paper regenerated from the computer records for purposes of litigation is compromised almost beyond belief. As a result, any attempt to adjudicate this mess will necessarily be rife with error and based on power relations rather than “fact”.

    In other words, De Soto is way too accurate.

    As a veteran of the german reunification reparations process, I have to say I’m bemused by the sheer scope and quality of this deprecation of property rights. There, for more than 40 years, you had a country torn by war and occupation, under a system of government that had extinction of largeholdings as a policy foundation, and they still kept meticulous records of what had been expropriated from whom, on what date, and with which ostensible legal authority. The “free market” does not look so good by comparison.

  7. James Wimberley says:
    “Barry: Pasquale says “de Soto has long been a hero of conservative property rights groups”. Isn’t there a meme that “you don’t need to give foreign aid, just fix the property rights and all will be OK”? Mind you, these are relatively reality-based and grown-up positions, the sort you could expect from Bruce Bartlett, and his wing of the GOP is in hiding. So I call touché.”

    There might be such a meme, meaning that somebody in the human race thought of it and told somebody else. So what?

    I haven’t seen conservatives in the USA being too respectful of property rights, save in the baseline sense of they don’t want their own stuff taken. And that’s what I was referring to.

  8. (Barry): “I haven’t seen conservatives in the USA being too respectful of property rights, save in the baseline sense of they don’t want their own stuff taken.
    From the dissent in Kelo:

    Allowing the government to take property solely for public purposes is bad enough, but extending the concept of public purpose to encompass any economically beneficial goal guarantees that these losses will fall disproportionately on poor communities. Those communities are not only systematically less likely to put their lands to the highest and best social use, but are also the least politically powerful. If ever there were justification for intrusive judicial review of constitutional provisions that protect “discrete and insular minorities,” United States v. Carolene Products Co., 304 U.S. 144, 152, n. 4 (1938), surely that principle would apply with great force to the powerless groups and individuals the Public Use Clause protects. The deferential standard this Court has adopted for the Public Use Clause is therefore deeply perverse. It encourages “those citizens with dis-
    proportionate influence and power in the political pro-cess, including large corporations and development
    firms” to victimize the weak. Ante, at 11 (O’Connor, J., dissenting).

  9. (Barry): “I haven’t seen conservatives in the USA being too respectful of property rights, save in the baseline sense of they don’t want their own stuff taken. And that’s what I was referring to.
    More on Kelo. From the syllabus:

    Stevens, J., delivered the opinion of the Court, in which Kennedy, Souter, Ginsburg, and Breyer, JJ., joined. Kennedy, J., filed a concurring opinion. O’Connor, J., filed a dissenting opinion, in which Rehnquist, C. J., and Scalia and Thomas, JJ., joined. Thomas, J., filed a dissenting opinion.

  10. See also this from Ciry Journal.

    The RDAs’ diverted funds and failed promises are reason enough to get rid of them, but their abuses of property rights are the last straw. After the U.S. Supreme Court’s controversial 2005 Kelo decision allowed the use of eminent domain for economic-development purposes, most states followed the court’s additional advice and reformed their eminent-domain rules to make it harder for redevelopment agencies to drive property owners off their land. California failed to pass serious reform, however, and its RDAs continue to confiscate private property. In 2002, for example, the city of Cypress’s RDA invoked eminent domain to seize property owned by the Cottonwood Christian Center and transfer it to retail stores. City officials pointed out that churches, unlike stores, don’t pay many taxes. After years of legal wrangling, the city and church cut a deal that allowed both retail development and a church.

    Such proceedings are manifestly unfair, of course. But they also wreak economic damage by diminishing property rights and confusing expectations. I once interviewed a developer who owned a strip mall in Southern California. He wanted to rebuild it, but it was in a redevelopment area, so he had no secure property rights. Sure, he could invest a few million dollars in the project, but because he feared that the city would take the property away, he sat on it. I remember another area that was being threatened by eminent domain. Activity stopped in the neighborhood—until the day after the local RDA’s plan was halted, when owners went back to work improving their properties and expanding their businesses.

    If cities want to spur economic growth, they have a far more effective approach at their disposal—one pioneered by Anaheim. In the 1970s, the city’s redevelopment agency bulldozed part of the seedy but historic downtown, planning to create a new downtown district by luring new companies that would build high-rises and other attractions. But it’s easier to demolish old buildings than it is to find investors to put up new ones, so the result was parking lots and vacant land. The downtown remains largely a ghost town more than three decades later.

    But starting in 2002, under the leadership of former mayor Curt Pringle and current mayor Tom Tait, the city embraced a freedom-friendly approach to land use. Their target was an area called the Platinum Triangle, a collection of one-story warehouses that they wanted to become a new downtown with high-rise condos, hotels, restaurants, and shopping. Instead of taking the redevelopment approach—creating a project area and then forcing businesses to leave—the city “upzoned” the Triangle, allowing far more uses for the land. This was a great stroke of luck for the area’s businesses: they could stay if they chose (the city outlawed eminent domain for economic development), but most sold out to developers, who paid handsome sums for land that was now zoned for more valuable residential and office uses. Then the city encouraged the developers to bring their plans to City Hall. The area boomed with high-rises constructed in a couple of years (though it did hit hard times after the real-estate bubble burst).

    The lesson: deregulation and private enterprise work better than central planning. Developers don’t need subsidies and eminent domain to build in older cities; they need the relaxation of burdensome government rules and a reduction in taxes, which tend to be higher in urban cores. And they need the freedom to develop their own plans, rather than blueprints from city-hall planners.

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