Well defined private property rights matter ………

Professor Maitreesh Ghatak who teach economics in LSE says in today's FE that:

• “…where property titles are ill-defined, where legal disputes takes decades to settle, where poor farmers or small businessmen face eviction threats, it is difficult to imagine how they can behave like textbook economic agents, namely, taking a long-run view, saving, investing, and climbing their ways out of poverty. Security of property rights therefore is of utmost importance. 
  
• The term property right refers to an owner’s right to use a good or asset for consumption and/or income generation (referred to as “use rights”). This can also include the right to transfer it to another party, in the form of a sale, gift or bequest (referred to as “transfer rights”). A property right also typically conveys the right to contract with other parties by renting, pledging, or mortgaging a good or asset, or by allowing other parties to use it, for example, in an employment relationship. 
  
• By property rights, economists typically refer to private property rights, a key feature of which is being able to legally exclude others from using a good or asset. This affects resource allocation by shaping the incentives of individuals to carry out productive activities involving the use of the good or asset, undertake investments that maintain or enhance its value, and also, to trade or lease it for other uses.”
  

Proper Property right under rule of law is the solution to prevent future financial crisis

Yes Proper Property is the solution to prevent future financial crisis says Peruvian economist Hernando de Soto in the newsweek article. 

See some of those interesting discussion. 

• “This poisonous paper is scaring off potential creditors and investors who lack the legal means to understand what this paper signifies, how much there is, who has it and who might be a bad risk. Finally, policymakers in the White House seem to be coming to grips with the real enemy: the debasement of the legal financial documents that represent value, allow it to be transferred and signal risk. 
  
• You are able to hold, transfer, assess and certify the value of such assets only through documents that have been legally authenticated by a global system of rules, procedures and standards. Ensuring that the relationship between those documents and each of the independent assets they represent is never debased requires a formidable system of legal property rights. That system produces the trust that allows credit and capital to flow and markets to work. 
• In recent years, governments have debased paper by carelessly allowing into the market a biblical flood of financial instruments derived from bad mortgages nominally valued at some $600 trillion or more—twice as much as all the rest of the world's legal paper, whether it represents cash, traditional financial assets, or property, tangible or intangible. 
  
• The main challenge for Obama and Geithner is to restore trust in the prime vehicle of credit—not money, which we know how to control, but paper, which we clearly don't. The overwhelming amount of available credit is made up of proprietary paper, such as mortgages, bonds and derivatives, all of which is not money per se but has some of the financial attributes of money—what economists used to call "moneyness." To prevent the debasement of paper and adequately infer its value, the Obama administration must turn to well-tested rules ensuring paper's credibility. 
  
• Moreover, every financial deal must be tethered to the real performance of the originating asset, ensuring that the amount of debt secured on the basis of assets does not become dangerously "out of scale" with those assets underlying the debt—the most prominent cause of a recession, according to the economist John Kenneth Galbraith. And assets can continue to be leveraged and repackaged—but only to improve the value of the original asset. Finally, it must be recognized that clarity and precision are indispensable for creating credit and capital through paper. 
  
• Still another challenge to Obama is that many of those involved in resolving the crisis now claim that it is virtually impossible to identify and value all the toxic paper now on the financial institutions' books. Yet in the past U.S. and European lawyers and bureaucrats have proved brilliant at sorting out toxic paper whether it referred to bad debt, confusing claims or opaque legislation. In doing so, they have untangled claims after the California gold rush, picked up the pieces of Europe's crumbling precapitalist order, converted Japan's feudal enclaves into a market economy after World War II and reunified Germany after the fall of the Berlin Wall. That's the process of capitalism: continuous detoxification. And we're hard at it today, too, in developing countries, searching for toxic paper in our shadow econ-omies—informal titles, licenses, contracts, laundered money and identity documents —in an effort to bring their people into the mainstream”.  

"What does the fish know about the water in which it swims?"

There is interesting Peruvian economist Hernando de Soto interview in the Newsweek. The following are some of those: 

• “How does this relate to the financial crisis? 
  
• 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. 
  
• Has the subprime mortgage market become a shadow economy? 
  
• Subprime mortgages are not a shadow economy. But what happened is that a lot of these mortgages got repackaged into securities. Then they became collateralized debt obligations and some of these mortgages were sliced and diced and put into tranches. When some of these mortgages went sour and people started defaulting on their payments, then of course a lot of the securities tied to them also started defaulting. But when you try and trace who's ultimately responsible for the value of that paper, you couldn't find it. That's the part of the market that has become the shadow. 
  
• So basically ill-defined property rights in the subprime mortgage sector caused a meltdown. Does the same happen in the developing world? 
  
• Yes. 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. Look at the Iranians, look at the North Koreans—they're building nuclear plants. Look at the computer—they're being built in northern India. The issue isn't the expansion of technology. We can all get it, borrow it, buy it or steal it. The issue is how do you get a legal system that allows people to cooperate so as to create more complex systems and objects. 
  
• So at this point, a Wall Street banker in a $10,000 suit is encountering basically the same problem that Nairobi slum dwellers have had to deal with for decades or more. 
  
• Absolutely. The difference, however, is that in Nairobi they are still struggling to understand that a property system is the best way that they can do things. In the United States, every piece of land, every house, every automobile, every airplane, every manuscript for a film, every patent is written up and recorded and described. There's only one thing in the United States which is not recorded in such a way and that's derivatives. We're only talking about 7 percent of the subprime market being in default, yet it is causing a major contraction in your economy. You're not getting your credit flowing because you don't know what is where and who it belongs to.
  
• What's the answer? How do we assign "property rights" to derivatives? 
  
• The banks and the holders of all of these instruments have got to report them in such a way that your government and the public knows who owns what and where. Once the light shines, you will know who's solvent, who's insolvent. You'll be able to have a clean debate as to who to help and who not to help. And you're going to have a much better idea of the consequences of not helping or helping. Right now you're talking about all of those issues, but you still don't have the facts. So the first thing is to have the law require those people who own these things to fess up”.