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Industry Helps U.S. Unlock Wealth, Famed Economist Says

October 26, 2009

A standing-room only crowd packed the Ponce de Leon ballroom of The Breakers in Palm Beach, Fla., as attendees of the American Land Title Association’s 2009 Annual Convention listened to one of the world’s most renowned economists offer insight into the value of the land transfer system.

Hernando de Soto, president of the Institute of Liberty and Democracy and considered as one of the two most important think tanks in the world, served as the keynote speaker of ALTA’s annual convention. President Bill Clinton called him “the world’s greatest living economist.” Forbes magazine named him one of the 15 innovators “who will reinvent your future.” De Soto also is the author of two best-selling books about economic and political development, including “The Other Path” and “The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else.” De Soto’s presentation during the conference was made possible by Fidelity, First American, Stewart and Old Republic, as all four shared the sponsorship.

The economist shared the immense value of the title insurance industry and how it enables the United States to create wealth.

“As a third-world person, I see the U.S. in a different light,” de Soto said. “And what I do is try to find the quickest way to get where the United States is as fast as possible for third-world countries.”

To do this, he said, you must consider the rule of law – which is basically a social contract and determines how we relate to each other. “To do that, you have to start with property because it’s the first basic thing that is needed,” de Soto said.

In many third-world countries, only a small percentage of people enjoy clear property rights, and you can’t get wealth unless you are part of the system.

“The majority of the people are outside the rule of law system,” de Soto said. He then shared a story about the making of pencil, and that parts from 17 countries and 300 suppliers are needed to put the pencil together. The process can be achieved with unity because there is a trust developed. The higher-more sophisticated combinations create a higher surplus value.

“That’s what you all do because you have this capacity to give security to a transaction,” de Soto said.

De Soto then touched on the value of having a standard system so people across the world can understand. Items such as thermometers, stethoscopes and microscopes – all items that raise the standard of living and things we need– are possible because they allow many micro-facts to become one large fact, provide assurance and aid communication. He added that this is why he admires the title insurance industry because it combs through many facts in order to bring trust to the transfer of property.

“What stands behind the success of Western style of economics is essentially that you have a system of standards where you quickly know the other party and gives you elements of information packaged in such a way that it produces trust,” he said. “That’s what’s missing in the rest of the world.” In the transfer of real estate, trust is built around the services the title insurance and settlement services industry provides to the transaction, he said. There would not be credit market if there was not trust, and there would be no credit market without the documentation of the transfer of property, according to de Soto.

“After documenting land, then you can start to create identities,” he said. “Once you have that information in place, other things begin working correctly.”

One of the wonders to de Soto is that the United States has everything on records. Not only assets, but also who has rights over what. He said the U.S. system started to go wrong when a new instrument called the derivative was created. “Basically, financial paper that is based on financial paper,” de Soto said. There was all of this these financial documents that were sliced and diced and referred to some underlying asset somewhere down the line.

“But it got to a point where you lost touch,” de Soto said.

De Soto said a recession is due to a credit crunch. This occurs when all the facts aren’t known and there is widespread fear that borrowers will be unable to repay loans. There were no more clear signals in who owns what and who is in the red and who is in black. If you don’t have credit, transactions shrink. If transactions shrink, then you have a drop in unemployment. If you have a drop in unemployment, then you have a drop in the value of property, de Soto said.

“First time in history of the United States that it had an asset that had not been recorded,” he said. “The derivative crisis is why things need to be recorded. It meant to me that the West forgot that assurance is critical. You now have the world’s biggest shadow economy.”

To prevent such a catastrophe from occurring again, de Soto said it’s important to begin recording derivatives and identifying them.

“DNA is like title insurance. It gives identity,” de Soto said. “If I ask President Obama who is your property administer, he will tell you that we don’t have one. But you do.”



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