Bailouts; fragile confidence; falling stock markets; talking heads; criticism; applause; more criticism; Republicans; Democrats; Latvia’s economy collapsed; Citibank stock down to less than $3; fear; nationalizations; hope; speeches; uncertainty; and more bailouts. What is going on? How can we get out of this mess?

What is going on is exactly what everyone is trying to figure out. There is so much uncertainty out there that I would not be surprised if people started asking astrologists what will happen to their pensions and savings. So much effort is being put into reversing this crisis, yet things still look gloomy.

As I was writing my book and comparing the robustness of property markets and property rights systems in the United States and other countries I realized early on that the United States has a rather weak system for defining and stabilizing property rights. In such a context speculation is almost certain and of course can lead to destabilizing prices and push the entire market beyond its limits.

I strongly believe that the key challenge in our current crisis is to stabilize home and real estate prices. But no one seems to be attacking it head on.

Unfortunately, the weak U.S. property rights system is complemented with some private-sector risk management tools that seem only to increase the uncertainty as they muddle the supply. I talked about this topic 2 days ago on Radio http://www.archive.org/details/RadioInterviewFebruary242009

What needs to happen to stabilize home prices now and for the future? The first step is to reverse the trend toward property being a speculative entity. That will require consolidating in a standardized manner all information about the asset in a single property registry system. We can get the information to begin from the existing (less than ineffective) public registries and from title insurance companies.
This would be a better approach than one that concentrates only on the effects of the crisis, rather than the impacts. Instead of a focus on nationalizing the banking sector, let’s take the more effective – and less expensive – route of undertaking a deep reform of the public registry system and fix the valuation method of every home out there.

You may be interested in reading the following articles:

Nationalizing America’s Banks  (The Economist February 26)

The risks of a bust-up in Europe (The Economist February 26)

No “magic bullet” in Obama housing relief plan.  ( February 18)

Last December, I presented my book at the World Bank sponsored by the World Bank Institute. That talk was special not only because Francis Fukuyama was on the panel and presented a historic development of property rights in economies around the world, and not only because the auditorium was filled to standing room only, but also because Deborah Thomas was there. I wrote about Deborah in my book (chapter 5)
She is a woman from the old segregated and distressed neighborhoods of DC whose financial worth equaled a welfare check … back in the day. She lived with her five children in a housing project, and her mother lived in similar conditions (rent-controlled housing). This living arrangement was all that was offered in the market for people like Deborah: social housing; never owning her own home or apartment, but instead a government- controlled subsidized rental.
One night, Deborah’s home caught fire. She was seriously injured as she tried to rescue her children, one of whom was blinded that same night. After her house was burned she was then officially declared homeless. She had no choice but to move into her mother’s apartment at 14th and W Streets, NW, in DC (across from today’s well-known bookstore/café “Bus Boys and Poets”) – the same apartment she had been raised in as a child, in a building that had been rent-controlled since the 1970s.
But her mother’s building was “Condemned.” A notice glued on the front door of the building declared that it was unsatisfactory for living purposes and that the 150 units had to be vacated in 30 days, with families bussed to shelters.
Deborah and her family were victims of what I call “Unreal Estate” – property so burdened with regulations and unclear rights about usage and responsibilities that it render the asset illiquid.
Unlike so many people who feel powerless to do anything but accept this fate, Deborah researched the regulations, looking for ways the law might allow the tenants to have a choice to purchase and become proud owners of their apartments. She learned that the tenants had the right of first refusal. With her leading the way, the tenants exercised that right. Today, their building and each apartment are valued so much higher, now that they have been pulled out from under public housing regulation and have renovated.
Deborah is no longer on welfare. Instead, she is a proud Middle Class lady in a community that she cares about and to which she belongs. Ownership of her apartment provides a reason to strive, work, save, and invest, and offers a better future for her and her kids.
Deborah’s story is one of HOPE that became REAL CHOICE and has led to a new PROSPERITY.