Economic Activity, Public Trust, XBRL, and Property Law

Hernando de Soto’s brilliant Wall Street Journal op-ed today, “Toxic Assets Were Hidden Assets,” contains a wealth of common sense.

Among the ideas worth mining is his insistence that “[a]ll documents and the assets and transactions they represent or are derived from must be recorded in publicly accessible registries.” This brings to mind the largely inaccessible public registry of ASCII and HTML text spanning multiple “pages” in obscure EDGAR filings created by the securitization industry in the run-up to the crisis.

Last month, I described the “principles-based set of disclosure items” that fell short. The point I didn’t make, which de Soto brings to mind this morning, is that these “disclosures” — if you can call them that — were made with the intent to build private derivatives on top of them. They were converted from nominally public securities (but not good enough for retail investors) to shadow securities after a year or so, contrary to the principle of erga omnes that de Soto explains.

The common sense de Soto advocates, that “[g]overnments can no longer tolerate the use of opaque and confusing language in drafting financial instruments,” has been drowned out by constant whining that the toxic security structure is too complicated for normal human beings to comprehend. But there is good news. The FDIC has key duties in Treasury’s current bailout plan and as the plan proceeds, its years of experience with the XBRL data standard position it to mandate the use of the standard — or give preference to private sector participants who use it — for the purpose of enforcing clarity.

XBRL is simply a version of XML that helps computers verify compliance with business and legal rules. It’s in use around the world and in the U.S. by public companies, banks, the SEC, and the FDIC. Thanks to the SEC mandate that public companies use XBRL, XML geeks nationwide are getting up to speed on the new standard. A simple search for XBRL on Twitter reveals much, in the words of Twitter, about what is happening now on XBRL.

Moreover, XBRL US has testified to Congress that XBRL is ready to be applied to asset backed securities. Properly implemented, XBRL technology could support the vision outlined by de Soto more efficiently than any other technology — including paper.

Much history of economic growth is dominated by the development of property titling and enforceable contract rights. When people enter normal contracts, the contracts usually work because both sides know they can go to court or otherwise enforce them. But when people sell investments of money in common enterprises derived solely from the efforts of others — aka, securities — they create externalities that trigger erga omnes.

That’s why the basic law that all securities must be registered or exempt is so important. The rule that was successful in the past was that issuers had to make strong cases to earn exemptions. By making disclosure faster, better, and cheaper, XBRL lets regulators raise the threshold for exemptions. It’s an opportunity worth exploiting expeditiously.

Thanks to XBRL, there is a means of to achieve the goal of moving from pseudo-capitalism based on speculation to real capitalism based on facts — and a world where willing buyers and sellers can make markets based on those facts.

We already have a remarkable land titling system mostly at the county level. Mortgage servicers have a wealth of data about the performance of every mortgage tied to that land. Integrating those data sets with the heretofore poorly accessible data in the 20,000 or so instruments like these, along with a few other key facts, could result in a highly transparent and competitive market for securitized consumer real estate debt.

Profits might move from industry incumbents to first movers on the de Soto vision, or be retained by borrowers in the form of lower borrowing costs. That is one reason little has happened so far. But someday, soon, and for the rest of our lives, someone will change the consumer debt ecosystem to get us back on track along the technological road that has made the world richer over time. That world, as de Soto describes it, is where “a huge information system…processes raw data until it is transformed into facts that can be tested for truth, and thereby destroys the main catalysts of recessions and panics — ambiguity and opacity.”

Improving technology and improving law are the essential ingredients. I don’t know which is the ground beef and which is the seasoning, but it’s time mash those two simple ingredients into patties and fire up the barbecue.