I don't believe anyone says "if it's not papered it's not a good dog". However a good dog does not necessarily make a good breeding dog.
Part of breeding is knowing the dog's lineage because this provides insight into what genetics the dog carries. There are many genes, for health, temperament, physical traits and all sorts of other things that a dog may not express itself but that exist nonetheless and could be passed down to offspring. Papers and pedigree provide somewhat of a genetic roadmap to the dog and knowledge of those allows the breeder to make a very educated guess into what those hidden genes may be. This is vitally important when making breeding decisions. If the dog itself is good, but the rest of it's pedigree or close relatives are not, it is more likely to produce the not good than the good because of the prepotence of those not good genes in the bloodlines.
Without papers and pedigree, those important aspects are unknowns. If the breeder doesn't know the dog's lineage, the breeder can't know what genetics lie there and that does not make for sound breeding decisions.