Category Domestic Policy

Accepting Political Heat

Danny Vinik 1 Comment

New York switched to the Common Core standards last year and that means tests scores for New York City are about to come in well below previous levels. With just a few months left as Mayor, Michael Bloomberg is being criticized on all sides for the low scores:

In New York City, the proportion of students deemed proficient in math and reading could decrease by as many as 30 percentage points, city officials said, threatening to hand Mr. Bloomberg a public relations problem five months before he is set to leave office.

Already, many of Mr. Bloomberg’s rivals — the teachers’ union, parent groups, and several of the Democratic candidates vying to succeed him — have begun to use the prospect of a steep drop in scores to call into question the mayor’s record on education

This just illustrates the trouble with our political system. Adopting the Common Core standards was a big decision for many states and whether you are a fan of them or not, they should not be judged based on previous test scores. That was a different test after all. But that’s how Bloomberg is going to be graded. In his final year in office, he’s going to be responsible for a mega drop in scores. That’s not a good legacy to leave. But Bloomberg accepted this risk when he bought into the new standards. He put himself out there politically to implement what he deemed to be a better test.

Undoubtedly, a tougher test would lead to lower scores – especially initially as students and teachers adapt to it. In the years that come, scores will likely rise a bit – at the very least thanks to increased familiarity with the type of questions on the exam. Whoever becomes the next Mayor can take credit for those score rises, even though they are a natural result of greater experience with the test and nothing to do with specific policies.

This reminded me a bit of Governor Romney’s claims in the campaign last year that Massachusetts was ranked No. 1 in the country in education. Politifact rated this “mostly true,” because it was basically true. But Massachusetts also claimed the nation’s top spot in education before Romney took office. So, did Romney actually lead Massachusetts as the top state in education? Or did he just take credit for previous policies that had already made Massachusetts No. 1? How much credit does Romney deserve? These are very tough questions to answer and I don’t think anyone came up with a good response to them during the campaign.

This shows how difficult evaluating different policies is. Mayor Bloomberg is going to take a lot of heat for the test score drop, even though it’s a result of a new, tougher test, not necessarily less educated or less prepared teachers. Governor Romney earned significant praise for his education record as Governor, even though Massachusetts’s terrific education record preceded his time in office. How much do we blame Mayor Bloomberg and give credit to Governor Romney? That’s a tough question to answer. At the very least, remember to give Bloomberg credit for risking his reputation and legacy. It’s not something that every Mayor is willing to do.

It’s More Than A Gender Bias Working Against Yellen

Danny Vinik Leave a comment

Ezra Klein wrote an insightful blog post yesterday outlining the hidden sexism that has permeated the coverage of who will be the next Fed Chair and how it has harmed Yellen’s candidacy. Here’s Ezra:

People get understandably defensive when you use the word “sexist.” But here’s the simple fact: There’s no male candidate Andrew Ross Sorkin could’ve named who would’ve elicited fears from Fisher that the pick was being “driven by gender.” Not Don Kohn. Not Alan Blinder. Not Roger Ferguson. It would’ve been either a laugh line or a controversy if Sorkin had asked about Tim Geithner’s chances and Fisher had brought up his gender.

When a woman is up for the job — no matter how qualified — the lurking worry is that the pick will be “driven by gender.” When a man is up for it, gender never enters into the conversation. That’s how privilege works in practice: Gender is invisible when it comes to male appointees but a constant presence when it comes to female appointees.

That gets the situation backwards.

There’s never been a female Federal Reserve chief. There’s never been a female Treasury Secretary. There’s never even been a female president of the powerful New York Federal Reserve. This isn’t an accident, and it’s not because women can’t manage those positions. It’s because gender really has played a driving role in appointment processes for a long time. It’s just done so on behalf of men.

I don’t disagree with any of this, but I want to extend it a bit. The title of Ezra’s post is “Funny how gender never am up during Bernanke’s nomination. Or Greenspan’s. Or Volcker’s.” You know what also didn’t come up in those nominations? Race. Sexual Orientation. Religion. You know why none of those things are coming up this time? Because both Yellen and Summers are white, straight and Jewish. That’s nothing new at the Fed. But a woman as Fed Chair? That’s new.

This creates two different levels of bias against Yellen. The first is the explicit and implicit sexism in whether Yellen has the necessary “gravitas” to be Fed Chairman. Of course she does! No man with Yellen’s resume would face similar questions.

There’s also a second form of bias that I’m going to term “newness bias.” This is the bias that exists because everyone is ultra concerned that the Fed choice will be “driven by gender.” After all, for a position as important as Federal Reserve Chairman, it’s vital that the President select whoever is most qualified. He shouldn’t choose an inferior candidate just to break a gender barrier. But no male nomination can ever be “driven by gender,” because every Fed chair before has been male. It’s the same reason neither Yellen or Summer’s selection could be “driven by race.” When there’s never been a female in a certain position, the immediate reaction to breaking that barrier is that the President is doing so just to nominate a woman, not because it’s the right choice.

That’s what Yellen is working against. Ezra spells this out perfectly:

And then, when a female candidate does threaten to break into that top echelon, the whispers begin that the pick is really driven by gender, that more qualified men are being passed over, that it’s all just about political correctness. But the truth is typically closer to the opposite. A woman (or an African American, etc) can only get to the point where she can hold a top position after clearing a much higher bar than the male candidates.

The President may feel that if he is going to name Yellen as the next Fed Chairman, she must be by far the best candidate for the job. Because if not, he’ll face criticism for choosing her over Summers just to install the first woman at the helm of the Fed. It’s an absurd bar that only candidates facing the “newness bias” confront. If Richard Ferguson receives further consideration for the job, expect the fact that he’d be the first African-American Fed Chairman to come up more frequently. And expect analysts to start asking whether his selection would be “driven by race.” He wouldn’t face the blatant sexism about “gravitas” that Yellen faces, but he’d still confront the “newness bias.”

So remember this whenever you hear people questioning whether Yellen’s choice is “driven by gender.” The fact her selection would break a gender barrier doesn’t mean she needs to be more qualified than other candidates to justify her selection. She’s the best candidate for the job and that’s what matters. President Obama would do well to tune out any worries about her “gravitas” or that her nomination would be “driven by gender.” Those are just not-so-subtle ways for her opponents to use her gender to tear her down. It isn’t fair and it isn’t right. I hope the President doesn’t fall into that mindset as well.

Eminent Domain is Coming to Richmond, CA

Danny Vinik 4 Comments

After quite a bit of searching, Mortgage Resolution Partners (MRP) has finally found a town willing to take a chance on its plan to use eminent domain to help underwater homeowners. The details for this specific plan aren’t quite clear yet, but this plan still has a major problem. Let’s first look at how this will work.

Richmond is giving investors a choice: either willingly sell or we’ll use eminent domain to force you to sell. According to the New York Times, the city is offering to pay what it deems to be fair market value:

The city is offering to buy the loans at what it considers the fair market value. In a hypothetical example, a home mortgaged for $400,000 is now worth $200,000. The city plans to buy the loan for $160,000, or about 80 percent of the value of the home, a discount that factors in the risk of default.

MRP’s plan has been to put up the capital for these purchases so that no taxpayer money is involved. After it has purchased the loan – either by agreement or by force – the city will write down the value of the loan so that the homeowner is no longer underwater and can refinance at lower rates:

Then, the city would write down the debt to $190,000 and allow the homeowner to refinance at the new amount, probably through a government program. The $30,000 difference goes to the city, the investors who put up the money to buy the loan, closing costs and M.R.P. The homeowner would go from owing twice what the home is worth to having $10,000 in equity.

Done correctly, using eminent domain to purchase underwater homes is a promising idea. Unfortunately, MRP’s plan has always been aimed at helping investors make a nice profit, not helping out homeowners. This plan has the same major flaw: it doesn’t just write down loans for homeowners delinquent on their loans, but also for borrowers current on them.

The intellectual godfather of the plan, Cornell professor Robert Hockett, noted in his paper promoting the plan that MRP would only contribute capital to use eminent domain for mortgages that are current. The problem with this is that these are the homeowners who don’t need help. Yes, they are severely underwater and would be helped by a principal write down, but they aren’t defaulting on their loans. They are still able to make their payments.

Of course, for that reason, those borrowers are also the most valuable for investors. Homeowners current on mortgage payments on a $400,000 loan that is for a house worth only $200,000 is still profitable. The security is no longer worth face value since the losses in the case of default are now higher due to the lower home value. But that means the loan is worth somewhere between $200,000 and $400,000, depending on the risk of default. Since the home is worth $200,000 now, the loan is worth more than 100% fair value of the home.

MRP’s original plan was to only use eminent domain for homeowners current on their mortgages and would not pay anything more than 85% the fair market value of the home. As just shown, these loans are worth more than 100% the value of the home. No investor would ever be willing to sell at this price, even if it could solve the collective action problem that permeates the housing market (more on this later today).

However, this is the only way MRP makes money. If it were to purchase the loan for $250,000 (as it may be worth) and then refinance it at $200,000, it would lose money on the transaction. The only reason that the company earns a profit is because it’s using eminent domain to pay significantly less than the fair value of the loan.

Banks are (rightfully) furious at Richmond’s plan and will undoubtedly take this to court, arguing that the proposal is unconstitutional in a number of ways. Not least of all is the fact that eminent domain requires the city to pay fair market value for property. In purchasing the mortgages of homeowners who are current on their loans, Richmond is certainly not adhering to that rule. What really sucks for the city is that banks will likely freeze credit in the area as both a punishment and a deterrent to warn other cities not to follow in Richmond’s footsteps. Maybe more details will emerge that make this plan look like a better deal, but right now it’s looking like MRP finally duped a municipality into implementing its plan and Richmond is going to face severe consequences for doing so.