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Out of Control Policy Blog Archives: 4.15.12–4.21.12

New Orleans is Already Demonstrating What will be Possible When We Open Up School Markets

As Fast Company reports not only is New Orleans the most market-oriented education system in the United States but it is becoming an open-source platform to test and nurture new innovative education ideas from teachers that are attracting large investments from venture capitalists.

"If you're an edtech entrepreneur who wants to pilot an idea, you have the most efficient and smartest market in the country here," says Matt Candler, CEO of 4.0 Schools. That's because instead of a centralized bureaucracy, there are more than 40 schools making independent decisions on both hiring and procurement. Organizations like KIPP, Teach for America, and the Gates Foundation have established beachheads, drawing top teachers and fresh blood from all over the country. These are intersecting with a nascent startup scene dubbed "Silicon Bayou" to produce a hothouse of ideas to change education: for-profit and nonprofit, from school redesigns to apps, often from younger, female entrepreneurs.

This is why Neerav Kingsland the chief strategy officer of New Schools for New Orleans has the most important message ever for everyone who works in the public school system. In "An Open Letter to Urban Superintendents in the United States of America" he writes:

In the following letter I aim to convince you of this: the single most important reform strategy you can undertake is to increase charter school quality and market share in your city--with the ultimate aim of turning your district into a charter school district.

In other words: rid yourself of the notion that your current opinions on curriculum, teacher evaluation, technology, or anything else will be the foundation for dramatic gains in student achievement. If history tells us anything, they will not be.


Read the whole thing to learn so much more about why we should be replicating New Orleans in cities across America.

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Caine Monroy: The New Poster Child for School Choice in America

The New York Times chronicles the compelling story of Caine Monroy an inspiration to kids and adults alike:

On an industrial street lined with auto repair shops, there are few signs that this is the home of an Internet sensation. But slow down at the end of the block, just off the freeway in eastern Los Angeles, where a 9-year-old boy has created a makeshift arcade in his father's auto parts store with balls, cardboard boxes and tape.

A few days ago, few people had heard of Caine Monroy, who worked for hours last summer in the store making simple games out of discarded boxes from the junkyard. Now, eager children, television crews and curious supporters stop by almost incessantly, captivated by an 11-minute film featuring Caine that has been viewed more than five million times on the Internet in the last 10 days. His college fund has ballooned to more than $170,000, driven by donations to a Web site created by the filmmaker.

Caine Monroy could also be the new poster child for school choice in America. While his story gives us all hope about what is still possible in America with entrepreneurial spirit, there is also a school choice angle--in that now Caine and his father can afford a private school or tutor to help Caine who struggles with reading. How many other kids like Caine Monroy are bright kids out there in our world and are going to schools that are not meeting their basic academic needs? Most will not be saved by a viral video.

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FHFA, DeMarco, and the Politics of Mortgage Modifications

Mortgage principal write downs are not a Republican v. Democrat issue. At least they should not be. But just as global warming apologists and deniers split down party lines without much to connect the deep roots of conservative ideology or progressive tradition, so too have mortgage modifications become a partisan issue.

In this context, the recent comments from FHFA Acting-Director Ed DeMarco are interesting for the responses that he has gotten. He has not, despite his favorable tone given to modifications last week that has not been heard in years, changed is tune. Nor has he given blank approval to modifications. Rather, he has always relied on FHFA analysis to determine what would involve the lowest possible losses for the taxpayers and has until now come up with a "no modification" strategy. Now the analysis is providing some room for modifications.

In the wake of the FHFA report, there has been a host of comments from both sides making political hay out of DeMarco's words. Few have argued that FHFA's analysis suggests reducing taxpayer losses at the GSEs by accessing a taxpayer funded incentive program called HAMP, in effect making a gimmicky accounting transfer (that is admitted in the FHFA report as a trade-off). Rather, the comments have been black and white views on principal write down as some kind of poison or healing potion, depending on the view. 

So lets clear a few things up: How do mortgage modifications, principal write-downs or refinances, fit into the democratic platform any different from a republican platform? Does one party prefer the housing market to suffer while the other not? No. Nothing inherent about modifications makes this a partisan issue.

To hear the democrats tell it, the republicans do want the housing market to suffer more for wanting to see housing prices bottom out. Ironically, while it would be a good thing for housing prices to bottom out, most republicans (at least in Congress) have shied away from the legislative options put in front of them that would actually have the housing market bottom (lowering the conforming loan limit, unwinding the GSEs, etc). And there have been few voices on the Hill crying out about the injustice of the mortgage settlement—at least in regards to the way it treats contracts and pension funds. 

To the the republicans tell it, the democrats want to just give free handouts to deadbeat borrowers who took on more than they can pay back. Ironically, while it is true that a wide spread principal write down program divorced from case-by-case economic consideration would involve free handouts to deadbeats, the GOP stands in favor of the mortgage interest deduction which gives free handouts to successful homeowners—and the point of the critic is the handout, not the deadbeat or the actual homeowner. More over principal write downs are not always bailouts.

The reality is that writing down the principal on a mortgage, which the investor or owner of the loan chooses to do so, can be the best way of recouping lent funds. Sometimes the losses will be higher without the write down. Sometimes the best guess at maximizing return is principal forbearance, rather than a straight up write off of the debt. And sometimes foreclosing on a home, fixing it up, and selling it, will yield the highest return.

Every case is different. Mortgages are individual products that, even if offered with the same dollar amount on the same terms, have different risk profiles based on the borrower (which has a wide number of variables) and the geographical location of the mortgage.

Even trying to estimate a mortgage's risk profile based on zip code can be inaccurate because the possibility of vastly different neighborhoods and development prospects with a sometimes wide geographical zone defined by zip code. (If investors had access to address level data due diligence would be much more reliable.)

So it is ridiculous to reject principal write downs universally—as the GOP has done. And it is ridiculous to accept them blindly—as the democrats have done.

What we have written time and again is that the evidence suggests that principal write downs are often times not the best way of getting money back for lenders. That means forced principal write down programs are a bad idea—no reason to force banks to take losses. It means that the GSEs should not start writing down mortgage principal in large chunks—no reason the taxpayers hould have to cover those losses too.

But all of that is in the abstract. I don't manage the GSE mortgage portfolio or the Wells Fargo portfolio of loans. Only those running the numbers can estimate on what the best option should be. I can point to the fact that more than half of the modifications under HAMP have failed. And we have done so in trying to push back on the idea that modifications are some how the panacea needed in the housing market. 

They are not. But they might be answer to some mortgages.

Enter Ed DeMarco last Tuesday, who noted that in "some circumstances" lowering the mortgage debt level of borrowers could reduce the possibility of default. Such a conclusion is not earth shattering. While a majority of the HAMP modified mortgages have failed, some have succeeded and theoretically staved off foreclosure. What has been missed in many stories about DeMarco's speech is that he was clear to point out that principal write downs are not a "magic bullet," and the benefits are "limited." 

He is right to say these things and the GOP is wrong to suggest that there should be no modifications (though modifying the principal on a mortgage the GSEs do not own would be a problem without authorization from the investor). Democrats are equally wrong to claim some sort of victory as if the debate over whether or not to go all in on principal write downs is won. This is ultimately a debate about servicing debt and managing the deleveraging process. It is a debate about what tools to use in preventing more taxpayer losses. DeMarco framed it this way:

"This is not about some huge difference-making program that will rescue the housing market. It is a debate about which tools, at the margin, better balance two goals: maximizing assistance to several hundred thousand homeowners while minimizing further cost to all other homeowners and taxpayers."

I will offer this critique of FHFA's analysis though. FHFA suggests it can reduce losses to the taxpayers by $1.7 billion by taking advantage of incentive payments made by HAMP to those who write down mortgage principal. The challenge is that in order to do this, the taxpayers have to pay out those HAMP fees. So in this particular case, the FHFA "savings" to the taxpayers is little less than an accounting gimmick. It is possible that principal write downs would save taxpayers from higher losses, but if it is only because the losses are otherwise subsidized by the taxpayers then there is no net gain and moral hazard from the write downs wins the day.

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Sheila Bair on the Prowl, a Guide

My first thought when I read the soon-to-be infamous Sheila Bair op-ed in the Washington Post this weekend was to laugh out loud and share the $10 million-loan-for-everyone suggestion with the driver of the taxi I was traveling in through downtown D.C. My second thought was "damn, I wish I'd had written the case against ZIRP like that." 

In fact we have written similar arguments as the former FDIC chairwoman articulated her humorous and cutting commentary. But not in the tone that she was able to articulate, shining a light on what has truly become a farce: the Federal Reserve's free money passed out in bulk to Wall Street to "support" the financial system. The idea Bair proposes is completely crazy, but that is the point. She is just articulating what Fed policy is for the financial system, and it is no less crazy to be handing them billions in free loans. 

Here is a guide to understanding the Bair tongue-anchored-to-cheek op-ed. First she writes:

For several years now, the Fed has been making money available to the financial sector at near-zero interest rates. Big banks and hedge funds, among others, have taken this cheap money and invested it in securities with high yields. This type of profit-making, called the “carry trade,” has been enormously profitable for them.

So why not let everyone participate? Under my plan, each American household could borrow $10 million from the Fed at zero interest. [...] Think of what we can do with all that money. We can pay off our underwater mortgages and replenish our retirement accounts without spending one day schlepping into the office. With a few quick keystrokes, we’ll be golden for the next 10 years.

Such a suggestion is usually overheard at one of D.C. well attended liquor and beer distributing establishments. Well, except for the bond trading part. The difference between professional investors and Americans suddenly power-ball-lottery-winner rich is the disciple to "order up a few trades" as she puts it later in the piece. Theoretically, if everyone just bought sovereign debt and lived off the interest we could avoid an inflation problem of all that new money chasing far too few widgets made by a rapidly declining labor force. But it is much more likely that all that money would flow into the economy, ruining creditors who are paid back to complete the deleveraging cycle, but unable to buy much with the now worthless cash that has been paid back to them (via Fed helicopter).

Bair begins to expose her point when suggesting how the "carry trade" could be accomplished for America's new denizens of wealth: 

The more conservative among us can take that money and buy 10-year Treasury bonds. At the current 2 percent annual interest rate, we can pocket a nice $200,000 a year to live on. The more adventuresome can buy 10-year Greek debt at 21 percent, for an annual income of $2.1 million. Or if Greece is a little too risky for you, go with Portugal, at about 12 percent, or $1.2 million dollars a year. (No sense in getting greedy.)

This is actually what financial institutions have been doing with all that Fed money. The bailout was supposed to shore up bank balance sheets so the failed institutions could lend. Quantitative easing was supposed to free up capital from assets and let the fresh money boost the economy. Zero interest rate policy (ZIRP) has long been declared necessary to encourage borrowing and keep housing prices propped up.

But all this has done is contribute to a limping, recoveryless recovery. As we predicted in Reason magazine two years ago, we've been going "sideways" for a while. And that is Bair's beef with the Fed.

She also has a barb to throw at Congress:

Of course, we will have to persuade Congress to pass a law authorizing all this Fed lending, but that shouldn’t be hard. Congress is really good at spending money, so long as lawmakers don’t have to come up with a way to pay for it. Just look at the way the Democrats agreed to extend the Bush tax cuts if the Republicans agreed to cut Social Security taxes and extend unemployment benefits. Who says bipartisanship is dead?

Fair point. When it comes to actually helping the economy, Congress goes AWOL. When it is time to score some political points, compromise abounds (under the cover of something substantive happening). Bair doesn't hold back from going after social issues either in the piece:

Because we will be making money in basically the same way as hedge fund managers, we should have to pay only 15 percent in taxes, just like they do. And since we will be earning money through investments, not work, we won’t have to pay Social Security taxes or Medicare premiums. That means no more money will go into these programs, but so what? No one will need them anymore, with all the cash we’ll be raking in thanks to our cheap loans from the Fed.


We can stop worrying about education, too. Who needs to understand the value of pi or the history of civilization when all you have to do to make a living is order up a few trades? Let the kids stay home with us. They can play video games while we pop bonbons and watch the soaps and talk shows. The liberals will love this plan because it reduces income inequality; the conservatives will love it because it promotes family time.

The frightening thing is that many of these attitudes are prevalent in American society even without the $10 million loans. 

The tax code is skewed. The answer is not to raise tax rates—the income tax system is a terrible way to tax a society and just slows down the economy—but that doesn't make the lower tax rates paid by wealthier segments of society any less damning. At the very least, the incentive structure of the tax code is set up to drive assets into many unsustainable things (like housing) and away from funding public liabilities (as Bair notes). 

Education is screwed up in America as well. Test scores are stagnant. High school graduation rates are sliding. Labor force mismatch issues are becoming an increasing concern. And it hasn't taken $10 million loans to end interest in math and history in many corners of America. 

So is Bair's solution viable? According to her, "This is the best American financial innovation since liar loans and pick-a-payment mortgages... Some may worry about inflation and long-term stability under my proposal. I say they lack faith in our country. So what if it cost 50 billion marks to mail a letter when the German central bank tried printing money to pay idle workers in 1923? That couldn't happen here. This is America." 


There will probably be more than a few out there who don't get the joke. But building on a pattern of loans without paper work to make everyone indebted to the Fed is not a serious policy proposal. Rather, her point is to channel the incredulous feelings of the readers into a criticism of the fact that the Fed does exactly this proposed idea, just with financial institutions instead of households. 

It is crazy and it has to stop. 

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Midtown Tunnel Could Die Without Tolls

Recently, in a column originally published by the Jefferson Policy Journal, my colleague Len Gilroy and I detailed the importance of moving forward with the Midtown Tunnel extension in the Hampton Roads area. 

Despite the U.S. Department of Transportation providing a $422 million loan for the Midtown Tunnel project and Skanska Announcing the official financial close for the project, Hampton Roads area officials seem bent on delaying or cancelling the proposed public-private partnership (PPP) for the $2.1 billion Midtown Tunnel expansion. 

More stringent fuel efficiency mandates and inflation have been yielding diminishing returns for federal and state gas taxes in recent decades. There is a consensus among economists, state transportation agencies and other experts that it’s a matter of when, not if, we make a dramatic shift away from gas taxes to other more direct and financially sustainable types of user fees, such as tolls. Additionally, Tolls are fairer than taxes, as those who benefit from the tolled facility pay for it as they use it.

But after years in the making, some Hampton Roads area pols have cynically stepped in at the last minute to undermine the Midtown deal, holding the state budget process hostage for more state transportation money so they can lower planned local tolls.

The Midtown PPP illustrates well the sorts of PPP benefits now in jeopardy. First, PPPs expand the funding pool by allowing governments to tap into new sources of capital not typically used in traditional tax- or debt-funded transportation projects. Second, a PPP provides the only viable method to finance new road capacity in the Midtown Tunnel. The new tunnel will also improve the frequency and reliability of bus service. Finally, PPPs transfer key project risks to the private sector and away from taxpayers. This is in contrast with traditional infrastructure projects where government sponsors shoulder most project delivery and operational risks.

Attacking the Midtown Tunnel PPP will do nothing for the region but make the project more costly and forestall needed congestion relief. The full commentary is available here.

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Denver’s RTD Publishes 2011 Report on FasTracks

Every year Denver’s Regional Transportation District (RTD) publishes a report detailing ongoing rapid transit projects within the boundaries of the Denver Regional Council of Governments (DRCOG). RTD’s largest project is FasTracks, a multimodal, multi-billion dollar transit expansion program that aims to ultimately comprise of 122 miles of commuter rail transit (CRT) and light rail, 18 miles of bus rapid transit (BRT) and 21,000 new complementary parking spaces across eight counties.

When Denver-area voters approved FasTracks in 2004 the system was slated to cost $4.7 billion and be complete by 2017. RTD has been unable to finish FasTracks on budget or on time. The report notes that overall costs increased from $4.7 billion in 2004 up to approximately $7.4 billion in early 2012. All other things unchanged, the system won’t be done until 2042. So, what’s next?

Last week RTD published its 2011 Annual Report to DRCOG on FasTracks. For a detailed system-wide update by region, see the full report available online here. The report includes an RTD map with a comprehensive view of the system:

FasTracks Plan, Rapid Transit Lines

FasTracks Plan, Rapid Transit Lines

Source: Regional Transportation District, 2011 Annual Report to DRCOG on FasTracks, April 3, 2012.

While the system is large, the Northwest Corridor has been at the center of the conversation over the past six months. RTD is asking DRCOG to approve a new option that would double the original regional 0.4% sales and use tax along the Northwest Corridor to generate more revenue for FasTracks. This option would expedite portions of rail construction and provide intermediary BRT service until rail is complete. Ultimately RTD hopes to complete the Northwest Rail Line out to Longmont, and estimates they will initiate construction and begin revenue service between 2026-2032. If DRCOG approves this option, then RTD will begin the process of placing the initiative on the November 2012 ballot.

For more on FasTracks see my previous reason.org commentary, "Denver’s RTD Weighing Options for Northwest Corridor."

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