Regulation

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MEAA issues wish list over proposed media reforms

Published by Anonymous (not verified) on Thu, 21/01/2021 - 11:20pm in

The union which oversees its member journalists and others involved with media and creative arts in Australia has issued a list of concerns in conjunction with two major media reform-related actions, less than a fortnight away from the federal Parliament convening for the first time in 2021. The Media, Arts and Entertainment Alliance (MEAA), in…

The post MEAA issues wish list over proposed media reforms appeared first on The AIM Network.

What stock markets tell us about the covid-mania.

Published by Anonymous (not verified) on Fri, 11/12/2020 - 2:46am in

Stock markets give us a glimpse what people with money have deduced about world events before they happen. Investors can make mistakes, sometimes terrible mistakes, but they are honest mistakes: you don’t buy a stock at a 100 if you actually honestly believe that same stock will only cost 50 next week. So whilst you might be wrong in following a herd, or you may be mislead, the price of stocks still reflects an honest valuation at that moment. This makes stock markets very useful for reading political and economic events, though interpreting them requires a lot of knowledge of the possible influences on those prices. I want to tell the story of how the markets seem to have read the covid-mania of 2020 in 3 graphs, where the last one is the most depressing one.

The first graph shows the stock value of Airbus, a European company that makes airplanes. The restrictions on travel throughout the world decimated the industry it made planes for, such that the number of orders for new planes dropped from about a 100 a month to nothing.

This graph first off shows you the whopping 65% drop from the end of February to March 18th. Thus the markets in early March saw coming that governments were going to make life tough for the airline industry, long before many governments actually instigated lockdowns or travel restrictions. The market analysts were quicker than me, because I only started to really see what was coming around March 10th. The graph thus shows you the uncanny speed with which financial analysts are reading future political decisions.

You see an uptick in June when restrictions were eased in many countries and the markets had some reasonable hope that the covid-related travel-restrictions were going to come to an end soon, though not a huge amount of hope because the uptick was ‘only’ 20% or so. That uptick probably also had to do with the fact that governments were bailing out their airline companies, so investors knew bankruptcy was not going to happen. Airbus was too big to fail.

You see the drop in October when markets realised Europe and some US states were going to lock down again, even though that only actually happened a month or so later. The uptick in November then probably reflects the fact that markets started to believe vaccines would actually come in much earlier than previously thought and would allow some degree of normalisation, though still estimating that Airbus was worth 30% less than at the start of 2020.

So the Airbus stock price tells you the standard story of what forward-looking financial analysts were thinking at different moments about the political economy of the pandemic, pre-guessing lockdowns, reduced restrictions, a second lockdown, and vaccines. What you also see in the strong price changes though is that they did not see things coming way in advance, but more like a few weeks in advance, and that they got some things ‘wrong’ in a longer-run sense: if you’d had known on March 1st what was going to happen with lockdowns, you would have made a killing betting on a big downturn the next two weeks. If you’d have known markets would believe in vaccines in November, then you could have made a killing by buying up this stock in August. Hence, in many ways, the Airbus stock price is a standard, but beautiful example of how stock markets tell you of the reality and limitations of forward-looking information in prices.

The second graph I want to talk about is that of the NASDAQ, which is the main stock market for the US Big Tech companies.

This graph tells you a very different story. Just as with Airbus, there was a big general crunch early March of around 30% of the initial value, which was less severe than with airbus that lost 65% of its value. So there is the same story of how financial analysts predicted the lockdowns, but it also shows they predicted that the policies would hurt Big Tech less than it would hurt the airline industry. Still, they anticipated covid-mania would be bad for Big Tech.

The second big thing about the graph is the continued rise from April till about August, increasing the index 20% above February prices. So unlike Airbus that was still 50% down in August, the markets had learned that covid-policies were actually really good for Big Tech, which was not anticipated but came as a surprise. Big Tech was the big facilitator of covid-mania, something the markets started to realise around late April, so pretty quickly. They started to notice the increase in online shopping, online job search, online socialising, online everything. What they also learned was that governments were not stopping it by hampering home deliveries or using the opportunity to muscle in on Big Tech monopolies.

The drop in October is relatively small and probably some kind of correction on the assessment of how well things were going for Big Tech. The blip down at the very end is due to the US authorities talking about breaking up Facebook and perhaps other Big Tech companies.

So the story of the Nasdaq tells you that the benefits Big Tech got from covid-policies were unanticipated but very large (almost a doubling since the end of March). This of course tells you exactly why Big Tech is so keen on extending lockdowns and the covid-mania via censorship and disinformation: long may the good times last for them! And the markets clearly anticipate there will not be much of a backlash.

Whilst the second graph is depressing enough, the third one is really nasty in my view. It’s the story of Starbucks, the coffee chain.

Now, this stock first behaves the way you’d now expect: just like Airbus, coffee chains are really hampered in their business by the lockdowns and other covid-mania policies, so the markets anticipate a big drop in business, and thus we see a 40% drop in share value early March. The downturn is also what the company itself reports, flagging in June that it had over 3 billion dollars less in sales, and that is just from the preceding quarter.

The first surprise is the uptick in April-May, probably related to government subsidies which big companies are good at securing.

The depressing bit is the large uptick after August: an increase of about 30% coinciding with the new lockdowns, making the company worth 10% more mid December than in February, even though turnover is still highly depressed and whilst it will probably take take years for coffee-fueled office life and tourism to return to normal. What is going on, you might wonder? Why are we not seeing a lower valuation for Starbucks at the end of such a terrible year for them, just like we saw for Airbus?

The Financial Times tells us the likely reason: many of the smaller chains (like Nero) and independent coffee shops are going bankrupt, leaving Starbucks a bigger market share. This is probably also why by now, the Dow Jones index in the US is above its pre-March level and why the Indian stock-market (the Nifty50) is up almost 15% on the start of this year despite a drop in GDP of over 10%: big business is now expected to gain from the demise of small business that is squashed by the covid-policies. This too was not foreseen early on.

I find this quite depressing because in a way I am looking at the demise of independent and smaller businesses in this graph, with the bigger companies soaking up the additional demand. It’s the modern version of the enslavement of a once free population: from independent coffee shop owner to an employee who will have to clock in hours, abide by company procedures, and do tonnes of corporate responsibility training. From proud workers to schmucks who have to smile on demand and sign non-disclosure contracts they don’t understand.

So there you have the basic story of the covid-mania in three stocks: a hit of 65% to the travel industry that became 30% when government subsidies and vaccines softened the blow; the unexpected gains of Big Tech making them have an interest in continued covid-mania; and the decimation-by-policy of the independent smaller businesses leading to gains among the big boys, heralding a more feudal and more unequal future for the vast majority. Let’s hope the markets are wrong about that.

Can regulators avoid a green bubble after the pandemic?

Published by Anonymous (not verified) on Mon, 30/11/2020 - 1:39am in

Global concerns have increased under the COVID-19 pandemic’s impact on the environmental, social, economic, technological and political relationship between energy systems, growth patterns, the climate and the environment. As a result, many countries are now planning to focus on a green or climate-friendly recovery. Indeed, huge amounts of investments are still needed in energy efficiency and low-carbon technologies up to 2030 to meet the goals of the Paris Agreement.

The case for climate action has never been stronger. Many relevant issues are at stake, including which is the global governance of climate finance and whether it is possible to regulate climate finance in a transnational way. The predicted decrease in CO2 emissions by 8 percent in 2020, according to the International Energy Agency (IEA), is the product of both supply and demand shocks. The future climate finance scenario depends mainly on the outcomes of the global health and economic crisis means, and the creation of just transition financial models within wider “green recovery” policy frameworks.

So far, according to the United Nations Framework Convention on Climate Change (UNFCC) data, global total climate finance has been increasing in the last decade and private actors and institutions have been the main driver for mobilizing climate finance. As matter of fact, the access to climate finance can be hindered by a wide range of issues, such as: lack of technological ability to implement projects; difficulties in meeting the investors´ requirements; political and legal instability, among others. Moreover, most of public resources refer to Development Finance Institutions and the public sector still plays a relevant role as a key driver in covering risks. In this scenario, the role of Climate Funds is still low.

Globally, green bond and loan issuance rose by 49 percent last year to $249.5 billion, according to the Climate Bonds Initiative. Of this amount, green loans were 2.6 percent. With $50.6 billion, the US is at the top of national rankings, followed by China with $30.1 billion and France with $29.5 billion.  In terms of currency, largest foreign market for green bonds with $106.7 billion in annual issuance has been the European Union.

What is a green bond? A kind of financial asset issued by private or public institutions that is expected to be instrumental in reaching the objectives of the European Green Deal while playing a large role in unlocking the private sector’s potential to address climate change and foster green projects. The European Parliament has been committed to the Green Deal, with proposals to invest in renewables, clean transport, organic food, and global supply chains that are shortened and diversified.

Green projects should contribute to climate change mitigation and adaptation; sustainable use and protection of water and marine resources; transition to a circular economy; pollution prevention and control; protection and restoration of biodiversity and ecosystems. Green finance can include green assets and expenditures in green projects.  Some examples include   1) physical assets, like a windfarm, where a company is looking to diversify its financing sources and plans to issue green bonds, 2) financial assets, such as mortgage loans, when a bank is looking to finance a portfolio of green real estate mortgages and do this by issuing green bonds, 3) expenditures related to Research and Development, like those related to the generation of more efficient wind farm technology financed by green bonds.

However, a core component of sustainable investment would remain investors´ demand for green assets. The general problem of balancing standards across the sub-sectors of green, from infrastructure to real estate to sustainable forestry to corporate bonds, remains a challenge. Establishing such a standard was therefore a recommendation in the final report of the Commission’s High-Level Expert Group on Sustainable Finance that provided detailed input on what an EU Green Bond Standard could be. From June to October 2020 there was an EU Green Bond Standard public consultation as part of the development of an official EU Green Bond Standard that could help to consolidate the EU as a global hub for green finance. Among the regulators´ key-targets, we can highlight the adoption of 1) the use-of proceeds approach with focus on transparency, reporting, reviewing and verification, and 2) the EU taxonomy as an “unified classification system” to define project eligibility and to ensure consistency between the project financed and the EU’s long-term environmental objectives.

Scaling up climate finance is key to promote a green recovery in a post-pandemic world. Nevertheless, one of the current issues at stake is to prevent a green bonds´ bubble. Indeed, in the context of the health and economic crisis, there are many challenges for current regulators to enhance clear green strategies, eligibility of green projects and transparent practices of reporting, review and verification of green financial assets.

Fabricated Ballots, Dead Voters and Other Phantom Fears From Trump Supporters at Georgia Presidential Audit

Published by Anonymous (not verified) on Wed, 18/11/2020 - 3:57am in

Steven Rosenfeld reports from Georgia. Partisan suspicions shadow hand count of every ballot in most populous county. Continue reading

The post Fabricated Ballots, Dead Voters and Other Phantom Fears From Trump Supporters at Georgia Presidential Audit appeared first on BillMoyers.com.

PERC Podcast with Michelle Meagher – Competition is Killing Us

Published by Anonymous (not verified) on Thu, 05/11/2020 - 10:58pm in

Will Davies spoke to Michelle Meagher, Senior Policy Fellow at the UCL Centre for Law, Economics and Society, about her book, Competition is Killing Us: How Big business is harming our society and planet – and what to do about it Their conversation covers the history of anti-trust, the pernicious influence of Chicago School ideas, and her vision of an alternative regulatory paradigm focused on reducing corporate power.

PERC Goldsmiths · PERC Podcast with Michelle Meagher – Competition is Killing Us

The post PERC Podcast with Michelle Meagher – Competition is Killing Us appeared first on Political Economy Research Centre.

Bank Capital, Loan Liquidity, and Credit Standards since the Global Financial Crisis

Published by Anonymous (not verified) on Wed, 21/10/2020 - 10:00pm in

Sarah Ngo Hamerling, Donald P. Morgan, and John Sporn

LSE_Bank Capital, Loan Liquidity, and Credit Standards since the Global Financial Crisis

Did the 2007-09 financial crisis or the regulatory reforms that followed alter how banks change their underwriting standards over the course of the business cycle? We provide some simple, “narrative” evidence on that question by studying the reasons banks cite when they report a change in commercial credit standards in the Federal Reserve’s Senior Loan Officer Opinion Survey. We find that the economic outlook, risk tolerance, and other real factors generally drive standards more than financial factors such as bank capital and loan market liquidity. Those financial factors have mattered more since the crisis, however, and their importance increased further as post-crisis reforms were phased in in the middle of the following decade.

Measuring Credit Standards

The Fed’s Senior Loan Officer Opinion Survey (SLOOS) is a quarterly survey of about eighty large domestic banks and twenty-four foreign banks. The domestic banks, our focus, account for roughly 70 percent of all U.S. banks’ assets. The first question in the survey asks about credit standards for commercial and industrial (C&I) loans:

Over the past three months, how have your bank's credit standards for approving applications for C&I loans or credit lines—other than those to be used to finance mergers and acquisitions—to large and middle-market firms changed?

a. Tightened considerably
b. Tightened somewhat
c. Remained basically unchanged
d. Eased considerably
e. Eased somewhat

The chart below plots the number of banks reporting tightening and easing between 2001 and 2019. Banks tend to cycle from easing to tightening before recessions but that shift had never been so dramatic as during the 2007-09 crisis. Researchers have found that tighter standards strongly predict slowdowns in bank credit growth and economic activity (Lown and Morgan; Basset et al.).

Bank Capital, Loan Liquidity, and Credit Standards since the Global Financial Crisis

What Drives Credit Standards?

Banks reporting a change in credit standards or terms are asked to rate the importance of various factors in driving the change. The set of reasons offered since at least 2001 is listed in the table below in slightly abridged form (the full text is here). Easing and tightening banks are offered the same set of reasons, except with the directions reversed. For example, the text on bank capital is either “improvement in your bank’s current or expected capital position” or “deterioration …”

The second column below reports the mean share of respondents that ranked the reason as either very or somewhat important. By that (simple) metric, real factors drive standards more than financial factors like bank capital and liquidity. That is notable in light of recent academic literature stressing the importance of banks’ capital strength in driving credit supply (Bernanke and Gertler; Peek and Rosengren). Of course, the hypothesis of a bank capital channel is that capital also matters, along with real factors, not that it matters more. Note also that financial factors were markedly more important during the financial crisis, as shown in the final column.

Bank Capital, Loan Liquidity, and Credit Standards since the Global Financial Crisis

Columns (3) and (4) report the means separately for banks that reported easing or tightening and column (5) reports the difference in means. The financial factors matter symmetrically, that is, increased concerns about banks’ capital or loan liquidity drive easing standards as much (or as little) as decreased concerns drive lower standards. The real factors, by contrast, matter asymmetrically, with all but one mattering more for tightening than for easing. The exception is competition; increased competition among lenders drives standards downward much more than weaker competition drives them upward. The strong link between increased competition and easing standards is consistent with the long-standing notion that increased competition spurs more risk taking by banks (Carlson, Correia and Luck provide interesting historical evidence on that conjecture; Goetz reviews the literature). However, we’re not aware of theories that predict the asymmetric effects of competition on credit standards.

Different Drivers Since the Crisis?

To see if the drivers have changed since the financial crisis of 2008-09, we compare the average share of banks reporting that a reason was important before the crisis to the average share after the crisis, conditional on the number of banks that changed standards. Technically, we regressed the number of banks saying x was an important reason why they tightened or eased each quarter on a constant, a “post-crisis” indicator, and the number of banks that tightened or eased. Given the asymmetries just noted, we estimated separate models for easing and tightenings. The chart below summarizes the results. The asterisks over the red bars indicate if that reason was significantly more or less important after the crisis.

While real factors still predominate over the cycle, financial factors are more significant since the crisis. On the easing side, the mean share of easing banks citing their capital position rose from 18 percent to 23 percent, eclipsing banks’ own risk tolerance in importance. On the tightening side, both capital and loan market liquidity were more significant drivers; the mean share of tightening banks citing capital concerns increased from 5 percent to 14 percent while the mean share citing liquidity concerns increased from 7 to 18 percent.

Bank Capital, Loan Liquidity, and Credit Standards since the Global Financial Crisis

To see what’s behind the post-crisis shift, we plot the fraction of tightening banks citing capital and liquidity concerns below. Those concerns remain elevated for several years after the crisis, which partly explains their heightened importance since the crisis. That post-crisis “hangover” is not the whole story, however, since capital and liquidity concerns resurged somewhat in the middle of the decade.

Bank Capital, Loan Liquidity, and Credit Standards since the Global Financial Crisis

That resurgence roughly coincides with the finalization of stricter bank capital and liquidity rules in 2013 and 2014, respectively, and their gradual implementation over the next few years. We can’t put too fine a point on this interpretation given our simple analysis, but the timing squares with other recent evidence that those reforms might have unintentionally reduced or reallocated bank credit supply (for example, Roberts, Sarkar, and Shachar; Kovner and Van Tassel). Of course, the policy question is whether any such costs of reforms outweigh the benefits of increased bank resilience and financial stability, a more difficult question indeed.

Hammerling_sarah

Sarah Ngo Hamerling is a senior research analyst in the Federal Reserve Bank of New York’s Research and Statistics Group.

Donald P. Morgan


Donald P. Morgan
is an assistant vice president in the Bank’s Research and Statistics Group.

Sporn_johnJohn Sporn is a collateral value analysis associate in the Bank’s Markets Group.

How to cite this post:

Sarah Ngo Hamerling, Donald P. Morgan, and John Sporn, “Bank Capital, Loan Liquidity, and Credit Standards since the Global Financial Crisis,” Federal Reserve Bank of New York Liberty Street Economics, October 21, 2020, https://libertystreeteconomics.newyorkfed.org/2020/10/bank-capital-loan-....




Disclaimer

The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

How Has Post-Crisis Banking Regulation Affected Hedge Funds and Prime Brokers?

Published by Anonymous (not verified) on Mon, 19/10/2020 - 10:00pm in

Nina Boyarchenko, Thomas M. Eisenbach, Pooja Gupta, Or Shachar, and Peter Van Tassel

LSE_2020_hedge-funds-prime-brokers_eisenbach_460

“Arbitrageurs” such as hedge funds play a key role in the efficiency of financial markets. They compare closely related assets, then buy the relatively cheap one and sell the relatively expensive one, thereby driving the prices of the assets closer together. For executing trades and other services, hedge funds rely on prime brokers and broker-dealers. In a previous Liberty Street Economics blog post, we argued that post-crisis changes to regulation and market structure have increased the costs of arbitrage activity, potentially contributing to the persistent deviations in the prices of closely related assets since the 2007–09 financial crisis. In this post, we document how post-crisis changes to bank regulations have affected the relationship between hedge funds and broker-dealers.

The Relationship between Hedge Funds and Prime Brokers

Hedge funds rely on prime brokers and broker-dealers for a slew of services, such as trade execution, the extension of leverage, securities lending, and account centralization of cash and securities. Consolidation of the banking system over time has led to the largest broker-dealers becoming part of bank holding companies and therefore subject to bank regulations. In an update to our Staff Report, we find specific evidence that post-crisis regulation has affected the match between broker-dealers and their clients. This evidence is consistent with the hypothesis that regulations affecting incentives for banks to take on leverage pass through to their hedge fund clients and thereby increase the overall “limits-to-arbitrage” in leverage-dependent arbitrage trades.

We use data from Form ADV, which is an annual regulatory filing required by the U.S. Securities and Exchange Commission for investment advisers. Form ADV data provides us with a repeated panel of hedge fund-prime broker pairs. These pairings enable us to study how the choice of prime brokers for a given hedge fund changes over time, including the probability of new match formation and the persistence of existing matches.

The Impact of the Supplementary Leverage Ratio (SLR)

We focus on key Basel III banking regulations that became active in 2014. In particular, the supplementary leverage ratio (SLR) requires that large banking organizations hold capital against their total leverage exposure—including on-balance sheet assets and off-balance sheet assets and exposures. Our hypothesis is that these regulations incentivize banks and their broker-dealer subsidiaries to be wary of their balance sheet size and hesitant to provide balance sheet space to hedge fund clients. We expect hedge funds to adjust by splitting their business across a larger number of prime brokers. Because the regulations are more stringent for larger and more systemic institutions, we expect the effects to be stronger for prime brokers affiliated with global systemically important banks (G-SIBs).

The next chart shows the average number of prime brokers reported by hedge funds over our sample period, as well as the average share of those prime brokers that are affiliated with a G-SIB. We see a first indication of the changing relationship between hedge funds and G-SIB prime brokers, with the average number of prime brokers used increasing and the share of G-SIB prime brokers declining over time.

LSE_2020_hedge-funds-prime-brokers_eisenbach_ch1-01

However, the hedge funds in our sample vary considerably in terms of size so we explicitly study effects for different types of funds. We split our sample into a pre-SLR period (2011–13) and a post-SLR period (2014–18), indicating the periods before and since the implementation of the SLR. We then compare within each decile of the distribution of fund size (gross asset value). On average, the smallest 10 percent of funds (1st decile) have gross assets of $1.9 million pre-SLR and $2.2 million post-SLR while the largest 10 percent have $4.1 billion pre-SLR and $5.6 billion post-SLR.

Hedge-funds Diversify to More Prime Brokers Post-SLR and the Effect Is Stronger for Larger Funds

The next chart shows the average number of prime brokers per fund for each fund size decile. Larger hedge funds tend to use more prime brokers overall and the chart shows that larger hedge funds also increased their prime brokerage relationships more post-SLR. Hedge funds splitting their business amongst more prime brokers post-SLR is consistent with the hypothesis that funds are under pressure from their brokers to economize on balance sheet space with larger funds under more pressure than smaller funds.

LSE_2020_hedge-funds-prime-brokers_eisenbach_ch2-02

Hedge Funds Rely Less on Prime Brokers That Are More Constrained by the SLR but the Effect Is Weaker for Larger Funds
The next chart shows the average fraction of a hedge fund’s prime brokers that are affiliated with a G-SIB, for each fund size decile. Overall, hedge funds reduce their reliance on G-SIB prime brokers. However, for larger hedge funds, which are more reliant on G-SIB prime brokers, the effect is weaker than for smaller hedge funds. The reduced reliance on G-SIB prime brokers after the introduction of SLR is consistent with our hypothesis that the more constrained prime brokers exert more pressure on their hedge fund clients. The weaker effect for larger hedge funds is consistent with larger funds being more dependent on services that only a large G-SIB prime broker can provide.

LSE_2020_hedge-funds-prime-brokers_eisenbach_ch3-02-02

In our Staff Report, we investigate these trends more formally using regressions where we can control for additional fund and prime-broker characteristics. We also consider the probability of a relationship at the level of each broker-fund pair and study both the probability of new relationships forming as well as the persistence of existing relationships. Consistent with a shift away from relying on G-SIB prime brokers, we find that fewer new relationships are formed each year in the post-SLR period and that this effect is stronger for G-SIB prime brokers. Further, existing relationships are more persistent, suggesting a more specialized match in each broker-fund relationship, but this effect is weaker for G-SIB prime brokers and large hedge funds.

Summing Up

Taken together, our results suggest a pass-through of regulation from the directly affected sector to other parts of the financial system, such as hedge funds, that rely on the regulated sector for leverage as well as funding, execution, and clearing services. This is important since it affects the ability of hedge funds to fulfill their role as arbitrageurs contributing to the functioning of the financial system. Recognizing these externalities, regulators temporarily excluded U.S. Treasury securities and deposits from the SLR calculation in the wake of Treasury market dislocations in early March 2020 “to allow bank holding companies, savings and loan holding companies, and intermediate holding companies subject to the supplementary leverage ratio increased flexibility to continue to act as financial intermediaries.”

Boyarchenko_nina

Nina Boyarchenko is an officer in the Federal Reserve Bank of New York’s Research and Statistics Group.

Eisenbach_thomas
Thomas Eisenbach is a senior economist in the Bank’s Research and Statistics Group.

Gupta-poori
Pooja Gupta is is a senior associate in the Bank’s Markets Group.

Shachar_or

Or Shachar is a senior economist in the Bank’s Research and Statistics Group.

Vantassel_peter

Peter Van Tassel is an economist in the Bank’s Research and Statistics Group.

How to cite this post:

Nina Boyarchenko, Thomas M. Eisenbach, Pooja Gupta, Or Shachar, and Peter Van Tassel, "How Has Post-Crisis Banking Regulation Affected Hedge Funds and Prime Brokers?" Federal Reserve Bank of New York Liberty Street Economics, October 19, 2020, https://libertystreeteconomics.newyorkfed.org/2020/10/how-has-post-crisi... .




Disclaimer

The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

Orwell that ends well: Can evaluation save us from ourselves?

Published by Anonymous (not verified) on Tue, 01/09/2020 - 3:35pm in


I really love this design by Casey Finley, who was kind enough to allow me to publish it here. He has a very distinctive style which is really coming into its own as he works on it. For instance, see here and here.

When I first saw the Productivity Commission’s Draft Indigenous Evaluation Strategy, my heart sank. I’d had had several quite extensive meetings with Romlie Mokak, the Indigenous Commissioner at the PC who struck me as a person of great intelligence, straightforwardness and practical commonsense. He and his team at the PC had also seemed interested in my own thoughts about evaluation and the contradictions involved in the way it is being embraced as a panacea, as something that can save the system from itself. But though that interest turned up in the report, it did so as reportage – including a box on my Evaluator General model – rather than real engagement on the ideas.

Often at times like this, it’s best to just keep one’s mouth shut and not make enemies but, without much hope of being understood within officialdom, I thought I really should bear witness to the travesty that it seemed to me was unfolding. And I’m glad I did. As I wrote, lots of things I’d been pondering for a good while started falling into place. For instance, you’ll see my reference to Lord Acton’s faultline introduced in Section 3 as integral to the analysis rather than a throw-away line. But there are plenty of other examples.

These things enabled me to clarify what I think the challenge is. At bottom, it’s a challenge of bona fides. Are we prepared to face up to uncomfortable truths? I’ve always thought in my own life it’s the only route to self-betterment. And it’s all I have to offer officialdom. It seems to me what Orwell was about.

It turned into a long piece so I’m grateful to Peter Browne who runs the excellent Inside Story for publishing the piece. Like the themeatisation of so many things, publishers seem increasingly preoccupied with the form of a piece, specifying length, subject areas and so on. Of course, targeting is the essence of publishing, but so too is quality, so I’ve always appreciated publishers who vary their guidelines somewhat to accommodate what matters most to authors. Anyway, Peter did that for me here, for which I’m grateful.

I’ve had a very good reaction from those who’ve read the piece – including Romlie Mokak who was interested in its arguments and its suggested changes to the draft (though of course made no promises) – so I look forward to getting feedback from the Tropposphere!

The essay begins below the fold.

Humility is not a peculiar habit of self-effacement, rather like having an inaudible voice. It is selfless respect for reality and one of the most difficult and central of all virtues… Humility is a rare virtue and an unfashionable one… Only rarely does one meet somebody in whom it positively shines, in whom one apprehends with amazement the absence of the anxious avaricious tentacles of the self.
— Iris Murdoch

The divergence between the facts established by the intelligence services — sometimes by the decision makers themselves (as notably in the case of McNamara) and often available to the informed public — and the premises, theories, and hypotheses according to which decisions were finally made is total. And the extent of our failures and disasters throughout these years can be grasped only if one has the totality of this divergence firmly in mind.

— Hannah Arendt

I have a theory that the truth is never told during the nine-to-five hours.
— Hunter S. Thompson

1. Introduction

From 1788 till the 1960s, Europeans established themselves on Indigenous land in a brutal regime, first of dispossession and then of disregard. Yet some among them had strikingly good intentions. A year before Wilberforce took on the cause, nearly eighty years before the Emancipation Proclamation, Arthur Phillip accepted his commission insisting that slavery had no part in the new colony. Phillip sought to treat the Indigenous people fairly, at least according to his own lights. But mutual incomprehension reigned and those with murkier intentions soon prevailed.

Today, good intentions abound, though racism often lives on in unacknowledged assumptions. Governments outlay vast sums, whether adequate or not, on specific Indigenous programs and in general expenditure on Indigenous health, education and social security. Widely supported grand gestures are announced every few years. You might think “Closing the Gap” was Kevin Rudd’s idea but it rebooted (or is that rebranded?) a Hawke government initiative of twelve years earlier. But the results are meagre.

Now comes a new cycle of activity, this one focused on whether formal evaluation processes might allow us to identify and scale up those Indigenous programs that actually “work.” Most recently, the Productivity Commission has been hard at work on a national Indigenous Evaluation Strategy, which was the immediate trigger for this essay and to which I’ll return. Will this cycle of activity produce better results than earlier efforts? I’ll explain below why I have my doubts.

To first clarify where I’m coming from, it is not from deep knowledge of Indigenous policy. My focus here is rather on a prior question: how our formal institutions of government — and most particularly our bureaucracies — might need to change to succeed where previously they have so consistently failed. To make that question concrete I draw on my experience in other intractable areas of social policy that bear family resemblances to Indigenous policy.

Programs to protect children from abuse and neglect, particularly in disadvantaged families and communities, follow the same endlessly repeated cycle of failure followed by grand plans for reform that then run into the sand before the cycle begins again. This essay focuses on how little the system really appreciates the distance it would need to travel to really be effective, in terms of either its own values and objectives, or those of the disadvantaged communities — including Indigenous communities — it claims to be serving.

2. The “what” and the “how,” the saying and the doing

So here’s my very simple description of the problem: despite endless pronouncements of what we must do, there’s minimal comprehension of how to do it.

This is an endemic problem. Dependable know-how itself — whether it’s improving outcomes in an Indigenous community or representing government in the High Court — is not directly legible to government systems. Anyone can claim to have that know-how but a bureaucracy needs something more dependable than that. As a consequence, it will interact with know-how as a certified, decontextualised “what.” That “what” could be a credential, the meeting of a key performance indicator, or a particular bureaucrat’s informal reputation for being a “good operator” or a “safe pair of hands.” In improving Indigenous lives, however, know-how won’t align with any such things, not least because so much of it resides among Indigenous people and communities themselves. We need to access their knowledge and their agency to improve their own lives in ways that matter to them.

The cliché used to convey this idea is “putting people at the centre” or “putting people first.” However well-intentioned such slogans are, more often than not they operate as a kind of doublethink — as if adopting the slogan were to put its intent into practice.

The philosopher Martha Nussbaum offers a story that illustrates this difference between saying and doing. She describes how a development program encounters a woman in a traditional rural community who is uninterested in education for herself or her children. Nussbaum is showing how our (reductive) framing of the other’s perspective can cut us off from the wisdom of the other’s lifeworld. “Clearly,” she writes, “a one-shot logical argument” wouldn’t be enough to engage the woman:

[S]uch a procedure would only reinforce her conviction that education has nothing to do with her. Nor would the exchange get very far if the development workers sat down with her… asking… calm and intellectual questions about what she thinks and says. But suppose, instead, they spent a long time with her, sharing her way of life and entering into it. Suppose, during this time, they vividly set before her stories of ways in which the lives of women in other parts of the world have been transformed by education of various types — all the while eliciting, from careful listening over a long period of time, in an atmosphere of trust that they would need to work hard to develop, a rich sense of what she has experienced, whom she takes herself to be, what at a deeper level she believes about her own capacities and their actualization. If they did all this, and did it with the requisite sensitivity, imagination, responsiveness, and open-mindedness, they might over time discover that she does indeed experience some frustration and anger in connection with her limited role; and she might be able to recognise and to articulate wishes and aspirations for herself that she could not have articulated to Aristotle in the classroom. In short, through narrative, memory, and friendly conversation, a more complicated view of the good might begin to emerge.

Nussbaum’s scenario is based on actual fieldwork in Bangladesh, and couldn’t be cost-effective if it involved professionals engaging rural women en masse. But, as I discovered when I was chairing the Australian Centre for Social Innovation, the spirit of this translational endeavour is already captured in existing and cost-effective programs in Australia.

The centre’s Family by Family program takes families who feel they’re close to crisis. A trained coach then takes each family through a structured program of mentoring by another local family that has come through similar stresses. The family seeking help chooses the family that mentors them and sets the objectives they want to work on.

The program was co-designed with families over many months, but the simplicity and obviousness of the end result gave those involved in it and many lookers-on numerous “aha” moments. Family by Family embodies the rare art of professionals vacating centrestage in a therapeutic intervention to create space for those who must do the real work. Professional knowledge, which grows with the program, is always there — but as midwife, not obstetrician.

Talking to some of these families, I was struck by their visceral engagement with the program and their mentors. To take just one example — of which there were many — one mother in the program had received twenty-seven statutory “notifications” documenting outsiders’ suspicions that she was neglecting her kids. The relevant department was heading to court to take her four kids into guardianship. When her mentor family took her family camping, she learnt many things from them — not least to hug her kids. The department stopped proceedings against her.

The thirty-week program cost around $13,000. If that sounds expensive, it’s a fraction of what social workers would have cost, and much more effective. Moving all four kids into care would have cost around $224,000 per year. So, if Family by Family steered just this family from the shoals of state intervention it probably paid for its development and first couple of years of operation.

Before I saw Family by Family in action, I’d have described my outlook as that of a tragic liberal — committed to fairly generous spending on social disadvantage, but with very modest expectations of how much it could turn things around. After seeing Family by Family, the penny dropped. Ingrained patterns and social reinforcement are immensely powerful, almost immovable forces. But people’s desire to work towards better lives for themselves, their families and their communities is similarly elemental if they can somehow unlock their own agency and that of those around them.

3. Lord Acton’s fault line

After acknowledging the vast gulf between identifying the “what” and mastering the “how,” between the saying and the doing, we should then do something I’m doing for the first time in this essay. For decades I’ve referred to it in asides, but it needs to be brought centrestage so we can look it in the eye. It’s significant that it’s a joke, just as it’s significant that so many of the best insights into bureaucracy are provided by comedies like Yes MinisterThe Office and Utopia.

More than a century ago Lord Acton quipped that rowing was the perfect preparation for public life. Why? Because you face in one direction while moving in the other. One crucial reason that we’ve made so little progress is that in a thousand ways, large and small, the actors in the system face in one direction — with their mission statements, corporate values, strategic plans, evaluation strategies and all the rest of it — while moving in the other.

Of course, they’d prefer to do a good job — most people would. But when push comes to shove, their animating imperative isn’t to keep progress going in the field. It’s to keep up appearances. Seen this way, all those grand announcements we keep making are part of the problem. They’re really directed at our own anxieties. They alleviate and distract us from facing our disappointment — our discomfort — that the world remains so resiliently impervious to our good intentions.

Lord Acton’s fault line appears between the two feet on which we stand — between what we say and what we do. That’s why the words we use matter so much, and why we should take George Orwell’s advice to choose the simplest and clearest words we can. As he put it:

If you simplify your English, you are freed from the worst follies of orthodoxy. You cannot speak any of the necessary dialects, and when you make a stupid remark its stupidity will be obvious, even to yourself. Political language — and with variations, this is true of all political parties [and here we can include officialese]… is designed to make lies sound truthful… and to give an appearance of solidity to pure wind.

Since those in the system are the ones with the power, all we have to appeal to is their own self-respect — their own desire to feel better about themselves. When they say they want to change, the real question is how much. The system has said that it wants greater Indigenous agency in its programs for ages. But as I’ll illustrate, our programs are so dominated by that same system’s routines and perspectives that Indigenous agency barely gets a look-in. Instead it gets reduced to things that are legible to the system — such as Indigenous ethics codes and certified cultural sensitivity. These things may have some benefits. They may also have costs, which I’ll discuss. But they are mostly the system saying rather than doing.

This takes us to the nub of the problem. It is only humility, or some institutionalisation of it, that can create that space within which Indigenous agency might be nurtured and grow. But “humility” itself is now turning up as a cliché in all those “how to” guides (it appears just before “nuance” and after “authenticity” — yes, authenticity really was a corporate value of PwC for a while there). So I’ve tried to revivify it with Iris Murdoch’s magnificent words above. For the non-Indigenous among us who fancy we care, we must find ways to untangle ourselves and our institutions from the “the anxious avaricious tentacles of the self.”

4. Enter evaluation

Like a patient resisting therapy, the system constantly initiates new beginnings. But Lord Acton is never far away. At the political level leaders talk of evidence-based policy, but then shunt it aside when convenient. In fact, substantial performance evaluation was built into the structure of the Aboriginal and Torres Strait Islander Commission but sidelined after ATSIC was dismantled by John Howard’s government. The failure of the Northern Territory Intervention to take an evidence-based approach is legendary, worked up as it was over a few days in Canberra in the run-up to an election and yet largely maintained by the incoming government.

More recently, while stressing his own commitment to following the evidence, newly elected prime minister Malcolm Turnbull expanded income-management schemes without mentioning that the independent evaluations were highly equivocal. However well the idea played in non-Indigenous Australia, the evaluations suggested that compulsory income management has clear, positive impacts in very few cases and gives rise to “considerable feelings of disempowerment and unfairness.” As one might expect, voluntary income management is more successful.

Now, it is one thing for senior officials not to speak publicly of their political masters’ hypocrisy. But their complicity goes deeper. In 2009, a finance department review of Indigenous expenditure stressed the need for “a more rigorous approach to program evaluation at a whole of government level.” In 2016, the nation’s most senior public servant, the secretary of the Department of the Prime Minister and Cabinet, Martin Parkinson, echoed those sentiments. In response to such concerns, $40 million over four years was allocated for evaluation. Parkinson’s department was responsible for Indigenous affairs, but the Audit Office reported three years later that its performance was desultory.

As ANU researcher Michael Dillon has suggested, even the Audit Office’s report was “extraordinarily hedged and timid, and failed to make a substantive assessment of the actual independence of the evaluations undertaken” by the department:

Of thirty-five evaluations on the department’s 2018–19 workplan, fifteen had not commenced. Of the remaining twenty, eight had been published and twelve withheld from publication… In at least four cases (involving very significant and sensitive program evaluations) the department was waiting to brief the minister or awaiting his noting of a brief. In plain language, the minister was preventing timely publication of the evaluations.

Further, Dillon observed, Parkinson’s response to the audit “fails to acknowledge or address in any way the negative content of the audit.” Is it likely that the system will engineer something better if it can’t acknowledge its own failure to do as it says?

Which brings us back to the Productivity Commission’s Indigenous Evaluation Strategy, a draft of which was released in June. The PC has always attempted to pitch its proposals to government within the “Overton window” — that range of options that will be taken seriously by powerful people. Given that constraint, as I’ll explain, I respect its compromises on policy. But the point of the PC’s independence is that, however much it compromises on the policy, it spares no one, least of all itself, the truth. What the great scientist Richard Feynman wrote about science is also true of social science. For me, it’s a holy grail of social policy and aligns nicely with Orwell’s advice: “The first principle is that you must not fool yourself, and you are the easiest person to fool.”

5. Putting Indigenous people at the centre: the words

There’s a kind of ambiguity at the very heart of the PC’s draft strategy that’s increasingly common. It’s Orwellian in the bad sense. I guess the genre was introduced into polite society by the “vision statement.” Here one states an aspiration as a fact. You know the kind of thing: “PHP Residual Solutions is the world’s foremost residual solutions provider.” At least in its awkward baldness, it’s not misleading. We all know that global domination is an aspiration, not a fact.

But this fusion of fact and fancy appears as the fundamental building block of the PC’s draft strategy: “The Strategy puts Aboriginal and Torres Strait Islander people at its centre, and recognises that governments need to draw on the perspectives, priorities and knowledges of Aboriginal and Torres Strait Islander people if outcomes are to improve.”

One of the ways to ensure we remain fixed to the spot with Lord Acton’s fault line yawning beneath us is to encourage the idea that saying something is doing it. Does the PC know how to put Indigenous people at the centre of its strategy? Can it point us to better and worse examples of doing so? Can it highlight cautionary tales where grand claims have been made that are belied by the facts on the ground? These are some of the questions — pointed, uncomfortable questions — that we need to answer if we’re ever to step over Lord Acton’s fault line and enter the promised land of “how.”

At the level of programs, rather than evaluation, there are at least two perilous steps in the expedition to get from saying to doing — from signing the cheques to putting the resources of government properly at the disposal of Indigenous people and their communities:

  1. We need to learn how to put Indigenous people and communities at the centre of these programs — or, to put it differently, how to realise their agency within them.
  2. Then we need emerging successes to spread. That requires validated new knowledge of what’s working in the field — always fragile in large organisations to say nothing of systems of organisations — to trump the institutional imperatives that so often frustrate the spread of successful practice.

To me, these are the great priorities for the Indigenous-specific programs I have focused on in this essay, though analogous priorities would apply when considering the impact of general welfare programs on Indigenous people and communities. And any evaluative strategy would emerge from an appreciation of how evaluation might contribute to their wellbeing. As progress was made it would shed light on how further priorities might be set.

But the draft strategy makes clear that this is not the kind of priority-setting the PC has in mind. Its initial priorities reproduce those of COAG’s Closing the Gap report, and their foremost characteristic is their legibility to the system. They’re even arranged around the system’s existing organisational structure, which includes families, children and youth, health, education, economic development, housing, justice, land and waters. Makes you wonder what isn’t a priority! And all of them identify a “what” rather than a “how.”

6. Putting Indigenous people at the centre: the actions

How will we get Indigenous people and perspectives into the centre of evaluation? In their submission to the PC, researchers from Inala Wangarra and the University of Queensland argue that:

“Accountability” has become a lopsided concept, whereby the focus is overwhelmingly on service providers being accountable to government, and where there is no concomitant focus on the accountability of government to the most important stakeholders: Aboriginal and Torres Strait Islander peoples.

So might placing Indigenous people at the centre of an evaluation strategy involve making service providers and government policies accountable to Indigenous people? This possibility doesn’t seem to have made it into the PC’s strategy, even as a “what.” And even if it had, I’d argue that what the PC has endorsed is likely to be implemented in a way that actively obstructs getting to the “how.” The PC talks about the importance of “whole-of-government” approaches to evaluation. That sounds innocuous enough — commonsensical even. But why does it have me thinking of “whole-of-church” approaches to the solar system at the time of Galileo?

The only way I can imagine a whole-of-government agenda not doing more harm than good is if it were to imagine itself as being at the service of solving the concrete and urgent problems in the field — by identifying good practice in the field, for example, and coordinating the system to expand its influence.

Despite senior officials’ and politicians’ protestations that they aspire to encourage innovation in the field and spread and scale “what works,” progress has been conspicuously lacking. Peter Shergold saw this as a major problem as he rose through the ranks of the public service, but after over a decade at its commanding heights conceded there’d been little change. As he put it in 2005:

If there were a single cultural predilection in the Australian Public Service that I could change, it would be the unspoken belief of many that contributing to the development of government policy is a higher-order function — more prestigious, more influential, more exciting — than delivering results. Perhaps it is because I have spent so much of my career in line agencies, learning to deliver Indigenous, employment, small business, and education programs that I react so strongly against this tendency.

Eight years later he confessed that little more progress had been made:

Too much innovation remains at the margin of public administration. Opportunities are only half‐seized; new modes of service delivery begin and end their working lives as “demonstration projects” or “pilots,” and creative solutions become progressively undermined by risk aversion and a plethora of bureaucratic guidelines.

In its preoccupation with grander narratives than identifying what works and spreading it, the PC sets its evaluation process up to be driven by the system rather than its intended beneficiaries, however much it protests that they’re “at the centre.” In a familiar move, the PC suggests that its strategy is driven by four principles, each identified by a pleasing adjective with them all arranged in a pleasing diagram. According to this diagram, evaluation should be “Credible, Ethical, Transparent and Useful.” But these words are so general, so capaciously flaccid, that they constrain no one, like a scientific hypothesis that couldn’t possibly be falsified. And so, rather than constraining (and so guiding) practice, those words will come to mean whatever people want them to mean, often in retrospect to justify whatever practice is chosen.

Note two further aspects of the high-level pronouncements echoed by the Productivity Commission. First, the PC speaks of evaluation as if its function is to bolster the accountability of those in the field to their senior managers, with evaluation’s function being to objectively certify the extent to which the program meets the system’s stated objectives. Second, it shows little awareness of how broad and permissive this relatively new discipline of evaluation is. In reaching for some actionable means of validating that it is embracing a thing called “evidence-based policy,” evaluation is taken to be something far more settled and definitive than it is — as if getting something evaluated were like getting an auditor to check financial accounts or an engineer to check the structural integrity of a bridge.

As Michael Dillon has observed, the assumption that there are or should be simple linear relationships between objectives and performance is “problematic in cross-cultural contexts and certainly not necessarily the case in the… Indigenous domain.” In that regard, the system — and the PC — seems oblivious even to the existence of “goal-free evaluation.” There, the evaluator investigates the impacts of the program without referring to — or ideally even knowing — a program’s stated goals.

In an increasingly managerial world oriented to the needs of organisations and their senior managers, this unconstrained focus deploys the evaluator’s skills in an open-minded way that can more fully reflect the interests and aspirations of other actors in the system — most particularly, intended beneficiaries of the program and the families and communities of which they are a part. Goal-free evaluation puts the evaluator in the best possible position to notice and document all consequences, both good and bad. It can also improve program hygiene just as double blindness adds to the hygiene of a randomised controlled trial.

7. The anatomy of Lord Acton’s work

Then there’s the question of exactly how evaluation will identify what is and is not working, and how these findings will improve policy and practice. This raises several challenges at the heart of the PC’s draft strategy. First, evaluation should be independent so that it is candid. Second, it should be published, in order to help develop a “knowledge commons” around “what works” (and what doesn’t) and to strengthen incentives for policy, programs and practice to follow the evidence. Yet past behaviour shows that the system responds to such constraints by saying one thing and doing another. So why would it be any different here?

Indeed, the woods are full of regimes in which higher-order objectives are foisted on policymakers to do the Lord’s work (Lord Acton’s work that is). These systems allow those at the top to say one thing as they face towards an objective in general, while they do another thing that quietly prevents it happening in particular. And thus ensues a prosaic variant of something Oscar Wilde told us about life:

Yet each man kills the thing he loves…
The coward does it with a kiss,
The brave man with a sword!

Freedom of information regimes sit atop Lord Acton’s fault line. And the discomfort this induces is all too often relieved with strategic cowardice. Having been lowered from on high, freedom of information faces boldly towards transparency. At least in general and at least when it comes to the saying. When it comes to the particular, to what is actually done, officials travel in the other direction. Transgressions go off the record — into corridors, personal phones and email accounts — or are reclassified “cabinet in confidence” or some such. And that’s just the tip of the iceberg as far as actions that are routinely taken to delay and obfuscate transparency under FOI.

If FOI solves its problems the coward’s way, regulation reviews use the sword. Today, new regulation can’t be introduced without a “regulatory impact analysis” duly demonstrating that its benefits exceed its costs. Australia introduced it in 1986, and it seemed like such a good idea that it was replicated around the world — but invariably with the same (desultory) result. Here’s the British Chambers of Commerce back in 2007:

Both Conservative and Labour administrations approach deregulation with apparent enthusiasm, learn little or nothing from previous efforts and have little if anything to show from each initiative.

Sound familiar? Regulation review is another take on the Lord Acton quickstep. Those at the top introduce a compliance regime, but those administering it are trying to get things done for their ministers. So they obey the letter but not the spirit of the regime, and it degrades into empty box-ticking.

8. Getting past Lord Acton’s fault line

To recap: as attractive as they sound, independence and transparency cannot be imposed without setting off powerful and perverse incentives. Any attempt to deal with these dilemmas must look them in the eye. I foregrounded them in 2016 with my own proposal for an evaluation architecture. I called it the evaluator-general to stress the importance of independence and transparency, and also to structurally separate the delivery of services from the means by which we validate their fitness for purpose.

The organisation of the public sector already honours this principle of structural separation — between doing and validating the effects of what we’re doing. Thus, the Audit Office and the Bureau of Statistics are independent information and integrity agencies whose work helps inform us of the success or otherwise of other “doing” agencies directed by ministers — such as the health department and Treasury. At the same time, we expect all these agencies to collaborate — sometimes quite closely.

My proposal for an evaluator-general provides the institutional scaffolding within which the same close collaboration amid structural separation between doing and knowing can be brought right down to operations in the field. That way independence and buy-in can grow quietly from the bottom up within organisations rather than being heroically imposed from the top in a grand gesture that experience suggests will fail and fail again.

My aim was to nurture the self-accountability of those out in the field — Feynman’s imperative that one mustn’t fool oneself — and to build system accountability on that foundation. That’s how Toyota revolutionised manufacturing productivity in a way that’s now imitated the world over. It found a way to build from “how.” It did so by placing the workers on the line, the suppliers and the customers at the centre.

Are my ideas viable or just naive? We’ll only know when we give something like them a good try. We’d need no more than a dozen or so teams to try them. In the PC’s near 400-page background paper there’s some reporting on these problems of independence and transparency, but not in the context of any critical vision or clear explanation of how they can be overcome.

9. Independence-for-hire and the he-who-pays-the-piper problem

The PC’s incuriosity extends to its ignoring the incentive issues arising from how evaluation is commissioned and conducted. As I’ve argued, allowing firms in our private sector to appoint their own auditor profoundly compromises auditors’ independence. By contrast, the auditing of government finances is overseen by an independent auditor-general. Still, while it’s far from optimal, we’ve made the independence-for-hire of private sector auditors work tolerably by specifying highly prescriptive auditing standards. With evaluation, things are very different, there being any number of ways to conduct evaluations to serve numerous tastes and purposes. So evaluators’ independence-for-hire provides wide scope for doing Lord Acton’s work.

As I’ve argued elsewhere, independence-for-hire sits at the heart of a “now-you-see-it-now-you-don’t” catch 22 that prevents promising developments in the field even becoming visible to the system, let alone having their expansion supported by it.

It goes like this. Responding to all the stirring visions of government “scaling what works,” non-government organisations seek government funding to expand their most promising programs. At this point, departments of finance oppose such funding, as well they might, until the programs are independently evaluated. They don’t take responsibility by commissioning the evaluation themselves or even specifying what kind of evaluation they require. Thus, when the NGO returns, a few hundred thousand dollars poorer, with a Deloitte, PwC or Lateral Economics report in hand (we’re cheaper!), it’s ignored again because independence-for-hire isn’t independence. And so the process of “scaling what works” is stopped dead in its tracks.

Though it understands the value of independence in evaluation, the PC completely flubs the “independence-for-hire” problem, simply associating contracted-out evaluation with independence. And it won’t bite the bullet and recommend true independence because it knows it lies beyond the confines of the Overton Window. It would be rejected out of hand. But to keep the idea of independence in play, it proposes Lord Acton’s independence — an independent Office of Indigenous Policy Evaluation that will “oversee” evaluation, though the actual evaluation will continue to be conducted within the very agencies whose performance is being evaluated.

No doubt the PC hopes that this might introduce some independence into the process. But progress, if any, will be agonisingly slow. Allowing agencies to do their own regulatory impact analysis has kept the tiger of regulation review pristinely toothless for thirty-five years now in every country where it’s been introduced. The old Office of Regulation Review operated within the PC itself, but the greater notional independence it had there made not the slightest bit of difference. The requisite boxes were ticked and regulations — both the good and the bad — went on piling up as normal.

10. Stated intentions and animating imperatives

It’s Lord Acton pretty much all the way down. The PC’s draft strategy stresses the need for evaluations to:

• be done ethically
• involve and engage Indigenous people
• be respectful of and in sympathy with Indigenous cultures and knowledges.

Now, each of these is a commendable objective as a “what.” As I keep saying, the hard part is working out the “how.” And tackling each of these matters productively requires great insight. Further (and astonishingly), the importance of each of these requirements is relatively new to the system even as a “what.” Should we really put that same system in charge of learning the “how”? What will happen is already a foregone conclusion — the PC more or less recommends it. Rather than proceed humbly, foregrounding its ignorance, the system will go through its well-worn routines. Codes of practice will be developed. I assume there’ll be lots of consultation.

But these codes won’t deliver what is written on the packet any more than the mission statement “putting families at the centre” would have delivered Family by Family. However well-intentioned, these codes’ animating intent — what will matter when push comes to shove and someone might end up on the telly or in a headline — will be the institutional safety of those developing and administering the codes.

This is what happens when the system’s commanding heights are put in charge of delivering something that is difficult and context-sensitive but not highly valued in our political culture. Those defending Indigenous interests would be well advised to look on the burgeoning performance regimes in numerous sectors — particularly education and university research — where more and more practitioner time is taken up complying with relentlessly expanding requirements from bureaucracies that have neither the slightest knowledge of nor regard for what’s going on out in the field. As the accountability theatre ramps up, administrative numbers and salaries swell at the centre and performance declines. As Britain’s Institute for Government documented in a different context, inquiries and restructurings abound and new ten-year plans are announced once every three or four years.

I recall when, in response to another paedophilia scandal, South Australia strengthened its child safety requirements. The very department whose lapses had produced the outrage refused to stagger the starting date of the new system for different community organisations. With the department’s processing capacity thus overwhelmed, it took over a month to clear the new paperwork. Family by Family was paralysed. If exceptions were allowed to the deadline, they were for more important folks than us. Overnight, practices that had worked brilliantly and safely for several years — that placed families at the centre of the program — became an offence. I don’t know about then, but today the department describes itself as “a customer-focused organisation that puts people first.”

In fact, an evaluation was done on Family by Family. The process was a train wreck. From memory numerous preliminary ethics processes took around nine months, though this was simply to ask families questions about their progress — as they’d been asked regularly within the program. The evaluation ignored the program’s effect on children. Why? Because getting that aspect through the ethics procedures would have been too expensive, uncertain and time-consuming. How ethical can you get?

When the evaluation finally began, the department funding the program wouldn’t give evaluators the data to identify our cohort of families. So the evaluation was forced to compare impacts on all families in the host suburb against two other areas (one of which was bizarrely incomparable). As I recall, the result was mildly positive but inconsequential — unsurprisingly, given the small number of families involved. To use J.K. Galbraith’s term, it was all “innocent fraud” — that is, all that effort and money produced an outcome that amounted to nothing. But its worthlessness was a system failure despite the best of intentions of everyone in it.

I expect that the National Health and Medical Research Council, which issued the ethics guidelines, the family services department and the university centre for family studies thought of themselves as putting people first. But far from nurturing the innovation breaking out on the edges of the system — driven by bright, idealistic, young professionals and increasingly enthusiastic families — the incumbent organisations imposed their own routines and imperatives, each one making the labyrinth denser, more bewildering, more dysfunctional, each one making it harder to put the families first.

Whether or not the evaluation report was released (I don’t believe it was), we all cooperated in covering up its worthlessness, which required nothing more than not to advertise it. This is just one close-up of a phenomenon the disillusioned development economist William Easterly has called “the cartel of good intentions.” It is built on Lord Acton’s fault line. But you won’t see any serious engagement with any of this in the PC’s material on Indigenous evaluation.

11. The perils and the promise of candour

You may think what I’ve written so far is scathing. Yet, as I indicated above, I think the PC makes the right basic calls in its draft strategy. Bereft as the report is of suggestions about how to bring it about, it nevertheless endorses more Indigenous involvement in evaluation. And it backs independence and transparency. In a system that’s nowhere near ready to seriously engage with such things, it also makes defensible compromises in shepherding those values into policy. The real shame is that the pathologies of the existing system are deeply entrenched and yet they hardly get a look-in in the commission’s analysis. So any strategy for shifting them requires something much more hard-headed — more problem-focused — than four pleasing adjectives and a well-intentioned tagline about putting Indigenous perspectives at its centre.

Here we get to Orwell’s point. The greatest service the PC could do Indigenous people — the way it could really put their interests at the centre of its concerns — would be to express itself simply and candidly. Its draft strategy asserts that program participants and the broader community should “have confidence that policies and programs are being assessed objectively and independently.” Poppycock. It should stop pretending and fess up on behalf of the system. Having recommended a highly compromised form of independence for now, it should explain that the system isn’t ready for much candour right now and explain why.

Now you can see the power of Orwell’s advice about speaking simply. Speaking simply makes it hard, excruciating even, for you to cover your tracks — to mask your motives — with the usual sophistry. Once the officialese is jettisoned (or should that be official-ease?) the discomfort that the system is defending itself against becomes its own discomfort in explaining the sorry situation it is dealing with. And the only way to relieve that discomfort would be to go further and sketch out a longer-term plan to reach the outcome described in the honeyed words.

12. Towards the final strategy

For the final strategy to deliver a minimum viable product, I think it needs these changes to the draft.

First, it should base its policy compromise on a much harder-headed understanding of the obstacles that stand between us and the land of “how.” After explaining why the whole system can’t possibly embrace real independence and transparency at the moment, it should go on to sketch its own vision of how that might be grown from the bottom up. I’ve shown one possible model with my proposal for an evaluator-general, which involves structural separation between the system’s doing on the one hand and its knowing and evaluating on the other. It needn’t be grandiose and system-wide: it can be built on a small scale and grown from there. Some submissions to the PC seem to think it has merit. The PC itself gives the idea considerable elaboration, but only as reportage. If it has a better model it should set it out.

Second, if the strategy is its contribution to thought, its direct contribution to action should be to call for and begin the process of designing a new burst of energy and innovation that might grow at the margins of current activity and begin to spread through the system.

Here, the current weakness of the system lies not so much in the lack of promising experiments in the field as in the relationship between them and the system itself. The system must be able to identify, validate and acknowledge the best of those experiments. Currently, it can’t do that. Evaluation can play some role in fixing that, though we should guard against something that’s already clearly in evidence — the system grabbing hold of evaluation as a deus ex machinait’s next fad diet that will save it from itself.

And there are two far graver obstacles to progress. First, as those in the field can attest, our politicians frequently play to their own political advantage irrespective of the evidence. Second, bureaucracies have terrible trouble responding to knowledge of what’s working from the field, for such bottom-up learning is countercultural in a hierarchy where power is at the top. Further, if learning were to rise from the bottom at any scale, it would involve the discomfort and uncertainty of change for large numbers of people.

The PC can do little about the first of these more serious problems. But it can hope to be influential regarding the second. I think it’s possible to be very concrete and specific about what is necessary here. The system can only sustainably expand what works by bolstering the status of the individuals and communities who have made it work and giving them much more authority and resources within that system.

Those at the centre of the system are just as important as the successes in the field, but there’s nothing unique about them — or there shouldn’t be if the system is working properly. Those in the system need to be made accountable not just for talking about expanding what works but for making sure it happens, despite the discomfort it will undoubtedly cause. To that end, a regular report could be recommended, by the auditor-general or some other independent guardian of integrity in the system, to document, say every two years, what progress was being made towards this goal of spreading “what works” and particularly the increasing empowerment of those who make it work.

For those of us who call ourselves Australians to properly begin the task that governor Arthur Phillip began with such high ideals and so little to show for it, we can only do it to the extent that non-Indigenous people and their institutions unloose themselves from those “anxious avaricious tentacles of the self.” To the extent we falter, the soft voice of conscience will keep whispering that destiny to us. •

This essay benefited from helpful comments on earlier drafts from Romlie Mokak, Keryn Hassall, Janina Gawler, Michael Griffith, Jon Altman, Mike Dillon, Christos Tsiolkas and Clive Kanes. As always, I am wholly responsible for the essay’s remaining inadequacies. The title “Orwell that ends well” is shamelessly stolen from my friend Konstantin Kisin.

Debt Relief and the CARES Act: Which Borrowers Benefit the Most?

Published by Anonymous (not verified) on Tue, 18/08/2020 - 9:00pm in

Rajashri Chakrabarti, Andrew Haughwout, Donghoon Lee, William Nober, Joelle Scally, and Wilbert van der Klaauw

 Which Borrowers Benefit the Most?

COVID-19 and associated social distancing measures have had major labor market ramifications, with massive job losses and furloughs. Millions of people have filed jobless claims since mid-March—6.9 million in the week of March 28 alone. These developments will surely lead to financial hardship for millions of Americans, especially those who hold outstanding debts while facing diminishing or disappearing wages. The CARES Act, passed by Congress on April 2, 2020, provided $2.2 trillion in disaster relief to combat the economic impacts of COVID-19. Among other measures, it included mortgage and student debt relief measures to alleviate the cash flow problems of borrowers. In this post, we examine who could benefit most (and by how much) from various debt relief provisions under the CARES Act.

Data and Definitions

In addition to direct stimulus to individuals and corporations, the CARES Act provides for debt forbearance (that is, a temporary break from debt service payments) for various types of loans. FHA- and GSE-backed mortgages are eligible for a 180-day forbearance period, which can be extended to 360 days, but the borrower needs to contact the mortgage servicer to request forbearance. There was also a moratorium on foreclosure for 60 days after March 18. Federal student debt borrowers can defer payments until September 30, with interest waived. This forbearance is administrative and does not have to be negotiated. The Act also suspends involuntary collections, which includes wage garnishment and the reduction of tax refunds or other federal benefits, for qualifying federal student debt borrowers who are in default. While private student debt makes up a small share (approximately 8 percent) of total outstanding student debt, our data do not enable us to differentiate between federal and private student debt. The small subset of the student debt borrowers who have only private student loans will not be eligible for CARES Act forbearance relief. For simplicity, we will consider all student debt borrowers as being eligible for student debt forbearance in this post.

To understand who may benefit (and by how much) from the mortgage and student debt relief proposed, we draw on the New York Fed’s Consumer Credit Panel—an anonymized, nationally representative sample of Equifax credit report data. Our data set for this post covers a representative 1 percent sample of the nation’s adults with credit records, showing payments, balances, and delinquencies for various types of debt, including student loans, mortgages, auto loans, and credit cards. We focus on mortgage and student debt in this post because the relief under the CARES Act pertained to these two kinds of consumer debt.

To understand who the potential beneficiaries of debt relief are, we examine differences in forbearance relief across income, age and racial lines. Specifically, we split zip codes into equal-population quartiles of median household income (pre-tax); we refer to the bottom quartile as “low income,” (with median income below $46,310) the two middle quartiles as “middle income,” and the top quartile as “high income” (with median income above $78,303). We also look at zip codes that are “majority Black,” “majority Hispanic,” “majority white,” and “mixed.” We define majority Black zip codes (neighborhoods) as those in which Black residents make up at least 50 percent of the population, and define majority Hispanic and majority white zip codes (neighborhoods) similarly. We group all other neighborhoods together into a fourth category, “mixed” neighborhoods. For all income and race data, we use the 2014-18 Five-Year American Community Survey. We investigate the extent of mortgage and student debt relief faced by each of these neighborhoods: low income, middle income, high income, majority Black, majority Hispanic, majority white, and mixed.

At the end of December 2019, the majority of borrowers (63 percent) in our sample have neither mortgage nor student debt, but 21 percent have a mortgage but no student debt and 12 percent have student debt but no mortgage. Only 4 percent of adults have both mortgage and student debt. The median student debt borrower is 34 years old while the median age of mortgagors is 51. Thus, while the student debt relief will potentially benefit younger borrowers, the mortgage relief will potentially benefit relatively older borrowers.

Who Can Benefit from CARES Act Debt Relief?

Borrowers who have student debt or mortgage debt (and hence may qualify for CARES Act debt moratoria) fall into three groups: those with student debt but no mortgage, those with mortgage but no student debt, and those with both types of debt. In the table below, we investigate what share of the adult (above 18) population in each type of neighborhood has student debt but no mortgage (column 1), mortgage but no student debt (column 2), and both mortgage and student debt (column 3), and hence will potentially be eligible for corresponding student debt and/or mortgage debt relief. Differentiating across neighborhoods by income, we find in column 1 that similar shares of the adult population will potentially be eligible for assistance from only the student debt relief provisions of the CARES Act across the three neighborhoods (18 percent), but a markedly higher share (more than double) can be eligible for mortgage relief in the high income neighborhoods relative to low income neighborhoods (column 2). The share of the adult population that may benefit from only mortgage relief is also considerably larger in middle income neighborhoods (1.6 times) than in low income neighborhoods. Column 3 reveals that the share of adult population respectively in high and middle income neighborhoods that can benefit from both the CARES Act mortgage and student debt relief is double the corresponding share in low income neighborhoods.

Differentiating by race, column 1 shows that a significantly larger share (20 percent) of the adult population in majority Black neighborhoods can be eligible for assistance from only the student debt relief provisions of the CARES Act compared to such shares in the majority Hispanic, majority white, and mixed neighborhoods. In contrast, columns 2 and 3 find that a substantially larger share in majority white neighborhoods will be potentially eligible for only mortgage relief or both mortgage and student debt relief compared to the shares in majority Black, majority Hispanic, and mixed neighborhoods.

 Which Borrowers Benefit the Most?

Is There Heterogeneity in the Expected Benefit from the CARES Act Student Debt Forbearance?

To further understand who may benefit and the extent of the potential cash flow assistance (driven by funds released by deferral of payments), we look at a neighborhood type in the table below and examine what share of the adult population in that neighborhood will be eligible for any student debt assistance and how much assistance they may receive based on their debt profile at the end of 2019. Differentiating by income, we find in the first column that a slightly higher share of the adult population in high and middle income neighborhoods can benefit from student debt relief than in the low income neighborhood. Unlike column 1 of the first table in this post, this column accounts for any student debt relief, regardless of whether the borrower holds both mortgage and student debt or holds student debt but no mortgage debt. The higher shares in this table (in contrast to the earlier table) are driven by increased incidence of borrowers who hold both student and mortgage debt in the high and middle income neighborhoods.

 Which Borrowers Benefit the Most?

Turning to the amount of potential forbearance, we find that the median scheduled monthly payments per borrower (those eligible for forbearance) in low income neighborhoods are markedly smaller than those in high income neighborhoods; at least half of the student loan borrowers in low income neighborhoods had a scheduled payment of zero before the onset of the pandemic. These may be due to a number of factors: smaller loan sizes in these neighborhoods, larger incidence of in-school deferment, or higher participation in income-driven repayment programs in these neighborhoods. In column 4, we find that the mean scheduled payment per adult (and hence the potential assistance per adult) in high income neighborhoods is more than double that in low income neighborhoods. Annualizing the payments and comparing mean scheduled payment to the median household income of the zip code the person lives in, we find that the relief is actually a higher share of median income in these low income neighborhoods, despite the smaller forbearance amount (column 5).

By race, we continue to find that majority Black zip codes have markedly higher concentrations of student debt borrowers relative to the other neighborhoods. 23 percent of the adult population of majority Black neighborhoods is eligible for student debt relief versus 14 percent in majority Hispanic and 17 percent in majority white and mixed neighborhoods. However, as in the case of low income neighborhoods, more than 50 percent of borrowers in majority Black zip codes have no regular monthly scheduled payment, and thus would not benefit from forbearance. We find in column 3 that the mean scheduled payment per borrower is higher in majority white neighborhoods and significantly lower in majority Black and majority Hispanic neighborhoods. In column 4, we find that the mean scheduled payment per adult is broadly similar across majority white, majority Black and mixed neighborhoods, while it is perceptibly lower in Hispanic neighborhoods. The difference in patterns between columns 3 and 4 is driven by the fact that majority white neighborhoods are considerably more populous than majority Black neighborhoods (column 4 of the first table in this post). Interestingly, we once again find in the last column that the potential forbearance amount will constitute a higher share of median household income in majority Black neighborhoods than in other neighborhoods. In summary, we find that larger shares of borrowers from majority Black neighborhoods can benefit from the student debt relief provision, although the expected per-borrower relief to these communities is smaller. Regardless, this relief will address a higher debt burden (as share of income) in these neighborhoods.



Understanding Heterogeneity in the CARES Act Mortgage Debt Forbearance Relief

We can repeat this analysis for mortgage debt. Remember, not all mortgages are FHA or GSE-backed and hence eligible for forbearance. The table below shows that the highest concentrations are in majority white and higher-income zip codes, as qualifying for a mortgage requires a relatively high credit score and steady stream of income. Mortgagors in high income zip codes also pay much more per month than those in other areas, indicating higher home value and mortgage balance on average. We find from column 3 that the monthly scheduled payment of mortgagors (and hence the potential forbearance amount per mortgagor) is higher for those from high income, mixed, and majority white neighborhoods, and smallest for those from low income and majority Black neighborhoods. Looking at mean scheduled payment per adult in the various neighborhoods, the indicator of average per-capita forbearance dollars to a neighborhood, once again we find that high income, majority white, and mixed neighborhoods can expect higher mortgage forbearance relief, while this relief is lowest for low income, majority Black, and majority Hispanic neighborhoods (column 4). Nevertheless, turning to the mean payment as a share of median income in the neighborhood, we find that this relief amount again constitutes higher relative debt burdens in low income, majority Black, and majority Hispanic neighborhoods, largely because of lower median income in these neighborhoods.

 Which Borrowers Benefit the Most?

To summarize, we have investigated who may benefit (and the expected forbearance amounts) from the various debt relief provisions in the CARES Act. We find that while student debt relief may be expected to reach a larger share of borrowers in majority Black neighborhoods, the dollar value of expected student debt relief per borrower will be perceptibly less in low income, majority Black, and majority Hispanic neighborhoods. Unlike student debt relief, mortgage relief may be concentrated in high income and majority white neighborhoods, both in terms of dollar amounts and share of borrowers that will be potentially assisted. It is worth emphasizing that in this post we have outlined who may benefit from the mortgage and student debt relief provisions of the CARES Act. In other words, we have focused on the supply of this relief to different neighborhoods. Who will actually benefit and the amount of relief obtained will be determined by a combination of supply and demand factors. Since, low income and majority minority neighborhoods have been affected more negatively by this pandemic, residents in these neighborhoods may have the highest take-up rate. Moreover, mortgage benefits are not automatic; mortgagors must actively seek out these benefits by contacting servicers and proving financial hardship. Thus, ultimately, who actually benefits and by how much will be determined by a combination of factors, a topic we will continue to study. This post starts the conversation by investigating the potential beneficiaries and the potential reach (in dollar terms) of the forbearance programs.

Rajashri Chakrabarti

Rajashri Chakrabarti is a senior economist in the Federal Reserve Bank of New York’s Research and Statistics Group.

Andrew Haughwout

Andrew F. Haughwout is a senior vice president in the Federal Reserve Bank of New York’s Research and Statistics Group.

Donghoon Lee

Donghoon Lee is an officer in the Bank’s Research and Statistics Group.

Joelle Scally

Joelle Scally is a senior data strategist in the Bank's Research and Statistics Group.

Wilbert van der Klaauw

Wilbert van der Klaauw is a senior vice president in the Bank’s Research and Statistics Group.

How to cite this post:

Rajashri Chakrabarti, Andrew Haughwout, Donghoon Lee, William Nober, Joelle Scally, and Wilbert van der Klaauw. “Debt Relief and the CARES Act: Which Borrowers Benefit the Most?" August 18, 2020, https://libertystreeteconomics.typepad.com/libertystreetecontest/2020/08....

Additional heterogeneity posts on Liberty Street Economics:

Heterogeneity: A Multi-Part Research Series




Disclaimer

The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

The language of rules: textual complexity in banking reforms

Published by Anonymous (not verified) on Thu, 13/08/2020 - 6:00pm in

Tags 

reform, Regulation

Zahid Amadxarif, James Brookes, Nicola Garbarino, Rajan Patel and Eryk Walczak The banking reforms that followed the financial crisis of 2007-08 led to an increase in UK banking regulation from almost 400,000 to over 720,000 words. Did the increase in the length of regulation lead to an increase in complexity? Tightening rules to reduce risks, … Continue reading The language of rules: textual complexity in banking reforms →

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