Author: johncla

The 2008 crash continues as a source of debate, probably because after six years the recovery is still not complete. We differ on what caused the crash. There are liberal versions, there are conservative versions, both are wrong.

The liberal explanation
Liberals reflexively point to business as the source of any problem. They’ll tell you the 2008 crash was a case of Wall Street running wild, cheating Americans with trick mortgages and fraudulent mortgage-backed securities. For an authentic liberal narrative, see the conclusions of the Financial Crisis Inquiry Commission:

1. We conclude this financial crisis was avoidable.
2. We conclude widespread failures in financial regulation and supervision proved devastating to the stability of the nation’s financial markets.
3. We conclude dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis.
4. We conclude a combination of excessive borrowing, risky investments, and lack of transparency put the financial system on a collision course with crisis.
5. We conclude the government was ill prepared for the crisis, and its inconsistent response added to the uncertainty and panic in the financial markets.
6. We conclude there was a systemic breakdown in accountability and ethics.
7. We conclude collapsing mortgage-lending standards and the mortgage securitization pipeline lit and spread the flame of contagion and crisis.
8. We conclude over-the-counter derivatives contributed significantly to this crisis.
9. We conclude the failures of credit rating agencies were essential cogs in the wheel of financial destruction.

The conservative explanation
Similarly, conservatives reflexively point to government as the source of any problem. Government pushed banks, Fannie Mae and Freddie Mac to insure or even buy mortgages for the poor, who basically ripped off the system.

A better explanation…
The problem with both the conservative and liberal explanations is that they focus on conditions specific to the US. The 2008 crash was global.

Housing bubbles emerged in numerous countries, like Ireland, with very different regulatory regimes and political cultures than ours. Financial firms collapsed all over the world. There is no way to explain all of this by citing U.S. economic policies

See this exhibit from the dissent to the Financial Crisis Inquiry Commission report:

The 2008 crash was not due to the causes commonly identified by either liberals or conservatives. Many of these causes contributed to the crash, but they didn’t cause it. The financial deregulation and expansionist housing policies of the 1990s were bipartisan. Accountability, ethics, and greed played roles, but are not unique in any political persuasion or economic class.

What is the metric to determine the success of regulation? How do you improve accountability and ethics, and what to do about greed? All of these are great questions, but don’t point to causes of the 2008 crash, or ways to prevent the next crash.

For the best explanation, one that follows the money and takes into account the global roots of the crash, see the dissent to the Financial Crisis Inquiry Commission report:

1. A credit bubble. China and the oil-producing states developed large capital surpluses, then loaned these savings to the US and Europe. Interest rates fell.
2. A housing bubble, in the US and other countries.
3. High-risk nontraditional mortgages amplified the housing bubble in the US.
4. Mortgage securitization (CDOs) and erroneous credit ratings transformed bad mortgages into toxic financial assets, and fueled creation of more bad mortgages.
5. Financial institutions made big bets on housing (concentrated correlated risk).
6. Financial institutions over-leveraged (too little capital relative to the risks they were carrying on their balance sheets).
7. The financial system was too vulnerable to contagion through interconnectedness (counter party credit risk).
8. The financial system was too vulnerable to a common shock. Unrelated firms made the same investment, then failed at roughly the same time due to that investment failing.
9. Global panic, evaporation of confidence and trust.
10. The financial panic then caused a contraction in the real economy.

The bottom line
Liberals have their list of causes, focused on deregulation and misbehavior in the financial industry. Deregulation did occur, but liberals share the blame. See Senator Charles Schumer, and the legislative history in Congress. Misbehavior occurred. Presumably the guilty were prosecuted, but that’s another topic.
Conservatives blame government involvement in the housing market. The Community Reinvestment Act, Fannie Mae and Freddie Mac are distasteful to fans of small government, but they did not cause the crash.
The crash occurred across the globe. Root causes cannot be found in US government policy or US financial institutions.

K-12 education in the U.S. is struggling. A recent article in The Atlantic Magazine summarized the record of US schools. Compared to OECD countries “the U.S. scores below average in math and ranks 17th among the 34 OECD countries. It scores close to the OECD average in science and reading and ranks 21st in science and 17th in reading.”

No, the problem isn’t that we spend too little. Money isn’t the issue. From the same article in The Atlantic: “The U.S. ranks fifth in spending per student. Only Austria, Luxembourg, Norway, and Switzerland spend more per student. To put this in context: the Slovak Republic, which scores similarly to the U.S., spends $53,000 per student. The U.S. spends $115,000.”

Some say it’s the teachers’ fault. Maybe. We know that schools have plenty of money. Are teachers today as good as they were a couple generations in the past? There’s no way to know. So what’s left? Wait…the students! Maybe today’s students aren’t as bright, or eager, or prepared. Maybe kids don’t have the same parental and cultural support as in the past. That’s a good guess.

Educational failures combine with social decline
I don’t see much, or anything in the direction of US society that says parents on the whole are more concerned, or working harder at, or more successful in supporting their kids at school. It’s common to link the decline of various social indicators to problems with schools. Pat Buchanan writes:

Where out-of-wedlock births in the 1950s were rare, today, 41 percent of all American children are born out of wedlock. Among Hispanics, it is 51 percent; among blacks, 71 percent. And the correlation between the illegitimacy rate, the drug rate, the dropout rate, the crime rate and the incarceration rate is absolute…This helps to explain the four decades of plunging test scores of American children and the quadrupling of the prison population.

Parents
The importance of parents seems accepted and well understood. The NEA says

students with involved parents are more likely to:
o Earn higher grades and test scores, and enroll in higher-level programs
o Be promoted, pass their classes, and earn credits
o Attend school regularly
o Have better social skills, show improved behavior, and adapt well to school
o Graduate and go on to postsecondary education

…When parents talk to their children about school, expect them to do well, make sure that out-of-school activities are constructive, and help them plan for college, their children perform better in school.

Where are the numbers?
So what’s happening with parental support? If it’s a problem, the first thing you need to do is measure it. Educators have developed a term: readiness to learn. When I hear ‘readiness to learn’, that says ‘parental involvement’ to me.

There are metrics for this, but it seems there’s more than one metric, and adoption is spotty.

• Brookings Institute created a task force, reporting in September 2013 that “the task force calls for new global indicators to include ‘readiness to learn’ in early childhood.”
• A non-profit in Ohio is tracking and reporting a readiness to learn metric for sixteen school districts in Montgomery County, starting with the 2009-10 school year.
• In my own city, Seattle I see no sign that the school district is measuring or tracking school readiness. Their web site offers readiness guidelines for parents of different ethnic backgrounds (Spanish, Chinese, Amharic and so on) but no sign of any effort to move the ball, or even find out where the ball is.

What to do?
I assume that school readiness overall today is not as high as it was forty or fifty years ago. If true, what’s the fix?
One path might be to identify family attributes that correlate with high readiness for school, and support those attributes. Just guessing…but I expect this will draw some attention to welfare programs that encourage single-parent families.
How clear are public schools about parent responsibilities? I’ve never heard a parent complaint that a school required too much hands-on involvement. That tells me that either expectations need to be higher, or they need to be clearer.

The bottom line
Social indicators in the US seem to trend downhill. Apparently there’s a feedback loop with public education, where despite increasing budgets, school results do not improve. Are teachers in the US struggling uphill against a tide of ill-prepared students without support and motivation from parents?
Schools should establish metrics for readiness to learn. These numbers should become part of the debate on public education.
Society as a whole should be accountable for teachers having the resources to succeed. They have the money. Let’s give them good students.
Do more to increase parent accountability.