↳ Debt

May 22nd, 2020

↳ Debt

Municipal Bonds, Race, and the American City

An interview with Destin Jenkins

The rapid and expansive action taken by the Fed over the past two months in response to the coronavirus crisis has muddied the distinction between monetary and fiscal policy. In particular, its Municipal Liquidity Facility provides a path for financing emergency spending by local governments. In some optimistic accounts, MLF-backed investment has the capacity to dramatically reduce the geographical, income, and racial inequalities which have increased in recent decades. But in order to do this, the MLF must explicitly prioritize investment in these communities.

In a recent article for the Washington Post, UChicago Professor Destin Jenkins argued the historical case. In the aftermath of WWII, a municipal bond market that valued white, middle-class consumption diverted investment outside of cities and into the suburbs. Federal housing officials, mortgage bankers and real estate agents profited off of the construction of debt-financed highways, shopping malls, schools, and parks for this upwardly mobile demographic. Cities took on billions in debt, but their black, brown, and immigrant populations saw few of the benefits. Jenkins argues that the history of municipal debt is intimately tied to the history of racial disparity in American cities, and that interventions in the politics of bond markets could enable municipalities "to avoid the punitive credit ratings that devalue certain regions or populations over others."

We spoke to Jenkins last fall about his research, which focusses on the history of racial capitalism and its consequences for democracy and inequality in the United States. His forthcoming book, The Bonds of Inequality, examines the role of municipal finance in growing American cities and widening the racial wealth gap. Jenkins is the Neubauer Family Assistant Professor of History at the University of Chicago. You can follow him here

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January 21st, 2020

Futurist Landscape

REMEDY EXERCISE

Legal frameworks for sovereign debt restructuring

Despite contributing towards a series of crises (from the third world debt crisis of the 80s to the Euro-crisis of 2010), sovereign debt is rising across low-, middle-, and high-income economies, leading to renewed discussions around the macroeconomic consequences of sovereign debt restructuring and default.

In addition to debates about the economic consequences of default, a large academic and policy literature explores the varying legal architectures of debt contracts. In a 2002 paper, LEE BUCHHEIT and G. MITU GULATI present a history of contractual provisions for sovereign bonds in the United States, focusing specifically on the absence of collective action clauses, which are mandated in the UK.

From the article:

"In most contracts, the parties know each other's identity beforehand, and they make a conscious decision to enter into a legal relationship. In a multi-creditor debt instrument, the borrower's identity is of course known by each investor, but what the investors don't know is the identity of each other. When the bond issuer runs into financial difficulties, the actions of any one bondholder can dramatically affect the interests of all the other lenders.

Bonds issued by both corporate and sovereign borrowers in the early nineteenth century rarely contained provisions that contemplated collective decisionmaking by the bondholders. Each bond was a freestanding debt instrument; its terms could not be changed without the consent of its holder, and, if not paid when due, each holder was free to pursue her individual remedies against the issuer. The instruments did not require a holder to consult with, much less to act in concert with, fellow bondholders before, during or after a default. Although this approach ensured that each bondholder's claim against the borrower could not be deranged without that bondholder's consent, it also had the consequence of forcing financially-distressed corporate borrowers into bankruptcy (which in those days meant liquidation). This was, is, and ever shall be the "holdout creditor problem" in a debt workout.

One hundred years on, the financial community is again confronted with a remarkably similar problem. A sovereign bond issuer of the early twenty-first century is in much the same spot as the distressed corporate or railroad bond issuer of the early twentieth century. The merits of including majority action clauses in sovereign bonds as a method of neutralizing the holdout creditor are being proposed in some circles today, just as they were in the 1920s and 1930s in the context of corporate bonds. It may be feasible to engage the equity powers of U.S. federal courts in the oversight of some sovereign bond workouts with the result that the bondholders can be homogenized into a single voting class, and any court-approved compromise of the action will bind all members of that class."

Link to the paper.

  • "By noticeably intensifying distributional conflict over scarce public resources, sovereign debt crises tend to lay bare underlying power dynamics that, during normal times, are quietly at work beneath the surface." Jerome Roos's recently published book uncovers the global distributional politics underlying the financialization of sovereign debt. Link. See also Barry Eichengreen's 2003 comparative overview of debt restructuring proposals. Link.
  • Two pieces by José Ángel Gurría on the recent history of Mexico's debt crises: from Coping with Capital Surges, a chapter on the historical trade-offs of foreign direct investment; and a 1995 paper on "The Mexican Debt Strategy" draws policy lessons from the crises of the '80s. Link, link.
  • "The Greek debt restructuring of 2012 stands out in the history of sovereign defaults. It achieved very large debt relief—over 50 per cent of 2012 GDP—with minimal financial disruption, but it did so at a cost." From 2013, "An Autopsy" of Greek debt restructuring, by Jeromin Zettelmeyer, Christoph Trebesch, and Mitu Gulati. Link. And a 2014 paper by Miranda Xafa assesses the drawbacks to delaying the restructuring after mid-2011. Link.
    h/t reader Dominik L for several of these links
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October 15th, 2019

Machine

WEAK OUTCOMES

On the returns to for-profit colleges

As student debt grows and the labor market stagnates, a growing body of research seeks to answer questions about the worthiness of college. What characterizes the schools and populations for whom college is worth it? What does worthiness mean—financial, intellectual, for individuals, for society as a whole? A key way to examine these questions is to find evidence on the financial returns to college. Douglas Webber examines the question along lines of ability, major, and debt, and explores the question for marginal students; JFI’s Sidhya Balakrishnan and Barry Cynamon looked at the way that returns vary based on the type of financing (loans, IDR, ISAs).

A new paper from STEPHANIE CELLINI and NICHOLAS TURNER uses administrative data to examine the returns to public college vs. for-profit college certificate programs. The key finding is that “for-profit certificate students experience lower earnings and employment post-college than their public sector counterparts,” but the richness of the data allows for many more surprising conclusions as well: one is that for-profit college may actually have worse returns than no college whatsoever; another is that for-profits may have worse effects for women than for men. From the paper:

“Across the board, our results show that despite the much higher costs of attending a for-profit institution, the average for-profit certificate student experiences lower earnings effects relative to public sector students. For-profit colleges outperform public institutions in only one of the top ten for-profit fields—cosmetology. Further, students in online and chain for-profit institutions appear to fare worse than students in more traditional campus-based and independent institutions. Our institution-level regressions reveal that the weak performance of the for-profit sector is not limited to a few poor performing institutions, rather the majority of schools appear to have negligible average earnings effects.”

The full paper is available in the Journal of Human Resources here.

  • Scott Cunningham wrote a substantial tweet-thread summary, available here. “I’d include this paper when sorting through the human capital vs signaling debate. This is arguably pure credentialing… So why are the returns so bad if it’s also a credential? I’d be curious how proponents of the ‘education is only signaling’ hypothesis reacted to this study.” For more on that debate, see our previous JFI letter.
  • How can for-profit colleges be held accountable for poor returns to the educations that they provide? A 2016 report from Davids J Deming and Figlio explains the successes and failures of Obama’s Gainful Employment Act, and suggests the importance of financial “skin in the game” for all kinds of institutions. Link.
  • A new data explorer from the Urban Institute brings together an array of education data sets. Link.
  • Cellini and Turner’s piece examines certificate programs at for-profits. For more on certificate programs, see our March letter on the work of Di Xu and Madeline Trimble, and our May letter on the many non-Title-IV certificates, certifications, and credentials about which there is almost no data.
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September 3rd, 2019

Eye Machine

IMPLICIT FAVOR

The failures of research on fin-tech and poverty alleviation

Last week, we considered how social and political standards can pressure climate scientists to under-report their findings, introducing an underestimation bias into published climate research. In a recent thread, Nicholas Loubere examines the development buzz around mobile money, showing how similar factors can serve to exaggerate the findings of academic studies.

In a new article quoted in the thread, MILFORD BATEMAN, MAREN DUVENDACK, and NICHOLAS LOUBERE contest a much cited study on the poverty alleviating effects of mobile money platforms like M-Pesa. The criticism rests largely on grounds of omission: the study, they argue, ignores the closure of nearly half of microenterprises opened with M-Pesa, the jobs and incomes lost with the introduction of new businesses into fragile markets, the burgeoning debt accrued through digital loans, the overwhelmingly foreign ownership of M-Pesa and its profits, and the wealthy networks composing its primary users. Methodologically, it had no control group, used a small sample size, and overlooked the potential for reverse causality.

Why was a potentially flawed study so well regarded? According to Bateman, Duvendack, and Loubre, it's in part because its results told researchers and policymakers what they wanted to hear. From the article:

"The rapid popularization of fin-tech as a developmental solution is premised on the continued prominence of microcredit and the broader concept of financial inclusion. The microcredit movement was established and validated in the 1980s on overblown and ultimately false claims that providing small loans to groups of poor women was a panacea for global poverty reduction—claims that were especially associated with Dr Muhammad Yunus. Empirical justification came from an impact evaluation undertaken in Bangladesh by then World Bank economists Mark Pitt and Shahidur Khandker, which claimed that microcredit programs had significant beneficial results for impoverished female clients. For many years, Muhammad Yunus used Pitt and Khandker’s findings to successfully ‘sell’ the microcredit model to the international development community, generating a consensus that the microcredit model was the most effective way to efficiently provide enormous benefits to the global poor."

Link to the article, and link to a blogpost in which the authors outline their key findings.

  • "Kenya’s new experience of debt reveals a novel, digitized form of slow violence that operates not so much through negotiated social relations, nor the threat of state enforcement, as through the accumulation of data, the commodification of reputation, and the instrumentalization of social ties." Kevin P. Donovan and Emma Park report on the consequences of mobile debt for poor borrowers. Link.
  • In an article from 2017, Loubere "examines examples of exploitation, fraud, instability, and extraction related to expanded digital financial coverage in contemporary China." Link. At Bloomberg, David Malingha compares credit markets in Asia with those of sub-Saharan Africa. Link.
  • "This article claims that to bring finance back to serve the real economy, it is fundamental to (a) de-financialize companies in the real economy, and (b) think clearly about how to structure finance so that it can provide the long-term committed patient capital required by innovation." Mariana Mazzucato on governments' role in ensuring that finance serves public ends. Link.
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July 18th, 2019

Student Debt & Racial Wealth Inequality

How student debt cancellation affects the racial wealth gap

The effect of cancelling student debt on various measures of individual and group-level inequality has been a matter of controversy, especially given presidential candidates’ recent and high-profile proposals to eliminate outstanding student debt. In this work, I attempt to shed light on the policy counterfactual by analyzing the Survey of Consumer Finances for 2016, the most recent nationally-representative dataset that gives a picture of the demographics of student debt.

When we test the effects of cancelling student debt on the racial wealth gap, we conclude that across all samples, across all quantiles, the racial wealth gap narrows when student debt is cancelled, and it narrows more the more student debt is cancelled.

With respect to the two presidential candidates’ plans, this means that the Sanders plan, completely eliminating outstanding student debt, reduces racial wealth inequality more than does the Warren plan, which only forgives $50,000 of debt, and phases that out for high earners. But the difference between the two plans as measured by the reduction in the racial wealth gap is not large. It would be fair to say that the Warren plan achieves the vast majority of the racial wealth equity gains that the Sanders plan achieves, while leaving the student debt held by the highest-income borrowers intact.

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March 10th, 2018

The One With Nothing On It

CRIMINALIZATION OF DEBT | INTERNET CENSORSHIP | EQUALITY

BRUTAL ATTACHMENTS

A new report on the criminalization of debt

Last week, the ACLU published a report entitled "A Pound of Flesh: The Criminalization of Private Debt." It details the widespread use of the criminal justice system in the collection of debts—including medical, credit card, auto, education and household—in many cases resulting in de facto debtor's jails.

"In 44 states, judges—including district court civil judges, small-claims court judges, clerk-magistrates, and justices of the peace—are allowed to issue arrest warrants for failure to appear at post-judgment proceedings or for failure to provide information about finances. These warrants, usually called 'body attachments' or 'capias warrants,' are issued on the charge of contempt of court.

At the request of a collection company, a court can enter a judgment against a debtor, authorize a sheriff to seize a debtor's property, and order an employer to garnish the debtor's wages.… In most of the country, an unpaid car loan or a utility bill that's in arrears can result in incarceration."

Link to the full report.

  • The report was given a lengthy write-up at The Intercept. "Federal law outlawed debt prisons in 1833, but lenders, landlords and even gyms and other businesses have found a way to resurrect the Dickensian practice. With the aid of private collection agencies, they file millions of lawsuits in state and local courts each year, winning 95 percent of the time." Link.
  • A brief overview of the history of debtors' prisons, leading to the upward trend of collectors' leveraging criminal consequences against debtors. Link.
  • A 2011 paper titled "Creditor's Contempt" describes the procedural and doctrinal mechanisms linking collectors and courts, and the "difficult balance between the state's and creditors' interest in rigorous judgment enforcement and debtors' interest in imposing reasonable limitations on the coerciveness of debt collection." Link. And documentation of a Duke Law conference covers the criminalization of debt alongside discussions of credit scoring and consumer bankruptcy. Link.
  • The criminalization of private debt dovetails with the more widely discussed issue of criminal justice debt resulting from fines and fees, which also leads to de facto debtor incarceration. Often called "legal financial obligations" (LFOs), these revenue-raising fees are levied for everything from warrants and case processing to parole check-ins and electronic monitoring devices. For more, see this 2010 report from the Brennan Center for Justice, this 2015 investigation from NPR, and this 2016 reform guide from Harvard's Criminal Justice Policy Program. (Also from CJPP, an interactive criminal justice debt policy mapping tool. Link.)
  • In a 2014 post on their now-defunct blog House of Debt, Atif Mian and Amir Sufi (authors of a book by the same name) on the history of debt forgiveness. Link. (For attempts at exploiting the imperfections of debt markets to cancel various kinds of debt, see the Rolling Jubilee project, and its relative the Debt Collective.)
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February 10th, 2018

No Noise is Good Noise

AUTOMATIC PRECISION

Translating randomized controlled trials into policy action

"A randomized experiment is performed,a statistically significant comparison is found, and then story time begins, and continues and continues—as if the rigor from the randomized experiment somehow suffuses through the entire analysis."

From a short paper by ANDREW GELMAN, who adds his analysis to the debate on the use of RCTs in policy development. Link.

The paper that Gelman is commenting on, by ANGUS DEATON and NANCY CARTWRIGHT, tackles misunderstandings and misuses of the form across disciplines:

"RCTs are both under- and over-sold. Oversold because extrapolating or generalizing RCT results requires a great deal of additional information that cannot come from RCTs; under-sold, because RCTs can serve many more purposes than predicting that results obtained in a trial population will hold elsewhere…

The gold standard or 'truth' view does harm when it undermines the obligation of science to reconcile RCTs results with other evidence in a process of cumulative understanding."

Link to the paper.

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