QUESTION: What impact with the US downgrading have on the global markets?
And how will it impact Main Street?
---
Quick ideas on the downgrade:
1 The effects in the global markets: Current knowledge status do not let you give an informed opinion. This extreme volatility is forcing many investors (individuals and corporations) to park their money, idling at accounts that yield little benefit. See BNY Mellon, which last week announced that some depositors, above $50 million, will be charged for having the money there.
2 The effect in Main Street: Some changes will affect it indirectly, so it will take a time to clearly see the effects (months, maybe a year). Changes in monetary policy (e.g., new rounds of so-called quantitative easing due to concerns of slowdown) can increase inflation. With positive inflation surprises come redistribution of wealth from some lenders to some borrowers (negative inflation surprises do the opposite). Such redistributions will increase bankruptcies, which means some providers (Main Street's) will not get paid, and some financial institutions will see that loans' quality will worsen, all of this in excess of normal problems.
Of course, there are also risks if we overshoot while fighting inflation due to the central bank's panic for previous high inflation: with lower inflation rates, holding cash is more appealing, so more depositors work partially outside banks, which see their earnings go down -- a few will run into insolvency sooner or later in excess of normal mortality of banks. This will mean that some Main Street customers will see more disruptions in their payments and other transactions (and possibly lose some money). Also, customers with a good credit history will see that reputation lost when switching to a new bank.
If stocks go down due to the downgrade, more people will lose money in the short term, and will have less to spend in Main St. Also, fear will rise, and that will change prospects for consumers, and that will take a toll too. This can be pretty quick, maybe weeks.
There are other ways for the downgrade to affect Main Street, of course.
Tuesday, August 9, 2011
Weathering the financial crisis: good policy or good luck?
Weathering the financial crisis: good policy or good luck?, by Stephen Cecchetti, Michael R King and James Yetman - BIS Working Papers No 351 - August 2011
Abstract: The macroeconomic performance of individual countries varied markedly during the 2007-09 global financial crisis. While China's growth never dipped below 6% and Australia's worst quarter was no growth, the economies of Japan, Mexico and the United Kingdom suffered annualised GDP contractions of 5-10% per quarter for five to seven quarters in a row. We exploit this cross-country variation to examine whether a country's macroeconomic performance over this period was the result of pre-crisis policy decisions or just good luck. The answer is a bit of both. Better-performing economies featured a better-capitalised banking sector, lower loan-to-deposit ratios, a current account surplus, high foreign exchange reserves and low levels and growth rates of private sector credit-to-GDP. In other words, sound policy decisions and institutions reduced their vulnerability to the financial crisis. But these economies also featured a low level of financial openness and less exposure to US creditors, suggesting that good luck played a part.
Introduction
The global financial crisis of 2007–09 was the result of a cascade of financial shocks that threw many economies off course. The economic damage has been extensive, with few countries spared – even those far from the source of the turmoil. As with many economic events, the impact has varied from country to country, from sector to sector, from firm to firm, and from person to person. China’s growth, for example, never dipped below 6% and Australia’s worst quarter was one with no growth. The economies of Japan, Mexico and the United Kingdom, however, suffered GDP contractions of 5–10% at an annual rate for up to seven quarters in a row. For a spectator, this varying performance and differential impact surely looks arbitrary. Why were the hard-working, capable citizens of some countries thrown out of work, but others were not? What explains why some have suffered so much, while others barely felt the impact of the crisis?
Fiscal, monetary and regulatory policymakers around the world may be asking the same questions. Why was my country hit so hard by the recent events while others were spared? In this paper we examine whether national authorities in places that suffered severely during the global financial crisis are justified in believing they were innocent victims and that the variation in national outcomes was essentially random. Was the relatively good macroeconomic performance of some countries a consequence of good policy frameworks, institutions and decisions made prior to the crisis? Or was it just good luck?
We address this question in three steps. First, we develop a measure of macroeconomic performance during the crisis for 46 industrial and emerging economies. This measure captures each country’s performance relative to the global business cycle, which provides our benchmark. Next, we assemble a broad set of candidate variables that might explain the variation in cross-country experiences. These variables capture key dimensions of different economies, including their trade and financial openness, their monetary and fiscal policy frameworks, and the structure of their banking sectors. In order to avoid any impact of the crisis itself, we measure all these variables at the end of 2007, prior to the onset of the turmoil. Putting together the measured macroeconomic impact of the crisis with the initial conditions, we then look at the relationship between the two and seek to identify what characteristics were associated with a country’s positive macroeconomic performance relative to its peers.
Briefly, we construct a measure of relative macroeconomic performance by first identifying the global business cycle using a simple factor model. We calculate seasonally adjusted quarter-over-quarter real GDP growth rates and extract the first principal component across the 46 economies in our sample. This single factor explains around 40 per cent of the variation in the average economy’s output, but with wide variation across economies. We then use the residuals from the principal component analysis as the measure of an economy’s idiosyncratic performance. For each economy, we sum these residuals from the first quarter of 2008 to the fourth quarter of 2009. This cumulative sum, which captures both the length and depth of the response of output, is our estimate of how well or how poorly each economy weathered the crisis relative to its peers.
With this measure of relative macroeconomic performance as our key dependent variable, we examine factors that might explain its variation across economies. Given the small sample size, we rely on univariate tests of the difference in the median performance between different groups of economies, as well as linear regressions.
This simple analysis generates some surprisingly strong insights. We find that the better-performing economies featured a better capitalised banking sector, low loan-to-deposit ratios, a current account surplus and high levels of foreign exchange reserves. While the degree of trade openness does not distinguish the performance across economies, the level of financial openness appears very important. Economies featuring low levels and growth rates of private sector credit-to-GDP and little dependence on the US for short-term funding were much less vulnerable to the financial crisis. Neither the exchange rate regime nor the framework guiding monetary policy provides any guide to outcomes. Whether the government had a budget surplus or a low level of government debt are unimportant, but low levels of government revenues and expenditures before the crisis resulted in improved outcomes. This combination of variables suggests that sound policy decisions and institutions pre-crisis reduced an economy’s vulnerability to the international financial crisis. In other words, not everything was luck.
Results (excerpted)
(1) Economies where banking systems had higher levels of regulatory capital outperformed other economies in our sample, with a median CGAP of +1.5% versus ?0.7% for those that had not. These medians are statistically different from each other at the 1% level.
(2) Economies that experienced a banking crisis between 1990 and 2007 fared better, with a median CGAP of +2.6% versus ?0.7% for those that had not.
(3) Economies with a low loan-to-deposit ratio performed better than those with a high loan-to-deposit ratio. A one-standard deviation, or 51 percentage point, decrease in this ratio saw a 2.5% improvement in GDP performance over the crisis period.
(4) Economies with a current account surplus outperformed those with a deficit. A one-standard deviation increase in the current account as a percent of GDP, equivalent to 9 percentage points, resulted in a 2.4% outperformance in real GDP over the crisis period. Trade openness does not explain cross-country variation, and there was little difference between the median performance of commodity exporters and other economies.
(5) Economies with a low level of financial openness fared better than economies with higher levels of gross foreign assets and liabilities. When dividing the sample at the median level of financial openness, the half that were the most open had a median CGAP of –0.9% versus +3.0% for the half that were the least open.
(6) Economies dependent on the US for short-term debt financing fared worse. A one-standard deviation increase in US holdings of foreign short-term debt, equivalent to 2 percentage points of GDP, resulted in 2% less growth over the crisis.
(7) Economies with lower private sector credit did significantly better. When dividing the sample at the median level of private sector credit to GDP, economies in the top half, with higher private sector credit, had a median CGAP of –0.7% versus +2.9% for in the bottom half. The regression coefficient indicates that economies with credit-to-GDP one-standard deviation above the mean underperformed by 2% over the crisis period. Lower growth in private sector credit in the lead-up to the crisis also had a statistically significant effect of a similar magnitude.
(8) Countries that had a large stock of foreign exchange reserves outperformed. When dividing the sample at the median level of this variable, economies with more than the median foreign exchange reserves had a median CGAP of +2.9% versus –0.7% for economies in the bottom half. This result is not explained by whether an economy had an exchange rate peg or not. Similarly, the framework for monetary policy does not distinguish performance across countries.
(9) Countries having a small government, both in terms of low government revenues and expenditures to GDP, outperformed. When dividing the sample at the median level of either of these two variables, economies in the bottom half had a median CGAP of +3% versus –1% for economies in the top half. The regression coefficients imply that a year-end 2007 value for either government revenues or expenditures to GDP that was one-standard deviation above the sample mean was associated with lower output growth of 1.9% over the two-year period.
Taken together, these results confirm that economies with better fundamentals were less vulnerable to the crisis. Economies that experienced a banking crisis post-1990 and took steps to increase the capitalisation of their banks had superior macroeconomic performance, suggesting that prudential measures taken in response to crises improved the robustness of the financial system. A current account balance, low levels of financial openness and lower levels and growth rates of private sector credit-to-GDP helped insulate an economy from the crisis. Given that this crisis was triggered by events in the US, it also helped if an economy was not dependent on the US for short-term funding.
You can download the full paper at: http://www.bis.org/publ/work351.htm
Abstract: The macroeconomic performance of individual countries varied markedly during the 2007-09 global financial crisis. While China's growth never dipped below 6% and Australia's worst quarter was no growth, the economies of Japan, Mexico and the United Kingdom suffered annualised GDP contractions of 5-10% per quarter for five to seven quarters in a row. We exploit this cross-country variation to examine whether a country's macroeconomic performance over this period was the result of pre-crisis policy decisions or just good luck. The answer is a bit of both. Better-performing economies featured a better-capitalised banking sector, lower loan-to-deposit ratios, a current account surplus, high foreign exchange reserves and low levels and growth rates of private sector credit-to-GDP. In other words, sound policy decisions and institutions reduced their vulnerability to the financial crisis. But these economies also featured a low level of financial openness and less exposure to US creditors, suggesting that good luck played a part.
Introduction
The global financial crisis of 2007–09 was the result of a cascade of financial shocks that threw many economies off course. The economic damage has been extensive, with few countries spared – even those far from the source of the turmoil. As with many economic events, the impact has varied from country to country, from sector to sector, from firm to firm, and from person to person. China’s growth, for example, never dipped below 6% and Australia’s worst quarter was one with no growth. The economies of Japan, Mexico and the United Kingdom, however, suffered GDP contractions of 5–10% at an annual rate for up to seven quarters in a row. For a spectator, this varying performance and differential impact surely looks arbitrary. Why were the hard-working, capable citizens of some countries thrown out of work, but others were not? What explains why some have suffered so much, while others barely felt the impact of the crisis?
Fiscal, monetary and regulatory policymakers around the world may be asking the same questions. Why was my country hit so hard by the recent events while others were spared? In this paper we examine whether national authorities in places that suffered severely during the global financial crisis are justified in believing they were innocent victims and that the variation in national outcomes was essentially random. Was the relatively good macroeconomic performance of some countries a consequence of good policy frameworks, institutions and decisions made prior to the crisis? Or was it just good luck?
We address this question in three steps. First, we develop a measure of macroeconomic performance during the crisis for 46 industrial and emerging economies. This measure captures each country’s performance relative to the global business cycle, which provides our benchmark. Next, we assemble a broad set of candidate variables that might explain the variation in cross-country experiences. These variables capture key dimensions of different economies, including their trade and financial openness, their monetary and fiscal policy frameworks, and the structure of their banking sectors. In order to avoid any impact of the crisis itself, we measure all these variables at the end of 2007, prior to the onset of the turmoil. Putting together the measured macroeconomic impact of the crisis with the initial conditions, we then look at the relationship between the two and seek to identify what characteristics were associated with a country’s positive macroeconomic performance relative to its peers.
Briefly, we construct a measure of relative macroeconomic performance by first identifying the global business cycle using a simple factor model. We calculate seasonally adjusted quarter-over-quarter real GDP growth rates and extract the first principal component across the 46 economies in our sample. This single factor explains around 40 per cent of the variation in the average economy’s output, but with wide variation across economies. We then use the residuals from the principal component analysis as the measure of an economy’s idiosyncratic performance. For each economy, we sum these residuals from the first quarter of 2008 to the fourth quarter of 2009. This cumulative sum, which captures both the length and depth of the response of output, is our estimate of how well or how poorly each economy weathered the crisis relative to its peers.
With this measure of relative macroeconomic performance as our key dependent variable, we examine factors that might explain its variation across economies. Given the small sample size, we rely on univariate tests of the difference in the median performance between different groups of economies, as well as linear regressions.
This simple analysis generates some surprisingly strong insights. We find that the better-performing economies featured a better capitalised banking sector, low loan-to-deposit ratios, a current account surplus and high levels of foreign exchange reserves. While the degree of trade openness does not distinguish the performance across economies, the level of financial openness appears very important. Economies featuring low levels and growth rates of private sector credit-to-GDP and little dependence on the US for short-term funding were much less vulnerable to the financial crisis. Neither the exchange rate regime nor the framework guiding monetary policy provides any guide to outcomes. Whether the government had a budget surplus or a low level of government debt are unimportant, but low levels of government revenues and expenditures before the crisis resulted in improved outcomes. This combination of variables suggests that sound policy decisions and institutions pre-crisis reduced an economy’s vulnerability to the international financial crisis. In other words, not everything was luck.
Results (excerpted)
(1) Economies where banking systems had higher levels of regulatory capital outperformed other economies in our sample, with a median CGAP of +1.5% versus ?0.7% for those that had not. These medians are statistically different from each other at the 1% level.
(2) Economies that experienced a banking crisis between 1990 and 2007 fared better, with a median CGAP of +2.6% versus ?0.7% for those that had not.
(3) Economies with a low loan-to-deposit ratio performed better than those with a high loan-to-deposit ratio. A one-standard deviation, or 51 percentage point, decrease in this ratio saw a 2.5% improvement in GDP performance over the crisis period.
(4) Economies with a current account surplus outperformed those with a deficit. A one-standard deviation increase in the current account as a percent of GDP, equivalent to 9 percentage points, resulted in a 2.4% outperformance in real GDP over the crisis period. Trade openness does not explain cross-country variation, and there was little difference between the median performance of commodity exporters and other economies.
(5) Economies with a low level of financial openness fared better than economies with higher levels of gross foreign assets and liabilities. When dividing the sample at the median level of financial openness, the half that were the most open had a median CGAP of –0.9% versus +3.0% for the half that were the least open.
(6) Economies dependent on the US for short-term debt financing fared worse. A one-standard deviation increase in US holdings of foreign short-term debt, equivalent to 2 percentage points of GDP, resulted in 2% less growth over the crisis.
(7) Economies with lower private sector credit did significantly better. When dividing the sample at the median level of private sector credit to GDP, economies in the top half, with higher private sector credit, had a median CGAP of –0.7% versus +2.9% for in the bottom half. The regression coefficient indicates that economies with credit-to-GDP one-standard deviation above the mean underperformed by 2% over the crisis period. Lower growth in private sector credit in the lead-up to the crisis also had a statistically significant effect of a similar magnitude.
(8) Countries that had a large stock of foreign exchange reserves outperformed. When dividing the sample at the median level of this variable, economies with more than the median foreign exchange reserves had a median CGAP of +2.9% versus –0.7% for economies in the bottom half. This result is not explained by whether an economy had an exchange rate peg or not. Similarly, the framework for monetary policy does not distinguish performance across countries.
(9) Countries having a small government, both in terms of low government revenues and expenditures to GDP, outperformed. When dividing the sample at the median level of either of these two variables, economies in the bottom half had a median CGAP of +3% versus –1% for economies in the top half. The regression coefficients imply that a year-end 2007 value for either government revenues or expenditures to GDP that was one-standard deviation above the sample mean was associated with lower output growth of 1.9% over the two-year period.
Taken together, these results confirm that economies with better fundamentals were less vulnerable to the crisis. Economies that experienced a banking crisis post-1990 and took steps to increase the capitalisation of their banks had superior macroeconomic performance, suggesting that prudential measures taken in response to crises improved the robustness of the financial system. A current account balance, low levels of financial openness and lower levels and growth rates of private sector credit-to-GDP helped insulate an economy from the crisis. Given that this crisis was triggered by events in the US, it also helped if an economy was not dependent on the US for short-term funding.
You can download the full paper at: http://www.bis.org/publ/work351.htm
Monday, August 8, 2011
Possible Unintended Consequences of Basel III and Solvency II
Some IMF staff published some ideas about the financial regulatory regime in a paper titled as this post:
Excerpts:
Paper objectives: (i) to present similarities and differences among Pillar 1 requirements of the two accords; and (ii) to discuss possible unintended consequences of their implementation. In order to ensure focus in the analysis, this paper is intentionally limited to aspects related to Pillar 1 (minimum capital requirement) in the two capital accords. The paper acknowledges that there can be significant overlap in the business activities of banks and insurers. For example, consumers save with banks through deposits and with life insurers through annuity with savings products. In addition, banks and insurers invest in many of the same types of assets and they compete with one another in raising capital, both in the capital markets and within the financial conglomerates of which many are members. Due to this overlap, differences in the two accords can generate unintended consequences in the area of cost of capital, funding patterns, and interconnectedness, and promote risk/product migration across or away from the two sectors. These unintended consequences are summarized in the conclusions together with policy considerations. Finally, the paper acknowledges that other sources of arbitrage not analyzed in this paper, like differences in Pillar 2 (supervisory approach) and Pillar 3 (market discipline), as well as differences in accounting (partially discussed here) and tax treatments, could reinforce or offset the impact of differences in the capital regulatory frameworks. required more closely to the risks of each insurer, without necessarily increasing the quantity
Conclusions (edited):
Order a print copy here: http://www.imfbookstore.org/IMFORG/WPIEA2011187 (broken link for now).
Or request a PDF copy from us leaving a comment to this post.
In today’s financial system, complex financial institutions are connected through an opaque network of financial exposures. These connections contribute to financial deepening and greater savings allocation efficiency, but are also unstable channels of contagion. Basel III and Solvency II should improve the stability of these connections, but could have unintended consequences for cost of capital, funding patterns, interconnectedness, and risk migration.
Excerpts:
Efforts to strengthen the quality of capital for banks and insurers through Basel III and Solvency II are well advanced. On the one hand, the Basel Committee on Banking Supervision (BCBS), the organization responsible for developing international standards for banking supervision, adopted the Basel II framework in 2004 and, in response to the financial crisis, has taken steps to strengthen it in an incremental fashion to form what is now known the Basel III framework (BCBS 2009, 2011a, 2011b, and 2011c). On the other hand, the European Commission (EC) is leading the Solvency II project, in close cooperation with the European Insurance and Occupational Pensions Authority (EIOPA), to develop harmonized standards for insurance supervision within the European Union. A directive was adopted in 2009, and work—which included a series of quantitative impact studies—has been underway to develop supporting rules.
The regional scope of application of the two accords varies. Basel is an “accord”/agreement with no legal force but potentially global applicability, whereas Solvency II is a legal instrument that will be binding in 30 European Economic Area (EEA) countries4 (27 European Union (EU) states plus Iceland, Liechtenstein, and Norway). However, Solvency II has also implications beyond Europe through, for example, its influence on the international standards being developed by the International Association of Insurance Supervisors (IAIS), and because external insurance groups will be more easily able to operate in the EU if their home supervisory regimes are considered equivalent.
Although these standards have much in common, differences do exist. Both take a risk-based approach to minimum capital requirements and supervision and promote the integrated use of models by institutions in managing risks and assessing solvency. However, their objectives overlap only partially. In particular, Basel III attempts to increase the overall quantum of capital and its quality as a means of protecting against bank failures, including improved quantification of risks that were poorly catered for under Basel II. However, Solvency II attempts to strengthen the quality of capital and tailor the quantity of capital within the sector as a whole. Finally, the two accords have been tailored to the business characteristics of the respective sectors, often as a result of bilateral negotiations, and shaped by the views of those involved in their development in a piecemeal manner. Accordingly, they have generated long and complex documents which define the same concepts in different ways and often deal differently with the same or similar issues.
Paper objectives: (i) to present similarities and differences among Pillar 1 requirements of the two accords; and (ii) to discuss possible unintended consequences of their implementation. In order to ensure focus in the analysis, this paper is intentionally limited to aspects related to Pillar 1 (minimum capital requirement) in the two capital accords. The paper acknowledges that there can be significant overlap in the business activities of banks and insurers. For example, consumers save with banks through deposits and with life insurers through annuity with savings products. In addition, banks and insurers invest in many of the same types of assets and they compete with one another in raising capital, both in the capital markets and within the financial conglomerates of which many are members. Due to this overlap, differences in the two accords can generate unintended consequences in the area of cost of capital, funding patterns, and interconnectedness, and promote risk/product migration across or away from the two sectors. These unintended consequences are summarized in the conclusions together with policy considerations. Finally, the paper acknowledges that other sources of arbitrage not analyzed in this paper, like differences in Pillar 2 (supervisory approach) and Pillar 3 (market discipline), as well as differences in accounting (partially discussed here) and tax treatments, could reinforce or offset the impact of differences in the capital regulatory frameworks. required more closely to the risks of each insurer, without necessarily increasing the quantity
Conclusions (edited):
124. The nature of capital needed by banks and insurers is naturally different. [...]
125. Basel III and Solvency II both attempt to increase the quality of capital in their respective sectors, but often have different provisions for similar issues. [...]
126. Provisions that cannot be related to the intrinsic differences between the two sectors can result in unintended consequences. For instance, it is unclear whether and, if so, to what extent the cost of capital for banks is going to increase compared to the cost of capital for insurers. On the one hand (i) the lack of an explicit objective to increase capital levels under Solvency II; (ii) the more restricted geographical application of Solvency II; (iii) the less persuasive need for capital systemic risk surcharges for insurers; and (iv) the yet to be defined standards for internal models for insurers suggest that cost of capital may increase more for banks than for insurers. On the other hand, arguments in support of higher cost of capital for insurers can also be made. But in general, Pillar 1 requirements across the two sectors are too different to argue conclusively in either direction. In addition, the new liquidity standards for banks and the new credit risk charges for insurers could affect the funding patterns of banks and increase the interconnectedness of the two sectors through the sovereign balance sheet. Finally, the two accords may result in an increased use of securitization for funding purposes by both banks and insurers. Hence, these unintended consequences could translate into risk migration between or away from the two sectors.
127. Several policy considerations stem from the aforementioned analysis:
* Basel III and Solvency II suggest a need for insurance regulators to communicate with their banking counterparts to understand the combined implications of the behavioral incentives that the two regimes may provide. This could significantly reduce the risk of unintended consequences associated with seemingly inconsistent treatment of same risks under the respective accords. This would also avoid unintentional arbitrage between internal models and the standardized approach under Solvency II, as has happened under Basel II.
* In addition, while group supervision has been strengthened, concerns about leakages still remain. This is especially a concern under Solvency II, due to its restricted geographical application and the potential use of non-equivalent jurisdictions for reinsurance. A key challenge for all groups remains what will be the approach by the EC to equivalence.
* Also, the adequacy of safety nets may need to be reviewed in the future. The likely increased use of covered bonds by banks for funding purposes would ring-fence assets so that they are unavailable to depositors and unsecured creditors in case of resolution.
* Basel III and Solvency II could further increase the need to expand the perimeter of regulation. As both Basel III and Solvency II push banks and insurers toward shorter duration and less risky business, non-regulated entities and market-based risk transfer mechanisms might evolve to fill any gap in market capacity that emerges. In addition, the likely increased use of securitization by banks and insures alike requires a strengthening in transparency and oversight of these contagion channels including securities lending-related cash collateral reinvestment programs, implementing macro-prudential measures (such as counter-cyclical margin requirements) related to securitization, repos and securities lending where appropriate, and improving market infrastructure for secured funding markets.
* Basel III and Solvency II may lead to excessive risk transfer to consumers and therefore, may require strengthening consumer protection. To the extent that the new accords increase capital and funding costs, the product mix offered by banks and insurers may change and entail additional risks for consumers. For example, excessive risk transfers could be a concern in the area of pension benefits where consumers already bear significant investment and longevity risk. Additional risk transfers to consumers may not be socially desirable from the pension policy point of view.
* Finally, there appears to be a need for empirical investigation about the magnitude of the impact of unintended consequences. There is no universally agreed set of unintended consequences and this paper is the first attempt (that we know of) to generate a set and relate it to the specifics of the Basel III and Solvency II accords. In addition, there is a general absence of empirical studies on the extent of the impact of possible unintended consequences
Order a print copy here: http://www.imfbookstore.org/IMFORG/WPIEA2011187 (broken link for now).
Or request a PDF copy from us leaving a comment to this post.
Friday, August 5, 2011
The Bright and the Dark Side of Cross-Border Banking Linkages
The Bright and the Dark Side of Cross-Border Banking Linkages
Author/Editor: Cihák, Martin; Muñoz, Sònia; Scuzzarella, Ryan
August 05, 2011
Summary: When a country’s banking system becomes more linked to the global banking network, does that system get more or less prone to a banking crisis? Using model simulations and econometric estimates based on a world-wide dataset, we find an M-shaped relationship between financial stability of a country’s banking sector and its interconnectedness. In particular, for banking sectors that are not very connected to the global banking network, increases in interconnectedness are associated with a reduced probability of a banking crisis. Once interconnectedness reaches a certain value, further increases in interconnectedness can increase the probability of a banking crisis. Our findings suggest that it may be beneficial for policies to support greater interlinkages for less connected banking systems, but after a certain point the advantages of increased interconnectedness become less clear.
Excerpts:
Or ask us for a PDF copy.
Author/Editor: Cihák, Martin; Muñoz, Sònia; Scuzzarella, Ryan
August 05, 2011
Summary: When a country’s banking system becomes more linked to the global banking network, does that system get more or less prone to a banking crisis? Using model simulations and econometric estimates based on a world-wide dataset, we find an M-shaped relationship between financial stability of a country’s banking sector and its interconnectedness. In particular, for banking sectors that are not very connected to the global banking network, increases in interconnectedness are associated with a reduced probability of a banking crisis. Once interconnectedness reaches a certain value, further increases in interconnectedness can increase the probability of a banking crisis. Our findings suggest that it may be beneficial for policies to support greater interlinkages for less connected banking systems, but after a certain point the advantages of increased interconnectedness become less clear.
Excerpts:
One of the hallmarks of financial globalization has been a growth in cross-border linkages (exposures) among banks. On the positive side, these linkages have been associated with new funding and investment opportunities, contributing to rapid economic growth in many countries (especially in the early part of the 2000s). But the growing financial linkages also have a “dark side”: the increased cross-border interconnectedness made it easier for disruptions in one country to be transmitted to other countries and mutate into systemic problems with global implications.Order a print copy (broken link as of today): http://www.imfbookstore.org/IMFORG/WPIEA2011186
The potential harmful consequences of cross-border interconnectedness for domestic banking sector stability have been illustrated rather dramatically during the recent global financial crisis, when shocks to one country’s financial system were rapidly transmitted to many others. One of the upshots of the crisis was that considerable efforts have been devoted to better measuring “systemic importance” of jurisdictions around the world. There is a growing consensus that interconnectedness, together with size, should be a key variable in assessing the systemic importance of a jurisdiction from the viewpoint of financial stability (IMF, BIS, and FSB, 2009; IMF, 2010).
This paper aims to answer the following key question: when a country’s banking system gets more linked to the global banking network, does it become more stable, or less stable? The answer to this question is obviously relevant for policymakers and regulators in individual countries. To the extent that interlinkages help banking stability, should policies and regulations be designed to promote such cross-border interconnectedness? And to the extent that interlinkages are bad for stability, should policies and regulations aim to stop or, at least limit, the growth of such interlinkages?
We examine the above key question in two ways: First, we analyze it conceptually, using simulations. Second, we examine it empirically, based on a range of econometric approaches—parametric as well as non-parametric—that combine data on banking crises around the world with a comprehensive data set on cross-border banking linkages. To preview the main results, our short answer to the above question is: it depends on the degree of interconnectedness. The relationship between the likelihood of a banking crisis in a country and the degree of integration of that country’s banking sector into the global banking network is far from trivial. We find that in a country whose banking sector has relatively few linkages to other banking sectors, increased cross-border linkages tend to improve that system’s stability, controlling for other factors. In other words, within a certain range, connections serve as a shock-absorber. The system acts as a mutual insurance device with disturbances dispersed and dissipated. Connectivity engenders robustness. Risk-sharing – diversification – prevails. But at some point—which we estimate to be at about the 95th percentile of the distribution of countries in terms of interconnectedness—increases in crossborder links begin to have detrimental effects on domestic banking sector stability. At a yet higher point, when a country’s network of interlinkages becomes almost complete, the probability of a crisis goes down again.
One of the novel insights of our paper is that it is important to distinguish whether the crossborder interlinkages are stemming primarily from banks’ asset side or from their liabilities side. We introduce measures that distinguish those two types of interconnectedness (which we call “downstream” and “upstream” interconnectedness), and we find that the impact of changes in interconnectedness on banking system fragility are more significant for liabilities-side (“upstream”) interconnectedness than for asset-side (“downstream”) interconnectedness.
Or ask us for a PDF copy.
CBO's 2011 Long-Term Projections for Social Security - Additional Information
You can request the PDF version of it and the full report of the same title as above.
Tuesday, July 26, 2011
Democratic Accountability, Deficit Bias, and Independent Fiscal Agencies
An IMF working paper by Xavier Debrun "illustrates key features of a model of independent fiscal agencies, and in particular the need (1) to incorporate the intrinsically political nature of fiscal policy - which precludes credible delegation of instruments to unelected decisionmakers - and (2) to focus on characterizing "commitment technologies" likely to credibly increase fiscal discipline."
Introduction:
Concluding remarks:
Introduction:
The fiscal legacy of the economic and financial crisis of 2008-09 brought to the fore serious concerns about the capacity of governments to maintain sustainable public finances. Several vulnerable countries came under severe market pressure, while government bond yields in countries considered so far as safe havens also started rising. Of particular concern is the fact that the large fiscal deficits and ballooning government debts caused by the crisis came on top of already substantial inherited liabilities and ahead of intensifying demographic pressures on entitlement spending. These trends are on a collision course with the intertemporal budget constraint, making ambitious and sustained consolidations unavoidable. The challenge is formidable and markets are on the watch, pushing governments to look for ways to firm up the credibility of their commitments to sound public finances.
While formal fiscal policy rules have long been used to contain tendencies toward fiscal profligacy (e.g. Fabrizio and Mody, 2006; and Debrun and others, 2008), it has been argued that many of the limitations and failures associated with numerical rules—most notably their inflexibility in the face of unusual circumstances—could be overcome by establishing nonpartisan agencies. Through independent analysis, assessments, and forecasts, such bodies could enhance policymakers’ incentives to deliver sustainable policies.
Despite a fairly active public debate, no full-fledged theory has either established the desirability of such institutions or derived first-order principles likely to secure their effectiveness. In a sense, this is hardly surprising, as one can only theorize about a welldefined object. In reality, the literature on independent fiscal agencies covers a wide array of specific (and sometimes outlandish) academic proposals as well as a number of existing institutions, including the Central Planning Bureau in the Netherlands, the High Council of Finance in Belgium, and the more recent Swedish Fiscal Policy Council and United Kingdom’s Office of Budget Responsibility. At best, existing papers propose a taxonomy (Debrun and others, 2009; Calmfors, 2010), but there currently is no consensus on the tasks these agencies should be assigned, what institutional form they should take, and on whether they should complement or instead substitute for a rules-based framework.
Expositions of the rationale for non-partisan agencies nevertheless share a common thread, the canonical illustration of which is Wyplosz (2005). First, there is a review of the many reasons why fiscal policy tends to systematically deviate from a socially optimal solution, with often an emphasis on common pool problems, short-termism, and time-inconsistency. Second, the author(s) lament(s) the ineffectiveness of fiscal policy rules. It is argued that the main problem with the latter is that the simplicity required for their smooth operation limits their appropriateness outside normal circumstances, undermining their credibility as soon as uncommon conditions prevail. For example, deficit ceilings fail to trigger discipline in good times—when compliance is more likely to result from automatic stabilizers rather than conscious actions—but bind in bad times, forcing undesirable procyclical contractions. Third, the author(s) call(s) on our sense of déjà vu to draw a parallel with the case for central bank independence, which is also based on the idea of an expansive bias affecting unconstrained discretionary policies, and on the manifest failure of rigid rules (e.g. caps on the growth of certain monetary aggregates) to address that bias.
The aim of this paper is to assess the theoretical framework anchoring the policy debate on politically independent fiscal agencies. After setting-up a basic model of fiscal policy (Section II), I show that the parallel with independent central banks is theoretically flawed because most models of fiscal bias cannot demonstrate why elected officials would want to establish such institutions in the first place (Section III). In addition, the idea of fiscal delegation is misleading because the very fear of delegating may motivate principled, yet baseless opposition from politicians. I then suggest—still using simple formal illustrations— that any full-fledged theory of fiscal agencies should (1) incorporate the intrinsically political nature of fiscal policy and the infeasibility of delegating policy instruments to unelected officials and (2) focus on characterizing mechanisms that encourage ex-post compliance with ex-ante commitments (“commitment technologies”) to fiscal discipline (Section IV). Some practical conclusions are drawn in Section V.
Concluding remarks:
The paper discussed from a theoretical perspective the role of independent fiscal agencies in enhancing fiscal discipline. The key point is that the effectiveness of such institutions depends on their capacity to deal with the root cause of deficit bias, including informational asymmetries between voters—the only legitimate principal in the policy game—and politicians. A number of practical implications emerge:You can order a print copy or ask us for a PDF copy.
1. The delegation of fiscal policy prerogatives to unelected officials is unworkable from a positive perspective, reinforcing the normative argument against fiscal delegation emanating from Alesina and Tabellini (2007). The model indeed illustrates that the very decision to delegate macro-relevant dimensions of fiscal policy—such as the level of the deficit, as suggested by Wyplosz (2005)—simply violates participation constraints of elected decisionmakers.
2. An independent fiscal agency is more likely to credibly enhance fiscal discipline if a broad mandate allows it to address the various manifestations of the deficit bias (from creative accounting to masking policy slippages or biasing revenue forecasts). This includes having the discretion to make normative assessments of the fiscal stance—albeit within the boundaries of elected politician’s own ex-ante commitments—in the light of cyclical conditions, public debt dynamics, and risks to public sector’s long-term solvency.
3. The agency’s effectiveness is likely to be greater if it receives specific instruments to trigger a public debate where elected officials would have to publicly explain slippages (with respect to ex-ante targets) deemed inappropriate by the agency. By becoming a reliable source on the overall quality of fiscal policy, the agency can help voters identify ex-post deviations related to “bad policies” (as opposed to “bad luck”) and hold policymakers accountable. This is a task that rules-based fiscal frameworks—bound to remain simple to be operational—cannot by themselves deliver. Indeed, mere deviations from preset benchmarks do not always signal policy mistakes.
4. As politicians may be reluctant to bear the short-term costs of deviations from ex-ante commitments, an effective fiscal agency ideally requires a degree of political independence enshrined in primary legislation (Constitutional or framework law) and guaranteed by ringfenced, multi-year budget appropriations or rules-based extra-budgetary financing (e.g. through a fixed transfer from the central bank) commensurate with the agency’s tasks.
Monday, July 25, 2011
Bill Gates: "We haven't chosen to get behind [vouchers] in a big way [...] because the negativity about them is very, very high"
Was the $5 Billion Worth It? By Jason Riley
A decade into his record-breaking education philanthropy, Bill Gates talks teachers, charters—and regrets.
WSJ, Jul 23, 2011
http://online.wsj.com/article/SB10001424053111903554904576461571362279948.html
Seattle
'It's hard to improve public education—that's clear. As Warren Buffett would say, if you're picking stocks, you wouldn't pick this one." Ten years into his record-breaking philanthropic push for school reform, Bill Gates is sober—and willing to admit some missteps.
"It's been about a decade of learning," says the Microsoft co-founder whose Bill and Melinda Gates Foundation is now the nation's richest charity. Its $34 billion in assets is more than the next three largest foundations (Ford, Getty and Robert Wood Johnson) combined, and in 2009 it handed out $3 billion, or $2 billion more than any other donor. Since 2000, the foundation has poured some $5 billion into education grants and scholarships.
Seated in his office at the new Gates Foundation headquarters located hard by the Emerald City's iconic Space Needle, Mr. Gates says that education isn't only a civil-rights issue but also "an equity issue and an economic issue. . . . It's so primary. In inner-city, low-income communities of color, there's such a high correlation in terms of educational quality and success."
One of the foundation's main initial interests was schools with fewer students. In 2004 it announced that it would spend $100 million to open 20 small high schools in San Diego, Denver, New York City and elsewhere. Such schools, says Mr. Gates, were designed to—and did—promote less acting up in the classroom, better attendance and closer interaction with adults.
"But the overall impact of the intervention, particularly the measure we care most about—whether you go to college—it didn't move the needle much," he says. "Maybe 10% more kids, but it wasn't dramatic. . . . We didn't see a path to having a big impact, so we did a mea culpa on that." Still, he adds, "we think small schools were a better deal for the kids who went to them."
The reality is that the Gates Foundation met the same resistance that other sizeable philanthropic efforts have encountered while trying to transform dysfunctional urban school systems run by powerful labor unions and a top-down government monopoly provider.
In the 1970s, the Ford, Carnegie and Rockefeller foundations, among others, pushed education "equity" lawsuits in California, New Jersey, Texas and elsewhere that led to enormous increases in state expenditures for low-income students. In 1993, the publishing mogul Walter Annenberg, hoping to "startle" educators and policy makers into action, gave a record $500 million to nine large city school systems. Such efforts made headlines but not much of a difference in closing the achievement gap.
View Full Image
Martin Kozlowski
.Asked to critique these endeavors, Mr. Gates demurs: "I applaud people for coming into this space, but unfortunately it hasn't led to significant improvements." He also warns against overestimating the potential power of philanthropy. "It's worth remembering that $600 billion a year is spent by various government entities on education, and all the philanthropy that's ever been spent on this space is not going to add up to $10 billion. So it's truly a rounding error."
This understanding of just how little influence seemingly large donations can have has led the foundation to rethink its focus in recent years. Instead of trying to buy systemic reform with school-level investments, a new goal is to leverage private money in a way that redirects how public education dollars are spent.
"I bring a bias to this," says Mr. Gates. "I believe in innovation and that the way you get innovation is you fund research and you learn the basic facts." Compared with R&D spending in the pharmaceutical or information-technology sectors, he says, next to nothing is spent on education research. "That's partly because of the problem of who would do it. Who thinks of it as their business? The 50 states don't think of it that way, and schools of education are not about research. So we come into this thinking that we should fund the research."
Of late, the foundation has been working on a personnel system that can reliably measure teacher effectiveness. Teachers have long been shown to influence students' education more than any other school factor, including class size and per-pupil spending. So the objective is to determine scientifically what a good instructor does.
"We all know that there are these exemplars who can take the toughest students, and they'll teach them two-and-a-half years of math in a single year," he says. "Well, I'm enough of a scientist to want to say, 'What is it about a great teacher? Is it their ability to calm down the classroom or to make the subject interesting? Do they give good problems and understand confusion? Are they good with kids who are behind? Are they good with kids who are ahead?'
"I watched the movies. I saw 'To Sir, With Love,'" he chuckles, recounting the 1967 classic in which Sidney Poitier plays an idealistic teacher who wins over students at a roughhouse London school. "But they didn't really explain what he was doing right. I can't create a personnel system where I say, 'Go watch this movie and be like him.'"
Instead, the Gates Foundation's five-year, $335-million project examines whether aspects of effective teaching—classroom management, clear objectives, diagnosing and correcting common student errors—can be systematically measured. The effort involves collecting and studying videos of more than 13,000 lessons taught by 3,000 elementary school teachers in seven urban school districts.
"We're taking these tapes and we're looking at how quickly a class gets focused on the subject, how engaged the kids are, who's wiggling their feet, who's looking away," says Mr. Gates. The researchers are also asking students what works in the classroom and trying to determine the usefulness of their feedback.
Mr. Gates hopes that the project earns buy-in from teachers, which he describes as key to long-term reform. "Our dream is that in the sample districts, a high percentage of the teachers determine that this made them better at their jobs." He's aware, though, that he'll have a tough sell with teachers unions, which give lip service to more-stringent teacher evaluations but prefer existing pay and promotion schemes based on seniority—even though they often end up matching the least experienced teachers with the most challenging students.
Teachers unions can be counted on "to stick up for the status quo," he says, but he believes they can be nudged in the right direction. "It's kind of scary for them because what we're saying is that some of these people shouldn't be teachers. So, does the club stand for sticking up for its least capable member or does it stand for excellence in education? We'll, it kind of stands for both."
Asked if the National Education Association and the American Federation of Teachers have any incentive to back school reforms that help kids but also diminish union power, Mr. Gates responds by questioning the scope of that power. "We have heavy union states and heavy right-to-work states, and the educational achievement of K-12 students is not at all predicted by how strong the union rules are," he says. "If I saw that [right-to-work states like] Texas and Florida were running a great K-12 system, but [heavy union states like] New York and Massachusetts have really messed this up, then I could draw a correlation and say it's either got to be the union—or the weather."
Mr. Gates's foundation strongly supports a uniform core curriculum for schools. "It's ludicrous to think that multiplication in Alabama and multiplication in New York are really different," he says. He also sees common standards as a money-saver at a time when many states are facing budget shortfalls. "In terms of mathematics textbooks, why can't you have the scale of a national market? Right now, we have a Texas textbook that's different from a California textbook that's different from a Massachusetts textbook. That's very expensive."
A national core curriculum, detractors say, could force states with superior standards, like Massachusetts, to dumb down their systems. And even if good common standards could be established, how would they improve going forward if our 50-state laboratory is no longer in operation?
Mr. Gates responds to that by saying there's no need to sacrifice excellence for equity. "Behind this core curriculum are some very deep insights. American textbooks were twice as thick as Asian textbooks. In American math classes, we teach a lot of concepts poorly over many years. In the Asian systems they teach you very few concepts very well over a few years." Nor does he see the need for competition among state standards. "This is like having a common electrical system. It just makes sense to me."
On the fraught issue of school choice, his foundation has been a strong advocate of charter schools, and Mr. Gates is particularly fond of the KIPP charter network and its focus on serving inner-city neighborhoods. "Whenever you get depressed about giving money in this area," he volunteers, "you can spend a day in a KIPP school and know that they are spending less money than the dropout factory down the road."
Mr. Gates is less enamored of school vouchers. "Some in the Walton family"—of Wal-Mart fame—"have been very big on vouchers," he begins. "And honestly, if we thought there would be broad acceptance in some locales and long-term commitment to do them, they have some very positive characteristics."
He praises the private school model for its efficiency vis-à-vis traditional public schools, noting that the "parochial school system, per dollar spent, is an excellent school system." But the politics, he says, are just too tough right now. "We haven't chosen to get behind [vouchers] in a big way, as we have with personnel systems or charters, because the negativity about them is very, very high."
It's a response that in some ways encapsulates the Gates Foundation's approach to education reform—more evolution, less disruption. It attempts to do as much good as possible without upsetting too many players. You can quibble with Mr. Gates about that strategy. You can second-guess him. You can even offer free advice. Or you can shake his hand, thank him for his time and remember that it's his money.
Mr. Riley is a member of the Journal's editorial board.
A decade into his record-breaking education philanthropy, Bill Gates talks teachers, charters—and regrets.
WSJ, Jul 23, 2011
http://online.wsj.com/article/SB10001424053111903554904576461571362279948.html
Seattle
'It's hard to improve public education—that's clear. As Warren Buffett would say, if you're picking stocks, you wouldn't pick this one." Ten years into his record-breaking philanthropic push for school reform, Bill Gates is sober—and willing to admit some missteps.
"It's been about a decade of learning," says the Microsoft co-founder whose Bill and Melinda Gates Foundation is now the nation's richest charity. Its $34 billion in assets is more than the next three largest foundations (Ford, Getty and Robert Wood Johnson) combined, and in 2009 it handed out $3 billion, or $2 billion more than any other donor. Since 2000, the foundation has poured some $5 billion into education grants and scholarships.
Seated in his office at the new Gates Foundation headquarters located hard by the Emerald City's iconic Space Needle, Mr. Gates says that education isn't only a civil-rights issue but also "an equity issue and an economic issue. . . . It's so primary. In inner-city, low-income communities of color, there's such a high correlation in terms of educational quality and success."
One of the foundation's main initial interests was schools with fewer students. In 2004 it announced that it would spend $100 million to open 20 small high schools in San Diego, Denver, New York City and elsewhere. Such schools, says Mr. Gates, were designed to—and did—promote less acting up in the classroom, better attendance and closer interaction with adults.
"But the overall impact of the intervention, particularly the measure we care most about—whether you go to college—it didn't move the needle much," he says. "Maybe 10% more kids, but it wasn't dramatic. . . . We didn't see a path to having a big impact, so we did a mea culpa on that." Still, he adds, "we think small schools were a better deal for the kids who went to them."
The reality is that the Gates Foundation met the same resistance that other sizeable philanthropic efforts have encountered while trying to transform dysfunctional urban school systems run by powerful labor unions and a top-down government monopoly provider.
In the 1970s, the Ford, Carnegie and Rockefeller foundations, among others, pushed education "equity" lawsuits in California, New Jersey, Texas and elsewhere that led to enormous increases in state expenditures for low-income students. In 1993, the publishing mogul Walter Annenberg, hoping to "startle" educators and policy makers into action, gave a record $500 million to nine large city school systems. Such efforts made headlines but not much of a difference in closing the achievement gap.
View Full Image
Martin Kozlowski
.Asked to critique these endeavors, Mr. Gates demurs: "I applaud people for coming into this space, but unfortunately it hasn't led to significant improvements." He also warns against overestimating the potential power of philanthropy. "It's worth remembering that $600 billion a year is spent by various government entities on education, and all the philanthropy that's ever been spent on this space is not going to add up to $10 billion. So it's truly a rounding error."
This understanding of just how little influence seemingly large donations can have has led the foundation to rethink its focus in recent years. Instead of trying to buy systemic reform with school-level investments, a new goal is to leverage private money in a way that redirects how public education dollars are spent.
"I bring a bias to this," says Mr. Gates. "I believe in innovation and that the way you get innovation is you fund research and you learn the basic facts." Compared with R&D spending in the pharmaceutical or information-technology sectors, he says, next to nothing is spent on education research. "That's partly because of the problem of who would do it. Who thinks of it as their business? The 50 states don't think of it that way, and schools of education are not about research. So we come into this thinking that we should fund the research."
Of late, the foundation has been working on a personnel system that can reliably measure teacher effectiveness. Teachers have long been shown to influence students' education more than any other school factor, including class size and per-pupil spending. So the objective is to determine scientifically what a good instructor does.
"We all know that there are these exemplars who can take the toughest students, and they'll teach them two-and-a-half years of math in a single year," he says. "Well, I'm enough of a scientist to want to say, 'What is it about a great teacher? Is it their ability to calm down the classroom or to make the subject interesting? Do they give good problems and understand confusion? Are they good with kids who are behind? Are they good with kids who are ahead?'
"I watched the movies. I saw 'To Sir, With Love,'" he chuckles, recounting the 1967 classic in which Sidney Poitier plays an idealistic teacher who wins over students at a roughhouse London school. "But they didn't really explain what he was doing right. I can't create a personnel system where I say, 'Go watch this movie and be like him.'"
Instead, the Gates Foundation's five-year, $335-million project examines whether aspects of effective teaching—classroom management, clear objectives, diagnosing and correcting common student errors—can be systematically measured. The effort involves collecting and studying videos of more than 13,000 lessons taught by 3,000 elementary school teachers in seven urban school districts.
"We're taking these tapes and we're looking at how quickly a class gets focused on the subject, how engaged the kids are, who's wiggling their feet, who's looking away," says Mr. Gates. The researchers are also asking students what works in the classroom and trying to determine the usefulness of their feedback.
Mr. Gates hopes that the project earns buy-in from teachers, which he describes as key to long-term reform. "Our dream is that in the sample districts, a high percentage of the teachers determine that this made them better at their jobs." He's aware, though, that he'll have a tough sell with teachers unions, which give lip service to more-stringent teacher evaluations but prefer existing pay and promotion schemes based on seniority—even though they often end up matching the least experienced teachers with the most challenging students.
Teachers unions can be counted on "to stick up for the status quo," he says, but he believes they can be nudged in the right direction. "It's kind of scary for them because what we're saying is that some of these people shouldn't be teachers. So, does the club stand for sticking up for its least capable member or does it stand for excellence in education? We'll, it kind of stands for both."
Asked if the National Education Association and the American Federation of Teachers have any incentive to back school reforms that help kids but also diminish union power, Mr. Gates responds by questioning the scope of that power. "We have heavy union states and heavy right-to-work states, and the educational achievement of K-12 students is not at all predicted by how strong the union rules are," he says. "If I saw that [right-to-work states like] Texas and Florida were running a great K-12 system, but [heavy union states like] New York and Massachusetts have really messed this up, then I could draw a correlation and say it's either got to be the union—or the weather."
Mr. Gates's foundation strongly supports a uniform core curriculum for schools. "It's ludicrous to think that multiplication in Alabama and multiplication in New York are really different," he says. He also sees common standards as a money-saver at a time when many states are facing budget shortfalls. "In terms of mathematics textbooks, why can't you have the scale of a national market? Right now, we have a Texas textbook that's different from a California textbook that's different from a Massachusetts textbook. That's very expensive."
A national core curriculum, detractors say, could force states with superior standards, like Massachusetts, to dumb down their systems. And even if good common standards could be established, how would they improve going forward if our 50-state laboratory is no longer in operation?
Mr. Gates responds to that by saying there's no need to sacrifice excellence for equity. "Behind this core curriculum are some very deep insights. American textbooks were twice as thick as Asian textbooks. In American math classes, we teach a lot of concepts poorly over many years. In the Asian systems they teach you very few concepts very well over a few years." Nor does he see the need for competition among state standards. "This is like having a common electrical system. It just makes sense to me."
On the fraught issue of school choice, his foundation has been a strong advocate of charter schools, and Mr. Gates is particularly fond of the KIPP charter network and its focus on serving inner-city neighborhoods. "Whenever you get depressed about giving money in this area," he volunteers, "you can spend a day in a KIPP school and know that they are spending less money than the dropout factory down the road."
Mr. Gates is less enamored of school vouchers. "Some in the Walton family"—of Wal-Mart fame—"have been very big on vouchers," he begins. "And honestly, if we thought there would be broad acceptance in some locales and long-term commitment to do them, they have some very positive characteristics."
He praises the private school model for its efficiency vis-à-vis traditional public schools, noting that the "parochial school system, per dollar spent, is an excellent school system." But the politics, he says, are just too tough right now. "We haven't chosen to get behind [vouchers] in a big way, as we have with personnel systems or charters, because the negativity about them is very, very high."
It's a response that in some ways encapsulates the Gates Foundation's approach to education reform—more evolution, less disruption. It attempts to do as much good as possible without upsetting too many players. You can quibble with Mr. Gates about that strategy. You can second-guess him. You can even offer free advice. Or you can shake his hand, thank him for his time and remember that it's his money.
Mr. Riley is a member of the Journal's editorial board.
Subscribe to:
Comments (Atom)
Posts
