How Costly is Noise? Data and Disparities in Consumer Credit

Link: https://arxiv.org/abs/2105.07554

Cite:


arXiv:2105.07554
 [econ.GN]

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Abstract:

We show that lenders face more uncertainty when assessing default risk of historically under-served groups in US credit markets and that this information disparity is a quantitatively important driver of inefficient and unequal credit market outcomes. We first document that widely used credit scores are statistically noisier indicators of default risk for historically under-served groups. This noise emerges primarily through the explanatory power of the underlying credit report data (e.g., thin credit files), not through issues with model fit (e.g., the inability to include protected class in the scoring model). Estimating a structural model of lending with heterogeneity in information, we quantify the gains from addressing these information disparities for the US mortgage market. We find that equalizing the precision of credit scores can reduce disparities in approval rates and in credit misallocation for disadvantaged groups by approximately half.

Author(s): Laura Blattner, Scott Nelson

Publication Date: 17 May 2021

Publication Site: arXiv

Bias isn’t the only problem with credit scores—and no, AI can’t help

Link: https://www.technologyreview.com/2021/06/17/1026519/racial-bias-noisy-data-credit-scores-mortgage-loans-fairness-machine-learning/

Excerpt:

But in the biggest ever study of real-world mortgage data, economists Laura Blattner at Stanford University and Scott Nelson at the University of Chicago show that differences in mortgage approval between minority and majority groups is not just down to bias, but to the fact that minority and low-income groups have less data in their credit histories.

This means that when this data is used to calculate a credit score and this credit score used to make a prediction on loan default, then that prediction will be less precise. It is this lack of precision that leads to inequality, not just bias.

…..

But Blattner and Nelson show that adjusting for bias had no effect. They found that a minority applicant’s score of 620 was indeed a poor proxy for her creditworthiness but that this was because the error could go both ways: a 620 might be 625, or it might be 615.

Author(s): Will Douglas Heaven

Publication Date: 17 June 2021

Publication Site: MIT Tech Review

The Opportunities and Dangers of Decentralizing Finance

Excerpt:

Decentralized Finance — or DeFi — has experienced explosive growth in the past year. But in order for DeFi to fulfill its promise as a disintermediated ecosystem that helps rather than harms, “now is the time to evaluate its benefits and dangers,” write Wharton legal studies and business ethics professor Kevin Werbach and David Gogel, a recent Wharton MBA graduate, in the article that follows. Werbach is author of the book The Blockchain and the New Architecture of Trust and leads Wharton’s Blockchain and Digital Asset Project. Werbach and Gogel recently collaborated with the World Economic Forum to create the Decentralized Finance (DeFi) Policy-Maker Toolkit,  providing guidance to regulators and blockchain watchers everywhere.

….

The market experienced explosive growth beginning in 2020. According to tracking service DeFi Pulse, the value of digital assets locked into DeFi services grew from less than $1 billion in 2019 to over $15 billion at the end of 2020, and over $80 billion in May 2021. Novel business models such as yield farming — in which holders of cryptocurrencies earn rewards for providing capital to various services — and aggregation to optimize trading across exchanges in real-time are springing up rapidly. Innovations such as flash loans, which are either repaid or automatically unwound during the course of a transaction, open up both new forms of liquidity and unfamiliar risks.

Author(s): Kevin Werbach

Publication Date: 16 June 2021

Publication Site: Knowledge @ Wharton

The Federal Reserve’s Ballooning—and Risky—Balance Sheet

Link: https://mises.org/power-market/federal-reserves-ballooning-and-risky-balance-sheet

Excerpt:

The Fed has embarked on a massive expansionary quest in recent years. In 2020, total Reserve Bank assets rose from $4.2 trillion to $7.4 trillion amidst the pandemic and related government lockdown and fiscal “stimulus” policies. That was roughly three times the extraordinary growth in the consolidated balance sheet for the Reserve Banks in the 2008-2009 financial crisis. And in the latest weekly “H.4.1” release, total assets were up to $7.8 trillion – rising about a hundred billions dollars a month so far this year. 

….

Today, short and long-term interest rates on government bonds rest near historic lows, important in part because the Fed massively expanded its purchases of government bonds. But low interest rates can’t be taken for granted, particularly if we get significantly higher inflationary expectations — which appear to have begun to sprout in recent weeks.  

If we get significantly higher interest rates for that reason, the Reserve Bank balance sheet impact from losses on securities assets would arrive if the losses become “realized” – a realistic prospect if the Federal Reserve  reverses course and starts selling off securities as a means of conducting monetary policy amidst higher inflationary expectations.

Author(s): Bill Bergman

Publication Date: 28 May 2021

Publication Site: Mises Institute

The Municipal Bond Cases Revisited

Link: http://blogs.harvard.edu/bankruptcyroundtable/2021/06/01/the-municipal-bond-cases-revisited/

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Excerpt:

The invocation of ultra vires to escape bond obligations is nothing new, though. In the second half of the nineteenth century, municipal debtors frequently welched on their debts. In the 1850s and 1860s, cities, towns, and counties across the Midwest and West issued bonds to finance the construction of railroads and other infrastructure. Many ultimately defaulted. Rather than simply announce that they couldn’t or wouldn’t pay, however, they often contended that they needn’t pay: for one or another reason, the relevant bonds had been issued ultra vires and so were no obligation of the municipality at all. Litigation in the federal courts was common. Several hundred repudiation disputes made their way to the Supreme Court in the forty years starting 1859.

With an eye to the modern cases, we set out to understand how the Court reckoned with repudiation. We read every one of the 196 cases in which the Justices opined on bond validity (i.e. the enforceability of a bond in the hands of innocent purchasers). In a recently published article, we correct received wisdom about the cases and remark on the logical structure of the Court’s reasoning.

To the extent the municipal bond cases are remembered, modern scholars usually think of them as exemplary instances of a political model of judging. The caricature has the Court siding with bondholders even when the law called on them to rule for the repudiating municipalities. The Justices—or a majority of them—are imagined as staunch political allies of the capitalist class, set against the institutions of state government and their regard for agricultural interests. We find that this picture is inconsistent with reality. In fact, the Court ruled for the repudiating municipality in a third of all the validity cases. As importantly, the Court’s decisions reflected a readily articulable formal logic, a logic the Justices seem, to our eyes, to have applied soundly.

Paper link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3699633

Citation: Buccola, Allison and Buccola, Vincent S.J., The Municipal Bond Cases Revisited (September 25, 2020). 94 American Bankruptcy Law Journal 591 (2020), Available at SSRN: https://ssrn.com/abstract=3699633

Abstract

Recent high-profile attempts to repudiate municipal bonds break from what had become a stable American norm of honoring public debt. In the nineteenth century, though, hundreds of cities, towns, and counties walked away from their bonds. The Supreme Court’s handling of repudiation in the so-called municipal bond cases conjured intense animus at the time. But the years as well as the archaic prose and sheer volume of the opinions have obscured the cases’ significance.

This article reconstructs the bond cases with an eye to modern disputes. It reports the results of our reading all 203 cases, decided 1859–1899, in which the Justices opined on bond validity. At a high level, our findings correct a stock narrative in the literature. The standard account paints the Court as a reliable champion of northeastern capitalists in what resembled regional or class politics more than law. That story does not withstand scrutiny, however. We find, for example, that the Court ruled for the repudiating municipality about a third of the time. Moreover, the decisions had a readily articulable logic at the heart of which lay a familiar law/fact distinction. Estoppel barred issuers in most instances from denying factual predicates of bond validity, but it did not prevent scrutiny of legal predicates. The Justices were willing to hold bonds void on even highly technical legal grounds.

Author(s): Allison Buccola (Independent) and Vince Buccola (Assistant Professor, The Wharton School)

Publication Date: 1 June 2021

Publication Site: Harvard Law School, Bankruptcy Roundtable

Return of the IRS Scandal

Link: https://www.wsj.com/amp/articles/return-of-the-irs-scandal-11623191964

Excerpt:

 Less than half a year into the Biden Presidency, the Internal Revenue Service is already at the center of an abuse-of-power scandal. That news broke Tuesday when ProPublica, a website whose journalism promotes progressive causes, published information from what it said are 15 years of the tax returns of Jeff Bezos, Warren Buffett and other rich Americans.

Leaking such information is a crime, since under federal law tax returns are confidential. ProPublica says it received the files from “an anonymous source” and doesn’t know who provided them, how they were obtained, or what the source’s motives are.

Allow us to fill in that last blank. The story arrives amid the Biden Administration’s effort to pass the largest tax increase as a share of the economy since 1968. The main Democratic argument for a tax hike is that the rich should pay their “fair share.” The ProPublica story is a long argument that somehow the rich don’t pay enough. The timing here is no coincidence, comrade.

….

This still leaves the real scandal, which is that someone leaked confidential IRS information about individuals to serve a political agenda. This is the same tax agency that pursued a vendetta against conservative nonprofit groups during the Obama Administration. Remember Lois Lerner?

This is also the same IRS that Democrats now want to infuse with $80 billion more to chase a fanciful amount of uncollected taxes. As part of this effort, Mr. Biden wants the IRS to collect “gross inflows and outflows on all business and personal accounts from financial institutions.” Why? So the information can be leaked to ProPublica?

Author(s): Editorial board of WSJ

Publication Date: 8 June 2021

Publication Site: Wall Street Journal

Schoolyard Justice in Federal Court

Link: https://www.wsj.com/articles/schoolyard-justice-in-federal-court-11623171249

Excerpt:

 The bank administered a loan of some $1 billion, sending payments from Revlon to the lenders. Citibank mistakenly sent a wire transfer of the entire principal amount due when it only intended a single installment.

Under established law, the money that Citibank wired should be repaid because it was sent by mistake. But U.S. District Judge Jesse Furman upset settled law and allowed lenders to keep the money on the ground that the recipients did not have notice that the funds had been sent erroneously. If that became the rule, it would upset the important relationships among lenders, borrowers and trusted intermediaries.

….

Mistakes like this occur with surprising frequency. In 2017, the German bank KfW mistakenly transferred $5.4 billion to lenders. In China, the bank Rural Commercial Bank in Changsha thought that a customer’s 10-digit account number was actually the amount of money to be transferred, and mistakenly sent 1.2 billion yuan (around $190 million) to the customer. Deutsche Bank recently sent $6 billion to a U.S.-based hedge fund in error. In all these cases, the banks recovered the errant funds transfers almost immediately.

Author(s): Jonathan Macey

Publication Date: 8 June 2021

Publication Site: Wall Street Journal

The Secret IRS Files: Trove of Never-Before-Seen Records Reveal How the Wealthiest Avoid Income Tax

Link: https://www.propublica.org/article/the-secret-irs-files-trove-of-never-before-seen-records-reveal-how-the-wealthiest-avoid-income-tax

Methodology: https://www.propublica.org/article/how-we-calculated-the-true-tax-rates-of-the-wealthiest

On legality etc: https://www.propublica.org/article/why-we-are-publishing-the-tax-secrets-of-the-001

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Excerpt:

ProPublica has obtained a vast cache of IRS information showing how billionaires like Jeff Bezos, Elon Musk and Warren Buffett pay little in income tax compared to their massive wealth — sometimes, even nothing.

….

In 2011, a year in which his wealth held roughly steady at $18 billion, Bezos filed a tax return reporting he lost money — his income that year was more than offset by investment losses. What’s more, because, according to the tax law, he made so little, he even claimed and received a $4,000 tax credit for his children.

His tax avoidance is even more striking if you examine 2006 to 2018, a period for which ProPublica has complete data. Bezos’ wealth increased by $127 billion, according to Forbes, but he reported a total of $6.5 billion in income. The $1.4 billion he paid in personal federal taxes is a massive number — yet it amounts to a 1.1% true tax rate on the rise in his fortune.

Author(s): Jesse Eisinger, Jeff Ernsthausen, Paul Kiel

Publication Date: 8 June 2021

Publication Site: ProPublica

U.S. Seizes Share of Ransom From Hackers in Colonial Pipeline Attack

Link: https://www.nytimes.com/2021/06/07/us/politics/pipeline-attack.html

Excerpt:

The Justice Department said on Monday that it had seized much of the ransom that a major U.S. pipeline operator had paid last month to a Russian hacking collective, turning the tables on the hackers by reaching into a digital wallet to snatch back millions of dollars in cryptocurrency.

Investigators in recent weeks traced 75 Bitcoins worth more than $4 million that Colonial Pipeline had paid to the hackers as the attack shut down its computer systems, prompting fuel shortages, a spike in gasoline prices and chaos at airlines.

Federal investigators tracked the ransom as it moved through a maze of at least 23 different electronic accounts belonging to DarkSide, the hacking group, before landing in one that a federal judge allowed them to break into, according to law enforcement officials and court documents.

The Justice Department said it seized 63.7 Bitcoins, valued at about $2.3 million. (The value of a Bitcoin has dropped over the past month.)

Author(s): Katie Benner, Nicole Perlroth

Publication Date: 7 June 2021

Publication Site: New York Times

Reforming Health Insurance: Competition Across State Lines

Link: https://www.manhattan-institute.org/reforming-health-insurance-across-states?utm_source=mailchimp&utm_medium=email

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Excerpt:

State governments often operate with limited administrative and technical resources and are highly vulnerable to lobbying by interest groups. Medical providers—physicians and hospitals—are well represented in state capitols, and they frequently push legislatures to mandate that insurers pay for services that they provide, as a way to increase the sales (and prices) of these services.

The typical state had fewer than one benefit mandate in 1970; by 2017, the average was 37. James Bailey of Temple University has estimated that each benefit mandate enacted by states tends to increase health-insurance premiums by 0.4%–1.1% and that new mandates were responsible for 9%–23% of premium increases during 1996–2011. Benefit mandates may have added value to insurance coverage by preventing insurers from leaving gaps in coverage, in order to deter sicker individuals from enrolling.[9] Still, in a study of the period 1989–94, Frank Sloan and Christopher Conover of Duke University estimated that 20%–25% of Americans without health insurance were deterred from purchasing coverage because of the added costs resulting from benefit mandates.[10]

Lobbyists for hospitals and physicians have similarly pushed states to enact laws that increase their pricing power, by making it hard for insurers to exclude them from networks of covered providers. When HMOs began to squeeze hospital costs in the late 1990s, more than 1,000 bills were introduced in state legislatures. Most states enacted laws requiring insurers to reimburse “any willing provider” for treatment according to their standard payment arrangements. A study by Maxim Pinkovskiy of the Federal Reserve Bank of New York found that anti-HMO state laws drove up the incomes of medical providers, increased service use, slowed reduction in hospital lengths of stay, and caused U.S. health-care spending to increase by 2% of GDP—accounting for much of the growth in health-insurance costs in the early 2000s.[11]

Author(s): Chris Pope

Publication Date: 8 June 2021

Publication Site: Manhattan Institute

The Federal Insurance Office: Looking Back, Looking Forward

Link: https://www.rstreet.org/2021/05/19/the-federal-insurance-office-looking-back-looking-forward/

Full pdf: https://www.rstreet.org/wp-content/uploads/2021/05/Final-No-231-FIO.pdf

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Excerpt:

1) The FIO was created in the wake of the financial crisis, as part of the Dodd-Frank Act. It has since been active on two fronts: as a source of information about the insurance industry for the U.S. Department of the Treasury and other branches of government, and as a representative of the insurance industry in international negotiations.

2) The FIO has had a challenging first decade. Since its launch, insurers have been concerned that the introduction of a new federal body, like all bureaucracies, is the camel’s nose in the tent, which would eventually lead to attempted expansion of its scope. Today, even though many have come to accept the FIO—provided it does not attempt to exceed its authority—there are still efforts to abolish it.

3) In the past, government restrictions of the free market with involvement in insurance have proven inefficient and anticompetitive. Should the FIO advance legislative attempts to address “affordability and accessibility” of insurance, it will likely contribute to the disruption of an efficient private market closely regulated at the state level.

Author(s): Jerry Theodorou

Publication Date: 19 May 2021

Publication Site: R Street Institute

CalPERS Desperate Response to Suit Over Illegal Secret Board Discussions and Other Abuses Seeks to Drag Case Out as Long As Possible

Excerpt:

Jelincic is challenging CalPERS’ dubious denials of two different Public Records Act requests he made. One focuses on impermissible secret board discussions shortly after Chief Investment Officer Ben Meng’s sudden resignation last August. The filing not only calls for these records to be made public but also demands that board members be released to discuss all the matters that CalPERS impermissibly covered in the August “closed session”. The second involves CalPERS’ continuing efforts to hide records showing how it overvalued real estate investments by $583 million. Yet CalPERS not only has said nary a peep about bogus valuations are larger than the total amount it was slotted to invest in a mothballed solo development project, 301 Capitol Mall, but it continues to publish balance sheets that include the inflated results.

We predicted that CalPERS would be be even more inclined than usual to fight these Public Records Act requests because the filing seeks remedies beyond release of the records. First, it requests that CalPERS be found to have violated the Bagley-Keene Open Meeting Act. Second, to the extent that the judge rules that the board discussed items in closed session that should have been agendized for and deliberated in open session, the suit asks that board members be permitted to disclose the contents of those particular discussions in public. Third, the filing calls on the court to require that CalPERS make video and audio recordings of all closed sessions and keep them for five years (this is something that CalPERS currently does but this obligation is meant to shut the door to “the dog ate my disk” pretenses down the road.)

Author(s): Yves Smith

Publication Date: 3 June 2021

Publication Site: naked capitalism