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Sunday, January 4, 2009

How the same practices that led to the economic crisis are being implemented in our schools

Today’s New York Times has two articles relevant to the education policy debate in NYC – but they aren’t about schools. Instead, they deal with the sudden collapse of the financial system and its causes.

Joe Nocera has a riveting analysis in the Magazine section called
Risk Mismanagement --about how Wall St. financiers failed to see the crash coming, because of their over-reliance on a single mathematical formula called VaR (for Value at Risk), that was supposed to accurately quantify the risk of financial losses:. “VaR’s great appeal is that it expresses risk as a single number, a dollar figure, no less.”

But the formula, in all its simplicity, was severely flawed, and investors placed undue confidence in it. As a result, they failed to respond in time to the catastrophe that was upon them. Aside from being overly simplistic, the formula was based upon only a few years worth of data – which in a bubble, are unable to predict possible future declines.

… because it is a very short-term measure, [VaR] assumes that tomorrow will be more or less like today. Even what’s called “historical VaR” — a variation of standard VaR that measures potential portfolio risk a year or two out, only uses the previous few years as its benchmark. As the risk consultant Marc Groz puts it, “The years 2005-2006,” which were the culmination of the housing bubble, “aren’t a very good universe for predicting what happened in 2007-2008.”

According to the article, another major flaw is that VaR was relatively easy to manipulate:

VaR could be gamed. That is what happened when banks began reporting their VaRs. To motivate managers, the banks began to compensate them not just for making big profits but also for making profits with low risks. That sounds good in principle, but managers began to manipulate the VaR by loading up on … “asymmetric risk positions.” These are products or contracts that, in general, generate small gains and very rarely have losses. But when they do have losses, they are huge.

Ironically, it turns out that one of the best ways to minimize risk, at least in the way the formula was written, was to load up on credit-default swaps; And we know how that turned out.

In an op-ed entitled
The End of the Financial World as We know it, Michael Lewis and David Einhorn discuss other reasons for the crash. They cite a litany of problems, including deregulation, in which the SEC essentially ceded all controls concerning the amount of leveraging and/or debt that companies could accumulate. These companies also focused almost exclusively solely on short-term gains, at the expense of a more rational long-term investment strategy, based on how their employees were rewarded.

Lewis and Einhorn are particularly good at explaining the many “wacky incentives” that led to poor decision-making– the faulty compensation structures that led to the bubble, and the way in which the ratings agencies like Moody’s and Standard and Poor’s were led to give high marks to corporations that were hugely overleveraged like MBIA –though it had “only $7.2 billion in equity against an astounding $26.2 billion in debt.” Why?

These oligopolies, which are actually sanctioned by the S.E.C., didn’t merely do their jobs badly. They didn’t simply miss a few calls here and there. In pursuit of their own short-term earnings, they did exactly the opposite of what they were meant to do: rather than expose financial risk they systematically disguised it.

In short, Moody’s and Standard and Poor’s gave triple-A ratings to companies that are now regarded as nearly worthless, because their own financial success was dependent upon the very companies whose instruments they were supposed to objectively assess. As Lewis and Einhorn point out, this was true of the SEC as well.

… the S.E.C. itself is plagued by similarly wacky incentives. .. anything the S.E.C. does to roil the markets, or reduce the share price of any given company, also roils the careers of the people who run the S.E.C. Thus it seldom penalizes serious corporate and management malfeasance — out of some misguided notion that to do so would cause stock prices to fall, shareholders to suffer and confidence to be undermined. Preserving confidence, even when that confidence is false, has been near the top of the S.E.C.’s agenda.

So what does this have to do with the NYC public schools?

All these same elements are central to the policies being pursued by the DOE:

• A system of deregulation, with principals let loose (or as the DOE likes to put it, “empowered”), to spend money and run schools as they like, with very little supervision or support, as long as they achieve continual gains in test scores.

• A “wacky” incentive system that provides merit pay to principals, teachers and students, all based on one-year gains in standardized test scores.

• An overly simplistic and inherently unreliable formula devised to give letter grades to schools -- again, based predominantly on the one year’s gains or losses in scores. DOE has vehemently refused to develop a more complex and accurate assessment that would be based on more than one year’s data, and/or would include more measures of a quality education, like class size and/or the level of arts education being provided.

• Like the manipulation of VaR by investment bankers, more and more “gaming” of the system has occurred, as our public schools become increasingly focused on driving up test scores to the exclusion of all else – through an overwhelming amount of test prep, resorting to more cheating, and/or excluding or discharging low-achieving students – all of which practices have been ignored or denied by DOE.

• Just as the SEC mistakenly believed that its primary goal was to bolster stockholder confidence in the financial system by ignoring negative consequences of current practices, the DOE acts as though it is its mission to spin the data to make it appear that its own flawed policies and objectives have been uniformly successful.

Thus, Tweed educrats and their PR machine continually ignore, minimize, or misstate all evidence of the contrary – including flat NAEP scores, rising class sizes, worsening overcrowding in many schools, increasing discharge rates – and even violations of the law.

It is ironic that just as our society has lost confidence in the flawed ideology and practices that led to the current financial catastrophe, including the notion that deregulation and unleashed competition would lead to all boats rising, and that simplistic formulas could be devised that would minimize any risks to investors and the economy as a whole, the political establishment seems to be intent on implementing eerily similar policies in our schools.

What will the inevitable crash look like in this case? Will we even be able to witness its full dimensions? Or will the cost in terms of students’ lives go unreported?
Please post your predictions in the comments area.


Pissed Off said...

We will be graduating a whole class of students that can not function in the real world. They will lack skills needed to succeed in college and in the job market. No one will be qualified to do anything more than sweep floors or flip burgers.

Only the graduates of elite private schools will be equipped to carry on.

Jennifer said...

We, as teachers, are constantly being told and advised by the clueless "empowerment" administrators that the business models can be applied successfully to schools and students.One problem- now that so many of these businesses have failed outright for the reasons enumerated in this article, by WHAT reasoning could any politician or administrator continue to believe that business models are the way to go when it comes to educating our children in the cities?Geez, and these rocket scientists are the ones in charge?  Or, perhaps as Pissed Off said, maybe this is the way the powers that be want it? A nation of illiterates, and minimum wage slaves.....

Michael Fiorillo said...

This is an important post that deserves wide distribution.

I'd just like to add that not only are there parallels between the follies of modern finance and corporate education reform, but substantial overlap, as well. Not only are the policies similar in their self-interest and self-delusion, but the players are, as well.

After all, Wall St. is deeply involved in the policy-making, funding and managing of the attack against public education, with urban schools as the initial beachhead. Investment bank, hedge fund and private equity players are everywhere in the landscape of corporate ed reform.

Teach For America has had a deeply symbiotic relationship with the investment banks, and the COO of Green Dot schools in NYC is the principal of Leeds Capital, a private equity firm that owns, among others, contingent labor/employment companies and proprietary, for-profit schools.

It is the intention of these people to transform as much of urban public education as possible into private franchises.

After all, who do you thinks hopes to get fees from floating the Initial Public Offerings of KIPP Academies, Green Dot Schools, et. al.?

You deserve thanks for discussing what should be a scandal, but is sadly just business as usual.

Michael Fiorillo,
Public school parent and UFT Chapter Leader

LeeDawg0 said...

As a Bronx high school science teacher, I am opposed to teacher incentives based on test scores. For one, the test scores are inflate to begin with and demonstrate little competence in the subject matter they evaluate.

When students are shuffled from grade to grade because it makes them feel better about themselves it cripples their potential in the real world. I have students in chemistry classes who can't evaluate exponents. I have "10th grade" biology students who read on the 6th grade level.

Granted science is not a very practical subject area. A surprising number of Americans probably wouldn't be able to pass a standardized high school biology exam. But it says something when students ask questions in class that struggle to demonstrate even minimal conceptual grasp of content. "Women carry babies in their stomach, right?" "The sun has to be a living organism." "10 pounds of feathers can't weigh the same as 10 pounds of lead because lead is always heavier!" And thousands more of statements and questions of similar ridiculousness...

Being that we live in a results based culture, it's ironic that we would rather look at test scores that somehow tell us our kids are learning but when you pull one aside and ask them a few simple/basic questions, they're totally clueless (they fish for answers and guess like it's their job - doesn't inspire much confidence).

It's only my second year teaching and I feel like education is an illusion. And people wonder why there's a ridiculous demand for math and science teachers in NYC. I now know why (few are crazy enough to stay in a beyond-flawed system), and I am contemplating leaving since I fail to see the impact I have in continuing this magic act to hide that our kids are failing.

"It is far better to grasp the universe as it really is than to persist in delusion, however satisfying and reassuring."
-Carl Sagan

Fred Smith said...


We don't need to make a prediction, because the over-reliance on test scores and misreporting of results have been going on for decades in NYC. There is historical evidence to build upon that politicians and administrators have made a living by misusing the annual testing program to promote themselves.

The outcome of this practice is that we have under-educated and mis-educated generations of children and conditioned them to respond in a bubble sheet way.

It's worse now with NCLB: the need to demonstrate adequate yearly progress; the pressure on the states to continuously improve; the test publishers working in concert with education departments to set the "standard"; tying higher test scores to financial rrewards for principals and teachers; teacher union leaders' doubletalk about the danger of such practices as they go along with the program and share credit for the spurious gains; holding children back on the basis of test scores; turning classrooms and lessons into ceaseless robotic test drill periods; killing children's creativity, joy in learning and love of books; blunting their minds to accept a lifetime of superficiality, obedience to instructions and easy distraction. All of this in the Orwellian name of standards and accountability.

The end game may well be the privatization of education, leaving this country with an ever-expanding gap between haves and have-nots to be controlled by a privileged elite. If this doomsday scenario comes to pass--its original blueprint was drawn many years ago. And, just as has proven true in the current financial crisis, there will be no bail out for the little guy--in this case, the children.

Pogue said...

Wonderfully written post. All on point. Mr. Fiorillo is right, this needs wider distribution. Really good, Ms. Haimson.

Anonymous said...

Ideologues, all, despite the Sagan quote. Cut to the chase - what works for kids?

NYC Educator said...

What works for the kids?

Good, experienced teachers, reasonable class size, and decent facilities--the same things the chancellor and the mayor demand for their own kids--and the same things suburban kids get as a matter of course.

inexile said...

What works for kids? Smaller class size. As LeeDawgO said, many of our students lack basic skills. The real shame is year after year I see students who conceptually are very bright. They are extremely smart and good thinkers. The gap between these conceptual skills and basic skills is wide. It frustrates them to no end and it's sad that such bright and articulate kids cannot write a sentence. We need smaller classes to help close the gap between what kids can think and say and what they can read and write.