Megan McArdle

Guest post by Dr. Manhattan, a lawyer in New York City who represents, among others, clients in the investment management industry.

Paul Krugman argues in his current column that "Wall Streeters" are nothing but a bunch of spoiled brats throwing temper tantrums (who have contributed nothing of value to the economy, to boot). Krugman's view echoes those of other commentators such as Alec MacGillis' epic March cover story in the New Republic about how the hedge fund community loved Obama in 2008 and has since turned on him. However, MacGillis' story points to at least one very rational reason why the hedge fund and private equity communities have turned on Obama, which is at odds with the "spoiled brats" narrative.

Specifically, everyone knows how the Obama administration wants to tax "carried interest" received by general partners of hedge and private equity funds as ordinary income rather than as capital gains. On the one hand, that's a clear attack on the economic interests of the people running those funds (and making big donations with the proceeds); on the other, there's a clear argument that the carried interest should in fact be treated as compensation for services rather than capital gains. However, the Obama administration's proposals in fact went much further, as MacGillis summarizes:

The fault line that emerged was over the treatment of carried interest, the "hedge fund loophole," which allowed partners in investment firms to have their compensation--typically, a 20 percent cut of profits--taxed at the 15 percent capital gains rate instead of the 35 percent top rate for ordinary income.

Despite its name, the loophole benefited private-equity partners more than most hedge fund managers, who often trade on too short-term a basis to qualify for it. But hedge funds and private-equity firms alike bucked as it became clear that Congress was intent on closing the loophole in such a way that would hit all of them in a place that hurt: their profits, should they decide to sell stakes in their firm. Tax reformers had worried that, if the loophole was closed, managers would respond by selling shares in their firms to a third party. The money they gained from the sale--essentially, up-front payment for the firm's expected cut of investment gains--would be taxed at a lower rate as capital gains. In order to prevent one loophole being replaced by another, the emerging legislation would tax part of the sale of a stake in a firm at the much higher rate for ordinary income.

To many fund managers, this approach, which they dubbed the "enterprise value tax," was pure expropriation: They had built their firms from scratch and felt they deserved to have any sale taxed as capital gains. In his letter in 2010, Loeb declared the proposal an "arguably unconstitutional Bill of Attainder." The lobbyist who has represented hedge funds says: "The biggest thing that's infuriating to the hedge fund industry--the single biggest thing--is this enterprise-value tax. They feel they've been singled out. ... [It] is what they're metaphysically upset about. (Emphasis added.)

Hedge and private equity fund managers may be every bit the spoiled brats that MacGillis and Krugman say they are, but sometimes even spoiled brats are treated unfairly. The proposed "enterprise value tax" would in fact go far beyond putting carried interest on par with ordinary income; it would single out the sale of one kind of business for tax treatment not applicable to (as far as I know) any other kind of business at all. (I would like to know if there are other examples of business sales not being eligible for capital gains treatment.)

And how in the world is realizing capital gains by selling a portion of one's business a "loophole?" The proposed tax isn't aimed at some types of sale transactions which could be argued don't actually transfer the business interest; it would apply to any sale of any amount of a business which advises such funds (see page 139 of the proposed American Jobs Act).  Is selling stock after holding it for 1 year rather than 364 days a "loophole" because the sale then qualifies for long-term capital gain treatment?) If selling some or all of a business is a "loophole," then the term "loophole" has no meaning other than "something which enables people I don't like to reduce their taxes."

Substantively, this is no different than, say, if revulsion at Mark Zuckerberg inspired a proposed tax code change to render the sale of shares in technology company IPOs ineligible for capital gain treatment. I'd respectfully suggest that if such a change was ever mooted, the reaction from Silicon Valley and their fans would make the billionaire egotists excoriated by Krugman and MacGillis' piece seem like Buddhists by comparison.  Sometimes even paranoids have real enemies, and it's not surprising that they'd oppose people who have targeted them in such unique fashion. Even if they really are a bunch of spoiled brats.

Guest post by Dr. Manhattan, a lawyer in New York City who represents, among others, clients in the investment management industry.

The holy grail of regulation, in my opinion, is to harness the power of private sector competition to provide, and constantly improve on, the regulation's goals.

Can this be done for financial regulation? Hell yes. My own field of investment adviser regulation is ideal for this approach, if only the SEC would dare (they won't, for reasons listed below). Specifically, the SEC should approach investment adviser regulation - and I think other types of financial regulation - like NYC's restaurant inspections, including grades. Yes, really.  Specifically, regulated entities should be graded on specified relevant criteria, and their report cards should be publicly available (together with the regulator's comments, scrubbed for confidential information). And to make things even better, the regulated entities can be graded on a curve: wouldn't it be great if banks had to compete for one of the few "A"s available?

I can say that for investment adviser regulation, this approach would be multiple times better than the current regime, where: (a) the SEC spends so much time on paperwork and compliance with policies and procedures that they have trouble noticing major violations that the policies and procedures are designed to guard against (like, say, running the biggest Ponzi scheme in history); (b) every regulated entity gets a letter noting deficiencies (that's not a real exaggeration - well over 90% of advisers have deficiencies upon inspection), but those letters are not publicly available - so an investor has no way of knowing whether an adviser got nailed for peccadillos or just-short-of-enforcement violations; and (c) the regulators "get tough" by, in the infamous words of Hank Greenberg of AIG, turning foot faults into murder charges. A good grading system would force regulators to focus on the important stuff - like whether an adviser is stealing from its clients - and would provide more information to the public. As another side benefit, a grading system might force the regulators to update obsolete regulations more frequently (of which, at least on the investment adviser side, there are MANY).  I would have a lot of fun designing the grading system for investment advisers.

A similar format could at least improve on other financial regulatory regimes. (And to be clear, none of this would or should interfere with the regulators' ability to inspect for or take action against fraud or other violations.) At the very least, regulators should be thinking of ways to harness private-sector competition to further their goals rather than thinking of regulation solely as something forcibly hoisted on an unwilling audience who will invariably focus on circumvention, like sullen teenagers and a newly-applied curfew.  For investment advisers, the SEC will never contemplate anything like this, not least because the political blowback will be catastrophic the next time they give a passing grade to the next Bernie Madoff.  But it'd still be a good idea.

Guest post by Laura McKenna, former political science professor, blogger, and freelance writer. 

If anyone could be described as the poster child for public colleges, it would have to be me.

I'm a graduate of SUNY-Binghamton and CUNY-Graduate Center. My brother has a BA from the University of Virginia. My sister attended SUNY-Binghamton. My husband has degrees from Miami University, Cleveland State University, and CUNY-Graduate Center. His father also attended Miami University.  My husband and I collectively taught at four different public colleges. 

My parents were the first in their families to attend college and both attended public universities. My dad, the third generation to work in Chicago's steel mills, started at the University of Illinois at Navy Pier, which transformed him from a C student to an A student. Two years later, he earned a full scholarship to the University of Chicago. He later became a professor and taught at City College of New York for 35 years. 

Over her Italian father's protests, my mother went to Hunter College back when it was a woman's college. She worked two jobs to pay her tuition. 

The affordable tuition and excellent education at these state schools were critical for the success of my family, as well as millions of working class and middle class Americans. 

So, what's the state of state colleges today? Are public colleges still taking care of their core constituency? 

Last week's New York Times article on student loan debt showed that students from state colleges had lower debt burdens than private college students. Tuition was half the price of private schools. (Please play with the Times' interactive graph.) That's good news. 

The Times also reports that all public colleges have been getting more selective, as students are priced out of private schools.

Across the country, the most selective public colleges have been growing more so for decades, with many of them seeing a notable shift in the past few years. The share of entering freshmen who were in the top 10 percent of their high school classes rose to 73 percent last fall from 69 percent in 2007 at the University of Texas at Austin, to 57 percent from 49 percent at Binghamton University and to 80 percent from 76 percent at the University of North Carolina at Chapel Hill, to name a few.

So, smart students are deciding to forgo expensive private school tuition and limiting their student loan burden. That's good news, too. 

The bad news is that a growing number of faculty at state or public colleges are adjunct instructors. Adjuncts are temporary faculty members who teach classes for low pay, no benefits. They do not have the protections of tenure. They are often not unionized. 1 million of the 1.5 million people teaching in American colleges are adjuncts. The number of adjunct faculty has increased dramatically over time. LinkedIn reports that it is the fastest growing job description. 

Doing some back of the envelope computations using data from the Chronicle of Higher Education, I found some depressing news about my alma mater and other public colleges. At SUNY Binghamton, of the 812 faculty, 383 are adjuncts. That's 47 percent of their total faculty.  At Penn State, of their 3,187 full time faculty, 1,428 are not tenured or on tenure track positions. In other words, 49 percent of their faculty do not have job security, equal pay, or benefits. If you attend University of Tennessee at Knoxville, you are highly likely to be taught by a graduate assistant. Of, their 4,235 teachers, only 1,295 are tenured or tenure-track professor. 2,062 of their teachers are graduate assistants. 

In a report released last year, 56 percent of all classes at community colleges in Pennsylvania were taught by adjunct or non-tenure track professors. They receive $2,500 per class. If the adjuncts taught a staggering five classes per semester, their salary would be $25,000 per year. They often receive no benefits. 

All these adjuncts are bad news for undergraduates at the public colleges. Many adjuncts are excellent teachers, but their temporary status and their exclusion from faculty meetings means that students can't rely on them for advice on course selection. It's difficult to develop relationships with faculty that may not have their own offices or might teach at multiple schools. It's also hard to be an excellent professor when you're poor and your career is unstable. 

State colleges have been forced to rely on non-tenure track faculty for several reasons. One factor has been the economic downturn, which has caused states to cutback on their support of higher education. State appropriations for colleges fell by 7.6 percent in 2011-12, the largest annual decline in at least five decades. With a decrease in revenue, an obvious way to save money is to hire cheap labor. At $2,500 per class, adjuncts are a bargain. 

Colleges have also been forced to rely on adjuncts as they push their tenured faculty to concentrate on research and graduate education. 

With tuition at private colleges in the $40,000 range, we're highly likely to be a third generation public school family. In a few years, I will be taking my son to tour Penn State and SUNY-Binghamton. I hope that in that time, I will see a reverse of some of these "bad news" trends. I hope that tenured faculty will return to the undergraduate classrooms and that all faculty members will be rewarded for excellence in the classroom.  

Guest post by Jonathan H. Adler, a professor at the Case Western Reserve University School of Law and regular contributor to the Volokh Conspiracy.

Fisheries continue to be among the best examples of the tragedy of the commons in action. As Garrett Hardin himself noted in his 1968 essay, "the oceans of the world continue to suffer" from the dynamic of the commons. Alas, little has changed. Ocean fisheries remain in trouble, as study after study reveals. Most fisheries around the globe are fully or over-exploited, and a substantial number have already faced collapse. The problem with fisheries management runs deep. 

It would be nice to think this is a problem confined to poor or developing countries, but it's not. Dozens of fish stocks in the United States remain overfished, despite herculean efforts to impose meaningful fishery regulations, from total catch limits to restrictions on fishing gear other inputs. Such measures try to limit access, but they do not alter the fundamental incentives of the commons. Each participant in the fishery retains every incentive to get what he or she can, even at the expense of the whole. In many fisheries, we see this manifested in a destructive and wasteful "race to catch," as each boat tries to get what it can before the fishery reaches its catch limit and closes. The resulting practices may make for good reality television, but they don't foster sound ecological stewardship. Traditional regulatory strategies do little to encourage concern among resource users for the long-term health of the resource and pit resource users against conservation interests. 

It does not have to be this way. Even before Hardin wrote his essay fishery economists had diagnosed the problem and explained how property rights in fisheries could solve the problem. Specifically by recognizing property rights in a percentage of the catch for a given species (or, in some cases, by recognizing rights in fishing territories), the "race to catch" could be eliminated and fishing crews could be given an incentive to husband the resource. The creation of property rights in the underlying resource aligns the incentives of those who work in the fishery with the health of the fishery. As owners of a share in the catch year-after-year, the fishers have a stake in ensuring there are more fish tomorrow than there are today. 

The benefits of such a system are not merely theoretical. They have now been confirmed through extensive empirical research. A recent study in Science that looked at over 11,000 fisheries over a fifty year period found clear evidence that the adoption of property-based management regimes, often called "catch shares" or ITQs, prevents fishery collapse. (More here.) This is only the latest piece of evidence supporting the use of property institutions for fishery conservation. As Hardin predicted, the institution of property rights averts the tragedy of the commons. 

There are many reasons for this. The creation of property rights in an ecological resource not only creates incentives for greater resource stewardship, to conserve the underlying value of the resource today and into the future. It also gives those who rely upon the resource a stake in the broader set of institutions that govern the resource. 

Under traditional fishery management, those who fish and those who regulate are typically at odds. Fishermen lobby for less restrictive catch limits so they may catch more today, out of fear the fishery may be more constrained tomorrow. Interestingly enough, the creation of property rights in the fishery catch encourages fishermen to take the opposite tack. More precautionary catch limits actually enhance the value of their catch shares, so they seek more protective policies. In some cases, as has been observed in New Zealand, fishery share owners themselves effectively take over the management of the stock, enforcing catch shares and limits, policing restrictions on by-catch, and funding the research necessary to ensure the fishery maintains its maximum sustainable yield over time. 

The move toward property rights appears to have had positive social benefits as well. Consider the experience of the popular reality show "The Deadliest Catch," which chronicles the efforts of several boats in the Alaskan King Crab fishery in the Bering Sea. The title for the show derives from the fact that Alaskan king crab fishing is one of the deadliest jobs around - or at least it used to be. 

After the first season, catch shares were adopted in the Alaskan king crab fishery, eliminating the race-to-fish that had made for such dramatic television, but a poorly run fishery. Among other things, this caused a significant increase in the safety of the fishery. As vessels no longer had to race to fish, there was now less of an incentive to cut corners and risk life and limb. They've also encouraged the boats to pay more attention to the ecological conditions of the waters in which they operate. As one of the captains explained in WSJ op-ed: 

Now we have a stake in protecting crab populations for the future. Because we aren't in such a race against the clock, we're able to get more young and female crabs we don't keep back into the ocean unharmed. When we find an area has too many juvenile crabs, there's time to go somewhere else instead. 

What made for better ecological management may not have made for good TV. After the second season the producers looked for new ways to up the excitement level in the absence of a race to catch. But it was good for those who work in the fishery, and certainly good for sustainability. 

The recognition of property rights in marine resources can also make it easier to adopt additional conservation measures. For instance, the adoption of catch-shares can reduce the incremental burden from the imposition of by-catch limits or the creation of marine reserves (though there are property-based ways to pursue these goals as well). A shift to catch-shares would have fiscal benefits as well. 

The most prominent objections to property-based fishery management are not ecological, but social and economic. Some fear the distributional consequences of recognizing transferable rights in a fishery or worry about the possible effect on local communities, particularly if fishery shares are bought out by larger companies. Such concerns are legitimate, but are best addressed directly. They should not be an excuse for leaving unsustainable fishery management regimes in place. 

 The theoretical and empirical case for property-based fishery management has been made. If we care about the health of marine resources, there is no reason not to move in this direction. Whether or not property rights in ecological resources are the solution to every environmental problem, they are in the case of fisheries.

More »

Guest post by Jonathan H. Adler, a professor at the Case Western Reserve University School of Law and regular contributor to the Volokh Conspiracy.

Thanks to Megan for inviting me to spend some time over here.  As she mentioned, much of my work focuses on environmental law and policy. I also do a fair amount on "administrative law" more generally (aka the law governing administrative and regulatory process), structural constitutional law (aka federalism and separation of powers), and the Supreme Court. Much of my academic work can be found on my SSRN page. While this first post will discuss some environmental issues, I expect to touch on these other subjects as well, particularly since The Atlantic has given me some of the credit (blame?) for marshaling legal arguments against the constitutionality of the individual mandate.

Much of my environmental work cuts against the traditional pro-regulatory grain of contemporary environmental law and policy. There have been significant environmental gains in many areas over the past fifty years, and traditional regulatory strategies deserve some of the credit, but modern environmental regulation is hardly a model of efficient governmental intervention. What, then, should we do differently? To answer this question it's important to think first about the nature of environmental problems, as our diagnosis of the problems will influence our choice of remedy.

The way we think about environmental concerns was heavily influenced by Garrett Hardin's seminal 1968 essay on "The Tragedy of the Commons." In this essay, Hardin described the fate of a common pasture, unowned and available to all. As Hardin explained, in such a situation it is in each herder's self-interest to maximize his use of the commons at the expense of the community at large. Each herder captures all of the benefit from adding one more animal to his herd. Yet the costs of overgrazing the pasture are distributed among every user of the pasture. And when all of the herders respond to these incentives, the pasture is overgrazed -- hence the tragedy. As Hardin explained it, the pursuit of self-interest in an open-access commons leads to ruin. Without controls on access and use of the underlying resource, the tragedy of the commons is inevitable. 

Hardin's essay is tremendously important, not so much because he discovered the commons problem -- others had documented this dynamic before -- but because he popularized a useful way of thinking about many environmental problems. As Hardin explained, the metaphor of the commons can be applied to virtually any environmental resource. Instead of a pasture we could talk of a herd of animals, a fishery, a lake or even an airshed. In each case, the underlying economic dynamic is the same, and if access and use are not limited in some fashion, over-use is inevitable as demand grows. [A quick caveat: What Hardin called the "commons," is more properly described as an open-access commons, as there are some resources that are owned or managed in common that do not suffer the tragedy because they are subject to community management of some form or other, but the central point stands.]

Hardin's diagnosis is often identified as a rationale for prescriptive regulation Hardin famously termed "mutual coercion, mutually agreed upon." This was his way of describing those regulations we adopt to keep a common resource of any sort from befalling the fate of an open-access commons, and it's largely the path we've followed in environmental policy for the past fifty years.

Administrative regulations have produced some gains, but also many failings. Our air and water are cleaner today than forty years ago -- and substantially so -- but many ecological resources are as threatened now as they ever were. Federal environmental regulation was not the savior many think, and many environmental regulations actually get in the way of further progress. The imposition of land-use controls under the Endangered Species Act, for example, discourages effective conservation on private land. 

One thing that Hardin overlooked is that the political process often replicates the same economic dynamic that encourages the tragedy of the commons -- a dynamic fostered by the ability to capture concentrated benefits while dispersing the costs. Like the herder who has an incentive to put out yet one more animal to graze, each interest group has every incentive to seek special benefits through the political process, while dispersing the costs of providing those benefits to the public at large. Just as no herder has adequate incentive to withhold from grazing one more animal, no interest group has adequate incentive to forego its turn to obtain concentrated benefits at public expense. No interest group has adequate incentive to put the interests of the whole ahead of the interests of the few. The logic of collective action discourages investments in sound public policy just as it discourages investments in sound ecological stewardship. This, in addition to the pervasiveness of special-interest rent seeking, explains many of the failings of centralized regulation. So despite the environmental gains of the past half-century, real challenges remain, and the tragedy of the commons is still with us.

Administrative regulation has been the dominant tool in environmental policy over the past half-century, but it was not the only prescription Hardin offered. What many forget is Hardin actually offered two prescriptions for preventing the tragedy of the commons. "Mutual coercion, mutually agreed upon" was one approach; but Hardin had another. In the alternative, Hardin suggested that greater reliance on property rights was a proven way to prevent the tragedy of the commons. As he explained, the tragedy of the commons "is averted by private property or something formally like it." Indeed, Hardin suggested this was one of the primary functions of property in land. 

As Hardin recognized, where property rights are well-defined and secure, the tragedy of the commons is less likely for each owner has ample incentive to act as a steward, caring for the underlying resource and preventing its overuse, both for themselves, and others who may value the underlying resource. In this way, the institution of property rights "deters us from exhausting the positive resources of the earth."

Hardin was not altogether sanguine about the potential for property rights to avert the tragedy of the commons in many areas because he feared it would be too difficult to define and defend property rights in threatened ecological resources, particularly against the threat of pollution. It's one thing to post and fence private land. Quite another to demarcate property rights in air or water. Yet there is far greater potential here than is commonly realized. Enhanced technologies and greater understanding of ecological conditions make it possible to conceive or property rights today where once they were the stuff of ecological fantasy.   

Pursuing the identification and expansion of property rights in ecological resources will be difficult, but the potential benefits are large. We understand the importance of property rights for economic prosperity, but we are also beginning to understand the importance of property rights for ecological sustainability. What we're learning is that where property-based institutions can be adapted to ecological resources more sustainable practices tend to result (and in my next post I'll provide a concrete example).

The importance of property rights for environmental conservation is not a new idea. It lay at the core of the early American conservation movement. After all, it was the institution of property rights that enabled the first Audubon Societies to post private reserves to protect birds from hunters who sought to collect their feathers for women's hats. It was the institution of property rights that enabled Rosalie Edge to turn Hawk Mountain from a hunting ground into a bird sanctuary. It is the institution of property rights that allows land trusts large and small, from the American Prairie Foundation to the Western Reserve Land Conservancy to protect precious places. The need to day is to keep moving beyond property in land and adopt property institutions to a wider array of ecological resources so that property institutions can have the chance to succeed in those areas where mutual coercion, mutually agreed upon has failed.

Guest post by Dr. Manhattan, a lawyer in New York City who represents, among others, clients in the investment management industry.

Thanks to Megan for the kind introduction. Anyone interested in additional biographical information can access that, along with my prior Atlantic posts, here. (My old blog is defunct, but Internet archeologists can access it here.)

If given the opportunity to pick one financial regulatory reform, I'd pick one which allowed us to pay regulators lots and lots of money, competitive with the worst excesses of the private sector if need be -- up to and including signing them up for the Porsche-of-the-Month Club. (Another way of saying the foregoing is that, notwithstanding all the attention paid to income inequality, we need much, much more if it in the public sector.) However, other people have made the same argument and it doesn't seem to have helped much. So maybe it's time to start thinking of some other exceedingly modest proposals which haven't gotten as much play: Some impractical ideas which nonetheless might point us towards actions which -- with apologies to Lena Dunham -- may not be "the solution to the problem, but a solution to a problem."

Here's my first such idea:

Abolish Mortgage-Backed Securities (and Offspring)

CDOs and credit default swaps don't kill financial systems, mortgages kill financial systems.

There has been altogether too much opproprium directed at CDOs, credit default swaps and other structuring techniques that spread financial contagion, and not enough directed at the underlying collateral. The record seems to be, however, that Dick Pratt was correct when he called the mortgage "the neutron bomb of financial products."

Don't believe it? Ask the foremost experts in credit derivatives, such as:

1) The inventors of credit default swaps and CDOs at JPMorgan: As Gillian Tett describes in Fool's Gold, while they truly believed in the CDO structure, they did not believe that the credit risk could be accurately measured on underlying mortgages. Other banks felt...differently, and this classic Felix Salmon post is the best synopsis of what happened.

2)  The long-time heads of AIG Financial Products: no that was not a typo. For most of the history of AIG FP, they absolutely refused to enter into any transactions, CDOs included, backed by real estate. It is worth excerpting the following from Roddy Boyd's definitive Fatal Risk, referring to Joe Cassano's predecessor as head of AIG FP:

[A]nything mortgage related left [Tom Savage] cold. He took a literal view of the issue: any security backed by a house or building was verboten. His colleagues saw it as a quirk of his personality...It was anything but that. As a groundbreaking modeler in the mortgage departments at First Boston and Drexel, he had come to see that all of mortgage trading was just a way to make money until the next unanticipated blow up. Time after time, the same thing happened: rates changed and entire trading desks, whole fixed income divisions were blown out of the water because of one or two mortgage trading positions. Savage had a litany of reasons why: hedges -- if they were even available -- always underperformed because the securities were too leveraged to interest rates. In turn, brokers and hedge funds, trying to squeeze every last dime of profit out of a trade, used too much leverage in positioning the bonds, so when the market reversed, they were always forced to sell in a panic.

Savage saw his former specialty, modeling mortgages, as little more than folly. The models the bank touted assumed that rates would move in sequential, orderly patterns and that market prices would follow. The opposite happened, of course, with panic, greed and liquidity flowing into or out of the market at a second's notice. Somehow those inputs never seemed to make it into the models. 

Similarly, the founder of AIG FP, Howard Sosin, refused to allow FP to invest in anything mortgage-related, believing that they would always be subject to risks they could neither analyze nor quantify. 

And the subsequent history of AIG FP demonstrates that the problem was the underlying collateral, not the structure: AIG FP's portfolio of credit default swaps on corporate and bank debt, despite always being much larger than its portfolio of swaps on "asset-backed" CDOs, did not cause the losses which destroyed the company in 2008: those were all concentrated in the smaller, latter portfolio (together, that is, with the losses in AIG's securities lending program, which is a similar story for another day).

Perhaps the best argument in favor of getting rid of MBS entirely is that -- as is happening with the regulatory dispute over money market funds -- the market is already doing the job.  As this Sober Look post describes in great detail, other securitizations are getting done and performing just fine: auto loans, credit-card receivables, etc. -- but home equity-based securitizations are barely visible.

(Yes, killing MBS will likely kill the 30-year fixed-rate mortgage with no prepayment penalty, which, in the words of Raj Date, "does not flourish in the state of nature."  And right now very few people can get one of those anyway, which is not a coincidence.)

In short, if we are to focus our regulatory ire on instruments which are per se dangerous, CDOs and credit default swaps are not the place to look: start with the humble mortgage-backed security and its offspring.

Guest post by Laura McKenna, former political science writer, blogger, and freelance writer. 

In yesterday's New York Times, David Kirp, a public policy professor from Berkeley, explains that school integration made a large, long term impact on African-American students.

The experience of an integrated education made all the difference in the lives of black children -- and in the lives of their children as well. These economists' studies consistently conclude that African-American students who attended integrated schools fared better academically than those left behind in segregated schools. They were more likely to graduate from high school and attend and graduate from college; and, the longer they spent attending integrated schools, the better they did. What's more, the fear that white children would suffer, voiced by opponents of integration, proved groundless. Between 1970 and 1990, the black-white gap in educational attainment shrank -- not because white youngsters did worse but because black youngsters did better.

Not only were they more successful in school, they were more successful in life as well. A 2011 study by the Berkeley public policy professor Rucker C. Johnson concludes that black youths who spent five years in desegregated schools have earned 25 percent more than those who never had that opportunity. Now in their 30s and 40s, they're also healthier -- the equivalent of being seven years younger.  

Kirp calls for a return to integration. "If we're serious about improving educational opportunities, we need to revisit the abandoned policy of school integration."

I haven't seen those studies. I would like to see how they controlled for certain factors. Was there something different about the parents of African-American children who got their kids into those integrated schools? Did white students maintain their education advantage, because their parents put them in private schools or relocated to another town? Still, I'm pretty sure that their findings are accurate. Many other studies have shown the importance of peer group influences and the impact of wealth of a community on education outcomes. 

Kirp is right in some ways. Creating larger, more diverse schools would definitely improve outcomes of more children. However, he has little sympathy or understanding for the forces that stymie the efforts of reformers.  

There's no way to go back to busing or 70s integration methods. Racism might be a factor, but the biggest problem is self-interest. People worry that integration will harm their kids and their property values. 

It's a natural parental drive to provide your kids with the best things in life -- a nice home, good food and an excellent education, even if it comes at the expense of others or it flies in the face of political ideology. Our last two Democratic presidents sent their children to private schools, while at the same time having lunch with the teachers' unions. Parents want their kids in the Gifted and Talented Programs and don't want the special education kids to suck up too many resources. 

While there's little evidence that a diverse student body in terms of income, ethnicity, or cognitive abilities creates a worse learning environment for the most privileged kids, any threat to a child drives a parent insane. Protecting one's child is a natural instinct, and school reformers must deal with this instinct with compassion. 

When our public schools were gerry rigged a hundred years ago, few would have predicted the value ofone's home would be so tied to school quality. If my house was hoisted by a crane and dropped in Newark, NJ, the value of the home would plummet. If an influx of new kids cause overall test scores to drop, my property value would most likely drop, too. For most people in this country, their home is their biggest investment. A loss of property value makes even the most well meaning individuals to hyper-ventilate and worry about eating cat food during their Golden Years.

This natural instinct to protect property and children has undone more than integration efforts. School vouchers proposals were shot down in state after state in part because of the strength of the teachers unions, but also because there was huge resistance from suburban voters to open their schools to other children. Republicans, who ideologically support vouchers, voted it down in state legislatures, because their suburban constituents did not want urban kids using a voucher to attend their schools. 

So, how do we create more diverse schools without stepping on the natural instinct to protect children and property?  Baby steps and compassion.

Thanks to our terrific stable of outgoing guest bloggers--though they're not all leaving you; Scott Winship decided he wasn't done talking, so he'll be staying over.