Always Consider Sources & Disclosures

This morning’s column began as a discussion about biases — how you need to know what may be influencing the sources you read; however, it has morphed into a look at transparency and conflicts of interest.

What prompted this was a post defending the payday lending industry that appeared on Liberty Street Economics, the blog of the Federal Reserve Bank of New York. As you can see here, I have previously found the writers there to be a good source of thoughtful and objective analysis, so that’s why “Reframing the Debate about Payday Lending” was rather disconcerting.

Note that payday lenders sometimes charge interest rates that approach 400 percent on an annualized basis.

It is noteworthy that major banks such as Wells Fargo, Bank of America, USBancorp, JPMorgan Chase and PNC — banks that in one way or another are regulated by the Federal Reserve system — were once involved in a form of payday lending call deposit advance. An advisory letter from the Federal Depo article was condescending, one-sided and misleading and a fisking of the post is worthy of another entire column. (See David Dayen’s post on The Intercept for a good beginning.)

Lacking the usual deep research details I’ve found in other Liberty Street posts, it was troubling. Four authors were listed, one of whom is Michael Strain, deputy director of economic policy studies at the conservative think tank American Enterprise Institute (AEI), a conservative organization who often plays fast and loose with the truth in pursuit of their conservative ideological agenda.

An AEI employee at a Federal Reserve post was a giant red flag.

I contacted the New York Fed to get more insight. They resolved some issues, but left others unanswered. Most importantly, the way the Fed manages conflicts of interest and disclosures needs some work. Some of this is picayune, but when it comes to the central bank, we have come to expect a high level of disclosure  and transparency.

The post is credited to four authors, listed in alphabetical order — Robert DeYoung, Ronald J. Mann, Donald P. Morgan and Strain. The New York Fed’s media relations office told me that the post was actually written by Morgan, who had sent a draft for comments to the listed co-authors. In other words, the other three weren’t really co-authors.

I don’t know if attributing authorship this way is standard practice in the economics profession, but it is at the least misleading. Perhaps a more accurate way to handle this is with an endnote thanking the others by name for their editorial advice and assistance. But we can all agree that misstating who the actual authors are is wrong.

Second, every Fed paper I can recall seeing was written or co-written by independent academics and/or transparent public organizations such as the National Bureau of Economic Research or a Fed research department; even academics should not have conflicts of interest, and issues should always be disclosed. Such is not the case with AEI.

Strain is a former New York Fed researcher, having worked there from 2005 to 2007, but he now works for a private think tank that is neither independent nor transparent.

That may be the biggest problem: Strain’s employer, AEI, doesn’t reveal its funding sources. There are some clues, however, about who they might be. AEI’s website lists the organization’s leadership, including its board of trustees and National Council. The finance industry, including banks, brokers, private equity and hedge funds are heavily represented there. It’s not much of a leap to assume that these entities are a significant source of funding for AEI. Indeed, that is the general take amongst other people I spoke with as to who funds AEI; their lack of disclosures make this the only rational conclusion.

That relationship should have been disclosed by Liberty Street Economics. If an author is writing about a subject near and dear to the heart of his or her financial backers, it should be stated right up front. Any private entity has the right not to disclose who their funders are, but that should preclude them from publishing at the Fed’s websites.

The New York Fed regulates the money center banks. Although it doesn’t regulate hedge funds or private-equity firms, it does pay attention to them because of their role in the broader financial system.

So here’s how this looks to me: A lobbying outfit, in the guise of a think tank, was in a position to influence a piece published at a financial regulator’s website. That strikes me as highly problematic.

Just to be clear, this isn’t a call for censorship of restraining free speech. I would rather err on the side of publishing any and all views. In no way should ideas, even ones that are bought and paid for or repellant to anyone’s sensibilities, be stifled. Let all ideas compete in the marketplace and may the sounder, more persuasive argument carry the day.

AEI has its own site, where it can and does publish on subjects that warm the cockles of the hearts of its financial backers. They are free to not disclose who their backers are, and we are free to make what we will of their opacity and lack of disclosure.

Open debate is important. But the caveat has to be that there is full and transparent disclosure by all the authors (including whether they are actually authors) involved. Open debate where all potential conflicts of interest are out in the open is essential.