CommentsEASTSIDER-Now I don’t pretend to be the savviest guy on the planet about the financial services industry. Heck, all three of the properties that we bought in the mid-2000’s to guarantee our retirement (thanks to smart financial planners) went down the toilet with the Great Recession.
But after the fact, I read Yves Smith’s “ECONned,” -- a book I think gives the most honest description of how these events really came to pass -- and got motivated to follow the shenanigans of the financial services industry as we head for another tank job. Fool me once...
I do, however, know a bit about public sector pension plans, having been involved in negotiating and mediating these matters in California for a few decades. And I have noted with interest the last ten or fifteen years-worth of attacks on all public pension plans, mostly funded by the same financial services industry that destroyed defined benefit plans in the private sector back in the 70’s, and is looking for new lambs to fleece.
Now it’s bad enough that the industry owns, in one way or another, virtually all of the 200 channels of electronic ‘news’ that most of us rely on in lieu of newspapers. And of course, they’re also same folks who own what’s left of the printed press. Most CEO’s are really money and stock managers instead of shepherds of the corporations they head. Sigh.
Anyhow, the universal drumbeat of the media is that the problem with public pension plans are all those greedy public employees. But the other night, as I was tuning out the media lies, I had one of those lightning “Eureka!” moments.
The Federal Reserve Bank is systematically destroying public sector pension plans in the United States.
Wow, what a conspiracy theory…was I nuts? All that most of us know about “the Fed,” is seeing Bernanke or Geithner or Yellen jetting off to Davos, in the pristine security of the Swiss Alps, to kiss the rings of the world’s financial elite. We’ve also seen them testifying in front of Congress, taking credit for stopping another Great Depression.
Since I don’t drink anymore, I can’t explain my insight as something that came in an alcoholic haze. So I started to do some research on the Fed just to see if my hot flash had legs. The basic premise is simple -- all public sector pension plans have to make big bets on basic assumptions: how much interest they are going to earn over a 10 to 30 year period in order to pay for plan member benefits as they retire? That bet, currently in the 7% to 7.5% per year range for most plans, is what determines the contribution rates for both beneficiaries and employers in the plan. It also determines whether the taxpayers could be on the hook for a nasty surprise in the event there is too much “underfunded liability.”
Unfunded liability is a polite way of saying “we don’t have the money to pay for this” unless we meet our target returns on investment (ROI) and “y’all ain’t gonna like it” when you wind up on the hook for the difference.
This insight came to me as I was winnowing through the insides of CalPERS -- which is actually one of the least underfunded plans out there. Still, its assumptions of 7.5% return on investment is something I would expect from someone who’s been smokin’ too much Humboldt Gold marijuana.
The reason that these percentage returns don’t work lies squarely in the fact that, since the great financial meltdown of 2008, interest rates have been artificially pegged at 0% by the Federal Reserve Bank.
Free market be damned! The Fed has largely fueled the increase in wealth for those who have access to free money. That’s what it really is and it’s at the expense of the rest of us who simply don’t have the clout and access to goodies like the billionaires have -- a truth that Bernie Sanders and Donald Trump seem to have in common.
Well, this may be cool for the Big Banksters, but why on god’s earth would the Fed mess up the entire economy for the rest of us?
Turns out there’s a perfectly logical explanation -- the Federal Reserve is not owned by the Federal Government! No sir, it’s actually a private institution whose only shareholders are the commercial banks themselves!
And if you really like a good conspiracy theory read, try “The Creature from Jekyll Island.” As the author described the Fed, “It is not federal and there are no reserves. Furthermore, the Federal Reserve Banks are not even banks.”
Apparently, the Fed’s job is to take care of their real owners, the banking cabal or cartel (take your pick), with a nod to trying to avoid taking the entire system down as they do so.
Let me circle back to my main argument that the Fed’s policies are destroying public sector pension plans. These plans all rely on a set of voodoo economic assumptions that includes a of rate on return per year for a period of at least ten years, and often more. So, if the rate they use is 7% and they only get 2%, the fund is seriously in the hole for that year. Replay this scenario from say, 2009 forward, which is when the Fed 0% policies started to really take hold, and the picture is scary.
The math isn’t pretty, and for once, it’s not the fault of the pension plans -- they’re just following guidelines by folks like NASRA and the American Academy of Actuaries.
Not only that, but under recent regulatory changes, these plans have to include their unfunded liability in their balance sheets, which really does show where the fault lines are.
Okay, say you are not a beneficiary of a public sector pension plan - why should you care about all this stuff? Here’s why. The public pension plans in the US are probably the biggest source of real hard dollars out there in the investment world -- over three trillion bucks in actual assets, not “money under management” or the highly leveraged boom and bust instruments used by the financial elite to manipulate us out of our socks. And the pension plans have to invest that money with an eye to hitting the target number on their annual rate of return.
If these pension plans become too underfunded and crater, I think the system goes down. Do not believe for a moment that the financial services industry will not let this happen -- they already have once, and are engaging in the same types of conduct that led to the last meltdown.
While I’m at it, please ignore talking heads like Paul Krugman and Larry Summers -- they are simply paid shills for the industry. Larry Somers is a very smart guy from Harvard who thinks he’s the most brilliant economist in history, and has so many character flaws that he makes Donald Trump look normal. And Paul Krugman, who once pretended to be a liberal, has evidently slurped the Obama/Clinton Kool-Aid and wants us to follow him off to Jonestown.
All right, enough depressing news. I do urge you, however, the next time you hear about greedy public employee pensions, to remember that the Fed is the 800 pound concrete chain on these pensions. We are all nothing more than gnats on the windshield of the Fed as it powers down the road on behalf of the banks.
Just to avoid being a total downer, I’m writing this article to hopefully provoke some thinking about exactly who’s doing what to whom in our wonderful government. Since we are in an election cycle, it presents an opportunity: the only people running for office in Congress who have called for doing something about the Fed are Bernie Sanders and Rand Paul. They are provoking cries of outrage and denial by simply calling for an audit, just like pension plans and real companies have to do.
What does that say about our system?
You might want to pose some hard questions to the Republicrats as they all run for office in their gerrymandered districts this June/November.
(Tony Butka is an Eastside community activist, who has served on a neighborhood council, has a background in government and is a contributor to CityWatch.) Edited for CityWatch by Linda Abrams.
