This reference is to Janet Yellen’s testimony in her Senate confirmation hearing as the chairman-to-be cited the benefits of the Fed’s policy of über low rates for the average household. While many Senators challenged the negative effects of the Fed’s policy for savers–financial repression in the words of Carmen Reinhart–Yellen noted that people were not just savers but also consumers. Thus, Fed policy may harm the return on savings, but households may receive the benefit of lower home and auto loans and the Fed’s QE policy may have had the ripple effects of getting their college graduate a job. So financial repression was a very difficult outcome to measure against the broad economic outcomes.
Posts Tagged ‘pension funds’
Notes From Underground: “And all My Words Come Back To Me In Shades of Mediocrity” (Paul Simon)
December 3, 2013Notes From Underground: George Soros and his Fascist Tendencies
February 12, 2012Yes, I know Athens is burning as some of the more violent demonstrators threw some Molotov cocktails and the media was given some photo ops so the situation can be understood by those too involved with life’s challenges to read. If that sounds acerbic it is because I have been writing about the Greek debt crisis since December of 2009 when the Chinese investment funds reneged on a promise to purchase $25 Billion of Greek bonds and the debt crisis was in full swing. Again, Athens may be the present battleground but the political and financial games are being played out in Paris and Berlin and of course in the offices of the IMF.
Notes From Underground: The Debt Wars Are Getting Stale–Each Day Positions Harden
July 26, 2011The seriousness of the U.S. DEBT CIRCUS cannot be overstated but evidently not from a market perspective. U.S. Treasuries have continued to be well bid as many investors still run to the TREASURY market in times of uncertainty. Besides the “rush” to safety in the BONDS, the FED has so badly perverted the market’s pricing mechanism that it is very difficult to determine the genuine impact of the Washington default countdown. European sovereign debt has been trashed during the last 20 months as there was no real central bank support to the market as the EFSF was a late comer to the scene and was provided with meager provisions.
Notes From Underground: There is now a surplus of fertilizer post G-20 meeting
February 20, 2011The breaking news during the weekend was the growing unrest in Middle Eastern nations as the contagion of TAHRIR SQUARE has created a desire for change in the autocracies dominating many Arab governments. Libya is the newest hotspot and protests against the Qaddafi regime has been met by state violence. Bahrain has also seen increased political unrest as the SHIITE majority is pushing for a greater say in how the small emirate is governed.
Notes From Underground: Bernanke adds one more concern to the the fragile state of STATES
August 3, 2010Yesterday, Ben Bernanke gave a speech to the Southern Legislative Conference (SLC) of the Council of State Governments. While the speech was not considered very significant for FED policy, we at Notes found it interesting that the FED Chairman raised an issue that we at Notes have been discussing on and off for several months: The dire situation that the underfunded public pensions are causing the individual states.
Previously, we cited the wonderful article that our editor–also my daughter–wrote about the major underfunding of the Teachers’ Retirement System of Illinois and the havoc it could reap on the taxpayers of Illinois. Mr. Bernanke warned the Conference:
“States’ unfunded liabilities are significantly higher than before the recession and financial crisis because many pension fund investmentshave declined in value, and because many states have found it difficult to maintain pension contributions while its budgets are under stress. INDEED, SOME ESTIMATES SUGGEST THAT, ON AVERAGE, STATES WOULD NEED TO MORE THAN DOUBLE THEIR TYPICAL ANNUAL PENSION CONTRIBUTIONS OVER THE NEXT DECADE TO AVOID COLLECTIVELY EXHAUSTING THEIR PENSIONFUNDS DURING THE NEXT COUPLE OF DECADES. THIS DAUNTING PROBLEM HAS NO EASY SOLUTION; IN PARTICULAR, PROPOSALS THAT INCLUDE MODIFICATIONS OF BENEFITS SCHEDULES MUST TAKE INTO ACCOUNT THAT ACCRUED PENSION BENEFITS OF STATE AND LOCAL WORKERS … ARE ACCORDED STRONG LEGAL PROTECTION, INCLUDING, IN SOME STATES, CONSTITUTIONAL PROTECTION.“
This is important and the fact that Bernanke is stating it makes it even more so. The poor stock market performance, plus questionable investments on the part of some funds during the last decade has left public and private pensions way underfunded and this creates a negative feedback loop for state governments as defined benefit plans that were agreed upond have to be made good. If state governments have to raise taxes or cut services to meet itspension promises, then more stimulus is withdrawn and growth is harder to attain.
We believe that Bernanke understates the problem as our editor’s well researched article showed for the pension funds have had to reach for high-risk OTC derivatives in order to meet near-term obligations. Every public pension fund is HOPING that the economy comes ROARING BACK so as to relieve the short-term stress and drag on public pensions.
If we were to go the route of Japan and muddle on for another decade, the pension liability is going to be a major economic drag and the question will of course arise as to who will bail out the individual states. Bernanke said pension benefits are “accorded strong legal protection, including, in some states Constitutional protection.” While private pension funds are supposed to be guaranteed by the Pension Benefit Guaranty Corporation, there is no precedent for the public pensions. As my daughter wrote in the article, because public pensions have yet to endure bankruptcy, the decision would ultimately reside with the courts–make the state pay or let the pension fund run out of money. Bernanke’s presumptive posturing is creating a guarantee that the government will step in if this happens … a government bailout, if you will.
Bernanke goes on to state that the pensions are just one part of the problem because state governments also have an estimated $600 billion liability for retiree health benefits. With the boomers starting to retire, this problem will probably increase the states financial burden. Is there any wonder why the discusion moves to the fear of deflation? It is very difficult to DEFALTE YOUR WAY OUT OF DEBT … and so it goes. Do we really need the equity market to rally for the next decade or will the pensions be refunded with 2 percent 10-year U.S. Treasuries?
Our readers can do the math but you better well figure that 2+2=5 will be the mainstay of that math course.
Notes From Underground: The Bernanke testimony was no surprise … so why did the market respond so negatively??
July 21, 2010Yes, we know that Bernanke was right out of central casting with the FOMC minutes being the mainstay of the prepared text. The market was supposedly surprised by the chairman’s words about the FED preparing ways to remove all the previous stimulus. We don’t know why Bernanke paid homage to that as it was in direct contradiction to the everything else he said. (He believes that the FED will have to leave interest rates at these low levels for an “extended period.”) Again, we stress that there was nothing new in the testimony, but as always we respect the market’s wisdom and its ability to inflict pain. We have long thought that as the long end of the DEBT markets rallied, the FED ought to be selling some of the MBS debt that it has bought as they would need to relieve their balance sheet to make room for future possible purchases. As long rates have fallen due to demand for BONDS and other debt instruments, we wonder who is buying all that paper now that the FED has stopped? If it is pension funds, shouldn’t the FED be selling it them so as to insure that they don’t bid the market to ridiculous levels?
Notes From Underground: Is the U.S. Chinese symbiosis fragile?
June 13, 2010First we note the obvious: Friday’s data on retail sales was much weaker than forecasted but unlike the previous week when the unemployment number was much weaker then expected, the S&Ps tried to break late but the downside fizzled and we experienced a late rally to close higher on the day. Are we back to a risk on mode? It is too early to tell as the market is going to retest the 200-day moving averages on the various equity indexes. There is a great deal of money sitting on the sidelines that became nervous because of the May 6 market action. It appears it will take some sideways action above significant technicals to bring this money out of the closet and back to the capital markets.