The Mess That Greenspan Made - Part 414

The Public Pension Problem Grows

Today’s news brings word that public and private pensions are having more problems, the one-two punch of an increasingly volatile stock market and the Fed’s two-year freakishly low interest rate guarantee making a bad situation even worse.

Reuters provides details on the perils of fund manager “de-risking” in this report and the dismal options for Rhode Island retirees are laid out in this Washington Post story.

State Treasurer Gina M. Raimondo (D) said that per capita, Rhode Island has the nation’s largest unfunded pension liability. But if the Ocean State’s pension problem is among the country’s most severe, so are the remedies being considered to solve it.

An ongoing pension reform effort is likely to result in reduced benefits for 51,000 public workers and retirees. Officials are pondering lowering retirement payments, replacing part of the guaranteed pensions with 401(k)-type accounts, and sharply reducing generous cost-of-living increases enjoyed by retirees. The Rhode Island legislature is expected to consider changes next month during a special session.

Until recently, most states, including Virginia and Maryland, have attacked their pension problems by cutting benefits for new hires while preserving retirement packages for current employees. Others have rolled over their pension debt by taking out loans or papering them over with what some have called unrealistic projections about investment earning and life expectancy.

But with states facing, by one estimate, a combined $3 trillion in unfunded pension liabilities and the economic downturn continuing to dampen government tax revenue, states are beginning to make changes once considered unthinkable — such as cutting pensions for people in retirement.

The “pension envy” felt by many people in the country should begin to lessen in the years ahead as early-retirees from the public sector are slowly squeezed in a multitude of different ways, none of which will be fun. Then, again, what they have will still be far better than that which is available to most retirees and aspiring retirees in the private sector.

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“Sell Everything Immediately … Quickly”

In light of what’s been going on in Europe over the last few days, perhaps it’s worth reviewing this Clark and Dawe video from last year on the area’s sovereign debt crisis.

Since this was originally aired, it would appear that about the only things that have changed are the actual debt totals for each nation and my guess is that they’ve all probably gone up.

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Tuesday Morning Links

MUST READS
Markets rise despite continuing debt concerns – BBC
Ackermann Says Market Reminiscent of 2008 – Bloomberg
Swiss bid to peg franc to the euro stuns currency traders – Guardian
European Bankers Urge Leaders to Move Quickly on Debt Crisis – NY Times
UBS Warns Of Collapse Of Banking System And Civil War on Euro Break Up – Zero Hedge
Zoellick: World in ‘Dangerous’ Period With EU Turmoil – Bloomberg
U.S. banks offered deal over lawsuits: report – Reuters
Postal Service warns it could lose $10 billion this year – Washington Post
Food stamp use in U.S. rises to record level as economy remains sluggish – xinhuanet
Rhode Island considers radical moves as pensions put state on brink – Washington Post
Governments increasingly buying gold – Mineweb
I AM 63 and I AM TIRED – Patrick.net

MARKETS/INVESTING
Oil falls to near $84 on global slowdown fears – AP
Gold falls from record after Swiss peg franc – Reuters
Treasuries Surge as 10Y Yield Falls to Record – Bloomberg
Metals stock volatility to increase but, so will opportunity – Mineweb
Investor Confidence Down Sharply Following Jobs Report – Rasmussen
Pension funds in new crisis as deficit hole grows – Reuters
Where does gold go from here – $1,500 or $2,000? – Mineweb
Exactly where we are in this gold bull market – StockHouse

ECONOMY/WORLD/HOUSING/BANKING
Is the Need for Stimulus “Undeniable”? – Mises
Is California economy improving, or worse than ever? – LA Times
Krueger and Krugman: It matters which is going to Washington -Washington Post
G7 to seek ways to prop up global growth: source – Reuters
Leaving Euro Would Cost Each German €8,000: UBS – CNBC
Berlin Lays Groundwork for a Two-Speed Europe – Spiegel
China growth may slide below 9 percent in 2012 – Reuters
German Factory Orders Fall More Than Expected – Bloomberg
House Prices falling at 9.5%: Don’t Buy Now! – Prosper Austalia
Herbert Hoover: On Bank Liquidity and Solvency, 1931 – Credit Writedowns
Fed’s Lacker: More stimulus higher prices, growth doubtful – FXStreet
Savers get burned by Fed’s zero interest rate policy – Kansas City Star
Please, no more QE until really needed – Telegraph

 

More “Lack of Demand” Nonsense

As the nation laments the dim prospects for its labor market on this Labor Day, we see another example of how the fundamental problem behind the bleak jobs picture fails to be understood, this story by Zachary Roth at The Lookout regurgitating what passes for conventional wisdom these days when it comes to root causes, citing a lack of consumer demand (irrespective of how the prior demand levels were attained) and providing more evidence that conventional wisdom is often wrong.

Right now, what’s holding back the economy is a lack of demand, in the form of consumer spending. And that lack of demand stems largely from the enormous loss of housing wealth that occurred in recent years. Until the housing sector picks up, the economy as a whole will struggle. And a successful mortgage modification program could have helped quite a lot.

But there’s something else worth keeping in mind: Economic shocks like the one we went through with the housing bust and the financial crisis take a long time to recover from. In a paper written last year for the Federal Reserve Bank of Kansas City, the economists Carmen and Vincent Reinhart, experts on the history of such crises, concluded that the effects typically linger for around a decade. “Income growth tends to slow and unemployment remains elevated for a very long time after a severe shock,” they wrote, predicting “a lengthy period of retrenchment.”

Until you start hearing policy makers and economics writers say, “Much of the economic growth we’ve seen in recent decades has been due to the unsustainable rise in asset prices and an unhealthy increase in debt at all levels – government, corporate, and personal. We must acknowledge these as the root causes and restructure the economy and financial markets accordingly before we can move forward in a meaningful way”, we’re not likely to make much progress in creating jobs or restoring the once robust levels of economic growth the U.S. has become accustomed to, if that’s even possible.

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