Moral hazard? Does the presence/behaviour of Central Banks encourage this? What if there were no lenders of last resort? Prudence or bankruptcy might focus minds and weed out the imprudent tendency. And what about Government ‘too big to be allowed to fail’ policy? What example do taxpayer funded bail outs set? The clear message, profit is privatised, risk is socialised if you are big enough and can lobby ($$$) enough because it’s all about saving jobs. Have none of them read Adam Smith? (Rhetorical)
When theory collides with common sense, common sense always wins. ZIRP collides with the common sense that there is always scarcity and opportunity cost. For a decade central banks believed in ZIRP. Now common sense is demanding payment for the delusion of a free lunch.
Note that the main Blindspot of the central bankers was the assumption that the real economy would provide the necessary supply of goods. But in the past decade, and culminating with Covid, governments have been strangling the real economy. Now we have real shortages of basic goods, especially fuel, and no finagling of the monetary system can fix that.
(For reference, I view common sense as wisdom built on long observation of human behavior and the world they occupy)
The pension plans problems are all, at their core, that the contributions to and the payouts from were always mismatched from the beginning. The plan providers promised benefits that couldn't be covered by the contributions made up front.
That mismatch is true of US Soc Sec and I'd guess UK too but I've always wondered if at core there is a bigger problem. Retirement savings is a banking of today's labor in order to buy tomorrow's labor. What if there isn't enough of tomorrow's labor? Of course this question is mitigated by investment in capital, economic grow, and surely other fsctors but does the hazard not still remain?
Promising benefits today to be paid for in the future is also what politicians do so often.
John Cochrane:
>>I was a loud critic of the Dodd-Frank approach to regulation, arguing for lots of equity rather than continued high leverage and the fantasy that regulators would really really see asset risks building up next time. That has obviously failed once again. But at least they had the decency to notice something went wrong, to say the words "moral hazard" and to do something about it. <<
>>Pension funds had a buffer to finance rates going up 1.25 percentage points or so, but they were not prepared for what happened this year. The 25-year gilt was 1.52% in January, early this week it was 4.16% up from 3.1% the week before! ... (It also doesn't mean LDI is a risky strategy, unless you lever it up seven-fold.)<<
After 10+ years of very very low rates, rapidly raising them should obviously be a problem. The rates should have been raised, a small amount, far sooner. And NOT raised so much at once this last quarter.
Handling inflation AND unemployment is at least one job too many for the Fed, or the UK central bank. The world is better off with stable money, and the US Fed should have that as its ONLY job.
Matt Levine... he gets a lot of technical details right but his conclusions are all over the place.
Pensions aren't a pot of money that is safe from market runs UNLESS they are fully funded. When pensions aren't fully funded they are not safe from market runs, in fact the expected outcome is that at some point in the future there will be a run on the pension system because it is underfunded. It is not the accounting fictions that he notes which are the issue, it is the legal fiction which allows the US to run a Social Security 'fund' and make promises that it cannot possibly keep under its current structure. Making promises you can't possibly keep is typically considered fraud, so we created legal fictions to allow what are blatantly fraudulent enterprises not only to exist but to simultaneously grown and become even more fraudulent.
This really isn't any different from the banking sector and their 'runs'. You can create a run free* banking sector by having time instead of demand deposits, and matching your investment horizons to the deposit horizons. The second you become underfunded for those future horizons you become at risk for a run, this is no different from a pension fund which is safe right up until they are underfunded in which case they are no longer safe.
*You'll still go bust if your investments are bad, but the same is true for pension funds.
Finance and risk. Root problem was that now one was taking account of systemic risk and sure enough stockholders and managers of firms who did not, did not suffer catastrophically in 2008. There should have been both a hugely greater, faster monetary response to 2008 (TARP was or ought to have been unnecessary) AND many more bankruptcies.
NEVERTHELESS the real damage of 2008 was the Fed's failure to have allowed inflation (and by implications NGDP) expectations to collapse, recover slowly, and not to return secularly to target.
National, state, and local banks, issuing non-debt based currency (hell, you don't even need to back it, just inflate on a set schedule). I'd take it a lot further (e.g. no tax penalties for exchanging currencies), but that would pretty much fix it.
At this point, freaking Dogecoin is a better currency than the USD.
"If you have a pot of money that is immune to bank runs, over time, modern finance will find a way to make it vulnerable to bank runs."
Maybe I don't understand this statement. Is a run different than the pot of money being vulnerable to losses resulting in a net negative value? If not, 'I'd say that a pot of money immune to a run is probably invested too conservatively. Kling's examples point out times the risk wasn't fully recognized. That seems completely different than assessing the risk as best one can and finding some balance of that risk and expected returns that seems satisfactory.
>>LDI collateral buffers are partly set using historical data to build models based on the likely probability of gilt price movements, according to Shalin Bhagwan, head of pension advisory at DWS Group. The sudden recent surge in gilt yields “blew through the models and the collateral buffers,” he said. <<
These models are of human behavior: there is no "market", that's a fiction to describe huge numbers of individual decision makers choosing to buy and sell for their various reasons and purposes.
Like the 2006-2008 MBS problems, the (market) models don't handle extreme behavior. 20 years of data is never enough BECAUSE the use of the model changes behavior so that, over time, the behavior previously modeled changes so as to invalidate the model.
The prior historical study of some behavior to assign probabilities to it is one aspect for understanding. Using those probabilities to create a system to profit from those probabilities changes the probabilities.
Like having 20 dice - what is the probability of all 6s, getting 120? extremely low.
But if you try to use that to make more money, it's like adding a die each year, or each quarter, or each month - after 10 more dice are added, that getting 120 or more becomes MUCH more likely.
The "value" of economics is understanding the "market" in order to make more money. But in making the money based on that understanding, the behavior will change.
This current problem is predicted & explained well in FT (tip Matt):
Please use the sharing tools found via the share button at the top or side of articles. Copying articles to share with others is a breach of FT.com T&Cs and Copyright Policy. Email licensing@ft.com to buy additional rights. Subscribers may share up to 10 or 20 articles per month using the gift article service. More information can be found at https://www.ft.com/tour.
>>For the past 25 years, the fall and fall in long-dated bond yields has delivered a costly headwind to pension funds. Thousands of firms that sponsor defined benefit pension schemes — typically now closed to new entrants — have seen the accounting value of their liabilities soar. <<
It's mostly a defined benefit scheme problem, when trying to minimize the current cost of a defined future benefit. That problem has mostly stopped growing - get rid of defined benefit, replacing it with defined contribution (and subject to general econ up & down risk).
Not enough actual liability, going bankrupt, is available to the Big Banks. They bet their firms equity on their models, which blow up? Their equity owners get wiped, their bond holders take a huge haircut. This honest, but brutal, "market" regulation needs to be used against Big Banks whose models fail. So that the 1% rich investors who want 25% of the economy's profit have far more at personal risk.
It would also be better to have more, smaller firms, with slightly different offerings that would mean more or less "model-change" risk. The rich fat cats Banksters don't want this.
Most of the governments of the world are playing a similar game. As the US dollar is a reserve currency, the investors in these countries try to save their value by shifting to dollars. But what strategies are available to us to use against our Fed and our government debasing our dollars? How do we protect the value of our future assets from inflationary theft?
"I do not buy the conventional story that Enron executives knew all along that they were running a scam. I think they fooled themselves at least as much as they fooled outsiders. I think that is part of the syndrome that Levine describes.
The sad thing is that Levine’s observation is probably correct. Financiers will always find a way to follow a strategy of picking up nickels in front of a steamroller. And when this goes spectacularly wrong, central banks feel obligated to provide a bailout."
DING DING DING we have a winnah
In the end the juice isn't worth the squeeze. End the Fed, and it ends these crimes against the people.
Moral hazard? Does the presence/behaviour of Central Banks encourage this? What if there were no lenders of last resort? Prudence or bankruptcy might focus minds and weed out the imprudent tendency. And what about Government ‘too big to be allowed to fail’ policy? What example do taxpayer funded bail outs set? The clear message, profit is privatised, risk is socialised if you are big enough and can lobby ($$$) enough because it’s all about saving jobs. Have none of them read Adam Smith? (Rhetorical)
End the Fed.
Would that be Ex Fed or Fed Ex? 😊
bart_simpson_drooling.jpg
When theory collides with common sense, common sense always wins. ZIRP collides with the common sense that there is always scarcity and opportunity cost. For a decade central banks believed in ZIRP. Now common sense is demanding payment for the delusion of a free lunch.
Note that the main Blindspot of the central bankers was the assumption that the real economy would provide the necessary supply of goods. But in the past decade, and culminating with Covid, governments have been strangling the real economy. Now we have real shortages of basic goods, especially fuel, and no finagling of the monetary system can fix that.
(For reference, I view common sense as wisdom built on long observation of human behavior and the world they occupy)
"Note that the main Blindspot of the central bankers was the assumption that the real economy would provide the necessary supply of goods."
They didn't have a blindspot, they knew this would happen. It's achieving it's intended purpose.
Never attribute to malice what can be explained by stupidity, EXCEPT WHEN THEY ADVERTISE THEIR INTENT AHEAD OF TIME, e.g. the WEF's agenda.
The pension plans problems are all, at their core, that the contributions to and the payouts from were always mismatched from the beginning. The plan providers promised benefits that couldn't be covered by the contributions made up front.
That mismatch is true of US Soc Sec and I'd guess UK too but I've always wondered if at core there is a bigger problem. Retirement savings is a banking of today's labor in order to buy tomorrow's labor. What if there isn't enough of tomorrow's labor? Of course this question is mitigated by investment in capital, economic grow, and surely other fsctors but does the hazard not still remain?
Promising benefits today to be paid for in the future is also what politicians do so often.
John Cochrane:
>>I was a loud critic of the Dodd-Frank approach to regulation, arguing for lots of equity rather than continued high leverage and the fantasy that regulators would really really see asset risks building up next time. That has obviously failed once again. But at least they had the decency to notice something went wrong, to say the words "moral hazard" and to do something about it. <<
He links to good Allison Schrager: https://www.bloomberg.com/opinion/articles/2022-09-30/hardly-a-surprise-pension-funds-stoked-the-uk-rout
>>Pension funds had a buffer to finance rates going up 1.25 percentage points or so, but they were not prepared for what happened this year. The 25-year gilt was 1.52% in January, early this week it was 4.16% up from 3.1% the week before! ... (It also doesn't mean LDI is a risky strategy, unless you lever it up seven-fold.)<<
After 10+ years of very very low rates, rapidly raising them should obviously be a problem. The rates should have been raised, a small amount, far sooner. And NOT raised so much at once this last quarter.
Handling inflation AND unemployment is at least one job too many for the Fed, or the UK central bank. The world is better off with stable money, and the US Fed should have that as its ONLY job.
By design.
Matt Levine... he gets a lot of technical details right but his conclusions are all over the place.
Pensions aren't a pot of money that is safe from market runs UNLESS they are fully funded. When pensions aren't fully funded they are not safe from market runs, in fact the expected outcome is that at some point in the future there will be a run on the pension system because it is underfunded. It is not the accounting fictions that he notes which are the issue, it is the legal fiction which allows the US to run a Social Security 'fund' and make promises that it cannot possibly keep under its current structure. Making promises you can't possibly keep is typically considered fraud, so we created legal fictions to allow what are blatantly fraudulent enterprises not only to exist but to simultaneously grown and become even more fraudulent.
This really isn't any different from the banking sector and their 'runs'. You can create a run free* banking sector by having time instead of demand deposits, and matching your investment horizons to the deposit horizons. The second you become underfunded for those future horizons you become at risk for a run, this is no different from a pension fund which is safe right up until they are underfunded in which case they are no longer safe.
*You'll still go bust if your investments are bad, but the same is true for pension funds.
Finance and risk. Root problem was that now one was taking account of systemic risk and sure enough stockholders and managers of firms who did not, did not suffer catastrophically in 2008. There should have been both a hugely greater, faster monetary response to 2008 (TARP was or ought to have been unnecessary) AND many more bankruptcies.
NEVERTHELESS the real damage of 2008 was the Fed's failure to have allowed inflation (and by implications NGDP) expectations to collapse, recover slowly, and not to return secularly to target.
End the Fed!
And replace it with?
National, state, and local banks, issuing non-debt based currency (hell, you don't even need to back it, just inflate on a set schedule). I'd take it a lot further (e.g. no tax penalties for exchanging currencies), but that would pretty much fix it.
At this point, freaking Dogecoin is a better currency than the USD.
"If you have a pot of money that is immune to bank runs, over time, modern finance will find a way to make it vulnerable to bank runs."
Maybe I don't understand this statement. Is a run different than the pot of money being vulnerable to losses resulting in a net negative value? If not, 'I'd say that a pot of money immune to a run is probably invested too conservatively. Kling's examples point out times the risk wasn't fully recognized. That seems completely different than assessing the risk as best one can and finding some balance of that risk and expected returns that seems satisfactory.
Here's a still relevant funny video about the Fed on Dan Mitchell's blog.
https://danieljmitchell.wordpress.com/2010/11/16/bashing-the-federal-reserve/
From Matt:
>>LDI collateral buffers are partly set using historical data to build models based on the likely probability of gilt price movements, according to Shalin Bhagwan, head of pension advisory at DWS Group. The sudden recent surge in gilt yields “blew through the models and the collateral buffers,” he said. <<
These models are of human behavior: there is no "market", that's a fiction to describe huge numbers of individual decision makers choosing to buy and sell for their various reasons and purposes.
Like the 2006-2008 MBS problems, the (market) models don't handle extreme behavior. 20 years of data is never enough BECAUSE the use of the model changes behavior so that, over time, the behavior previously modeled changes so as to invalidate the model.
The prior historical study of some behavior to assign probabilities to it is one aspect for understanding. Using those probabilities to create a system to profit from those probabilities changes the probabilities.
Like having 20 dice - what is the probability of all 6s, getting 120? extremely low.
But if you try to use that to make more money, it's like adding a die each year, or each quarter, or each month - after 10 more dice are added, that getting 120 or more becomes MUCH more likely.
The "value" of economics is understanding the "market" in order to make more money. But in making the money based on that understanding, the behavior will change.
This current problem is predicted & explained well in FT (tip Matt):
https://www.ft.com/content/83927688-e0d1-4934-8d91-e279da6d6b6c
"
Please use the sharing tools found via the share button at the top or side of articles. Copying articles to share with others is a breach of FT.com T&Cs and Copyright Policy. Email licensing@ft.com to buy additional rights. Subscribers may share up to 10 or 20 articles per month using the gift article service. More information can be found at https://www.ft.com/tour.
https://www.ft.com/content/83927688-e0d1-4934-8d91-e279da6d6b6c
>>For the past 25 years, the fall and fall in long-dated bond yields has delivered a costly headwind to pension funds. Thousands of firms that sponsor defined benefit pension schemes — typically now closed to new entrants — have seen the accounting value of their liabilities soar. <<
It's mostly a defined benefit scheme problem, when trying to minimize the current cost of a defined future benefit. That problem has mostly stopped growing - get rid of defined benefit, replacing it with defined contribution (and subject to general econ up & down risk).
Not enough actual liability, going bankrupt, is available to the Big Banks. They bet their firms equity on their models, which blow up? Their equity owners get wiped, their bond holders take a huge haircut. This honest, but brutal, "market" regulation needs to be used against Big Banks whose models fail. So that the 1% rich investors who want 25% of the economy's profit have far more at personal risk.
It would also be better to have more, smaller firms, with slightly different offerings that would mean more or less "model-change" risk. The rich fat cats Banksters don't want this.
Most of the governments of the world are playing a similar game. As the US dollar is a reserve currency, the investors in these countries try to save their value by shifting to dollars. But what strategies are available to us to use against our Fed and our government debasing our dollars? How do we protect the value of our future assets from inflationary theft?
+10^10
"I do not buy the conventional story that Enron executives knew all along that they were running a scam. I think they fooled themselves at least as much as they fooled outsiders. I think that is part of the syndrome that Levine describes.
The sad thing is that Levine’s observation is probably correct. Financiers will always find a way to follow a strategy of picking up nickels in front of a steamroller. And when this goes spectacularly wrong, central banks feel obligated to provide a bailout."
DING DING DING we have a winnah
In the end the juice isn't worth the squeeze. End the Fed, and it ends these crimes against the people.
1 Removing the Fed bailouts would surely reduce this risky behavior but I'm skeptical by how much and it surely wouldn't end it.
1a Risky behavior has economic benefits too. One can't simply look at the downside of these bailouts in isolation.
2 Maybe the bailouts are comparable to bathwater but you need much more justification for why that requires throwing out the baby (Fed) too.