Unkept Promises

Here is a great explanation of the credit crisis. But read it carefully. You might conclude that current economic conditions are the result of low interest rates. However, as the author points out, low interest rates are normally a good thing. Did interest rates get too low?

I doubt it. While I generally adhere to the Austrian belief that central banks can mess things up badly by allowing central bank interest rates to deviate from market interest rates, I have to note that central banks are responsible for only 15% of money and credit (which, for all practical purpose, are the same thing). Central banks are less powerful than they were back in the day and they simply can’t push interest rates around to the extent they did in the past.

If blame is to be placed, it has to go to investors in general and pension funds in particular. Corporations (private pensions) and taxpayers (public pensions) have underfunded their pension funds. As the author points out, this forces pension funds to accept greater and greater risk in order to meet their payout objectives. High risk is called high risk for a reason, and it’s just a matter of time until the worst happens. We simply have had too much capital invested in the wrong things and not enough in the right things. Markets can correct for that, and they are, as painful as it might be. But markets can’t correct for people making promises they can’t keep,  which is where I believe we are.

If you plan on being the beneficiary of a pension fund, whether public, corporate, or union, you’d better have a fallback position!


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