Months ago I proposed one or more not-for-profit investment banks to meet the financing needs of municipalities and other governmental entities. The context of that post was removing the profit motive from the process of selling municipal debt. I called for a patriotic philanthropist to set up such a system and pointed out how non-profit structures have been successful in some other areas of finance.
Beyond raising money, there are other points of intersection between a governmental need for honest banking services and the private banking sector (hereinafter: Wall Street), with its voracious appetite for profiteering. Matt Taibbi’s article in Rolling Stone magazine entitled “Looting the Pension Funds” examines how Wall Street, with help from ambitious local politicians, is confiscating large chunks of public pension money. It details how a number of states, led by Rhode Island, are altering laws and policies under the banner of “pension reform.” The true goals appear to include facilitating investment of pension money into “alternative investments,” legitimizing concealment of the ultimate destination of the funds, and slashing benefits. A significant amount is going into the hodgepodge of vehicles and strategies known as “hedge funds.” The various political and public policy groups pushing for these changes in RI can be traced back to Wall Street, anti-pension political groups, or both. The piece raises painful questions about public policy, privatized profit, and the common good.
Taibbi takes issue with the stated justification; that it is a necessary consequence of the 2008 financial crisis. Backers of the changes point out that the pensions are badly underfunded and claim the only viable path forward is to seek higher returns by paying Wall Street huge sums. Of course, as the article states, the crisis was largely brought about by the very greed and overreaching that is now being touted as the lone solution. It is as if a man wandered into the lion enclosure at the zoo, got badly mauled, and was then told his only hope for survival was returning to the cage for treatment by those very lions.
The 2008 crash exposed a longer term problem; politicians have habitually borrowed from public pension funds to pay for other goals. These redirections of worker pension money have, over the years, dramatically diminished the amount available for paying promised retirement benefits. Prior mismanagement of the funds, however, is not an argument against the structural viability of defined benefit pension plans. Nor does it justify grossly expensive investment proposals for those funds.
The stunningly high costs of the Wall Street sponsored schemes will only make matters worse. Nor can these proposals be justified by economic science, past experience, or common sense. Hedge funds cannot offer some magic cure for underfunded pensions. Indeed, they cannot even offer to keep pace with lower cost investments that are the obvious alternative choice. Taibbi points to Warren Buffet’s now famous bet pitting the S&P 500 against a collection of hedge funds picked by “geniuses.” Why use that single data point, though, when basic economic science can show the concept to be universal? A properly function market will drive out all bargains,[Insert a period here] Equity markets are sufficiently rational that they cannot be beaten consistently by clever stock pickers. Hedge funds have nothing to offer except a naked emperor whose (nonexistent) pockets overflow with other people’s money.
All of which brings us back to the point raised months ago. It is time to consider that the public purse cannot be left to the devices of private banking. We should explore the creation of not-for-profit financial enterprises capable of serving the financial needs of governmental entities. Rather than profit, these banking entities would be dedicated to performing their tasks, at cost, in furtherance of the public good.