Brad DeLong has a post up today in which he advocates an expansion of the Social Security system. He opens with the following paragraph:
Edward Filene’s idea from the 1920s of having companies run employer-sponsored defined-benefit plans has, by and large, come a-crashing down. Companies turn out not to be long-lived enough to run pensions with a high enough probability. And when they are there is always the possibility of a Mitt Romney coming in and making his fortune by figuring out how to expropriate the pension via legal and financial process. Since pension recipients are stakeholders without either legal control rights or economic holdup powers, their stake will always be prey to the princes of Wall Street.
Ripping off pensioners is indeed reprehensible, and we should be prepared to call out anyone who schemes the pension system at the expense of the powerless. And we should do it even if it means calling out a certain would-be-Fed-Chairman whom DeLong has championed:
When it comes to Wall Street, Summers said he obtained insights based partly on working part-time for the hedge fund D.E. Shaw and Company where he earned over $5 million in just one year. Summers said the experience gave him “a better sense of how market participants sort of think and react to things from sort of listening to the conversations and listening to the way the traders at D. E. Shaw thought.”
One young female quant who worked with him had this to say on her blog, “But when I think about that last project I was working on, I still get kind of sick to my stomach. It was essentially, and I need to be vague here, a way of collecting dumb money from pension funds. There’s no real way to make that moral, or even morally neutral.”
By “dumb money,” she is referring to the fact that investors, including those who manage public pension funds, routinely buy certain types of secure assets on a regular schedule or in other predictable patterns. Hedge funds like D.E. Shaw take advantage of that predictable behavior by selling these assets to investors for a slightly higher price. Because of the huge dollar value and volume of these investments, such strategies can make hundreds of millions of dollars for hedge funds.
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What sort of changes would you make to prevent this behavior?
Wouldn’t Summers have been negligent in his fiduciary duty to his clients if he failed to use public knowledge about the markets to their advantage?
It’s one thing for a broker to “front-run” his own clients’ orders, but if you observe a seasonal tendency in the market, how is it “wrong” to trade in anticipation of it? Is everyone who sells in May and goes away also guilty of ripping off other investors?
I would instead suggest sanctions against the “dumb money” pension fund managers, or penalize them for acting so predictably in such large amounts that they create arbitrage opportunities worth millions of dollars. They’re also being paid handsomely for their supposed expertise, not to be taken advantage of by their peers.
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Giving prominence to yet another front-running strategy as a way to rip off pensioners seems quite riciculous to me.
In part, and in big part, because pension funds could easily negate the strategy by being less predictable, so it is their lazyness that enables the front running.
But the more important reason is that this is a distributional issue:
* There are far bigger ways in which *existing* pensioners are being ripped off or outrageously subsidized by government policy, that always has a large distributional impact. For example in 2007-2008 the USA government and its central bank spent literally trillions of dollars to bail out pension funds, who were the major owners and creditors of deeply bankrupt looted banks. Consider just the hundreds of billions spent on AIG alone. And the extraordinary measures that followed that are meant to redistrbute income in favour of asset holders from working people.
* I cannot see any moral reason why *existing* pensioners should arouse your moral outrage, when on balance they had a pretty good deal from big company pensions, especially when all you can find is comparatively tiny front-running by hedgies. I would worry far more about the large mass of current workers that are being swindled out of a large part of their pension savings by high fees and being mis-sold inapproopriate but high-commission private pension products.
“I would worry far more about the large mass of current workers that are being swindled out of a large part of their pension savings by high fees and being mis-sold inapproopriate but high-commission private pension products.”
Did Larry Summers do that, too?
Dr. Kelton , this fits in close to the sociopathic behavior of the bankster profile and their courtier economists. This takes the neo-liberal ideology to the level of convenient absurdity. Some wag once commented that had something to do with neckties cutting off the flow of oxygenated blood to the fore brain. Though I stumble to provide a less sexist and more inclusive metaphor. So much for fence sitting, B.Del.. It is SUCH a strategic splash in the FT, that it must have been solicited.
After 24 years working for my county government, I received a big benefit cut to my pension contract because of the Great Recession. This happened to state, city, and county workers all across the country. Happened before & will happen again & again with our boom/bust economic system. Nevertheless, I urge all MMT advocates to look beyond these wounds & focus on the cause of all our economic woes: THE GREAT LIE. The .1% will always be the ruling class until most Americans learn that it is THE GREAT LIE that is the true cause of our failure to end poverty, end war, mitigate global warming, etc., etc.. The GREAT LIE is the ruling class story that there “isn’t enough money” to solve these problems. We must expose the GREAT LIE at every turn. at every moment, with every breath.