Ripping Off Pensioners is Wrong

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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