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We have to think about issues like income and wealth inequality, the structure of labor markets, institutional investor incentives, financial risk-aversion and deleveraging. We need to transform existing institutions, or invent new ones. -SRW (MY bold)

A good place to start transforming existing institutions might be pension funds. They play a key role in financial systems as they receive steady inflows of money today to cover obligations due in decades while paying out money today for obligations arising from money received decades ago. If they are not agencies of a country sovereign in its own currency then they can only pay out what they have received plus what they have earned on prior surplus receipts. Following inception they have a significant period in which inflows significantly exceed outflows. This serves as a source of capital for investment.

In the '60s the New York State Pension Fund invested in Green Valley, a retirement community south of Tuson and at a somewhat higher elevation. This was an excellent investment as it produced an asset that could service the needs of retirees and in a milder climate with lower land and construction costs. But, with continuing financialization of the economy pension fund 'investments' became more problematic. Even state backed funds 'invested' in the oil commodity boom that broke in July '08 and, in the new reality of Zero Interest Rate Policies, they are having difficulty even keeping up with inflation. This is one of the major downsides to ZIRPs and the losses are likely to be absorbed by a combination of the pensioners and the taxpayers of states that guarantee these retirement funds.

I can see only two real possibilities. Either the federal government assumes responsibility for shortfalls or we adopt sane macroeconomic policies. Some combination of both policies may offer the best result. I think this situation is symptomatic of an economy in which the financial sector has become many times the size of the underlying real economy. When that happens it is hard to keep the majority of the profits generated in the society out of the hands of financial sector executives and shareholders and it is even harder to keep them from controlling the government and using that control to their benefit and to the detriment of the general population. So the first step should be to cut the financial sector down to no more than twice the size of the real economy and keep it there.      


"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Nov 21st, 2013 at 10:10:17 AM EST
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