Top Harvard economist warns of 'mother of all
financial crises' amid coronavirus pandemic
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April 01, 2020 04:24 PM
A top economist
predicted that the coronavirus could cause the "mother of all financial
crises."
Kenneth S. Rogoff, a widely
cited, leading economist at Harvard University, predicted that the novel
coronavirus could trigger an economic crash, both in the United States and
globally. “This is already shaping up as the deepest dive on record for the
global economy for over 100 years,” Rogoff said.
“Everything depends on how long it lasts, but if this goes
on for a long time, it’s certainly going to be the mother of all financial
crises," Rogoff said, who co-authored a comprehensive financial history
book entitled This Time Is Different:
Eight Centuries of Financial Folly.
Last week, Congress approved and Trump signed a $2.2 trillion spending bill, the third relief
package designed to alleviate economic concerns of small businesses, large
corporations, and individuals during the COVID-19 pandemic. It allocates $500
billion in loans to large companies, $350 billion in forgivable loans, and
provides $1,200 in direct cash payments to many U.S. citizens, among other
items.
Before the historic relief package was passed last week,
House Speaker Nancy Pelosi said lawmakers must
begin drafting a fourth relief package to deal with the coronavirus pandemic,
arguing that the bill that was making its way through Congress was insufficient
to address the needs of state and local governments, workers, and other
entities affected by the spread of the virus.
On Tuesday, the president advocated for a $2 trillion
addition to congressional economic relief bills designed to help workers and
businesses during the pandemic, saying he hopes to increase employment through
federal programs.
"With interest rates for the United States being at
ZERO, this is the time to do our decades long awaited Infrastructure Bill. It
should be VERY BIG & BOLD, Two Trillion Dollars, and be focused solely on
jobs and rebuilding the once great infrastructure of our Country! Phase
4," Trump tweeted.
Since COVID-19 was first reported in the U.S., the Dow
Jones Industrial Average has precipitously fallen, plummeting from over 29,000
to approximately 20,900.
More than 911,000 people have
tested positive for the coronavirus globally. Of those, at least 45,000
have died from it, and more than 191,600 have recovered. The U.S. has seen at
least 206,000 confirmed cases, with nearly 8,400 reported recoveries.
THE LOOTING
OF AMERICA:
BARACK
OBAMA AND HIS CRONY BANKSTERS set themselves on America’s pensions next!
http://mexicanoccupation.blogspot.com/2015/04/obamanomics-assault-on-american-middle.html
The new aristocrats, like the lords of old, are not
bound by the laws that apply to the lower orders.
Voluminous reports have been issued by Congress
and government panels documenting systematic
fraud and law breaking carried out by the biggest
banks both before and after the Wall Street crash
of 2008.
Goldman Sachs, JPMorgan Chase, Bank of America and every other major US
bank have been implicated in a web of scandals, including the sale of toxic
mortgage securities on false pretenses, the rigging of international interest
rates and global foreign exchange markets, the laundering of Mexican drug
money, accounting fraud and lying to bank regulators, illegally foreclosing on
the homes of delinquent borrowers, credit card fraud, illegal debt-collection
practices, rigging of energy markets, and complicity in the Bernie Madoff Ponzi
scheme.
The Next Looming Economic Contagion: Pensions Collapse
As
the stock market implodes in response to COVID-19, there is an underlying economic virus
that will soon be evident: America's grossly underfunded
pensions. With the market down 40% in from its high point (before
rebounding March 24), many corporations may default on their pension
promises. consumption and thus gross sales will decline (further
dampening corporate profits), and the widespread weakness of pensions will be
exposed. This in turn will cause a vicious cycle in which retirees
and those planning retirement will have fewer disposable dollars and will
divert more money to retirement savings — further weakening consumption and
undermining the effectiveness of interest rate adjustments by the Federal
Reserve.
The
problem of underfunded pensions has been loudly proclaimed for
years. It is hard to ignore article titles like "The Coming
Pension Crisis Is So Big that It's a Problem for Everyone" (Forbes, 5/20/2019), "'Their house is
on fire': The pension crisis sweeping the world" (Financial Times, 11/17/2019), and "Pension
Plans for Millions of Americans Are on the Brink of Collapse" (NPR, 11/28/2018).
Yet
these warnings have been ignored. Now we must
face the consequences.
America
is on the brink of a realization of just how much corporations and legislatures
have "planned for the best, in denial of the worst." In
both corporate boardrooms and legislative budget-making, employees will look
back and see that what has been done is nothing short of fraud. But
it's too late now — we cannot roll back the investment clock.
Left unchecked, this crisis will decimate the
retirement future of millions. Over the years, the number of retirees has grown
dramatically, while the number of active participants and employers has decreased. This imbalance,
combined with the market decline from the Great Recession, has put many of
these vital pension plans on an unsustainable path[.] ... To make matters
worse, the Pension Benefit Guaranty Corporation (PBGC) multiemployer program,
the funding backstop for plans that have run out of money, is also projected
to collapse by 2025. The
dissipation of the PBGC would leave retirees with about 2% of what they had
counted on for retirement[.] ... The collapse of the entire system would
further compound the pension crisis at hand and have a domino effect on our economy,
potentially leading to widescale business closures, layoffs and rising
unemployment.
The
current decline was foreseen — and the warnings ignored. The
imminent implosion will quickly exceed all municipal defaults in U.S. history
combined. Worse, state pensions are some of the greatest offenders
in playing "kick the can" with beneficiaries'
contributions. Legislators everywhere have played this game of
promising costly benefits to unionized state labor organizations (especially
teacher unions) and then diverting required contributions to other budgetary
preferences using unrealistic predictions of returns on existing investments,
accounting gimmicks, and absurdly low estimates of future benefits.
There is
no federal Pension Benefit Guarantee Corporation for state plans —
the PBGC insulates only private-sector defined benefit plans under ERISA. State
workers may perceive that the government will always pay, but states don't
print currency, and they are limited by reality:
When states and local governments reduced their
employer contributions to their public pension funds during the Great
Recession, they in effect borrowed from those pension funds. If
governments hope to meet their contractual obligations to their employees, they
must pay these delayed pension contributions back at some point.
But
most states did not pay them back. This analysis from the Federal
Reserve Bank of Cleveland addresses the legal recourse of pension beneficiaries
when the state lacks the financial resources to keep its word in a time of
crisis:
[O]ur legal system provides judges with the
flexibility to adapt broad constitutional principles to the extreme and exigent
necessities of their times. In such times, federal courts typically
defer to states' "police" (sovereign) powers, a decision which
essentially allows the state, as a sovereign entity, to resolve an issue as it
sees fit. The US Supreme Court has made a similar ruling, deciding
that "[t]he contract clause must be construed in harmony with the reserved
power of the State to safeguard the vital interests of her
people. Reservation of such essential sovereign power is read into
contracts." In other words, when "vital interests"
are at risk, defending contracts may be of secondary importance. [A]
state may have all the legal authority it needs to shed its insurmountable
liabilities and force its creditors to accept any deal it offers.
What
remains now is to ponder the extent of the federal bailout that will be granted
to employees whose pensions are evaporating before their
eyes. When Sears sought bankruptcy protection, the PBGC undertook to
step in for some 90,000 employees. How many can
it rescue now, even with a federal infusion of
cash? The present situation promises to be exponentially larger.
If
President Trump is the voice seeking aid for private pensions, Nancy Pelosi and the Democrats will likely strangle
a rescue plan or try to attach socialist conditions. But how much
money would be required for the federal government to also rescue underfunded
state pensions?
In
June 2019, the Pew Charitable Trusts provided a 2017 snapshot of state pension
shrotfalls:
[T]he pension funding gap — the difference
between a retirement system's assets and its liabilities — for all 50 states
remains more than $1 trillion, and the disparity between well-funded public
pension systems and those that are fiscally strained has never been greater[.]
... In 2017, the state pension funds in this study cumulatively reported a
$1.28 trillion funding gap[.] ... Even after nine years of economic recovery,
most state pension plans are not equipped to face the next downturn.
A
serious hurdle to a federal rescue is this moral hazard — states that had been
most neglectful in funding their pensions would have the most to gain.
Whichever
way this shrinking pie is sliced, there will be only crumbs for retirees and
workers. The coming economic whirlwind is going to pick up
this Dorothy's house of pensions
neglect, and no one knows where it will land.
Democrats to seek aid for troubled union
pensions in next relief package
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April 01, 2020 12:01 AM
House Democrats
planning a new and sweeping economic relief package to respond to the
coronavirus say they’ll include federal aid for troubled union pensions.
Democrats have just begun drafting the relief bill, which
they said would include enhanced family paid leave, more money for food stamps,
and new worker safety requirements.
The pension bailout, if included in the measure, could cost
tens of billions of dollars if it matches a pension relief package the House
passed last year.
Speaker Nancy Pelosi, a California Democrat, told reporters
she believes President Trump has signaled interest in aiding troubled pension
programs but that it was excluded from the $2.2 trillion package signed into
law last week because Senate Republicans, led by Majority Leader Mitch
McConnell, did not want it in the bill.
“President Trump was actually supportive, but Mitch
McConnell was not,” Pelosi told reporters. “And so, he said we'll save it for
the next bill. Well, here's the next bill.”
House Democrats earlier this month introduced an economic
relief package, but it was rejected by Senate lawmakers, who negotiated the
$2.2 trillion bipartisan deal with the Trump administration.
The sidelined House proposal included the language in the
House-passed Butch Lewis Act, a multiemployer pension bailout measure with a
nearly $100 billion price tag. It would provide low-interest loans to the
nation’s most underfunded union pension plans to help them stave off looming
insolvency, and it would provide an additional $71 billion in direct cash
assistance to those struggling pension plans. The measure would help ensure
pension benefits for 1.3 million workers.
Pelosi did not indicate this week whether the draft of the
new economic relief bill will include the Butch Lewis Act, but a Democratic
aide confirmed it, acknowledging the plan would have to be bipartisan.
“Our proposal is the Butch Lewis Act, but, more
importantly, we need and want multiemployer pension reform that works,” a
senior Democratic aide told the Washington
Examiner. “We are not so committed to an approach that we can’t negotiate a
solution.”
The House-passed bill won support from dozens of House
Republicans, but it never received consideration in the Senate.
The plan has generated opposition from some economists who
argue it does nothing to address the underlying flaws in the pension programs
that now threaten their solvency.
About 125 multiemployer pension plans will become insolvent
in the next two decades, and some will go broke in the next few years, the
Congressional Budget Office said.
“It’s a way to kick the can down the road, and you are
using a lot of taxpayer money,” Rachel Greszler, a research fellow in
economics, budget, and entitlements at the Heritage Foundation, told the Washington Examiner.
Greszler pointed to a Sept. 6 letter from the CBO that
warned of the looming collapse of many union pension plans, even if Congress
passes a pension bailout.
“About one-quarter of the affected pension plans would
become insolvent in the 30-year loan period and would not fully repay their
loans,” the CBO wrote. “Most of the other plans would become insolvent in the
decade following their repayment of their loans.”
Greszler said it would make more sense for the federal
government to shore up the Pension Benefit Guaranty Corporation, or the PBGC,
which is also headed for insolvency, and to put in place reforms to help
pension plans survive, such as a slight reduction in benefits.
Democrats and many Republicans said Congress has no choice
but to act to stop the pensions from becoming insolvent.
The vast majority of union pension plans are grossly
underfunded and will have to cut benefits to retired workers without federal
help.
Congress last year passed legislation to protect the
pensions and healthcare for 92,000 mine workers.
Senate Republicans also introduced their own multiemployer
pension reform plan they said is “designed in a balanced way to avoid tipping
more plans into a poorer-funded condition and also to avoid exposing taxpayers
to the full risks associated with the largely underfunded multiemployer system
and pushing the PBGC into insolvency.”
The measure was authored by Senate Finance
Committee Chairman Chuck Grassley, an Iowa Republican, and Health, Education,
Labor, and Pensions Committee Chairman Lamar Alexander, a Tennessee Republican.
“We need to act quickly, but we can’t just pour money into
failing and mismanaged funds,” Grassley said. “Our plan will provide relief and
reform now. Without it, our retirees will be left without the future they
worked for.”
The AFL-CIO opposes the Grassley-Alexander plan, arguing it
puts too much of the responsibility on the unions by requiring them to provide
much higher premiums to the PBGC.
“This document contains no federal financial assistance
whatsoever,” AFL-CIO officials said in a statement. “Contrast this to the over
$700 billion that the government provided to the banks and Wall Street in 2008
and other corporate tax giveaways in recent years. It is punitive in nature,
imposing hefty new costs that even healthy plans will be unable to survive.”
Democrats will have to negotiate a bipartisan solution with
the Senate, which is run by Republicans. They'll also have to convince
McConnell, of Kentucky, that any pension bailout belongs in a new coronavirus
relief measure.
"I’m not going to allow this to be an opportunity for
the Democrats to achieve unrelated policy items that they would not otherwise
be able to pass," McConnell said Tuesday on the Hugh Hewitt show.
Report: States Face $1
Trillion in Unfunded Liabilities
States are facing more than $1 trillion in
unfunded future liabilities related to health and life insurance benefits for
their retired employees, a growing shortfall that amounts to about $3,100 for
every person in the United States, according to a new report by the American
Legislative Exchange Council (ALEC).
ALEC, which has come under attack by
left-wing advocacy groups in recent years, describes itself as “the nation’s
largest nonpartisan, voluntary membership organization of state legislators,
with more than 2,000 members across the nation.”
Its mission is “to discuss, develop, and
disseminate model public policies that expand free markets, promote economic
growth, limit the size of government, and preserve individual liberty.”
The new
study, the latest
in an annual series from ALEC’s Center for State Fiscal Reform, comes after
critics have complained for years that cash-strapped states don’t adequately
fund their retiree-related obligations, which has allowed those sums to
accumulate.
Its authors say that, “in the end,
government must be held accountable for its actions.” Without policy changes,
these liabilities could lead to future tax increases or force cuts to core
public services in states.
Making governments use “more prudent
actuarial assumptions and increasing transparency prevents state governments
from making impossible promises and allowing unfunded liabilities to
accumulate,” the report states.
These unfunded benefit programs for retired
public employees fall under a category that fiscal analysts call “other
post-employment benefits,” or OPEB. OPEB excludes public pension plans but
includes benefits to retired workers such as health insurance, life insurance,
supplemental Medicare insurance, and more. The study examined 132 OPEB plans
from fiscal 2013 to 2017, drawing on the most current Comprehensive Annual
Financial Reports (CAFRs) and Actuarial Valuation Reports.
“While a trillion dollars is a rounding
error in Washington, D.C., at the state level, it’s a huge threat to government
programs and taxpayers,” Jonathan Williams, chief economist and executive vice
president of policy at ALEC, told The Epoch Times in an interview.
Jonathan Williams of the American
Legislative Exchange Council. (Courtesy American Legislative Exchange Council)
“Governments, if they want to spend more
money on new programs, need to view OPEB liabilities as a threat, so I think
there is something for both parties to like from tackling these liabilities.”
Public pensions have generally been
prefunded at 80 percent in order to be considered healthy, “but now a lot of us
are thinking 100 percent is better.” OPEB items, by contrast, have generally
not been prefunded at all, he said.
“OPEB liabilities have flown under the
radar, but they have become more visible as a result of federal accounting rule
changes that force states to list them on their balance sheets,” Williams said.
Even so, they have been “overshadowed” by fiscal problems in Detroit and Puerto
Rico.
“Unfortunately, this new transparency has
left us with these very huge liabilities,” he said.
The states with the largest OPEB
liabilities are California ($166.6 billion), New Jersey ($130.4
billion), New York ($129.3 billion), Texas ($115.7 billion), and Illinois
($64.4 billion), according to the study. The states with the smallest OPEB
liabilities are Nebraska and South Dakota, which Williams said are tied at zero
because they don’t pay for retired employees’ health care, followed by Kansas
($285,000), Oklahoma ($9.1 million), and Utah ($210.9 million).
“There is a lot of doom and gloom in the
report,” but there are also a handful of states that are doing a good job
getting a handle on their OPEB liabilities, Williams said.
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