The Other Pension Crisis

Yves Smith explains how the Employee Retirement Income Security Act of 1974 contributed to the housing crisis and may have rendered company pension funds a lot more secure than they might otherwise be:
The result was that the pension funds, which had long been limited to safe assets such as corporate bonds and Treasury securities, could put some money into riskier investments such as stocks and venture capital — on the assumption that diversification, both by asset class and within each asset class, would reduce risk in the broader portfolio.

Unfortunately, over-reliance on the power of diversification has led fund managers to be less attentive to the hazards of particular investments. Consider two examples: private-label mortgage securities, which are issued without government guarantees, and private-equity partnerships, which acquire public companies with the aim of restructuring them and selling at a profit.

Seduced by AAA ratings, fund managers often ignored the extraordinary complexity of mortgage securitizations, which typically involve hundreds of pages of documents defining the circumstances under which different investors get paid or suffer losses. As a result, they failed to notice some significant pitfalls.

For one, the contracts governing the securities gave an outsized, badly conflicted role to the mortgage servicer, responsible for interacting with borrowers and passing payments along to investors. Because the servicers were often the same banks that had made other loans to the borrowers, and because they could make more money by foreclosing than by fixing troubled loans, they had strong incentives to act against the investors’ (and the borrowers’) best interests.

The evidence is overwhelming that servicers abused their powers. They gave their own loans preference in making modifications and when counseling borrowers on what to pay first. They increased their profits by precipitating foreclosures and by forcing borrowers to buy insurance. They skimmed extra fees from money that they were supposed to pass on to investors.

Such abuses made the housing crash far worse than it should have been, and left badly burned investors wary of ever buying private-label securities again. As a result, nearly six years after the crisis, the mortgage market remains on government life support.

As the demographic bump of Baby Boomers passes through the U. S. python, pensions—whether public, private, socialized, or personal—will become a matter of national concern. Pension agreements whoever engage in them are statements of future behavior and, consequently, hedges against future circumstances. We aren’t as rich as we thought we were and it is increasingly looking as though we won’t be as prosperous in the coming decades as we thought we would be.

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Being There

The editors of Bloomberg urge the president to go to Ferguson:

Attorney General Eric Holder will be in Ferguson tomorrow. But the president should go, too — if not tomorrow then in the days or weeks ahead.

So why isn’t he? Obama said yesterday that his reluctance to say or do more reflects his reluctance to “put my thumb on the scales one way or the other” during a federal investigation. Undoubtedly he also is mindful of the backlash that greeted his remarks about the Henry Louis Gates contretemps five years ago and the death of Trayvon Martin in 2012, and he must also know that many Democrats, with the midterm elections looming, are wary of his making a comment or gesture that could alienate some white voters.

To which there is only one proper response: So what? This is a moment for the president to act. He can lead by helping to bring together a town riven by a tension sadly common in America — between a black community that feels disrespected and a police force that feels misunderstood. He can convene, listen and show that there is a messy, but peaceful way forward. If he succeeds in lowering temperatures, many Americans (including some Republicans) will be reminded why they voted for him 2008. If he doesn’t, many Americans may give him credit for trying.

while Todd Purdum of Politico explains why he shouldn’t:

Obama’s dilemma on Ferguson boiled down to whether he should issue a statement that would leave the shooting’s passionate critics unsatisfied, or say nothing at all and appear disengaged.

“The circumstances determine the reaction, and it isn’t appropriate for the president to speak up emotionally in the midst of an ongoing investigation by the Justice Department,” White House senior adviser Valerie Jarrett said in a telephone interview. “He wants the attorney general and his team to be able to conduct an independent investigation without any thumb on the scale one way or another. I think the president’s goal is to add his voice in a way that is calming, so the violence ends, and to send a message to the government officials on the ground about what his expectations are in terms of freedom to assemble, freedom of speech and freedom of the press — and also to signal to the people who have been looting and shooting that that’s not an acceptable way to honor the death of a young man.”

If the people of Ferguson are to be treated as ends rather than means, I think a better choice would be to use the millions that the president would spend in visiting Ferguson to fund the salaries of some additional, presumably black, police officers. Ferguson is a small community of very modest means and I sincerely doubt that it has the wherewithal to hire additional police officers on its own and, given its employment contracts, they’re not in a position to terminate any of their present officers in favor of replacements. The only practical ways they might bring on additional officers would be to federate with other small North County towns (which wouldn’t guarantee the outcome) or to find some additional funding.

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The States

400 years ago the emerging states of Europe faced a problem. They had just been through nearly a half century of continuous war being fought with ever more deadly weapons, war everywhere and without end. To bring an end to that situation they created a fiction: the Westphalian state. Under this fiction states were distinct, equal, and sovereign which means that they had borders and were responsible for what went on within them and should be left alone within them as long as they did the same. The plan though flawed and imperfect succeeded. It didn’t completely end wars but it ended war without boundaries or end.

Over the last century we have been undermining that fiction in innumerable ways including extraterritorial governmental agencies, breaches of the sovereignty of states, and treating non-states as though they were states.

There remain large portions of the globe that have never bought into the Westphalian system, notably large swathes from the Bosporus to the Hindu Kush, a similar and related swathe in North Africa, and large portions of the African continent. That is the context for Patrick Smith’s jeremiad over the situation in the Middle East:

The ISIS goal of reestablishing a caliphate is a declaration that it intends to send the Sykes-Picot Agreement, the Anglo-French pact that led to the formation of modern Iraq and Syria, into history. Does the administration understand that in favoring the Kurds over the unity effort in Baghdad it risks encouraging the breakup of a nation?Obama cannot be blamed for all of the mess before us. When American pilots are bombing an insurgency firing American weapons and driving American vehicles, it is a reminder that things started long before he took office.But wasting time in Syria that could have been spent on a political solution, and reading Iraq wrong since American troops were ordered home three years ago—these mistakes are Obama’s and have worsened the crisis considerably.

I would add that the president’s “drone war” has contributed his own special touch to the decline of conditions bolstering states, a decline that has allowed this new “caliphate” to flourish. Among presidents only George Washington did not inherit lamentable policies from his predecessors. Bill Clinton inherited a “no fly zone” over Iraq from George H. W. Bush. George W. Bush inherited troops stationed in the Kingdom of Saudi Arabia, one of the key factors leading to the attack on 9/11/2001 from his.

President Obama has characterized the linchpin of his administration’s foreign policy as “don’t do stupid stuff” (presumably paraphrased). Refusing to acknowledge the world as it is and taking a mugwump attitude towards the Middle East is stupid stuff.

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Not As Simple As Black and White

The most prominent domestic story in the United States, sadly, remains that of the shooting of Ferguson, Missouri Michael Brown by a police officer and the days of demonstrations and riots that have followed it. One of the saddest things about the matter is how impossible it is to write about without pre-conditioning the story. I elected to write it as I did but many would condemn that as sweeping the facts under the carpet, preferring “black teenager Michael Brown” and “white police officer”. The reality is that at this point we do not know if those supplemental facts are relevant or not and we may never know.

It may be that any police officer in the situation in which this particular police officer found himself would have responded in the same way, regardless of the races of the principles and the misunderstandings and histories those convey. We just don’t know.

Eugene Robinson explains his view:

But the violence in Ferguson tells of a deeper, more fundamental narrative about what African Americans have done, and what has been done to them, in the decades since the urban riots of the 1960s — the fire last time.

Tempted to conclude that nothing has changed? Please note that the Missouri Highway Patrol commander, brought in to bring proportion and discipline to what had been a provocative local police response, is black. The attorney general who interrupted his Martha’s Vineyard vacation to order a Justice Department investigation and a third autopsy is black. And, of course, the president and commander in chief — who also took time from a Vineyard holiday to address the crisis in Ferguson — is black.

However, Mr. Robinson’s explication, too, sweeps some of the supplemental facts under the rug. President Obama is the the son of an African father and a white mother and was reared by white grandparents in Hawaii. Atty. Gen. Holder, born in the Bronx, is the son of a Barbadian father whose mother was the daughter of Barbadian immigrants. Neither of their life experiences has much in common with that of Michael Brown or with the millions of others of African Americans whose ancestors were brought to this country in the holds of ships as slaves. The sociologist Charles Moskas called these people “Afro-Americans”, a people with a distinct culture, history, dialect, and problems.

Our policies of the last half century have had the unfortunate effect of granting substantial benefits to those who shared only skin color and, perhaps, aspiration with Afro-Americans but not their problems. Meanwhile, our immigration, trade, tax, and education policies have made it very, very difficult for Afro-Americans to escape poverty and ghettoization.

We need better, more targeted policies.

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Post Mortem

The autopsy on Michael Brown, the Ferguson teenager whose shooting has sparked more than a week of demonstrations, riots, and tens of thousands of words of commentary does not appear to me to be consistent with a “fleeing felon” scenario:

“There were at least six entry wounds, there might have been seven, but we’ll have to correlate that with what was found in the first autopsy,” he said. The first autopsy was conducted by the St. Louis County Medical Examiner’s office. The U.S. Justice Department announced Sunday that it ordered its own autopsy.

(Ferguson update: Missouri governor deploys National Guard after clashes).

Dr. Baden said all of the gunshots were fired toward the front of Mr. Brown’s body. The results of the autopsy were first reported by the New York Times.

but with one of self-defense on the part of the police officer. It sounds to me as though either the officer is a pretty good shot or a very bad one.

I think the whole story is very sad with lots of blame and recriminations to go around however I wonder if those who’ve hinged their views on the image of a fleeing unarmed teen will be chastened by the autopsy’s findings. I’m guessing not.

For those who believe that the sad events were completely fomented by a mostly-black population and a mostly-white police force, what do you think should change? Keep in mind that until 2000 Ferguson was mostly white and it is only now mostly black. Do you think that:

  1. The population of Ferguson should have been mandated to remain white, consistent with its white police force.
  2. The police force should have been mandated to be mostly black consistent with the population it was now serving despite work rules governing hiring and firing.
  3. Some other solution and if so what?
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Serious Business

Indian journalist Brij Khindaria posts on how serious the situation in Iraq is. Here’s the meat of his post

Obama is misled if he imagines that Kurdish and Iraqi soldiers, aided by a few US advisors and warplanes, can prevent the self-proclaimed Caliph from firmly establishing the Islamic State stretching from Lebanon, through Syria to Iraq.

Air raids can stop IS fighters from gaining territory but dislodging and destroying them requires boots on the ground. The key question is, “Will local boots be enough?” Don’t hold your breath.

Meanwhile, former French foreign minister Dominique de Villepin points out (translation here at worldmeets.us) that ISIS is not the U. S.’s problem alone:

The borders of the Sykes-Picot era have been swept away. Post-colonial and Cold War political models are obsolete. Shiites and Sunnis are confronting one another and minorities are exposed to ethnic cleansing in all its forms. In a word, Islamism is to Islam what fascism was to the national ideal in Europe – a monstrous double, out of control, riding on the back of the archaic and modernity, imaginary archaic and medieval ideas communicated as propaganda through the latest technology. It will take the Middle East another generation to achieve its own peaceable modernity, but until then it needs to be on guard to nihilist temptations and civilizational suicide. We are at the dawn of a decisive moment when the region swings to one side or the other. Our role is to help it as best we can to choose life over death.

The foremost political issue here, as always, is unity and the law that the international community should embody. Force is only a stopgap to prevent the worst. It must be timely. And be aware that this is what the jihadists want to ennoble their fight and radicalize people against the West which is still suspected either of crusades, or colonialism.

While our European allies may think of the situation in terms of the “Pottery Barn rule”, they have more at stake than we do in Iraq. Their trade with Iraq is greater than ours and a caliphate stretching from the Bosporus to the Hindu Kush would threaten them more than it would us.

India, similarly, has much at stake. Their trade with Iraq is only a little less than ours and the putative caliphate would be at their backdoor.

We’re not alone and we shouldn’t act as though we were alone. But it does mean that the Europeans and other stakeholders need to act.

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The Real Fear

The real things we should be afraid of in the ongoing Ebola outbreak are that it will cause the fragile healthcare systems in West Africa to collapse under its weight and that it will spread to Nigeria:

Last week, my brilliant Council on Foreign Relations colleague John Campbell, former U.S. ambassador to Nigeria, warned that spread of the virus inside Lagos — which has a population of 22 million — would instantly transform this situation into a worldwide crisis, thanks to the chaos, size, density, and mobility of not only that city but dozens of others in the enormous, oil-rich nation. Add to the Nigerian scenario civil war, national elections, Boko Haram terrorists, and a countrywide doctors’ strike — all of which are real and current — and you have a scenario so overwrought and frightening that I could not have concocted it even when I advised screenwriter Scott Burns on his Contagion script.

Inside the United States, politicians, gadflies, and much of the media are focused on wildly experimental drugs and vaccines, and equally wild notions of “keeping the virus out” by barring travelers and “screening at airports.”

Let’s be clear: Absolutely no drug or vaccine has been proven effective against the Ebola virus in human beings. To date, only one person — Dr. Kent Brantly — has apparently recovered after receiving one of the three prominent putative drugs, and there is no proof that the drug was key to his improvement. None of the potential vaccines has even undergone Phase One safety trials in humans, though at least two are scheduled to enter that stage before December of this year. And Phase One is the swiftest, easiest part of new vaccine trials — the two stages of clinical trials aimed at proving that vaccines actually work will be difficult, if not impossible, to ethically and safely execute. If one of the vaccines is ready to be used in Africa sometime in 2015, the measure will be executed without prior evidence that it can work, which in turn will require massive public education to ensure that people who receive the vaccination do not change their behaviors in ways that might put them in contact with Ebola — because they mistakenly believe they are immune to the virus.

The former concern is already dangerously close to happening:

At the same congressional hearing, Dr. Frank Glover, a medical missionary who partners with SIM, a Christian missions organization, and the president of SHIELD, a U.S.-based NGO in Africa, warned that Liberia had fewer than 200 doctors struggling to meet the health needs of 4 million people before the epidemic. “After the outbreak that number went down to about 50 doctors involved in clinical care,” said Glover.

I myself have received emails from physicians in these countries, describing the complete collapse of all non-Ebola care, from unassisted deliveries to untended auto accident injuries. People aren’t just dying of the virus, but from every imaginable medical issue a system of care usually faces.

Liberia, population 3.5 million, for example has a single medical school with another in the planning stages. Each doctor or nurse there that dies of Ebola is not just a tragedy but a disaster. We are complicit in the desperate condition of African healthcare by tempting African physicians away from their home countries to the fleshpots of western medicine and Western volunteer organizations are completely inadequate to make up the difference.

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Missouri, Fleeing Felons, and Present Law

There’s an informative contribution to the discussion of the events unfolding in Ferguson, Missouri from Robert Verbruggen at RealClearPolicy. You can read the relatively brief post yourself but here’s a summary:

  • The Ferguson police officer whose killing of a young man was the spark that set off the days of demonstrations and riots was apparently acting within Missouri state law and official guidelines.
  • The state law and guidelines are an implementation of the “fleeing felon” rule.
  • The “fleeing felon” rule was deemed unconstitutional 30 years ago in Tennessee v. Garner.

The point here is that it’s quite possible that a criminal suit brought against the police officer in Missouri would fail but would prevail in the federal court of appeals.

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The House Divided

There are apparently two different federal government views of the Islamic State of Iraq and Syria, that of the White House and that of the intelligence departments:

The Obama administration’s Iraq policy seems premised on the idea that the terrorist Islamic State is so toxic that it will be self-limiting and ultimately self-defeating. But that’s not the view of U.S. intelligence officials.

In a briefing for journalists Thursday, a panel of five U.S. intelligence officials summed up their assessment of an organization that has shown a remarkable durability because it is “patient,” “well-organized,” “opportunistic” and “flexible.” Under the leadership of Abu Bakr al-Baghdadi, the group has rebounded from about 1,500 fighters in 2010 to more than 10,000 today — becoming a global jihadist organization that communicates in many languages.

Given the Islamic State’s stated intentions we had better hope that the White House is right and, indeed, our intelligence services’ track records in the region haven’t been particularly good for some time.

My own view, as I’ve mentioned any number of times before, is that as long as we’re content with security theater rather than security and are unwilling to disrupt the critical success factors that lead to the attacks on 9/11 we’ll continue to be as vulnerable as we were on 9/10/2001. As we learned it doesn’t take a lot of people or money to launch a disruptive, punishing attack and ISIS has both.

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The Disappearing Continent

I was aware of how many people in Europe take their vacations during the month of August but I hadn’t realized it was like this. It’s practically impossible to get anything done with European companies during the month. There’s nobody home.

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