Just a quick note to say that I am sort of caught up in the historical nature of the past week. I'm trying to wrap my head around the implications of a bailout/no bailout vote for my personal, professional, and school board functions.
My personal feeling is that yesterday was panic and those that needed to make a point, did so. Whether you agree with the bailout or not, nobody can tell you that it is certain to work. Nobody can tell you that it won't work. The question on my mind is, how much do we have to give up. Not just financially, but as far as our way of life. As a nation we seem to be on the precipice of a new paradigm. One where we can't simply borrow our way to prosperity. Is the passing of a bailout our one last gasp before the eventual decline? What country out there will give us the $700 billion? Or will we just print it?
I don't pretend to be an expert on these things but I do follow it closely. For those econ nuts out there that want to see where we are and what will happen next, I urge you to read this speech by Ben Bernanke from 2002. The title is "Deflation: Making Sure "It" Doesn't Happen Here". Bernanke is considered by most to be the pre-eminent scholar on the causes and effects of the Great Depression. When he uses that term to describe our current times, I am certain he does not do so lightly. The Great Depression was the greatest deflationary era in United States history. His speech outlines what he would do to avoid a deflation, and then, if we were in a deflation, what he would do to get out of it. The crazy thing is, it's not just Bernanke using this term to describe our current economic state, it's both Presidential candidates as well. Let me also point you to one of the best articles I have read that deals with this crisis. Click here.
Bernanke lists about 8 actionable ideas in his speech. From my count, he has done six of them. The last two appear to be fixing treasury yields and intervening in currency markets. I think yesterday, he may have actually intervened in the currency markets by more than doubling the cash available to banks around the world.
Current events have me concerned on a lot of fronts. I run the finances for my household, decide how to spend money for my business, and decide how to spend money for the school district. What is happening out there will have profound effects on the decisions I make in all three capacities. Think about this for a second. In 2000-2003, we had a major stock market sell-off. The PA Public School Employee Retirement System is scheduled to come collect for those stock market losses in 2012 (check out the last slide in this presentation). Yes, this is a full TEN YEARS after the fund had bad returns. Since 2002, the Fund has put more and more money into private investments such as hedge funds and real estate partnerships. Great timing, eh? Given the current crisis and its implications for a large number of hedge funds, I cannot begin to fathom what kind of losses pension funds like this are taking this year. Please see this article in the New York Times regarding hedge fund shakeups. Keep in mind that hedge funds don't have to report performance the same way that stocks and mutual funds do. I went through every hedge fund/private investment company listed in the teachers pension and I found information on maybe TWO of them out of over 50 private equity partners. Check out the roster for yourself here.
PSERS had almost $63 billion in assets on June 30, 2008. That is DOWN from $67.2 billion in June 2007. According to their website, the Fund returned -2.82 percent for the fiscal year ending June 30, 2008. We have seen this movie before. It doesn't end well.
The recently passed State budget doesn't address any of these issues. Instead of slightly increasing school district and/or employee contribution rates to make up the funding shortfall from the last stock market decline, the budget LOWERED how much we must allocate to this fund. Now we are destined to have a massive increase in 2012 that will blow many school district budgets out of the water.
The current situation is fluid. As things change, I am sure my view will change. There are a lot of macro-level issues (national debt, deficit spending, tax rates, etc) happening as I type this that will wind their way down to the micro-level (household finances, school district budgets, etc.) in a very short period of time.
These are historical times- times that will be written about in the history books of my grandchildren.
Thanks for reading.
James
