04 April 2008

More On PBGC and the Blueprint

The Pension Benefit Guarantee Corporation is adopting a new investment policy that will invest heavily in corporate stock. This is bad news. Why?

The PBGC is in charge is making good on a portion of defined benefit pension plan payments when the pension fund can't make good on its obligations. Pension funds invest in equities too. Pensions funds are most likely need PBGC help when equities are low which is what makes the pension funds unable to meet their obligations. Thus, PBGC equity investments are likely to render the PBGC insolvent at the precise moment when its need to make payments to PBGC beneficiaries is greatest.

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More on the Blueprint:

There is apparently more to the Blueprint for financial industry reform proposed by the Treasury Department than the executive summaries reveals.

Part of the plan is, for example, a merger of the SEC and CFTC. Hidden in the plan are proposals to lighten regulation -- for example, a proposal to lighten regulation of securities exchange rules on listings.

J. Gilbert Reese, proprietor of the Business Law Profs blog, however, thinks that the proposal is DOA but was proposed for political reasons, and bad ones at that:

The proposal of the plan itself is an illustration as to why government ought not have the power the plan gives the FED. There is too much pressure on government officials in a downturn to "do something" and that pressure, more often than not, leads to counterproductive actions. It is well known that Herbert Hoover should not be criticized for doing nothing during the early days of the depression; he should be criticized for doing stupid things in response to pressure -- increasing tariffs and increasing taxes. The plan, increasing the power of the Fed in crisis times, is likely to lead to more problems than corrections.

I tend to agree. When the economy has gotten too complex and out of hand, back to basics, and not an assumption that regulators can outsmart Wall Street, is probably a better approach.

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