When Princeton Professors collide! In one corner we have Nobel Laureate, Princeton economics professor and Bush-basher supreme Paul Krugman:
The decision [by the Pension Benefit Guaranty Corporation] to move a large share of the portfolio out of safe assets like Treasury bonds and into riskier but possibly higher-paying assets like stocks has been controversial.
Well, either they bought at the peak or they didn't, gentlemen - surely the reality-based community can get together on reality, or do we hope for too much? [Here is some belated reality from Justin Fox of TIME - "The Pension Benefit Guaranty scandal that isn't (at least not yet)"].
Go with Krueger on this one. Here is the Sept 30 2008 PBGC annual report (p. 17) noting that as of Sept 30 the investment shift had not occurred; here is a WaPo story from Oct 23, 2008 making the same point. The CBO and the GAO chimed in last spring and summer with very legitimate concerns. As of July the PBGC was still finalizing its implementation plan. I offer more mockery of more lefty dupes here; blame Josh Marshall as Agent Zero on this one.
Google can be your friend. That can be our little secret.
PENANCE: Maybe Paul Krugman can be coaxed into explaining how "the Bush administration may have left us all a gratuitous loss of hundreds of billions" when the PBGC has net assets of roughly $68 billion (per the WaPo). Even Ezra Klein, who is otherwise utterly suckered on this story, chokes on that. It's back to the groupthink-free Journolist!
Now, to be fair to Krugman, a related and plausible claim was made in the Globe article which inspired this wave of Bush-bashing nostalgia and Krugman is probably just mindlessly echoing it. From the Globe:
Nonetheless, analysts expressed concern that large portions of the trust fund might have been lost at a time when many private pension plans are suffering major losses. The guarantee fund would be the only way to cover the plans if their companies go into bankruptcy.
"The truth is, this could be huge," said Zvi Bodie, a Boston University finance professor who in 2002 advised the agency to rely almost entirely on bonds. "This has the potential to be another several hundred billion dollars. If the auto companies go under, they have huge unfunded liabilities" in pension plans that would be passed on to the agency.
I am sure Krugman's explanation will be memorable. And if he weaves in his basis for asserting that the PGBC had previously been investing in "bonds only", it will be a marvel. (I peeked - the PGBC has been investing in equities through the Clinton Boom and the Bush Dark Era.)
So let's recap - Krugman was wrong about the previous strategy having been "always bonds", wrong about the switch to equities being executed at the market peak, and wrong about possible losses amounting to "hundreds of billions" of dollars, we presume. He also misspelled "Guaranty". But he did find an opportunity to explain how stupid conservatives are. Mission Accomplished!
Well. My free advice to my friends on the left - sometimes reporters exaggerate and hype their story a bit (really!), so critical reading skills should be applied even if the reporter is bashing Bush. In the Globe story, to pick an example almost at random, the reporter explained breathlessly that the PBGC had decided to invest in equities but waffled on whether the decision had actually been implemented. Looks like April Fool's came early for some people.
WE WILL: Yes, put this in the "If Krugman is writing on economics you can take it to the bank" file.
DIG DEEP: Commenter Appalled delivers the Oct 24 2008 Congresssional hearing transcript. PGBC head Millard comes in on p. 102 with prepared remarks. Starting on p. 112 he explains why they haven't actually moved any assets.
The question of whether they should be in equities (since the PGBC is likely to take over companies with underfunded plans during recessions when equities are down) gets some back and forth. Mr. Millard notes that the PGBC's big takeovers have been in airlines and steel and not during recessions. Sure, in the past!
And here we go on the increased commitment to equities:
Chairman MILLER. I guess if you want to extrapolate out the new policy in today’s markets, the $4.8 billion would look something like more than $8 billion in losses?
Mr. MILLARD. If the new policy had been implemented in February, our experience from February to now—well, let me go back a step. It would have been impossible to implement the new policy in February anyway. As I discussed before, it takes years to layer in some of those asset classes and would have taken many months to layer in some of the others. So it is not the kind of thing that would have all happened at once anyway.
And a bit later:
Mr. MILLARD. No. The investment performance for fiscal year 2008, which concluded September 30th, and these are, again, I want to emphasize unaudited numbers, is based principally on the
prior policy. We have made very small changes so far in transitioning into the new policy because as we went into manager selection and as we talked to transition managers and we saw what was happening in the fixed-income markets, we saw things like the liquidity crisis, et cetera; it made sense to not only have a long-term strategy, we are not market timers, we are not trying to be a market timer, have a long-term strategy that is designed to pay our bills over time without having to turn to Congress for a multibillion dollar bailout, and at the same time as we transition, to do so in a deliberate and measured way.
Mr. COURTNEY. Then your testimony is then that this loss was not the result of any new policy?
Mr. MILLARD. Correct. The decline in our portfolio, the portfolio was approximately 70 percent [corrected to 30 percent] equities in September a year ago, and other than the fact that equities have dropped, we have not changed our allocation yet.
It hasn't happened, it wouldn't have happened, but Krugman believes it happened.
PROBABLY TOO MUCH DETAIL, BUT HERE GOES:
Mr. Millard expounded on the mix of asset classes:
Chairman MILLER. The new policy you mention is more diversified, and that would be how?
Mr. MILLARD. You mean specifically what are the projected asset classes? Currently, we are in U.S. equities approximately 25 percent; the non-U.S. equities approximately 2 percent; emerging market equities about one-half of one percent; long corporate bonds, approximately 40 percent; long Treasuries, approximately 25 percent; other Treasuries, approximately 4 percent; total fixed income, approximately 69.4 percent; cash, 1.6 percent; and private equity or real estate, approximately 1.8 percent. That is the current. The new would be 20 percent, U.S. equities; 19 percent, non-U.S. equities; 6 percent, emerging market equities; long corporate bonds, 13 percent; long Treasury bonds, 19 percent; high-yield bonds, 2 percent; emerging market debt, 3 percent; total fixed income, 42 percent; cash, 3 percent; total fixed income and cash, 45 percent; private equity and real estate, 5 percent each. Now if I can just add one point there, we could pick any one of those and say, you are going to put your money in what? And the point of that is we want a diversified investment policy. We don’t want to be subject to just what is the S&P doing on any given day. We don’t want to be relying on how are Treasuries doing on any given day.