Pension Crisis

We Need a Sequel to The Big Short to Critique Public Pensions

How public unions are driving another economic bubble.

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"The Big Short"
"The Big Short"

The Big Short is clearly a hit. Nominated for (and winning) a host of major awards, the film has reportedly clocked $131 million worldwide on a $28 million production budget.

That should give screenwriters the incentive to follow up with the true-to-life sequel. Call it The Big Short, Part Two.

Part one offered rare insight into the usually arcane world of government finance. When the film's protagonists (played by Brad Pitt, Christian Bale, Ryan Gosling and Steve Carell) prepare to bet that the housing bubble is about to blow, they identify the culprits: The bad guys are not just the sellers who prepared mortgage debt securities but the buyers of those toxic securities as well. And the biggest buyers of all were the managers of America's public-employee pension funds.

The housing bubble may have collapsed, but the public-employee pension fund managers are still with us. If anything they're bigger than ever, still insatiably seeking high returns just over the horizon line of another economic bubble.

And where do these predators go for their high returns? Along with their high-risk investments in hedge funds and private equity (where we have minimal transparency), pension fund managers invest in housing, once again inflated to unaffordable levels, thanks to over-regulation and low interest rates. They invest in public utilities that collect guaranteed fixed profits on overpriced services, thanks again to over-regulation. They invest internationally. And they invest in domestic stocks.

In every case, the goal of these powerful pension funds—Wall Street's biggest players—is to rack up another year of high returns. And to do this they need corporate profits, financial sector profits, rising home prices, rising utility rates—all of it fueled by debt accumulation.

It's an unsustainable model. As America is slowly turned into a debtors' prison, there will eventually be nobody left to pay the interest.

The most bullish on these high-risk investments are the people who, at least publicly, often denounce the domination of Wall Street: the leaders of America's government employee unions. When they say they want to occupy Wall Street, they apparently mean they want to occupy it with sacks of cash from the taxpayers who pay into government employee pensions.

The National Conference on Public Employee Retirement Systems—the self-proclaimed "Voice for Public Pensions"—is arguably at the forefront of this unsustainability lobby. This powerful trade association is run by public sector union executives from across the nation. Their president is also the treasurer of the powerful American Federation of Teachers. Their first vice president is a 30-year member of the Chicago Fire Fighters Union, IAFF Local 2. Their second vice president was union president of Fraternal Order of Police Queen City Lodge 69. And so it goes: Officers of government unions populate virtually every board position. Government unions run this organization.

The unsustainable pension benefit enhancements and unsustainable modifications to investment guidelines that were sold to politicians and the public weren't pushed by government union leaders all by themselves. Their partners in the financial community recognized and implemented what has to be one of the biggest scams in American history—the ability to pour taxpayer money into high-risk pension funds for government workers, collecting fees every step of the way, combined with the ability to raise taxes to bail out these funds whenever their returns don't meet expectations. And to make sure elected officials played ball, they had the government unions provide the political muscle. Compared to this setup, Bernie Madoff was a street hustler.

The National Conference on Public Employee Retirement Systems has thoughtfully created a list of "foundations, think tanks, and other nonprofit entities [that] engage in ideologically, politically, or donor-driven activities to undermine public pensions." The California Policy Center and UnionWatch are both on that list. But our organization does not advocate eliminating the mechanisms that run this scam. We support reforms to restore financial sustainability to pensions—not just for taxpayers but for retirees depending on income from government pensions.

We actually fulfill only one of their criteria for this list—we're an organization that "advocates or advances the claim that public defined-benefit plans are unsustainable."

Yes, we do. That the unsustainability lobby has recognized our work is a distinct honor. Winning an Oscar—or maybe just a credit—for our contribution to the forthcoming movie The Big Short, Part Two is our new ambition.

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  1. ‘Look for the union label’ sure has a another meaning in this day and age.

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  2. So why aren’t these public pension officials trying to sustain the capitalist system instead of backing legislation that would tend to kill their golden goose? Yeah, cognitive dissonance, but what else?
    And I thought “Big Short” left the impression the banks were bailed out by TARP and didn’t have to pay back the
    assistance. As I recall, the banks paid back every penny and hefty interest too, being the only good deal the taxpayers got out of the stimulus packages.

    1. I didn’t see it but,I’m sure they didn’t talk about Fanny Mae and Freddy Mac’s hand in this.Or how the Federal government encouraged lending to people that could not afford the loans. Then there’s the auto bail out of the car companies who made their own bed. And congress was neck deep in all this crap as was the Clinton and Bush admins.

      1. Are you kidding me? Everyone knows the housing crisis was caused by the capitalist casino that prioritizes profits over working families. Fannie and Freddie were just pawns in a grand scheme by financial institutions to defraud taxpayers. Huffpo told me so!

  3. The only thing evil here is the government using taxpayer money to guarentee defined benefits (in return for votes). Benefits that ensure the government employees can retire 20 years earlier than the taxpayer money that subsidizes those benefits. Benefit defined public sector plans should be illegal.

    1. That reminds me of a practice I’ve observed at the state prison (where I work as a contractor): people will often be promoted a few weeks before their retirement just so they can qualify for a bigger pension.

  4. As I understand it, one of the investment community’s concern with the latest DoL* fiduciary rules that require investment advisors to give the “best” investment advice to their clients rather than “good enough” advice is that those are some of those vaguely reasonable terms that are only going to be defined once you’ve been charged with violating the law, which means investment advisors are going to shy away from risky investments and lean toward safe investments – like government debt. Nothing self-serving about that at all, steering investment toward loaning the spendthrift government more money they’ve already spent and away from investing in innovative start-ups or new or expanding capitalist enterprises with that money. I know if I want good money-management advice I’m turning to the experts in Washington, DC.

    *Why the hell is the DoL setting rules for investments?

    1. IF your a oil company some AG’s want you to warn stock holders about ‘climate change’,or what ever the kids call it now a days.Not a word about government pensions.Maybe they want Exon to pony up money to help out the states? Couldn’t be (tobacco ).

    2. *Why the hell is the DoL setting rules for investments?

      They have jurisdiction over 401K & pension plan rules?

  5. Part one offered rare insight into the usually arcane world of government finance.

    Were we watching the same movie? They mentioned the pension funds like once or twice. And it was in a generally sympathetic light.

    I just watched this last night. The movie is filled with all the typical tropes of hollywood. Everyone is a fool blinded by greed. Even the people who AREN’T fools are greedy. That’s the rub of the whole movie. All the people involved in the Big Short may be right about the housing bubble, but at the end of the day, even Baum who purports to be doing this for idealist reasons finds himself at a crossroads where he can either exit his short position and make $1 Billion or continue staying in the position to try and prove a point.

    Government comes up in this movie rarely. The only time we actually meet a government character, it is a bimbo blond chick from the SEC. After lamenting about how the SEC cannot investigate anything “after budget cuts” (in 2005, SEC’s budget was cut by a whopping $5million dollars, out of $900 Million) the Bimbo explains how she is there trying to find banks to join up with after her stint at SEC.

    1. I loved the movie, btw. It is full of cool imagery. Two scenes in particular are great. The first is when two guys are doing due-diligence on some houses in Florida. They knock on one door and a giant thug looking guy opens the door. You are supposed to immediately be concerned for the guy doing due-diligence as he asks this thug about why he is 90-days delinquent on a mortgage. But then you realize this guy is paying rent like a good citizen and it is a faceless landlord that’s the bad guy. Good Hollywood switcheroo!

      The second great scene is in Vegas near the climax. Everyone has been at a conference realizing how fucked up the system is. The grand master finance dick walks out of his hotel to hop into a limo. The people who have figured it all out and are shorting them walk out and hop into taxis. Finally, out walk the SEC Bimbo and a finance Bro, arm and arm. She gives him a sloppy “Thanks for last night” kiss before hopping into her cab while he hops into his expensive land rover.

      If you can get over the standard Hollywood cliches of anti-capitalism, there is a great movie in there. Luckily the movie is pretty a-political about the whole affair. It’s more anti-wallstreet than anti-pro-wallstreet-government policies.

      Again though, if you expect Part II to take on the government, you are crazy.

      1. “The Big Short, one of this year’s nominees, cost $28 million to produce and was filmed in California, Nevada, and Louisiana. All three states have film tax credit programs, but Louisiana’s 40 percent partially-transferable credit is the largest. The film’s producers made a movie about Wall Street greed, but they clearly had no problem making taxpayers pay for their production costs.”
        https://reason.com/archives/201…..rs-taxpaye

        Nope. Hollywood will never bite the hand that feeds it.

  6. “When they say they want to occupy Wall Street, they apparently mean they want to occupy it with sacks of cash from the taxpayers who pay into government employee pensions.”

    Good one.

  7. From the tone of the article I guess ed didn’t like the movie. Anyone that criticizes investment bankers is probably suspect, to be honest. This article seems like it’s written through the same clinched teeth as a conservative who says, you know what Michael Moore should do? He should make a sequel to “Roger and Me” and talk about how the UAW ran GM out of town.

    1. That is not what conservatives want Michael Moore to do.

    2. Hey dipshit, have you paid your mortgage yet. Fucking parasite.

      1. You have to love the internal logic of capitalism:

        1. We don’t need government regulation of business because look how much money we’re making.
        2. We’d make more money if we watered-down the regulations that control our industry
        3. Regulatory agencies get de-funded because business interests buy off politicians
        4. A recession/ terrible industrial accident/ environmental catastrophe happens because no one is watching Bernie Madoff or questioning why women are sharpening their radium-paint covered paintbrushes with their tongue
        5. businesses ask for handout, go broke because they can’t pay for the lawsuits and leave taxpayers on the hook for low interest loans and Superfund cleanups
        6. New businesses form in the same business as old companies or subsidiaries are formed.

        Skip back to 1. I admire this total racket it in a way. You couldn’t ask for a better scam.

        1. You’re deceitfully conflating commerce with cronyism. Without corrupt politicians, there would be no cronyism. Without regulatory agencies, there would be no sweetheart rules to help cronies out compete their competitors. Without quasi-government agencies like Freddie Mac and Fannie Mae, there would be no manipulation of the mortgage industry that could then fail catastrophically and take down the banking industry.

          1. Yeah, we’ll also extol the virtues of greed and selfishness in the free market. Then, when those values end up bankrupting the country we’ll call that cronyism, which supposedly is bad. How can a libertarian lose?

            1. Yeah, we’ll create a labyrinth regulatory state. And we’ll staff if full of bureaucrats and give them arbitrary authority with zero accountability for their decisions.

              And when they inevitably sell out and start abusing their authority in exchange for kickbacks and political gain we’ll blame the evil capitalist system and agitate to make the government sector even bigger!

              How can a socialist lose?

            2. Yeah, we’ll also extol the virtues of greed and selfishness in the free market. Then, when those values end up bankrupting the country we’ll call that cronyism, which supposedly is bad.

              “Greed and selfishness” (aka self-interest) are individual motivations, common to most humans. Cronyism is when government and politicians hand out money to companies.

              Think of self-interest like gravity, and cronyism like throwing people off cliffs. You could attempt to fix the problems associated with throwing people off cliffs by legislating away gravity, but it wouldn’t work. It’s far better for government to stop throwing people off cliffs.

              1. And stop prohibiting people from building water slides.

            3. I never knew the CRA, Fannie, and Freddie were created by the free market. Tell me more, comrade. I need entertainment as I wait in the toilet paper line.

            4. Socialism is working peachily for Greece, France, Japan, Russia, Brazil, Venezuela.
              If it weren’t for an oil fund the size of Texas, Norway would be a train wreck.
              Why not give it a shot here?

          2. Well, technically speaking, most “commerce” operates on foundations laid forth by “cronyism”.

            Also, Fannie Mae and Freddie Mac weren’t the main causes of the subprime mortgage crisis; they definitely contributed to the crisis, but there were far more systemic developments (saturation of the prime mortgage market, overappreciation of housing values, greater reliance on credit, and the growth in the securities and derivatives markets following the 1970s and 80s).

        2. My Lord you’re quite the shallow individual.

          Yes, this is the ‘internal logic’ of capitalism.

        3. Speaking of Madoff, one private citizen analyzed what Madoff was supposedly doing, figured out that he couldn’t really be doing it, and concluded that Madoff’s business was a pyramid scheme. He took this to the SEC, which refused to pay attention to him; meanwhile, the SEC was protecting the public by requiring all the i’s to be dotted and all the t’s crossed in corporate prospectuses.

          The problem was not that there was no regulatory agency, but that the agency was badly misdirecting its activities. Pray think about this, American Socialist.

          1. Sources??

  8. If you can get over the standard Hollywood cliches of anti-capitalism, there is a great movie in there. Luckily the movie is pretty a-political about the whole affair.

    It wasn’t as bad as I expected it to be.

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  10. You have to admire the internal logic of socialism.

    1 Society owns everything
    2 Government is our proxy for society
    3 Agents of the government are more qualified than any individual to allocate the fruits of individual labor
    4 Those who object will be rooted out

  11. The movie was interesting – if not a tad technical – but it didn’t explore enough the government’s role in the mess.

  12. We actually fulfill only one of their criteria for this list?we’re an organization that “advocates or advances the claim that public defined-benefit plans are unsustainable.”

    I assume the science is settled on this as well? Public sector pension funds are sustainable indefinitely, no matter what?

    1. Are we taxed at 100% yet? Nope? Then they’re sustainable.

  13. Movies based on michael Lewis books tend to leave out the good bits. A member of our commentariat got cut from Moneyball.

  14. Curiously no one seems to mention the artificial housing scarcity created by zoning laws, rent controls, building restrictions and other regulation that caused most of the housing price increases.

    1. In CA we live it every day. No need to mention it here.

  15. Housing bubble is IRS slang for people having money to steal–like in Panama when These States were exporting prohibition and murder to Colombia, tracing some proceeds to Panamanian banks, then looting those banks. Tossing some boodle scraps to foreign governments shut them up really quick. Those that squawked soon had troubles of their own.
    The Big Short was what always happens when prohibitionists and tax looters join forces the way they did Stateside in 1929. It had everything to do with state and federal asset forfeiture rampages causing money to flee banks and brokerages and very little to do with balloon clauses or mortgage interest rate adjustments–those have always been there. Adam Smith saw this coming, and warned of highly visible unproductive hands in government being the Ruination of Nations.

  16. You know perfectly well that the public sector unions and politicians would shut this movie down in a heartbeat. First, the public sector unions would lean on the Hollywood unions to make sure nobody there would work on the film. Thus, the whole thing would have to be crowdfunded and made by independent filmmakers and staff.

    THEN, you know they would use the IRS and DOJ to try to shut them down like they did with Dinesh D’Souza (who did commit a crime, but a paltry one compared with Hillary’s crimes).

    THEN, if that didn’t work, they’d use threats of violence to shut the filmmakers up, perhaps send a few leftist #SJWs or union enforcers to rough them up a bit in a “peaceful protest,” which we all know doesn’t stay peaceful for long when the far-left is involved.

    It’s so easy and cool to hate on Wall St., but put the unions and politicians under the microscope, and people start getting disappeared.

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  20. Did anyone from Reason actually read this before posting it? This is one of the sloppiest, most intellectually lazy columns I’ve ever read here.

    1) “Part one offered rare insight into the usually arcane world of government finance.”
    It has NOTHING to do with government finance. Either he didn’t watch the movie or absolutely fails at the most basic level of comprehension.

    2) “Along with their high-risk investments in hedge funds and private equity (where we have minimal transparency), pension fund managers invest in housing…”
    Where is the evidence that public pensions have large investments in housing?

    3) “They invest in public utilities that collect guaranteed fixed profits?”
    I thought pensions invested in super-risky stuff. Now they invest in Example 1 of stability?

    4) “And to do this they need corporate profits? ?all of it fueled by debt accumulation.”
    Did Bernie Sanders write this? Since when are corporate profits bad? And who says it’s all funded by debt accumulation?

    5) “As America is slowly turned into a debtors’ prison…”
    Now I’m wondering if this just a troll by Jerry Mander or someone like that. Is this a joke?

    This is an incoherent mess of a column. Here’s a simple idea: the problem with public-sector defined-benefit pensions is the transfer of substantial risk from the employee to the taxpayer. Instead of this idiotic and rambling mess, focus on that simple problem. The typical investment portfolio of a pension fund is a pretty good way to save.

    1. Oh, please don’t confuse us with facts.

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  22. RE: We Need a Sequel to The Big Short to Critique Public Pensions
    How public unions are driving another economic bubble.

    Not to worry here.
    The republicans and democrats will just raise taxes on the unwashed masses to cover the asses of their cronies.
    What’s the problem?

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