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Except that while the agency is indeed increasing the chances it will get where it needs to go, it's also increasing the odds it will take a big loss. The S&P 500's tendency to deviate from that average return is about twice as large as the tendency for long-term government bonds to do so, for example. Using data from 1997 through 2006, the odds are that 95% of the time the returns on stocks will be between 48% on the upside (yea) and -27% on the downside (yipes). Returns on government bonds range from 19% on the upside to -14% on the downside.
A shaky assumption
That's all assuming, of course, that the financial markets won't be any more volatile over the next 10 years than they've been over the past 10. After living through the latter half of 2007 and the first two months of 2008, that feels like a pretty big assumption. (It's also an assumption that the PBGC didn't agree with in 2005 when, facing criticism that it was taking too many risks, it decided to rely more on bonds and less on stocks in its portfolio.)But, hey, the PBGC is willing to roll the dice -- with the knowledge that if it gets this wrong, 1) the folks who made the mistake will be long gone and collecting six-figure salaries as Washington lobbyists, and 2) the taxpayers who have to pick up the tab, and the workers without pensions, will bear the pain.
So what can we do? What should be done?
- Individually, we keep the faith. I was an unpopular geek in high school, so I've got some experience living with the scorn of the popular kids. Stick to the principles of our founding fathers -- Franklin, Hamilton and Buffett -- and keep away from the gaming tables. Keep putting money aside in your 401(k) every month -- into cash when the market is dicey. Making saving a habit is not stupid. It's smart. You won't feel like a chump if you've got cash when it's time to pick up the pieces -- at bargain prices.
- Tell the folks who manage our personal money -- the mutual fund managers, personal financial advisers and the like -- that we want them to stay true to time-tested strategies and not to give in to the pressure to take shortcuts. Tell them we don't need that extra 0.25 percentage point of yield if it involves taking on 2.5 points of extra risk. And if they don't get the message, we take our business elsewhere.
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- It's an election year, and the politicians might listen for the next few months. Let's tell them that we're fed up with regulators who don't enforce existing rules. The Federal Reserve could have cracked down on questionable mortgages originated by nonbank lenders. It has the authority. In Spain, bank regulators discouraged banks from creating off-balance-sheet funds. Here, regulators encouraged the practice. Who's sorry now? (And while we're at it, let's fix the rules that let the private buyers of companies increase their own profits by dumping underfunded pension plans on the PBGC.)
- Let's demand that the crooks -- the people who defrauded borrowers and investors in mortgage securities -- do jail time.
- Let's insist that every effort is made to let private "vulture" investors pick clean the carcasses of loan portfolios stuffed with rotten paper before there's even talk of taxpayer money being used for a bailout.
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The retirement crisisWe all know the housing bust has created an economic slowdown, a home-building depression and a credit crunch. But no one is talking about the retirement crisis, says MSN Money's Jim Jubak -- even though soon-to-retire boomers have just lost a whopping $2 trillion in home equity.
- Let's demand that our politicians and regulators stop talking solely about the need to fix the economy or the housing industry or the debt markets and start talking about this as a retirement crisis. We've just seen $2 trillion in home equity erased. That's a huge problem for Americans who rely on their homes as their primary retirement savings -- and that's a majority of us. I'll have more on this in my March 4 column.
- And above all, let's say to the Fed and to everyone in Congress and to whoever sits in the White House come January 2009 that we want an end to this bubble-and-bust cycle in the financial markets. Encouraging reckless gambling and then bailing out the worst -- and biggest -- gamblers is no way to run an economy.
Continued: Updates and developments
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