Saturday, October 5, 2013

Will we learn the lessons of history, or relive them?

For many people, history is very personal. If it did not happen to them, it does not matter.

From those who we entrusts as stewards of our future income security in retirement, and by extension, of the future of possibilities for prosperity, we can, should and must demand more.

We must insist that they take a long view of the past, to support their long view of the future. They must learn for us the lessons that history has to teach.

The lesson begins with the story of what happens when securities trading teams up with trusts for aggregating control over Other People's Money.

We should have learned this lesson the first time, back at the end of the 19th Century, when life insurance was a new technology, and this new form of evergreen trust started speculating with Other People's Money. We got the Panic of 1897 that almost bankrupted the United States, and lead to the trust-busting of the early 1900s.  It also lead to laws prohibiting insurance companies from trading securities with premium dollars, prohibitions that still exist, as the Legal List administered by the National Association of Insurance Commissioners ("NAIC").

We didn't learn, because it happened again, in a modified form, in the 1920's.  This time, it was commercial banks lending to speculators "on margin", that is, against their portfolios of speculative trading positions, as collateral. We all know what happened then. The Crash of 1929, followed by the Great Depression.  The fix came in the form of Glass-Steagal, a law that prohibited commercial banks from participating in securities trading. A law that was repealed in the late 1990s.

We still have not learned. Now it is happening again, this time with pension funds, speculating in the securities markets with our retirement savings. This time, nothing has really changed. At least not yet.

We remain caught in a trap of Casino Capitalism that is fueled by professionally managed pensions and other retirement savings committed to the default form of investment as securities trading. 

The problem with these managed funds is that they are open-ended, ongoing and therefor evergreen. There is no natural end-date, when the books can be closed and the accounts settled. They just keep going. 

They are then being double-stacked on top of financialized forms of enterprise ownership that are also open-ended, ongoing, and evergreen. Also no end-date, when the books are closed and the accounts settled. 

That should sound like a natural match, but it is not. There is no natural way for cash to flow out of financialized enterprise and into stewardship trusts. Instead, the money gets caught in a closed loop of speculative trading on financial asset/securities valuations in a zero-sum game of extracting value by outsmarting the other guy. We get what is now called systemic risk. All the values get inflated.

2008 proved that evergreen trusts and securities trading don't mix. 

The fix this time is easy. It does not require new legislation or government regulation. The legal profession can do it. Pensions themselves can do it. All it takes is an upgrade in the standards of fiduciary duties of loyalty, prudence and competence, an upgrade that recognizes the lessons we have learned about pension investing over the last 40 years, since the last time we upgraded the standards for fiduciaries, to empower them to speculate in securities in the belief that diversification would provide protection. 

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