Pension Crisis – Schrodinger’s pension


by David Malone

The last line of defence, the Maginot line, of the present policy of keeping insolvent banks alive no matter what is, “But if we don’t, all our pensions will die.”

This nonsense has been gumming up any attempt at a reasoned discussion like a shit impregnated piece of old gum for long enough. {jcomments on}

So let us deal with it and consign it to the pedal bin of history.

Many people have heard of Schrodinger’s cat – the famous quantum mechanics thought experiment of the cat in the box. Fewer people have heard of his pension. It’s a valuable, though less well known, thought experiment.

Schrodinger imagined he had put his gold plated pension in a box. It was a great pension. Backed by many AAA rated investments and mortgage backed securities wrapped in highly rated CDO’s and the like.

Now his question was this. If, in the outside world, the apparent value of all the real world things, houses and the like, that his pension was based on declined hugely, BUT he didn’t open the box, was his pension alive or dead? In the outside world events were taking their physical course, house prices declining, banks needing to have other people’s blood pumped into them to offset the arterial spray of losses from untreated wounds. But inside the box the figures and valuations of his pension were unchanged.

So, if he did not look was it worth what it once had been or not? So long as he didn’t actually open the box to look, then he could not be sure. And if he wasn’t sure, then that meant there was an element of doubt and no one could say for sure his pension was dead. In fact, according to the spooky logic of quantum economics, his pension could be both alive and dead, or in both states at once. And would stay in the super-position of multiple states just so long as the box was not opened and no one checked. You see why suspending mark to market rules was so vital.

This apparently is the interpretation, we’ll call it the Wall Street Interpretation, of Schrodinger’s Pension, that our leaders, both political and financial adhere to. It’s closely related to the theory which says, so long as you don’t have the pregnancy test you won’t be pregnant. Of course there are biologists who maintain that there is a brute level of biological reality which carries on its way in defiance of theory. I tend to agree with them – being a biologist.

Let’s look at the consequences of the Wall Street Interpretation. It basically says, so long as we don’t look inside the box and read the figures, as long as we don’t allow anyone to actually value the ‘assets’ but keep them hidden (the famous Hidden Variables that Quantum finance talk about) – so long as it all remains sealed away, off-balance sheet – then the value is still there. By this view, the value of the pension, of all our pensions, only disappears, only dies, WHEN the box is opened. Only when the box is opened is the outside world and its assets suddenly zeroed, by some myserious “spooky action at a distance” acting faster than the speed of light. This is the Wall Street interpretation.

This is the basis of the saying IF we allow the banks to go down, THEN our pensions will die. I would say, the pension died some time ago and that is what that peculiarly unpleasant smell is. They say to pay no attention to the smell and ‘assume’ the pension is fine.

But think about it. Their interpretation means they believe the value of the mortgages and the actual houses they in turn are based on are still today worth what they were at the height of the bubble. It will only be at the moment we allow the banks to go down (open the box) that magically, by some ‘spooky action at a distance’ working faster than light, that FOOM – the houses which were valuable till that precise moment suddenly fall into a state of decay, neglect and worthlessness.

I find that a difficult concept to swallow. I think, call me simple if you want – that the houses already are worth a fraction of what is claimed on the pension paper sealed in the box.

IN WHICH CASE no value will be lost from your pension should the banks be allowed to go down for the simple reason that the value WENT SOME TIME AGO. Your pension is already mauled. We’ve just been playing a very expensive game of pretend-with-bailouts.

Just because no one is admitting that the ‘assets’ being held by your pension lost their worth 18 months ago, doesn’t mean it is not in fact the brute physical reality. No amount of ‘not looking’ will hold this reality at bay.

Conservative estimates of how long it will take for property prices to ‘recover’ is five years. And that is for the properties that still exist. Many no longer do. They are already worthless shells. They will not recover any value at all. Neither will those mortgage backed assets which were backed with fraudulent developments which were never bought by anybody except a developer hoping to flip them at the height of the bubble. Neither will all the CDO’s holding bits of other CDOs created in the last two years of the bubble. Neither will the landfill of CDS paper insuring it all, because the companies which wrote the insurance have long since been found dead and rotting in their own little boxes.

That is Schrodinger’s pension.

But gum never comes off in one piece does it? There is always that piece rammed into the tread. Let’s cut that one out while we’re here.

The other pension panic is even if people tentatively accept that the pension might already be dead, they’ll still say, ‘But isn’t it best for us to simply bail everything out, no matter how unpleasant it is for us to pay off the bankers’ losses, in order to save the pensioners from penury. So no pretence any more just pragmatism.

Fine. Let’s look at the best test case of the policy of ‘deny the insolvency and the losses and keep the lid on the box’ – Japan.

Twenty years ago the Japanese had a massive property and bank lending bubble that burst. Immediately there was a chorus of panic – save the banks or the market’s will crash, the world will end, Japan will become poor and all our pensions will be ruined. They, just like us today, were shouted at to save the banks or else.

They did. The result is that twenty years later the Japanese banks are still wraiths of their former selves. The banks were not ‘saved’ in any meaningful sense. They, or rather their owners and directors were ‘maintained’ in luxurious uselessness. But far more seriously, twenty years later the Japanese stock market too, has not been saved. At its height, the Nikkei traded around 30K. It has never ‘recovered’ and for twenty years has ground and splintered along in the dirt at 9K. All those pension funds invested in it have dragged along in the same dirt.

What has that meant for the pensioners?
Well the one cohort of pensioners who were about to retire twenty years ago and would have been pole axed were saved from immediate loss. BUT every cohort after them for TWENTY years has had their pension massacred. Twenty years when pension payments should have accumulated worth as they have to, but DID NOT. Twenty years of pensioners hurt because of the policy which kept all the losses in the banking system and used public money and taxes to endlessly and pointlessly bail out dead banks.

The Japanese kept the box closed and have never let anyone look. But outside everything in their garden has withered and died.

Pensions require some growth so that the money invested accumulates in your pension. The policy the Japanese followed and which we are slavishly following killed growth and recovery except for the wealthy few.

The truth is that the total accumulated pension loss over twenty years has been massively greater and affected many more pensioners, than would have been the case if the losses had been taken twenty years ago.

Not only that but the long refusal to deal with reality has killed off the entire savings of the Japanese people AND their economy’s ability to grow. There has been no growth capable of pulling Japan from its long recession and decline, poverty levels among the young an old together have risen inexorably and now their jobs are being off-shored by the companies they ‘saved’.

This WILL be our fate too if we allow it.

The truth is this. If banks had gone down in Japan or if we had let ours go down two years ago, the stock markets would have toppled, Pension funds would have shrivelled like a wrestler who stops taking steroids. But the bad debts would have been flushed like a poison from our blood stream, and a film base for recovery would have been achieved.

What about the poor pensioners? There was and is nothing to stop the government of the day topping up the pensions up to a certain point. What? Bail out private pensions? Yes. We have a government guarantee for private deposits. Guaranteeing pension ‘savings’ up to a government limit is little different. For those saying where would the money come from? – the same place we got the money to bail out the banks. Only this use of a bail out would actually help real people rather than save a few banker’s bonuses. The guarantee would have saved the vast bulk of those with modest pensions. Those with the gold plated pension would have lost. AND?

Such a bail out of pensioners would have saved all the doom and panic of ‘what about the pensioners’. It would also have saved the hundreds of billions wasted on futile bank bail outs. And best it would have cleared the bad debts and allowed the financial system to do what the Japanese system has not been able to do for twenty wasted years and ours has not been able to do either and won’t, which is to start a real recovery.

If you are worried about your pension – and you should be- then kill the banks and allow productive activity to restart in the economy. ONLY a healthy economy will give your your pension. Keeping dead banks alive, keeping the box closed WILL NOT save you or your pension.

This article is reproduced with thanks to David Malone. He is the author of the book Debt Generation. You can read and listen to excerpts from his book here: