Our chief systemic risk monitors are like fire chiefs who hold an annual conference while their spouses are throwing matches at one another in the hotel lobby.
That hit me recently as I was watching a Treasury Department webcast recording of the first meeting of the Financial Research Advisory Committee (FRAC), and a second Treasury webcast recording showing a systemic risk conference organized by the Office of Financial Research (OFR) and the Financial Stability Oversight Council (FSOC).
Treasury officials set up FRAC, the OFR and the FSOC because of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Congress created the Dodd-Frank act because of the horror that came upon us all in late 2008, when it looked as if a collapse of the world financial system would make our pension plans, 401(k) plans and checking accounts vanish in a puff of printer toner.
The FRAC does include Maureen O'Hara, a finance professor who's on the TIAA-CREF board, and Prakash Shimpi, who has been the chief risk officer at ING U.S. But it seemed as if FRAC members spent most of their first meeting talking about organizational and technical issues. They mentioned insurance only in passing. If they talked about interest rates, that must have happened while I went and got coffee.
At the systemic risk conference, the only participant who had anything much to do with the insurance industry was William De Leon, a portfolio risk manager at PIMCO. (PIMCO is owned by Allianz.)
The participants mostly obsessed about what kinds of subsidiaries banks have and what regulators should do about the various kinds of subsidiaries. The participants barely mentioned insurance, annuities, pension funds or retirement savings in general, and they barely mentioned interest rates.
One exception was Haley Boesky, a former Federal Reserve Bank of New York staffer who now works in the global markets business at Bank of America Merrill Lynch.
A panel moderator asked that panelists whether the financial services system is more resilient today than it was in 2008.
Boesky seemed to be trying to look polite. "We have had extremely low interest rates for a prolonged period," she said, going on to mention that having those low rates and huge amounts of liquidity might possibly (just possibly!) pose challenges for financial services companies.
It took Robert Merton—an MIT professor who has won a Nobel Prize in economics and helped start a spectacularly unsuccessful hedge fund—to point out that the opening speaker, who was supposed to give an overview of what's happening in the economy, had, um, kind of left out pension funds.
Merton noted that U.S. public pension funds are missing about $3 trillion of the assets they will need to make good on pension obligations already incurred.
"This is not small," Merton said.
And it took Merton to mention, briefly, in passing, that, even though bank problems can cause systemic risk for the governments of the banks' countries, the governments' own financial problems can cause systemic risk for the banks.
But, let's face it: The nice, mild-mannered, patriotic, well-meaning folks at the Fed are coping with the hash Congress has made of the budget by keeping interest rates at levels that are devastating pension funds, retirement savings vehicles of all kinds, long-term disability insurance programs, long-term care insurance programs, and any other programs designed to help the elderly and the infirm years from now.
The regulators are, really, putting their claws around the necks of the insurers, squeezing hard, then wondering what will happen to the banks and the mutual fund companies after the insurers suffocate—without acknowledging that they are suffocating the insurers.
On the one hand: I respect the regulators. They're playing the hand fate and Congress dealt them.
On the other hand: How can the OFR and FSOC hold a meaningful conference on systemic risk without talking at excruciating length about the current low-interest-rate environment?
On the third hand: Of course, sooner or later, the return of obvious, price sticker inflation (not the sneaky "why is that candy bar so light?" type of inflation) will probably force the Fed to let rates go back up, and then we'll be wondering why they let rates rise five percentage points in a year.
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