Thursday, September 08, 2011

Commentary by Rich DeColibus: A Simple Version of Economics

From Rich DeColibus, September 8, 2011
As we near the next big Presidential election, there's lots of noise about which basic economic theory should prevail. The Republicans are big on supply-side economics where you cut taxes, eliminate regulations, and do everything possible to encourage businesses to succeed. Keynesian economists believe government, in slow economic times, should create (or, at least, preserve) jobs with stimulus packages. The more jobs created or preserved, the higher the tax revenue will be and the more the economy will prosper because more people will be buying goods and services.
I think I've got all this economic theory figured out. Neither Keynesian nor supply-side works most of the time, leading me to think some combination of the two is the best we can do, and that's another conclusion: the government can only do so much because, huge though it be, it's a relatively small fraction of the whole economic scene. The housing bubble was a good example. Lack of any kind of effective regulation (along with bad public policy concentrating on the idea everyone should own a home) allowed the housing bubble to grow and grow and grow and when it finally burst, it was such a huge bust nothing the government could do in terms of scale could match the debacle the financial parasites on Wall Street created.
The Keynesians believe this was a clarion call for massive government regulation, and I'm kind of in their camp on this one since it is crystal clear things got out of hand because of the lack of regulation. But, regulation has limits; supply-siders don't philosophically like any kind of government "interference" (their alternate word for regulation); it "interferes" with their ideological purity. My conclusion: some regulation is necessary, too much is a drag on the economy, and too little is an invitation for crooks and the greedy to run amok. The housing bubble is an example of too little, and the government red tape necessary to start and maintain a small business is an example of too much. And, it's a dynamic battle; the hour the ink is dry on new regulation, somebody's trying to figure out a way around it.
Supply-siders categorize any kind of government action like a stimulus package a basic "wealth distribution," from the hard-working rich and middle class to the lazy deadbeats who feed off the government like leeches. And, to some degree, they are correct since, in fact, anything the government gives to someone for any reason has to come from someone else; the government doesn't have anything of its own to give.
Supply-siders claim Obama's stimulus package was a failure, but I disagree. I would have made it smaller; but the goal was to reduce the number of people who were becoming unemployed, and it did that, mainly for construction and government workers. Those jobs are now being shed, but the fact remains a lot of these people would have been out of a job two years earlier if there hadn't been a stimulus package and what the package bought was time for the economy to recover. Which it may or may not have, depending on who you talk to.
Keynesians believe supply-side economics is simply another version of "the rich need to get richer." The fundamental cant of the supply-siders is everyone will benefit as wealth is created and some will trickle down to the little people (the trusty old "A rising tide raises all ships"). Unfortunately, that ideological purity is as flawed as the Keynesian belief government can spend its way out of a recession. We tried supply-side: the Bush tax cuts were classic supply-side economic theory. And, it didn't work; during the Bush eight years, the economy created about 1 million jobs, a pathetic job-creation rate. The rich got richer and nobody else in any large numbers got any better off. The rising tide raised the cabin cruisers and left the dingys and rowboats no better off.
The facts, then, as I see them, is that neither economic theory works all the time or even most of the time, and the only thing that will work is some dynamic, adjustable economic response by the Feds and the government to what economists think is going to happen short-term or long-term. That brings up another problem because economic predictions by economists are about as reliable as a hot tip on the next race at Thistledown. Might another stimulus package work? Maybe, if configured right. Would tax cuts work? Maybe, if configured right. But, it's not an on-off switch for either action; it's more like a dimmer and it's hard to get the light level right.
What doesn't work is Washington because the principal players are focused on their reelection (first and foremost) and power. Like Mitch McConnell said, the number one goal of this country, from his point of view, was making sure Obama wasn't President next term. Well, excuse me Senator, but that's not the top priority of most Americans, nor of the residents of your state, it's how to deal with the deficit and create jobs in a moribund economy. Obama's not the problem all by himself; indeed, his failure to inject himself into some of the current events is more of a problem than anything he's done. He may or may not be President for another term but it's hard to imagine that it even matters much economically.
The economy is controlled by 300 million Americans who, every day, make tens of thousands of decisions about economic matters, large and small, all of which are totally unpredictable. I offer as proof a simple question: If someone else had been President the last three years, what, economically, would have changed? My answer to that is straightforward: Not Much, for the simple reason the President and the government can only do so much. Sometimes, as the Bible says, you simply have to wait for natural cycles in the economy to play out: This, too, shall pass.

Rich is a Cleveland retiree (former chemistry teacher) and was president of the Cleveland Teachers Union for his last 16 years.

A "Ponzi scheme" or not... did Senator Faber still dodge the question?

From John Curry, September 8, 2011
John Curry to Senator Keith Faber, September 8, 2011
Senator Faber,

I thank you for your reply today one month after my original request. For some reason, the format on your letter today happens to "cut off" the print from both margins for a small amount of space, but if the readership wishes, they can copy it and paste onto Microsoft Word to be able to read it in its entirety. I find your statement, "While I am not necessarily for or against a defined contribution system, needs some clarification. It appears, by this statement, you are "leaving the door open" to the possibility of the adoption of a defined contributions pension model. This "changeover," if mandated, will result in increased costs to both taxpayers and retirement system participants.

I am saddened by the fact that your letter does not address the fact that "Ponzi schemes" are a violation of federal law and that your mention of these words as being associated with Ohio public pensions has done a disservice to all of my brothers and sisters who are stakeholders in these very same systems. It has also left a belief in many Ohio citizens minds that, for some reason, these systems are, in fact, "Ponzi schemes." This was an unacceptable utterance and was designed to turn Ohio citizens against the concept of Ohio's public service pensions and Ohio's public servants in today's highly charged political atmosphere.

Thank you,

John Curry

Senator Faber
To: John Curry
Sent: Thursday, September 08, 2011 1:34 PM
Subject: RE: Senator Faber....

September 9th, 2011

John Curry

Dear Mr. Curry,

Thank you for contacting my office regarding the fiscal solvency of Ohio’s five public pension systems. I apologize for the delay in response and am happy to address any questions or concerns that constituents have regarding current state issues.

First, let me begin by pointing out the fact that all of the public employee pension systems are having major difficulties maintaining their legal obligation of being solvent for 30 years or more. If these pension systems continue down the road of maintaining billions of dollars of unfunded liabilities and not being able to maintain their current legal commitments, those who rely on these pension systems for a stable retirement will eventually not see any of their benefits or their healthcare.

In regards to my comment of the public pension systems being a Ponzi scheme, I see these plans as a system of investment that needs new investors to pay current investors and that to me seems circumspect at best. Ohio’s public employees deserve the assurance that the pension they invested in during their careers will always be available to them when they retire. As sponsor of Senate Bill 3 I am working diligently to find the best solutions to these solvency issues and to safeguard a pension for every public employee that has made considerable investments toward their future. While I am not necessarily for or against a defined contribution system, it needs to be recognized that this system transfers the investment burden from the taxpayer to the retiree.

As a recipient of one of these plans, it would be sensible for you to join the rest of the public pension members who seek reforms that will preserve their retirements and healthcare. If you have been paying attention to all of the news coming out on this subject then you would know that I have been doing everything possible to insure that these modifications occur. Because pension reform is a multi-faceted subject that requires careful deliberation, I have instructed the ORSC to get proposals for an actuarial review to evaluate the current plans purposed by the pension systems to reform the current defined benefit structure. I look forward to seeing if these reforms will be sufficient enough to sustain solvency for current and retired members while quickly eliminating their significant unfunded liabilities.

Again, I would like to thank you for your e-mail. If you have any other questions or concerns regarding this issue or any other state issue please do not hesitate to contact me or my office.

Keith Faber
President Pro Tempore
12th Senate District


Senator Faber.....

From John Curry, September 8, 2011
[September 8, 2011]
Dear Senator Faber,
One month has now elapsed since I wrote you (copy of that letter is below) concerning your comments re. Ohio's public pension systems as being "Ponzi schemes." I have been patiently waiting your reasons why you think that they are Ponzi schemes (per the SEC "red flags" below indicating Ponzi schemes) and also awaiting word that you, in fact (and in the furtherance of justice), have reported this belief to the Securities and Exchange Commission for further criminal investigation so as to protect us public servants from these supposed evil retirement schemes. To this date I have received no reply from you. I realize that you are a busy person but, if these are in fact "Ponzi schemes" as you suggest....... they really need investigated by federal authorities, don't you think? Will be eagerly awaiting your reply....and so will thousands of other Ohio pension system stakeholders. Thank you.
John Curry
Wapakoneta, OH
An Ohio retirement system benefits recipient and resident of your district
Sent: Wednesday, August 17, 2011 10:13 AM
Subject: RE: Senator Faber....

Mr. Curry,

Thank you for you e-mail. As Senator Faber receives a large amount of correspondence and likes to respond to these letters personally, it can take a longer amount of time. Our office has received your previous e-mail and will make sure that it is responded to promptly. I apologize for the inconvenience.

If I can be of service with this or any other state matter, please do not hesitate to contact me at 614.466.7584.

Richard Thompson

Administrative Aide

Office of Senator Keith Faber, President Pro Tempore

From: John Curry []

Sent: Wednesday, August 17, 2011 2:58 PM
To: Senator Faber
Subject: Senator Faber....

Senator Faber,

It's been over one week now and I am still awaiting a reply concerning a letter (below) that I sent to you on August 8. I am awaiting your listing of the "red flags" exhibited by Ohio's public pensions that indicate the existence of a Ponzi scheme that you referred to in the Hamilton Journal. Are you having difficulties finding any you need more time? Thousands of (voting) retirees of Ohio's pension funds are eagerly awaiting your answer. They want to see if you really can back up your claim or if you are simply uttering "hot air."

John Curry

P.S. Have you "tipped off" the SEC about your belief that Ohio's public pensions are, in fact, Ponzi schemes? After all, if they are then justice needs to be served, doesn't it?

From: John Curry

Sent: Monday, August 08, 2011 1:00 AM

Subject: Senator Faber...are you sure you know a Ponzi scheme when you see one?

Senator Faber,

It is with interest that I read in the Hamilton Journal News that you refer to Ohio's public pensions as Ponzi schemes.

Faber said, “I call it the pension Ponzi scheme. I mean, (the pension funds) all anticipate that they’ll have new members coming in to pay the liabilities of the old members. Well, I think that’s bad public policy. In the long term I think you need public policy that essentially says ‘My contributions over my career are going to be what pays for my retirement.’ And I want to make sure that we set up a system that does that — my contributions plus a reasonable investment return.”

Sir, I beg to differ with you and wish to call your attention to the U.S. Securities and Exchange Commission...a governmental body which knows a whole lot more about "Ponzi schemes" than you'll ever know in a lifetime. The SEC addresses the issue of how to recognize "Ponzi schemes" and provides a list of "red flags" or "common characteristics" that identify a Ponzi scheme. Ohio's public retirement systems exhibit none of these red flags or characteristics. If you feel that they do, please list which of the following seven "red flags" that Ohio's public pension systems exhibit. Documentation would be appreciated. Thank you.

John Curry

Wapakoneta, OH

a benefits recipient of one of Ohio's public pension systems

P.S. Keith, why don't you just be honest with all Ohioans and tell them, up front, that you want to convert their pension investments from the current Defined Benefits system into a Defined Contribution system so that you can enrich the coffers of your friends in the banking and investments arenas so that they can in turn donate even more toward your future campaign contributions? Oh, there's an SEC 1-800 number listed below. The SEC wants tips from the public when those in the public think they see a Ponzi scheme in action. Feel free to call it.

What are some Ponzi scheme “red flags”?

Many Ponzi schemes share common characteristics. Look for these warning signs:

  • High investment returns with little or no risk. Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. Be highly suspicious of any “guaranteed” investment opportunity.
  • Overly consistent returns. Investments tend to go up and down over time, especially those seeking high returns. Be suspect of an investment that continues to generate regular, positive returns regardless of overall market conditions.
  • Unregistered investments. Ponzi schemes typically involve investments that have not been registered with the SEC or with state regulators. Registration is important because it provides investors with access to key information about the company’s management, products, services, and finances.
  • Unlicensed sellers. Federal and state securities laws require investment professionals and their firms to be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms.
  • Secretive and/or complex strategies. Avoiding investments you don’t understand or for which you can’t get complete information is a good rule of thumb.
  • Issues with paperwork. Ignore excuses regarding why you can’t review information about an investment in writing, and always read an investment’s prospectus or disclosure statement carefully before you invest. Also, account statement errors may be a sign that funds are not being invested as promised.
  • Difficulty receiving payments. Be suspicious if you don’t receive a payment or have difficulty cashing out your investment. Keep in mind that Ponzi scheme promoters sometimes encourage participants to “roll over” promised payments by offering even higher investment returns.

If you are aware of an investment opportunity that might be a Ponzi scheme, contact the SEC by phone at (800) 732-0330 or online at

Who Do Ohioans Trust, Politicians or Firefighters

"The politicians behind Issue 2 want us to do what they say, not what they do. They blame firefighters, nurses and teachers for the budget problems they created by giving hundreds of thousands of dollars in tax breaks to their corporate campaign contributors, while at the same time cutting funding to local communities for safety services."
Who Do Ohioans Trust, Politicians or Firefighters
By Dave on September 7, 2011
Columbus- Today supporters of Issue 2 launched two television ads attacking the rights of middle class workers in Ohio.
"As supporters of Issue 2 continue attacking worker rights with two politicians in television ads, We Are Ohio remains focused on what this bill will really do, hurt middle class families and put the safety of Ohio communities at risk," said Melissa Fazekas, spokeswoman for We Are Ohio. "The politicians behind Issue 2 want us to do what they say, not what they do. They blame firefighters, nurses and teachers for the budget problems they created by giving hundreds of thousands of dollars in tax breaks to their corporate campaign contributors, while at the same time cutting funding to local communities for safety services. At the same time politicians also left a gaping loophole which exempts them from Senate Bill 5. While claiming we all need to share in the sacrifices, politicians gave their staff members and upper management big pay increases and bonuses. Their actions continue to show who is important to them, their special interest friends who spent hundreds of thousands of dollars to help get them elected, not the hardworking Ohioans who serve and protect our families and communities. The hypocrisy never seems to end with these guys. Today Ohioans are left with one simple question, who do you trust more, hypocritical politicians who support this unsafe and unfair law or firefighters who risk their lives to serve and protect us?"
We Are Ohio is a citizen-driven, community-based, bipartisan coalition that has come together to repeal SB 5 by voting NO on Issue 2, the unfair and unsafe law that will hurt us all. We Are Ohio includes public and private sector workers and employees, police officers, firefighters, teachers, nurses, pastors, small business owners, Republicans and Democrats, local elected officials and business leaders, students, Moms, Dads, family members, and your neighbors.

Wednesday, September 07, 2011

New crisis for pension funds

From Tom Curtis, September 5, 2011
Analysis: Pension funds in new crisis as deficit hole grows
By Natsuko Waki
Reuters - September 5, 2011
LONDON (Reuters) - Pension funds in developed economies are facing a new crisis as falling equities and tumbling bond yields widen their deficits, threatening the incomes and retirement dates of future retirees.
At the heart of their problems is a steady move by pension plans in the United States, euro zone, Japan and the UK to cut exposure to risk after the financial crisis.
But this "de-risking" may end up depressing their long-term returns from stock market investment and challenge the conventional wisdom that shares generate higher returns than bonds.
With weaker holdings and increased liabilities, companies will find it more difficult to fund existing pension schemes. They may cut new business investments as they use more cash to pay pensions.
For future pensioners, it means they will potentially face a lower retirement income and a longer working life -- or both.
This year has been a nightmare for many in the industry -- which controls $35 trillion, or a third of global financial assets -- and funding deficits are posting double-digit rises.
"We had a credit crisis and government bond crisis, and the third one we have is the pension crisis. This is the one where everything is going wrong and there's no obvious way out," said Kevin Wesbroom, UK head of global risk services at consultancy Aon Hewitt.
The sharp retreat in stocks through the summer has hurt them again by weakening their asset positions and threatening to erode stock market recoveries seen since the equity collapse surrounding the 2007-2009 credit crisis.
Even lower bond yields are proving to be a new headache.
"The real killer is liabilities are going up because in the flight to quality everyone gets out of equities and runs for cover in safe assets like government bonds, and yields are falling," said Wesbroom.
Many defined benefit(DB) pension plans -- where benefits are pre-determined -- pay a fixed stream of income to retirees.
The low-yielding environment makes it harder for the funds to meet these bond-like liabilities, forcing them to accumulate even more fixed income instruments to try to meet their obligations, creating a vicious circle.
Recent data on pension deficits highlight the plight of many pension funds.
In the United States, funding deficits of the 100 largest DB plans rose $68 billion to $254 billion in July, according to the Milliman Pension Fund Index. July marked the 10th largest deficit rise in the index's 11 year history.
Even if these companies were to achieve an optimistic annual return of as much as 8 percent and keep the current benchmark yield of 5.12 percent, their funding status is not estimated to improve beyond 93 percent by end-2013 from the current 83 percent.
Aon Hewitt estimates deficits of DB pension plans for FTSE 350 companies as of end-August rose 20 billion pounds from July to a 2011 high of 58 billion pounds. Their funding ratio stands at 89.8 percent, down from 94.1 percent three years ago.
The drop in the funding ratio is driven by a rally in the fixed income market. In Europe, the double-A rated corporate bond yield -- one of the benchmark rates used by regulators -- fell 300 basis points in the last three years to 3.55 percent, according to Barclays Capital.
The widely used rule of thumb is that a 50 basis points fall in the discount rate roughly results in a 10 percent increase in liabilities.
"Things look substantially worse now than they were during the credit crisis," said Pat Race, senior partner at investment consultancy Mercer.
In reaction to the past few years of an equity decline and volatility, many pension funds are indeed planning to buy more bonds, a move highlighted by Mercer's survey of over 1,000 European DB pension funds in May.
"Trustees do want to de-risk but financial directors have irrational desire to have equities. They are too wedded to equity markets," Race said.
"You still have massive uncertainties with a potential for another dip into recession. I don't see any reversion to days when equities are dominant part of DB plans."
JP Morgan's data shows pension funds and insurance companies in the United States, euro zone, Japan and UK bought $173 billion of bonds in the first quarter, boosting their bond buying for the third quarter in a row.
At the same time, they cut equity buying for a fifth quarter in a row, selling $22 billion of stocks in Q1.
In Europe, pension funds slashed their weightings for equities to an average of 31.6 percent in 2011 from 43.8 percent in 2006, while fixed income holdings rose to 54 percent from 47.8 percent in the same period, according to Mercer.
Growing pension funds deficits on corporate balance sheets may make it more difficult for companies to access credit and discourage firms which are already hoarding cash from spending cash to expand business.
For wider financial markets, the giant industry's gradual move away from stocks could hit equity risk premium -- excess return of equities over risk-free securities which compensates investors for taking on the relatively higher risk.
This may reinvigorate an academic debate where some economic analysis suggests the equity risk premium should be small, in most cases less than half a percentage point, as opposed to the widely-used range of 4-6 percent.
Indeed, 10-year U.S. Treasuries gave higher total returns in the past 10 years on a rolling basis than world stocks.
"The puzzle... is that for the past 20 years, there has been no net equity risk premium. With the recent sell-off in risk and the rally in bonds, I think there might have been a net premium on bonds," Stephen Jen, managing partner at SLJ Macro Partners, said in a note to clients.
"This has turned financial theory on its head, and managers of pension funds and sovereign wealth funds need to think about this very carefully."
(Editing by Anna Willard)
STRS board to meet September 14-15, 2011
Details here.
Note: CORE will not meet this month, but members are encouraged to attend the STRS board meeting.

STRS board to meet September 14-15

From STRS, September 7, 2011
The State Teachers Retirement Board and Committee meetings currently scheduled at the STRS Ohio offices, 275 East Broad Street, Columbus, Ohio 43215, are as follows:
Wednesday, September 14, 2011
...11 a.m. Disability Review Panel and Final Average Salary Committee (Executive Session)
Thursday, September 15, 2011
...8 a.m. Disability Review Panel (Executive Session)
...9 a.m. Retirement Board Meeting

Tuesday, September 06, 2011

Good news -- he's back!

From John Curry, September 4, 2011
Remember the journlist who did the investigative reporting for the Canton Repository about the former STRS board and former Executive Director concerning their misspending, mismanagement and entitlement philosophy? Well....HE'S BACK! Please take the time to drop him an email (included in this article) to congratulate him with his new job as a reporter for the Cincinnati Enquirer. I have a strong hunch the Freedom Of Information Act will get a real workout real soon!
Following the Sept. 1, 2011 article from the Enquire below is a tribute article to the same Dr. Paul Kostyu featured by Kathie Bracy's blog five years ago. I consider myself very fortunate that I can call this gentleman a friend. If you do contact him he will get back to you!
September 1, 2011
Written by

(Click image to enlarge)
I joined the Cincinnati Enquirer today as the statehouse reporter in Columbus.
I bring to the job 35 years of experience — yes, I’m that old. I spent eight of those years reporting from Columbus for GateHouse Media and previously Copley Ohio Newspapers, which include three Ohio papers — the Canton Repository, Massillon Independent and New Philadelphia Times Reporter. I’ve also worked at papers in Michigan and North Carolina, as well as at National Geographic Magazine.
Covering state government is like working on a giant puzzle, trying to figure out how multiple pieces fit together so the picture becomes clear for readers. I enjoy working puzzles.
Feel free to contact me via email:; phone: 614-224-4640 or 513-368-2883; or follow me on twitter at And look for my political ramblings on this blog.
Saturday, August 12, 2006
Kudos to Kostyu: first place national award (Way to go, Paul!)
Kostyu receives national award
Canton Repository, August 12, 2006
COLUMBUS Paul E. Kostyu, Columbus Bureau chief for Copley Ohio Newspapers, won a first-place national award for in-depth reporting on environmental issues from the Association of Capitol Reporters and Editors.
He also won third-place in the single-report category for his story on the botched execution of Joseph Clark.
Kostyu won for daily newspapers of under 75,000 circulation. The award was announced at the group’s annual meeting last week.
A graduate of Heidelberg College with master’s and doctoral degrees from Bowling Green State University, Kostyu has also won a first-place investigative reporting award from the Associated Press Society of Ohio and was submitted as a Pulitzer Prize nominee for beat reporting.
The Capitol Reporters association awards recognize outstanding achievements in beat reporting, in-depth reporting, column writing, news analysis and commentary by print, radio and television journalists who cover state government.
Larry KehresMount Union Collge
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