Collapse of Pension Funds Due to Foreclosure Crisis -- Who Will Be Blamed?

One of the casualties of the collapse of the subprime mortgage industry that has not been talked about to any significant degree is that of the pension funds. Pension fund managers were convinced by Wall Street investment firms to put retirement money into supposedly safe mortgage securities. With the fallout from the record default rates, though, these funds have lost much of the retirement funds of workers.

Both public and private workers have been affected by this, and every person now facing foreclosure should check with their employer that their pension fund is relatively secure. No one wants to face both a current financial hardship and have to work on repairing a retirement account that has been destroyed by the poor financial returns generated by betting on poor people paying mortgages they could never afford in the first place.

One question that remains to be answered, however, is what public workers will do once they find out their retirement money has disappeared. Bureaucrats at all levels are often highly dependent on the fruits of other people's labor and live parasitically off of the productive of society, with their sense of entitlement growing as they exercise more coercive power over the people they are supposed to be serving. How will they react to the possibility of having to work longer than they expected or retire on less than would be necessary to maintain a wealthy lifestyle at the expense of the lower and middle classes?

There are several possible targets for local governments, which have been hit hardest by the subprime pension fallout, to attempt to hold accountable. The first, and least likely, will be that these governments try and go after the banks and investment companies that originally sold them on the safety of investing in mortgage-backed securities. These are the same banks that are responsible for putting many of the bureaucrats in power (through campaign contributions) and funding government salaries (through filing fees in the courts, providing loans to government, and property taxes), so it is unlikely local governments will target their most concentrated source of power directly.

Thus, the local governments will most likely avoid going after predatory banks, even if they operate branches in the community. Going after these lenders by proxy is much more likely, starting with the replacement or prosecution of the pension fund managers. Although the fund managers made enormously bad decisions with how to invest people's retirement money, many of them may have been just as taken in by the shady promises of security that tricked individual investors. While the largest state or big city pension fund managers may have worked with the banks to bilk people out of money, smaller governments were probably taken completely by surprise. This will not protect them from the self-preserving wrath of government, however, and there will likely be more unemployed fund managers after the fallout is more widely known.

The final target of governments to stop the bleeding of their pension funds due to the foreclosure crisis will be the people themselves. It may become much more difficult or costly for homeowners to stop foreclosure, with governments coming up with all sorts of mandatory programs to force people to keep paying their mortgages. Unfortunately, many of these programs will be self-destructive for the governments, either increasing the burden placed upon homeowners or unduly prolonging the foreclosure process to put off the inevitable. As local governments feel the squeeze of decreasing property taxes, they will try and raise funds other ways (more speeding tickets, county income taxes to reach former homeowners now renting, and so on), which will just push more homeowners into foreclosure.

With more county and city governments facing budget shortfalls, the pressure will be on to find more sources of funding and simultaneously reducing the burden on homeowners so that they can keep up with their mortgage payments (and property taxes, more importantly). Governments will have little option other than to reduce spending on services or raise taxes and fines. When the disaster in public pension funds becomes more widely-known, however, the bureaucrats, with inflated senses of entitlement, may be set off into a panic of grabbing revenue wherever they can. The end result will be a deepening spiral of foreclosures, tax increases, more foreclosures, and more tax increases, until there are far fewer homeowners and government services in communities.