From Pension Socialism to Pension-Funded Financialization to a New Pension Stewardship
In 1976, Late 20th Century American Management guru Peter Drucker published a book he titled The Unseen Revolution: How Pension Fund Socialism Came to America, in which he predicted that "through pension-fund socialism workers in America are gaining control of the nation's economy" (see summary on Amazon).
That did not happen.
What Peter Drucker did not see was the capital markets taking control of pension trust money, and transforming:
prudent stewards of a dignified future for some, directly, as a private benefit, that would also be a secure present ongoing into a dignified future for us all, consequently, as a public good
into
Asset Owners Allocating Assets across Asset Classes, and within classes selecting Asset Managers peer-benchmarked by Consultants for excellence in maximizing the highest possible profit extraction through price-taking in the public, or financially engineering value creation in the private, alternative, capital markets, solely in the financial best interests of capital markets professionals, on the axiomatic (and therefor unquestioned, and unquestionable) assertion that what is best for capital markets professionals (more transactions, measured in quantities of money, from which they can extract more fees and profits for themselves) is also always best for the quality of life that we all can live.
This did drive a revolution in how business does business, in Corporate America and around the world, but that revolution did not turn towards workers. It fixated on Growth.
The capital markets need growth in share prices to deliver liquidity to market participants, so that buyers can buy, and sellers can sell. Without liquidity there will be no participants. And without participants, there will be no markets.
And without Growth there will be no liquidity, no participants and no markets.
Growth itself is not particularly problematic for our lived quality of life in an economy financed by the capital markets. It is the rate of Growth required by financialized markets, markets that are dominated by professionals trading professionally , with pension fund money, that is a problem.
The capital markets are created by design to mediate the tensions between our need, as individuals who are idiosyncratic and opportunistic as investors, for liquidity in increments in our investments, and the need of enterprise for longevity at scale in its financings.
As individuals, we do not have the size, the purpose or the time it takes to invest in long-dated financings for large scale enterprises.
So the capital markets use the process of securitization to break up long-dated, large scale financing agreements with enterprise into large numbers of legally equal, incrementally liquid commodity shares of ownership in that financing, that can be bought by individuals in idiosyncratic increments and sold opportunistically, by those individuals, at market clearing prices, in markets for maintaining market clearing prices on such shares.
When markets are populated primarily by individuals buying and selling idiosyncratically and opportunistically, with our own money, for our own account, moved to buy or sell mostly by changes in our own lived experience - we buy when we have some money we can take a chance with, and sell when we need that money back, to spend on something we want to have (college for the kids, a second home, a grand vacation, our own new business venture, or to live on in our retirement, etc.) - modulated by our own personal and individual moral compass, and the values that we value, the markets move to the stately rhythm of buy-and-hold.
The need for growth in these authentic, buy-and-hold, markets is generally well-met by the hurly-burly of creative destruction in an enterprise-driven economy of rising and falling popularity for successive generations of technological innovation for prosperous adaptation to the changing circumstances then prevailing, as the prevailing circumstances change, from time to time, and over time.
I won't contend there is peace in the kingdom of this enterprise-driven, capital market financed economy, but the chaos is mostly driven by considerations of quality of life for everyday people living our best lives under the circumstances then prevailing, everyday, and the changing choices we make to fit the changing times in which we live; changes that show up in the economy as the flourish and fade of the social contracts between enterprise and popular choice, and in the capital markets as volatility and growth in the market clearing prices.
Enter Pensions.
By "pensions" we mean the money that is controlled by the fiduciaries who control the investment of money aggregated into social trusts for the social purpose of socially provisioning the social safety net of Workforce Pensions that promise contractually calculated payments to contractually qualified recipients at contractually specified intervals, "every month, forever", for income security in a dignified retirement as a private benefit for evergreen populations of current and future retired workers, directly, that is also a public good for us all, consequently.
Or, at least it should be.
Before 1970, pension trust fiduciaries did not participate in the stock market to any meaningful degree, because the markets are speculative and the law of fiduciary duty frowns on speculation as not really prudent and a threat to loyalty. Instead, pension trust fiduciaries mostly invested like bankers, making loans at interest according to something that was commonly known as the Legal List, that prioritized loans to Governments, highly rated Corporations and Real Estate as prudent and "safe", discouraging all other investments as not fiduciary.
In 1972 that all changed, when the Uniform Management of Institutional Funds Act gave the legal stamp of approval to participation in the stock markets by endowments trusts, IF they bought and sold on a diversified portfolio basis, according to the then-new learning about price movements in the stock markets that is popularly known as Modern Portfolio Theory.
Pensions soon followed the lead of endowments, and the resulting rush of billions (that now are tens of trillions, collectively, worldwide) into what are now called the capital markets drove the unseen revolution that Peter Drucker did not see. Thar revolution was not a new kind of worker socialism through pension financing for enterprise. It was a new kind of financialization of pension money that forced business to fixate on Growth.
We have seen this kind of financialization of securities trading corrupt the authentic workings of enterprise and the economy before. At least twice.
The first was the Gilded Age, when capital markets professionals took control of life insurance premiums, driving capital markets booms that went bust in the Panics of 1893 and 1907, causing Teddy Roosevelt to break up the trusts, and return the markets to individuals.
The second was the Roaring Twenties, when capital markets professionals took control of bank deposits, driving capital markets booms that went bust the Crash of '29 and The Great Depression, causing FDR to separate banks and the capital markets and bring in the New Deal.
Today, we are seeing it again. This time, with pensions.
A pension trust is a legal person, but it is not a natural person. It does not exist in Nature. It is a legal fiction conjured up out of nothing, by the law of its creation. It has no life, and no life events to motivate its choices of what to buy and when to sell as a participant in the capital markets. It has the moral compass of its institutional purpose to guide its choices, but those choices are not made in repose to life events, like ours are when we participate in the markets, as individuals.
Pension trust fiduciaries buy when new money is added to their trust, but once they buy they have no reason to sell.
This cannot be tolerated. That much money invested in the market buying and just holding would be a giant encumbrance on the liquidity that the markets need to be a market. So, the markets have to provide a reason to sell, from inside the markets themselves.
Market professionals stepped forward as experts at knowing what to buy and when to sell to extract profits from, and avoid losses on, volatility and growth in market clearing prices. Of course, once a pension trust fiduciary does sell shares it owns in the capital markets, it has to take the proceeds of that sale and use it to buy something else. Their job as fiduciaries is to invest money. They can't just sit in cash.
This new activity of pension trust fiduciaries started buy to sell in order to extract profits (or avoid a loss), started churning the markets, increasingly volatility as they also drove exponential increases in transaction volumes and an insatiable demand for growth from which to extract profits.
That is the real revolution that Peter Drucker did not see. And neither did we.
The experts in buying and selling, who began to market themselves as Asset Managers selling their services to pension fiduciaries rebranded as Asset Owners, promised that their skills at maximizing the highest possible profit extraction from Growth in share prices, when applied at the scale of fiduciary money (billions aggregating, collectively, worldwide into tens of trillions) would deliver more that is better for all.
Reality is not matching that rhetoric.
What we are actually experiencing through this revolution in Pension-Funded Financialization is more that is better for fewer and fewer (Wealth and Power Concentration) leaving less that is less for the rest (Wealth and Power Dissipation) driving a cascading cavalcade of social discord manifesting as:
The problem is that pensions need longevity at scale in their investments, just as enterprise needs longevity at scale in their financings. There is no tension here for markets to mediate through securitization for incremental liquidity.
The solution is for pension trust fiduciaries to withdraw from the markets, and engage with enterprise directly.
Private Equity shows us that these fiduciaries have the size, the purpose and the time it takes to use the circa 1983 vintage technologies of spreadsheet math, desktop publishing and digital communication to negotiate with enterprise of any size, in any business, anywhere on the planet.
Private Equity uses these technologies to financially engineer value creation for profit extraction.
But Tax Credit Equity shows that these technologies can also be used to financially engineer socially beneficial enterprise cash flows through negotiated agreement on equity payback to an actuarial/fiduciary cost of money, plus opportunistic upside, from enterprise cash flows prioritized by contract for suitability of the technology, longevity of the enterprise, and fairness in how the business does business, under the circumstances then prevailing, across all six vectors of fairness in business:
This is the other revolution that Peter Drucker did not see.