Pension Crisis Returns – New Jersey

N.J.’s failure to make full pension payments hinders fund | NJ.com.

The public pension hole grew by an astounding $ 5.5 billion by the end of 2011 after going down from $53.9 billion to $36. billion with the pension reform of last year. At the core of the reasons is the failure of the Christie administration to make a full contribution. In fact, the government has not even contributed the minimal amount which it had agreed to in the reform law. That is how the governor balances the budgets. It is the same irresponsible policy of his democratic predecessors.

The reduction of the deficit in 2011 was achieved totally on the backs of the workers after years of government un-funding. Public employees always contributed as the money is a payroll deduction.

What occurs with failing to fund the system is that the deficit poses a negative accrual just as a contribution creates a positive one. Money that is not there fails to earn any interest but both the principal and the interest were parts of the formula to keep the fund solvent and the finances of the state sound. The deficit compounds.

The carelessness of the governor was exemplified  just a few days ago when he refused to sign a law removing from the public pension system those political beneficiaries who are not public workers and should have never been part of the system.

Fully funding the public pension systems is fundamental for the fiscal health of New Jersey. The governor is acting in the style of Louis XV:  Apres-moi le deluge – After me the flood.

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N.J. Pension Funds Suffer as Markets Fluctuate, New Jersey Does Not Contribute

U.S. State, Local Pensions Drop 8.5 Percent – Bloomberg.

Despite the pension reform of the summer,  the Christie administration has followed the irresponsible steps of its predecessors and refused to fully fund the pension systems.

The deficit will negatively accrue and become a greater burden to New Jersey in the coming years. By 2018, the shortfall could reach the pre-reform figures.

Christie is just kicking the can down the road. Increasing un-met obligations of New Jersey could lead to further downgrades by the rating agencies. That in turn would increase the cost of borrowing, both short and long terms.

Spanish, French Bonds Recover After Auctions. Stocks Drop in U.S. Due to Bank Loses

Spanish, French Bonds Climb After Auctions – Bloomberg.

The yield on French 10-years notes went down to 3.11% and the Spanish dived to 5.29% signaling greater confidence among investors. By comparison, the U.S. 10-year note yielded 2.10%, Japan’s 1.07% and the German 2.18%. Yields are inversely proportional to price.

Banks loses in the U.S. damped any positive reaction to a favorable manufacturing report. Manufacturing is up as companies replace inventory.

New jobless claims went up to 402,000 last week. The dollar strengthened which is not a good thing for U.S. exports.

Massachusetts sued five lenders including JPMorgan Chase & Co. and Bank of America Corp., claiming deceptive foreclosure practices.

A contraction in China’s manufacturing could be caused by Europe’s situation.

Europe: Greek plan using same tools which caused 2008 meltdown

Controversial Leverage Plan: Europe Opting For Discredited Tools to Solve Crisis – SPIEGEL ONLINE – News – International.

The plan approved on Thursday, which is essentially the German proposal, leverages the European Financial Security Facility, EFSF, otherwise referred to as the euro rescue fund, by insuring up to 20% of investors losses in any future debt reduction events, such as  Italy or Spain could be.

First it is not certain that investors will buy bonds of troubled nations even if their risk is reduced from 50% to 30%, as the agreement goes into effect. 30% is still a pretty high risk and investors will demand higher returns for that. So the EFSF may be reduced to buy the bonds itself, not dissimilar to the quantitative easing done by the U.S. Federal Reserve twice.

Second, and more important, it puts the public of the largest economies of the euro zone in the front lines again. Once again it will be ordinary people of France and Germany bailing out their banks after the financial institutions went out for a  binge.

Standard & Poor giving AAA rating it denied to U.S. treasuries to subprime mortgage bonds

http://www.bloomberg.com/news/2011-08-31/subprime-mortgage-bonds-getting-aaa-rating-s-p-denies-to-u-s-treasuries.html

These are the same mortgage bonds (created by bundling a category of mortgages together) that were rated AAA prior to the financial crisis and then were dropped to junk status by the rating companies, thus initiating the 2008 financial crisis.

One has to wonder about the financial wisdom of the rating agency.