34 than passively continuing to finance them. Defined Benefit vs. Defined Contribution One of the links that I put in the bibliography is an interesting letter from one of the teachers’ groups in reply the John & Laura Arnold Foun- dation encouragement of defined contribution plans, as opposed to defined benefit plans. When you look at underfunding of pension benefits, your first conclusion might be to agree, “Oh, well, rather than promising a defined benefit and then struggling in the political or corporate process to make it happen, let’s switch to defined contribution. Then if the market or the dollar collapses, the beneficiary will assume the risk. We can’t have the state and local government or the corporations responsible for coming up with a set benefit. It’s just too risky and too difficult. So let’s shift responsibility to the beneficiary”. There is a certain logic in having beneficiary risk rise and fall with the market. That structure would be more flexible and more attractive to some par- ties. You have the benefit of the beneficiary taking the risk, but central managers still get to continue to control the capital: the best of both worlds for the people who run the financial system. But the problem remains: If you look at the bailouts and the money missing from govern- ment and at the largesse of quantitative eas- ing– which all come together in ‘the financial coup d’état’ – you see that we are guaranteeing a no-risk, zero-cost capital world to insiders, and then turning and saying, “You know what? Not only are we going to force the general population to finance our mistakes by bailing us out, but we are not going to maintain our legal contractual obligations to those people.” There was no legal and contractual obligation to provide the banks with $24+ trillion, and there is certainly no legal mechanism under the law to disappear $21 trillion, or whatever the real number is, from the Departments of Defense and Housing and Urban Development. Our government is creating a defined benefit world for a group of people who don’t have any legal rights or contractual benefits, but are adding that “No, we won’t maintain the defined benefits for this other group of people whom we call outsiders.’ We want them to bear all the risk. They bore the risk on the housing bubble, and they bore the risk on the bailouts, and now they are going to bear the risk on the pension funds.” So, the rich get richly defined guaranteed bene- fits and everyone else gets defined contributions. The rich bear no risk – all of which is borne by the general population. The big banks have a 0-1% cost of capital at the Fed window, while the poor are paying 30% on their credit cards and subprime loans for used cars. And you ask what causes growing inequality? The answer looks obvious to me. Index Funds If you compare the 60/40 benchmark that I de- scribed in the performance chart above, essential- ly one might look at that and say, “Well, maybe we should just index investments.” That’s not a good idea outside of working mar- kets. The index system from the beginning was designed to depend on market pricing, and on some active managers to do research and analysis that provides market discipline. As a result of government and central banks ac- tively managing markets, we’ve lost honest prices. Then as more investment is indexed, we take out the analysts who dig and question and make a difference to the pricing and the market function. Lose enough capacity, and investors start flying blind. We lose the market discipline that indexers depend on for their approach to work. If pension funds are indexed and if you’re not complaining about important issues related to to- tal economic returns (such as iPhones addicting children), and if you do not fund managers to do the kind of analysis to make sure that you really want to buy this stock, you’re taking out the last remnants of market discipline. It’s a sporting match without referees. The entire society can take all of its capital and drive right off a cliff because indexing can make you very stupid. The allocation of capital becomes even more political and can be even more manipulated. II. THE STATE OF OUR PENSION FUNDS “The rich bear no risk – all of which is borne by the general population. The big banks have a 0-1% cost of capital at the Fed window, while the poor are paying 30% on their credit cards and subprime loans for used cars.”