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7/22/2016 In the shadow of quantitative easing, party like it is 1788 - FT.com Referring to last year’s stress test of insurance companies by the European regulator, the Eesti Pank of Estonia now says that “the low interest rate scenario used in the stress test has already arrived, and the current yield curve is already lower than that used in the test. If companies do not take appropriate measures or adjust their operations or strategy, they could face difficulties in meeting their liabilities to policyholders earlier than was calculated.” The same problem applies to defined benefit pension plans, which are what most Europeans are counting on for that part of their retirement income that is not covered by pay-as-you-go state plans. As the promises to pension, life insurance and guaranteed investment contract beneficiaries are discounted at very low or negative rates, they eat through any reserves or capital the institutions have on hand. At the same time, the institutions earn less and less income from any new securities purchases. This has happened slowly, and, with the curve bending downwards in working populations, quickly. Someone will have to explain to the pensioners and survivors that they are not getting what they are promised. I would suggest not applying for that particular job opening. The compensation for investment managers who are arithmetically certain to lose money will tend to decline over time. When someone says I am not smart enough to understand persistent negative real rates (the “persistent” is important), I have to agree. There is no way I could project all the dreadful consequences. However, it would be difficult to match the stupidity of the excuses for the current consensus on central bank policy. Not that there will be a consensus for much longer. It does not take much reading between the lines of statements such as President Obama’s last note in the FT to see that the competitive devaluation implicit in the ECB’s policy path is making the leaders of a major currency zone rather cross. And just before a US election year, to twist the knife. But then it is always an election year somewhere, and it apparently is the job of macroeconomists to come up with plausible stuff to fill out press releases, not to make actual policy. To their credit, Federal Reserve staff seem quite guileless about the shortcomings of the long-term projections generated by their central model. Not that the market people are without their sins of oversimplification and formalism. They have stretched VAR models for risk far beyond their real utility. The market’s risk managers have the same motivation as the macroeconomists: their bosses want a short answer that supports their compensation plan or political platform. Enough hard feelings; Iam now confident that we in the developed world will succeed in our most important goal. That is to get through the year end and the bonus calculation period without having to put a complete financial disaster on the books. My concerns are about what comes after that. Next year some of the seemingly endless European processes of regulation writing are coming to an http-/Avww.ft.com/cms/s/O/aa7a54d6- 94f2-11e5-bd82-c1fb87bef7at htm Haxzz4F 9IV2RAR 2/3 HOUSE_OVERSIGHT_023568