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All Fall Down

Debt, Deregulation and Financial Crises

Jane D’Arista

All Fall Down traces the ways in which changes in financial structure and regulation eroded monetary control and led to historically high levels of debt relative to GDP in both developed and emerging economies. Rising stocks of debt drove the global financial system into crisis in 2008 when households, businesses, financial institutions and the public sector in some countries strained to generate sufficient income for debt service. The stagnation and fall in asset prices that followed began the process of unwinding that led to a run on the financial sector by the financial sector.
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Chapter 4: ERISA moves savings into securities markets

Jane D’Arista

Extract

Prompted by notable bankruptcies that resulted in the loss of promised pensions, the Employee Retirement Income Security Act (ERISA) of 1974 required companies to back pensions with assets. This requirement increased demand for securities in which plans could invest and initiated a move of household savings from bank deposits to the capital markets — a shift that increased risk for households, lowered their level of protection as bank deposit insurance covered a smaller share of savings, and increased the impact on economic activity of gains and losses in households’ net worth. Those risks intensified as falling asset prices eroded the value of the holdings of defined benefit plans and encouraged their sponsors to transfer potential losses to beneficiaries by switching to defined contribution plans.

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