Reaching for yield in all the wrong places. Photographer: Karen Bleier/AFP/Getty Images

Pension Funds' Risky Business

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of “The Up Side of Down: Why Failing Well Is the Key to Success.”
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It's the semi-annual Brookings Papers on Economic Activity conference, and I'm afraid I can't be there. But since I'm pining for two days of super-smart economists debating one another, I'm going to blog the papers anyway, starting with Gabriel Chodorow-Reich's paper on the effects of the Federal Reserve's low interest rates on financial firms.

Over the last five or six years, you've heard a lot about those firms "reaching for yield": moving their portfolios into riskier investments in order to make up for the Fed's ultra-low interest rate policy. Reich looks at four major categories of institutional investor -- banks, pension funds, life insurers and money markets -- and examines which of them reached for yield, and when.

Here, courtesy of the Brookings Institution, is a nifty infographic illustrating his findings:

This is probably a bit of a surprise to most of us: Banks, for all the talk of moral hazard, didn't significantly reach for yield. Pension funds did, which isn't surprising at all -- but they seem to have stopped, which does contradict what I've been hearing anecdotally.

One conclusion that you can draw from this is that where regulators were extremely focused on keeping firms from reaching for yield, they didn't. In areas where they weren't so focused, notably pensions, you saw investors sexing up their portfolios to try to make up for the losses of 2008 and miserly interest rates on safer investments. That suggests that pension regulators should be paying a lot more attention to pension fund portfolios in times of market stress.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

Megan McArdle writes about economics, business and public policy for Bloomberg View. Follow her on Twitter at @asymmetricinfo.

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