The sparkle of capitalism owes to optimism. As often as not, being roseate is not only not warranted, it’s downright disingenuous. Capitalism is prone to deception in many ways, including self-deception.
The financial near-death experience of the 2008 recession–itself inspired by the collective delusion of ever-upward housing prices – sent interest rates plummeting to historic lows. The cost of borrowing remained depressed for over a decade, as did returns to savers (investors in financial resources).
Depressed deposit rates and rock-bottom bond yields have meant that even governments can borrow at negative rates. Many institutional investors, particularly pension funds, refused to cotton to the reality of the financial milieu.
A pension fund provides retirement income to its investors. Most American pension funds, including those run by state and local governments, have long assumed a 7–8% annual return on their investments. This is practically impossible when 10-year US Treasury bonds yield just 2.4% on a 10-year commitment.
But there is strong incentive not to fiddle with the assumption of manna from heaven. CalPERs, the California state pension fund, cut its assumed return from 7.5% to 7% at the end of 2016. That little maneuver cost the state $2 billion in extra contributions.
To adjust to a realistic rate of return would be tantamount to declaring insolvency: unable to meet financial obligations to pensioners unless contributors kicked in more they could possibly pay. So, pension funds kicked their proverbial can of delusion down the road, merely postponing the inevitable crisis.