The Once Mighty Bond Market


This is illustrative of where we’re at today. The Federal Reserve has manipulated the bond market to serve the needs of the Federal government. This may sound good, but the bond market doesn’t obey the rules of cronyism like Washington does. When this writer refers to the bond market, he means the manipulation of credit and debt with interest rate subsidies through direct purchasing of government bonds by the Fed. This establishes a symbiotic relationship between the banking system as the creators of credit and the government as borrowers and spenders of the national debt. [See the Credit-Debt Machine.] Other lenders without government subsidies and guarantees (such as savers) are left to pick up the bill. Neutering the bond market means there is no effective constraint on government profligacy. Meanwhile, our deficient Fourth Estate distracts us with the Tea Party origins of any citizen protests to this unholy state of affairs.

From the WSJ:

How to Challenge Yellen—and Big Government

Make support for her confirmation conditional on reining in the central bank’s bond-buying program.

By Sean Fieler

‘I want to come back as the bond market. You can intimidate everybody.” That was James Carville, President Clinton’s chief political consultant, talking to this newspaper in February 1993.

When President Clinton backed away from HillaryCare and the rest of his big-government agenda, it wasn’t just Democratic losses in the 1994 midterm elections that forced his hand. It was the power of the bond market, a point Mr. Carville understood but Republicans seem to have forgotten.

If today’s Republicans are going to roll back President Obama’s massive expansion of government, they will need the muscle of a bond market free from the Federal Reserve’s manipulation. History suggests that only the prospect of higher and increasingly painful financing costs chastens committed big spenders. A liberated, and consequently less docile, bond market would not only restrain Washington’s profligacy, it would also free the Republican Party to refocus on the big ideas and positive vision that made it a global force in the 1980s.

No cause unites the Republican Party like the battle for limited government. From Ted Cruz’s government shutdown to Paul Ryan’s budget compromise with Patty Murray, the political tactics have varied but the goal of limited government has remained the same. The push for limited government even polls well. According to a recent Gallup poll, an overwhelming majority of Republicans, 81%, and a solid majority of Americans, 60%, think the federal government has too much power.

But despite the public’s support and Republicans’ herculean efforts, the campaign to pare back government has failed both politically and substantively. The federal government continues to grow while Republicans are increasingly derided for their obsession with spending cuts. Far too many Americans now see the GOP as opposing everything and favoring nothing.

The bond market’s apparent indifference to the growth of government has made Republicans’ sense of urgency about limiting government seem mystifying to many Americans. Trillion-dollar deficits provoked neither a spike in government bond yields nor Wall Street panic. Instead, the bond market actually welcomed Washington’s record deficits with a rally, and Wall Street profited. The type of intimidation that Mr. Carville feared was nowhere to be found.

The bond market’s reaction, however, is not natural or sustainable. And it is not the inevitable product of the dollar’s reserve-currency status, as some would suppose. After all, the dollar was the world’s reserve currency during President Clinton’s first term, when the U.S. bond market still commanded some respect in Washington. Rather, America’s quiescent bond market is a result of Federal Reserve manipulation.

Even with tapering under way and the end of quantitative easing on the horizon, a truly free bond market is not yet in the offing. So long as a threat of the Federal Reserve’s bond buying looms, even rising bond yields are unlikely to produce discipline in Washington. Mario Draghi, the head of the European Central Bank, has masterfully demonstrated the power the Fed would have merely waiting in the wings. By standing at the ready to buy government bonds if they decline, Mr. Draghi tamed Europe’s bond markets, driving Italian 10-year yields down to 4%, from 7%, as Italian debt-to-GDP, currently at 127%, continued its unsustainable climb.

Monetary policy’s dangerous interplay with irresponsible fiscal policy is as old as central banking itself. It was, after all, with good reason that the Federal Reserve Act of 1913 did not permit the Fed to buy government bonds, a restriction that Congress did not clearly lift until 1935. Even then the Fed did not use its power to control the bond market until 1942, and did not abuse it until 2012 by initiating a third round of quantitative easing.

With the economy clearly expanding and the Federal Reserve still unwilling to set the bond market free, the time for Republican action has come. President Obama has made clear his preference for a supine bond market and the big government programs that it will finance. Janet Yellen, his nominee as Fed chairman, has been an outspoken champion of the Fed’s bond buying.

Ms. Yellen’s vigorous support for quantitative easing gives Republicans a perfect opportunity to oppose the unhealthy alliance between big government and the Federal Reserve. Republican senators should vote against her confirmation, or, better still, make their support for her conditional upon the passage of a resolution capping the growth of the Federal Reserve’s already bloated balance sheet. A $4.5 trillion cap and a program to reduce the Fed’s balance sheet to $3 trillion by decade’s end would ensure continued tapering and an eventual unwinding of the Fed’s monetary adventurism.

With the bond market off the sidelines and back on the side of limited government, Republicans could revive their party’s Reagan-Kemp legacy: the party of the future, not of austerity. They could then once again advocate new policies, confident that their pro-liberty, pro-growth programs would present alternatives rather than additions to America’s already overgrown federal government.


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