see back in 92 we were right to
"...aggressively move to reduce the budget deficit in 1993 even thought the recovery was weak"
ya break a huge party redefining campaign pledge
to cut working family federal taxes ,,...
why brekl that pledge p ass NAFTA and lose the house in 94 ?
" to eliminate any market expectations
that high deficits would lead to higher inflation"
okay nonsense but okay ...
excpt brad doesn't really believe the market is the prime mover here
attendez vour to the nut cutter line
..."--more importantly--"
meaning in reality
"to eliminate any belief
on the part of the Federal Reserve
that it need to raise rates rapidly and far "
i repeat
that " more importantly"
is brad telling us
the FED is decisive in such a context
and the FED must be appeased
or the FED
by strangling the recovery in a credit crunch
would create
"... a low-investment jobless recovery "
and why would the FED dosuch a nasty thing ?
"in order to guard against any possibility
of a renewed inflationary spiral."
but brad
was there any basis for such a concern ?
an inflationary spiral ? ...come now
isn't that just what a weak recovery won't create ?
in particular
an inflationary spiral
so fierce it required over the horizon
pre emption ?
of course not
now check out this pusilanimous crap
"That was not an attack"
(of bond vigilantes)
but it was
" a horizon-sighting of bond-market vigilantes--"
or was it ?
if he had the cubes to stop there its one thing
but here he goes covering his crotch
".. perhaps only the market thinking the Federal Reserve thought it was about to get a horizon-sighting of bond market vigilantes."
no you guysin the white house basement
thinking the market might be thinking the federal reserve might be thinking..blah blah blah
enough ?
nope
now don't he ned to double down
"I think we were right then to fear and take steps to ward off the bond-market vigilantes"
really ?
eerrrr
" or perhaps"
" only right
to fear and take steps to ward off
any Federal Reserve decision
that it needed to fear and take steps
to deal with bond-market vigilantes."
amazing !
brad alibis bondage bob rubin crap
by fingering a trigger happy greenspan FED
beautiful
what a fudge fest
"First, what was going on in 1994--and what those of us working in the Treasury and watching the Federal Reserve and the financial markets thought was going on--was not an attack of bond-market vigilantes terrified of rising debt and the prospect of explicit default or implicit default through rapid inflation. The Federal Reserve had undertaken a long easing from 1990 through the mid-1992 unemployment rate peak. But then, as unemployment started to decline, the Federal Reserve held off on tightening: it was expecting the passage of the deficit-reducing Clinton 1993 Reconciliation Bill--OBRA 19930--and believed that the spending cuts and tax increases in that were sufficient. In early 1994, however, the Federal Reserve concluded that it was time for monetary tightening, and began to gradually raise short-term safe interest rates by selling off some of its bonds for cash.
We in the Treasury--and the staff at the Federal Reserve--had expected the reaction of the long-term bond market to this Fed tightening cycle to be modest. Between 1990 and 1994 the Federal Reserve had reduced short-term interest rates by 5%, and as it had done so long-term rates had fallen by 3%. We attributed 1.75% of that long-term interest rate reduction to the reduced current and expected future federal deficits as a result of Clinton's OBRA 1993 and the earlier Foley-Mitchell-Bush OBRA 1990, leaving 1.25% to be the reaction of the long-term bond market to lower short-term interest rates. Thus as the Federal Reserve raised short-term safe interest rates from 3% to 6%, we expected a quarter of that to show up as a rise in long-term rates--we expected to see them go from 6% to 6.75%.
Instead, in 1994 long-term bond rates rose from 6% to 8%.
In the end we attributed the excess rise in long-term bond rates in 1994 to two factors:
- As interest rates rose, the duration of Mortgage Backed Securities lengthened--people weren't refinancing their houses any more. MBS thus became much longer duration securities--there was a much greater supply of long-term bonds in the market--and by supply and demand that pushed the prices of such bonds down until investment banks could figure out how to tap more risk-bearing capacity to hold those bonds.
- Nobody was sure that the Federal Reserve was going to stop raising short-term safe interest rates when they hit 6%. In the late 1980s, after all, they had not stopped until short-term interest rates hit 8%. Without effective forward guidance from the Federal Reserve, the bond market was pricing in a larger tightening than seemed likely to us.
We were, I think, completely correct. By mid-1995 it was clear that the Federal Reserve had reached the end of its tightening cycle and more money had flowed into the long-term bond market to hold attractively-priced MBS, and the long bond rate fell back into the trading range we had anticipated--and then fell some more.
So: 1994 was an interesting lesson on the importance of clear Federal Reserve forward guidance in avoiding excess bond-market volatility and on the consequences of endogenous duration for the short-term pricing of complex securities, but it was not an example of bond-market vigilantes fearing higher deficits and default or inflation riding over the horizon. The federal deficit was under control and rapidly shrinking in 1994 as the combination of the business-cycle recovery and Clinton's OBRA 1993 worked even better than we had anticipated.
Second, there had been an attack--or, rather, not an attack but rather bond-market vigilantes visible on the horizon and gunshots in the air--earlier.
Throughout 1992 there was a 4%-point gap between the 3-Month Treasury rate and the 10-Year Treasury rate. Those of us in the Clinton-administration-to-be read this as market expectations that the uncontrolled federal budget deficit would lead people to expect higher inflation and the Federal Reserve would then feel itself forced to raise short-term interest rates far and fast in order to hit the economy on the head with a brick and keep those expectations of higher inflation from coming true. The result would be a low-investment and perhaps a jobless recovery. The right policy, we thought--and I think the evidence is pretty clear that we were 100% right--was to aggressively move to reduce the budget deficit in 1993 even thought the recovery was weak in order to eliminate any market expectations that high deficits would lead to higher inflation, and--more importantly--to eliminate any belief on the part of the Federal Reserve that it need to raise rates rapidly and far to create a low-investment jobless recovery in order to guard against any possibility of a renewed inflationary spiral.
That was not an attack but a horizon-sighting of bond-market vigilantes--or perhaps only the market thinking the Federal Reserve thought it was about to get a horizon-sighting of bond market vigilantes.
I think we were right then to fear and take steps to ward off the bond-market vigilantes--or perhaps only right to fear and take steps to ward off any Federal Reserve decision that it needed to fear and take steps to deal with bond-market vigilantes. In any event, our policies were right.
But that was then, with a 4%-point gap between 10-Yr and 3-Mo Treasury yields
Today we only have a 1.6%-point gap between 10-Yr and 3-Mo Treasury yields.
1.6% < 4%"
