Wednesday, May 26, 2010

Bond Vigilantes

From a recent Wall Street Journal article:

Remember the bond market vigilantes, that frightening band of financial marauders who once roamed the earth like a fearsome herd of Tyrannosaurus rex? They were so scary that in February 1993, as President Bill Clinton struggled to reduce the federal budget deficit, James Carville quipped that he wanted to be reincarnated as the bond market so he could intimidate everybody.

The article later adds that the bond market vigilantes are often a force for good and ill at the same time. So, while the bond market is quite powerful, it is not necessarily wise and rarely subtle.

Well, the real world requires at least a bit of subtlety.

The bond market -- or any properly functioning market -- is a useful signaling mechanism but at extremes can be the tail that wags the economic dog. The view that they are always right and always a useful disciplinary force is simplistic and deeply flawed.

To me, that view doesn't give enough consideration to the potential downside, at times, of such a hyperactive and interconnected system.

Check out the full article.


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