Stop Bond Market Mandarins From Running US Economy
THEY determine the cost of your home, how much you will pay for a car, and the interest rate on your credit card. They are a cadre mostly of young men with East Coast pedigrees who earn more in one year than some people do in a decade.Skip to next paragraph
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They are bond traders. An unelected millionaire's club in New York that for two years has been running America's economy.
The bond market will force the Federal Reserve Board to raise interest rates for the sixth time this year. Look for it right after election day when the Fed can escape public scrutiny. Since February the Fed will have raised the cost of debt by at least 2 percent.
That means a $20,000 car that cost you $1,400 to finance at a 7 percent rate in February will now set you back $1,800. A $100,000 house that cost $7,000 in finance charges in February, now costs $9,000.
Why is the Fed giving in? Because it has too. Otherwise it runs the risk of getting ``behind'' the bond market, which quivers at each new sign of economic strength.
For the bond market, good news is bad news. If more Americans are finding work and buying homes, that's bad news. More jobs and more homes mean a growing economy. A growing economy means more inflation, and more inflation means that a $10 million bond bought today will be worth less in 30 years. Lately there has been just too much good news about the economy.
If this month the Fed doesn't move to slow down growth the bond market will. Instead of the Fed raising short-term interest rates, the bond market will raise long-term ones (the Fed has no control over these), forcing the Fed to play catch-up with the market.
It is no longer up to Alan Greenspan and his Fed cronies to control our money. That power has been ceded to the bond market.
But who is the bond market anyway? Most of us have been taught, according to the precepts of Adam Smith, that a free market, whether it be in bonds or in barley, is the ideal exchange. It rationally allocates goods or services between supplier and customer. We were taught that the market would set the right price for everything.
The market was always held up as the perfect democracy - made up of thousands of individuals competing to buy and sell goods at the best possible price. That is what set us apart from the Communist world. Even John Maynard Keynes, the father of modern economics and the man who first showed us that a market economy is not always perfect, did not quibble with this basic notion.
History has taught us that markets are much better than any system of government allocation and price controls. But let's not confuse principles with practice.
The US bond market is made up of 39 primary dealers, several hundred secondary dealers, and thousands of customers. But the primary dealers dominate the market. On any given day, these dealers trade $100 billion worth of government securities among one another, and $50 billion for their customers.
THE primary dealers not only play the market, they shape the policy. Every three months, US Treasury officials meet with a group of these dealers for advice on how best to finance the Federal government's red ink.
So the bond market is basically 39 giant financial houses that act as advisers, salesmen, buyers, and traders for their customers, the US government, and themselves. These companies are run by a handful of privileged and very wealthy individuals who ultimately decide how much it will cost you to borrow money.
Among this group that shifts billions of dollars each day around the world, trading in New York, Tokyo, and London, a few individuals sometimes set the pace the others follow. On a single trading day the direction of the bond market can be determined by as little as one large buy or sell order.
So remember, the next time you send in your mortgage, or pay for dinner with your credit card, that the bond market is the one tallying up the final bill.
The US bond market is not a democracy, it is an oligarchy with great power. It's time they stop calling the shots. It's time for the Federal Reserve to stop playing follow the leader. The Opinion/Essay Page welcomes manuscripts. Authors of articles we accept will be notified by telephone. Authors of articles not accepted will be notified by postcard. Send manuscripts by mail to Opinions/Essays, One Norway Street, Boston, MA 02115, by fax to 617 -450-2317, or by Internet E-mail to OPED@RACHEL.CSPS.COM.