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How dumb are the bond markets?

I don't really understand this argument that the spending freeze is about convincing the bond market that Washington has the courage to deal with the long-term deficit. The long-term deficit is almost entirely driven by health-care costs. The White House has made this argument many times before. "Let me be clear," Obama said in September, "if we do not control these costs, we will not be able to control our deficit."

But the administration seems to be backing down on their health-care reform plan. Maybe they'll have a clearer message at tomorrow's State of the Union, but for now, the effort seems to be stalling. Yet the bond markets are supposed to be comforted because the White House is proposing -- which is not the same thing as passing -- some spending cuts that will have virtually no measurable impact on the deficit?

It can't both be true that bond markets are this irrationally dumb and that they understand what a non-security a discretionary spending freeze is.

By Ezra Klein  |  January 26, 2010; 5:57 PM ET
Categories:  Budget  
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Comments

No but political reporters are apparently dumb enough to buy this as an actual justification so as a CYA action it seems to be working in some quarters.

Posted by: endaround | January 26, 2010 6:35 PM | Report abuse

Ezra - what is there not to understand?

No one has ever seen Obama White House been able to reduce any expenses (I guess except Iraq). Bond market / people want a demonstrable incident where Obama White House indeed can reduce expenses. For this what target Obama White House can pick up?

Argument can be for these targets, but White House thinks 'discretionary spending' is the best candidate since departments are closely controlled / monitored by Admin / White House.

Your argument that strong lobby expenses will be spared while 'poor' folks programs will cut because of weaker political sponsorship is a valid one. Besides, it is an ideological / long term policy failure; is a valid argument too.

Posted by: umesh409 | January 26, 2010 6:48 PM | Report abuse

My guess is that tomorrows speech will mostly focus on A) a strong sale of the Senate HCR bill and a call for congress to pass the bill right away and B) a stern message to Wall Street that he meant it when he said that after the fire was put out we would deal with the people who started it.

I think he's going to stress the fact that the bill actually reduces the deficit and use the freeze as a further signal of seriousness about long term deficits.

I think the word about the freeze was leaked specifically so he could raise the hackles of liberal economists thereby demonstrating to bond markets that he's not afraid to piss off the left, but he also didn't want reaction to the freeze to obscure his main message tomorrow.

I think the WH wants to give liberal economists, bloggers and journalists a chance to fret about teh freeze today and tomorrow and get it all out of their system so that they won't be distracted and will be more focused on his core messages on Thursday.

Feel free to mock my naivete from now until the SOTU and some more after the SOTU if I'm wrong and you have a mind to.

Posted by: wintershag | January 26, 2010 6:51 PM | Report abuse

Ezra, have you ever considered that the bond markets (and their thousands of actually really smart people) get something that you seem to refuse to get?

These are many of the smartest finance people in the world and they are scared as hell and need tangible evidence from this administration acknowledging that the administration gets this fundemental problem. Debt will cripple this nation if the administration does not address it fast.

Posted by: lancediverson | January 26, 2010 6:53 PM | Report abuse

@ Wintershag: I do think you're being naive, but I sincerely hope that he proves me wrong and you right (especially re: A).

Posted by: onewing1 | January 26, 2010 7:53 PM | Report abuse

Ezra- Let me assure you, with 100% certainty, that the bond market is "smarter" than any single individual, even a politician or blogger.

Have you ever considered that the HC reform bill actually wouldn't reduce the deficit?

Posted by: MBP2 | January 26, 2010 10:07 PM | Report abuse

Ezra - suggest that you (and some of your commenters) read "Lords of Finance - The Bankers Who Broke The World" by Liaquat Ahamed if you haven't already. Like Ben Strong and Montagu Norman, Scheiber either fails to understand or refuses to understand that we are in a liquidity trap, monetary policy has lost all traction, we are in or on the verge of deflation and the rules that apply in normal times don't apply now (ask the Japanese).

Regardless of the long term prospects for budget deficits and the national debt (and regardless of the reason they increase be it healthcare spending or any other spending) interest rates will remain low until jobs become plentiful and wages start to rise.

That's why Obama's political gamesmanship is so demoralizing and will be so damaging.

Posted by: ethelmertz | January 26, 2010 10:12 PM | Report abuse

Sometimes you miss the forest for the trees: since the healthcare bills are intended to bring national medical costs under control and thereby reduce the pressure on the Federal budget, and since the provisions in the bill are highly integrated to create an overall regulatory system that will help accomplish the curve-bending objective, why was there not a compelling argument that the entire Senate bill, including the Finance Committee version with a public option, should have been subject to the reconciliation process?

Posted by: urbanlegend | January 27, 2010 12:42 AM | Report abuse

The bond markets are very smart. After all, while Bernanke and the fed are fretting about inflation, the bond markets see no risk at all in the foreseeable future.

The issue here isn't the intelligence of the bond markets, it's the ability of officials to correctly interpret them.

Besides, Ezra's point stands. This freeze is completely insignificant. If they are, in fact, "scared as hell," then A) interest rates would be much higher and B) they wouldn't care about something tiny like a non-security discretionary spending freeze.

Posted by: etdean1 | January 27, 2010 11:07 AM | Report abuse

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