Ronald McKinnon in WSJ Bemoans Absence of Bond Vigilantes To Go After Democratic Econ Policy

Conservatives Unhappy Interest Rates Are Not Higher, Economy Not Weaker

Bond Vigilantes is the term given to investors in government bonds who monitor sovereign finance and do not allow governments to run excessive deficits.  If a government is not behaving with fiscal correctness, the bond vigilantes step in and refuse to buy government debt unless interest rates rise dramatically.  The bond vigilantes are big and powerful in Europe, and have gone after Greece, Italy and Spain with a vengeance.

Conservatives were counting on the bond vigilantes to punish the Obama administration for running excessive deficits.  They expected trillion dollar plus deficits in the U. S. to result in big rises in interest rates.  This would cause even more economic decline and hasten the removal of Mr. Obama from the White House, to be replaced by a Republican who would run equally high deficits. (Republican deficits are ok, it’s only Democratic deficits that the Conservatives will not tolerate).

Unfortunately (for Republicans, not for the country) the bond vigilantes have not only not struck, interest rates for U. S. debt have fallen to record low levels as lenders flock to the safety of U. S. government debt.  So the Wall Street Journal needs an academic to write about how terribly wrong it is that U. S. monetary policy might be actually stimulating the economy, or at least keeping it from falling even further than it has.

Ronald McKinnon, who is is a professor at Stanford University and a senior fellow at the Stanford Institution for Economic Policy Research writes about the problem with the lack of bond vigilantes.  His total lack of understanding (ok that qualifies him for the WSJ opinion pages) can be illustrated by this pronouncement

When interest rates dipped in the past, at least part of their immediate expansionary impact came from the belief that interest rates would bounce back to normal levels in the future. Firms would rush to avail themselves of cheap credit before it disappeared. However, if interest rates are expected to stay low indefinitely, this short-term expansionary effect is weakened.

What he is saying is that if business thinks interest rates will rise, which will decrease economic activity they will rush to borrow money and invest.  That’s right, expectation of slower economic activity in the future stirs investment.  Spoken like a true academic, one whose real world view is obliterated by his political bias.

In fact, what has happened is that Mr. Bernanke and the Fed have made a specific committment to keep interest rates low for a long period of time, so that business will not fear rising rates in the near term will slow the economy and thus reduce the incentives for investment.  But this is logic that is unknown to Mr. McKinnon.

The conclusion Mr. McKinnon reaches is this

Perhaps Fed Chairman Ben Bernanke should think more about how the Fed's near-zero interest rate policy has undermined fiscal discipline while corrupting the operation of the nation's financial markets

a conclusion that is so completely at odds with economics that everyone who ever got a C+ or better in Macroeconomics 101 knows it is wrong. 

But then if you want to publish on the opinion pages of the WSJ, intellectual integrity will have to perish.  It’s what they mean when they say “publish and perish”.