Stop Bond Market Mandarins
From Running US Economy
By Alkman Granitsas
FYI from The Light Party
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
They are bond traders. An unelected millionaire's club in New York that for two years has been running America's
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 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" in 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 out money. That power has been ceded to the
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. In nationally 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 the 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 advisors, 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.
Alkman Granitsas is a Washington correspondent for AFX News, a European financial news wire owned by the Financial Times and Agence France Presse.
Copyright © 1996. The Light Party.