♠ Posted by Emmanuel in Credit Crisis at 5/26/2010 12:09:00 AMI almost forgot to post this op-ed by Alan Blinder on why the bond vigilantes are supposedly coming back with a vengeance. While they have, so far, not really come around to punishing the United States for its unprecedented profligacy, he argues that peripheral European countries are effectively the canary in the coal mine for Western governments to shape up their acts.
In this way Blinder is a lot like Roubini in espousing a sort of financial domino theory: up front are the PIIGS countries that are earlier in the pile to topple. Inevitably, however, despite (temporarily) declining yields on US Treasuries, German bunds, and the like, a lack of action will eventually yield similar results: lack of confidence in sovereign debt issues if fiscal health is not improved markedly in the medium term. From the Wall Street Journal:
From a long-run perspective, the bond market vigilantes have it right. Greece, Europe, the U.S. and other countries must take serious steps to get their budget deficits under better control. And the long-run budget problems of many nations are too large to be solved exclusively on either the tax side or the expenditure side.
The U.S. is a case in point. Under continuation of current policies, our budget deficit and national debt would soar to impossible heights. (Ask the oracle: the Congressional Budget Office.) The amount of deficit reduction needed to stop this incipient explosion is so large that no serious person should believe we can do it without both spending cuts and higher taxes.
But not yet, please. And therein lies the difficult-but-essential subtlety. St. Augustine urged the Lord to make him chaste, but not yet. Now budget and finance ministers around the world, including our own Peter Orszag [of the OMB] and Tim Geithner, must make an analogous plea to the bond market vigilantes—and back up their words with deeds. The problem is that the vigilantes are an impatient lot and Greece has set their clocks ticking faster.
What needs to be done varies enormously by country. Here in the U.S. Social Security reform, once considered the third rail of American politics, is now the low-hanging fruit of deficit reduction. Fixing Social Security's finances is easy, technically. And the timing is perfect because promising deficit reduction now but delivering it later is exactly the right thing to do. After all, no one wants to raise payroll taxes now or reduce retirement benefits without giving people many years of advance notice.
When the Greenspan Commission "fixed" Social Security's finances (for a while) in 1983, it delayed much of the pain for decades. Its proposals not only passed Congress in a flash but have raised barely a whimper of objection since. Pulling off something like that today might be a good way for the U.S. to steer a middle course between the Scylla of the bond market's wrath and the Charybdis of premature belt tightening that damages the recovery. Hey, Odysseus managed it.