Bond Vigilantes and the Free Market

The best-laid plans of mice and men often go awry. -- Robert Burns

Today is not a good day for the Obama economic team. Their boy's approval rating is slipping, the damnable free market won't cooperate, and now the bond vigilantes are back.

Who knew that investment banks wouldn't be excited about executive compensation limits? Or that secured creditors would take umbrage at their debt being subordinated to the interests of a labor union? Or that bond holders would actually expect their bonds to be worth something at maturity, and would react badly when the Fed perverted the money supply?

Why can't they all just play team ball???

We are at the point where government intervention and free market forces are at loggerheads. The current administration has pushed further into the market than any since FDR, and now the market is pushing back.

Today, an group of Indiana pension funds appealed to the Supreme Court to stay the sale of Chrysler. In their filing, they stated:

"Absent a stay, the Court will be deprived of the opportunity to decide critical, nationally significant legal issues relating to management of the economy by the United States Government."

While I don't think Ruth Bader Ginsburg is our best hope for a ruling in favor of secured creditors, ultimately it won't matter. The market is saying enough is enough.

Chrysler and GM have no shot at receiving any type of debtor in possession financing, as no sane lender is willing to risk the government abrogating another contract. The net result is that the cost of doing business rises dramatically for companies with excessive government involvement.

The message the market is sending to the Obama administration?

Keep fucking around and we'll make it impossible for nationalized companies to stay in business.

Enter the bond vigilantes. This nebulous group of ne'er-do-wells is the economy's best hope of stopping the runaway train that is the Federal Reserve.

Taking exception to the Fed's policy of flooding the market with dollars, the vigilantes are pushing long term yields higher in an effort to choke off mortgage financing and other consumer credit. By making it harder for the Fed to re-inflate the bubble, the vigilantes are protecting their bond investments and, by extension, the American taxpayer.

And they've been successful. Yields on 10-year Treasury notes have risen to 3.7% from 2.5% in March. Mortgage rates are up better than a quarter point this week alone, putting a stop to the burgeoning number of re-financings. 30-year mortgage rates are currently at 5.29%, the highest level since December.

The small matters of a $1.8 trillion budget deficit and runaway government spending are providing even more fuel for the vigilantes' fire. Until the boys in D.C. get their shit together, things could get pretty ugly.

Just when I started thinking capitalism was dead in this country, market forces prove once again just how impotent the government really is. The market lets the government get away with a lot, and a lot more this time than ever before in our lifetimes, but it's nice to know that when the government takes a little too much of the leash that the market isn't afraid to jerk it right back and smack the Feds on the snout with a rolled up newspaper.

Look for the market to be more proactive in punishing wrongheaded government policy in the future. Enough rope was given, and I believe the wealth redistributionists have hung themselves.

That's not to say it will be smooth, capitalist sailing from here on out. I don't expect the socialists to go down without a fight.

Ultimately, though, the market will be successful in exposing them for the idealistic dreamers that they are and the country will wake up. At least that's my hope.