Bond Voyage

Planet Money
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Automatic TRANSCRIPT

We're going to start in the early nineties back before this shift. When the old rules about government borrowing still applied. Bill clinton had just been elected president. He appointed an economist named laura tyson to be one of his top advisors and she looked at the economy and she saw this glaring problem year after year. Both government deficits and interest rates. Were going up and then he said omega if we don't get a hold of this federal deficit than that trend will continue. Those rates will continue upward. That was a very significant concern. Higher interest rates were concerned for a couple of reasons for one thing. Obviously they meant that the government had to pay more to borrow money but also when interest rates for the government went up. Interest rates also went up for everybody else. And that's it up this whole cascade of problems so we're people won't buy as many houses. There won't be as many houses constructed in their wealth as much capital equipment invested in and investments in important part of the Economic growth in your all sorts of every interest sensitive part of the economy the way the government runs a deficit. The way it borrows money is by selling bonds treasury bonds. The government says to really anybody. Okay lend us whatever one hundred dollars and in say ten years we will pay you back with interest will pay you back one hundred twenty dollars. The bond is basically the government's i. Iou you that it will pay back that loan with interest and during the clinton administration because of that link between deficits and interest rates. Everybody in the white house talked about treasury bonds about the bond market time. James carville was a political advisor to president. Clinton was just an obsession. In the early days of clinton's everybody say what's the bond market could house bot mocking react to hell multiple. i don't know it just became this omnipresent. The heart of every conversation. James carville was not an economics guy but as he spent time at the white house he realized that sort of bizarrely all these people who worked there making policy the people who had what seemed like the most powerful jobs in the world. We're in fact terrified of the bond market so when a reporter from the wall street journal called up carville to talk about the bond market. He came up with this line that became sort of famous or at least bond market famous kid. I wanted to grow up with four hundred hitter. The pope and the president. But i just want to be the bond. Market's gonna scare the hell out of everybody pleat. What did he say. A what a hundred hitter like in baseball pope the president baseball. I cannot tell you how many times he said that's me. Every meeting every meeting a lot of my memories are about carville sort of making jokes about you. Know you issues as a bond trader bond traders. These are the people who work in finance all around the world who manage a bunch of money. Generally other people's money pension funds or college endowments that kind of thing and every day they decide what bonds to buy and what bonds to sell what companies and countries to lend to and what companies and countries to not lend to to stop lending to and like with any lender bond traders worry about lending more money to a borrower who is already borrowing a lot because all that borrowing makes it more risky and so to compensate for that risk bond traders demand a higher interest rate. They stop lending until rates. Go up and this bond traders demanding higher interest rates when the government is borrowing more money. This is the scenario that everyone was so worried about people. Were so afraid of this that there was even a special term for the bond traders. Who do this bond vigilantes. Bill clinton has convinced. The bond vigilantes are scary and in fact he decides the us needs to bring the deficit down. He decides to build a whole economic plan around getting rid of the deficit. One of the economists he brought in to make that happen was jason and a central argument. That we made was if you do this. It will lower interest rates and interest rates are lower will have more investment and more economic growth and sort of amazingly. All of this happened. They did raise taxes and cut spending and get the deficit down. In fact by the end of the clinton administration the deficit felt all the way to zero. And what came next was sort of a golden moment for the economy in silicon valley. There was the dot com boom but really the whole economy was doing great businesses of all kinds. Were doing well. Ordinary workers were getting breezes lower deficits lead to lower interest rates which led to more investment. And that was good for basically everybody. The system was working. The next big moment in the story comes right after the financial crisis of two thousand eight and this is the moment when everything is about to change when this big shift in the way the world works is about to happen but nobody quite nosy yet. Brock obama has just been elected. President obama brings in clinton's guy. Jason furman as one of his economic advisors and ferment. Goes into this meeting to discuss. How big of a stimulus. Bill obama should push for as he takes office. We met with the president-elect december sixteenth two thousand eight and we're all crowded together in a conference room. I think it was in a law firm in chicago and he wanted it to be big. He wanted to be bold but there was this worry. The stimulus was going to be funded with deficit. Spending government was going to borrow the money. And some of obama's own economic advisers worried that borrowing and spending too much money might actually harm the economy for that classic reason

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