Here's an excerpt from an interview with E Ray Canterbery author Wall Street Street Capitalism: A Theory of the Bondholding Class(its major theoretical contribution is definition of what ERC calls the angel's share of natl income, discussed in the interview). It seems to be from mid last year. Canterbery argues that mounting surpluses shouldn't undermine the power of the bondholding class the ascent of which he takes to be the key political economic fact of our time.
I am skeptical of his provocative argument however.
Here is some of the preface to the interviewL
Wall Street Capitalism is first and foremost an indictment of the monetary and fiscal policies of recent administrations that have led to what Canterbery sees as an intolerable disparity in wealth between the richest Americans and everyone
else, coupled with a dangerous instability in the financial system.
Wall Street Capitalism is presented in five sections, each a necessary part of Canterbery's intricate argument. Part One documents the processes by which the "bondholding class" arose. Part Two describes the Wall Street/Washington alliance that maintain the class in power. Parts Three and Four detail the negative effects that the "bond market strategy" of the alliance has on, respectively, the general public and the national and global financial systems. Finally, Part Five outlines the remedial steps that can be taken to extend the current prosperity to the nonrich population and to avert a financial
meltdown.
Half a century ago, bonds were the stuff of trust funds and retirement accounts. No longer, says Canterbery. Military spend ing and tax reductions in the 1980s tripled the supply of government bonds, and Reagan administration policies encouraged corporate mergers financed by high-risk ("junk") bonds. Today there is a vast secondary bond market that is as volatile as the stock market, and Canterbery sees that as a dangerous sea-change:
In the good old days at Chevy Chase the resale market was used almost exclusively for liquidation during family emergencies. In contrast, more recent activity in the secondary bond market rejects family values in favor of the one-night stand. Bond traders buy "long-term" bonds to hold for only a few seconds,minutes, hours, days, weeks or months.... The bond market now resembles not so much a marketplace as a giant casino. [Wall Street Capitalism, pp. 40, 41.]
RinR: Of course, these capital gains are realized in the secondary or "previously owned" securities markets. The case for secondary markets-in stocks as well as in bonds-is often stated in terms of efficiency. They ensure that prices reflect current value. You don't buy this argument?
Canterbery: Nope. Just look at the amount of "churning" in financial markets required for alleged "efficiency." It took 2,702 trades a day and $45.8 trillion in resale activity in 1994 to yield only $185.3
billion in proceeds for the U.S. Treasury. What is so efficient about that? No retailer would spend 247 times his sales revenue simply to keep his store "open"!
RinR: With budget surpluses current and projected, doesn't the criticism of the bondholding class lose some force?
Canterbery: No. First, the current and projected budget surpluses could disappear quickly in a financial and economic crisis. Second, during a period, 1995-2000, when federal "surpluses" are awash, the federal debt outstanding has expanded! Other government agencies besides the Treasury can issue, and have issued new debt. Today, the federal debt outstanding is about $5.7 trillion. If this is insufficient for full-time play by the bondholding class, there has been a flood of corporate bonds coming to market since 1995. Besides, if net worth becomes so great that bonds become scarce, their prices should rise and capital gains will be even greater. Finally, don't forget stocks; it just happens that today the median value of their bond holdings is about twice the median value of their stocks. Let them eat stocks! Still, bonds-their staff of life-are here to stay, and the Good News Bears will continue to dictate the choices made by Alan Greenspan.
RinR: You say in the book that the secondary market in bonds sets bond prices even for the Fed. These bond prices are in turn based on expectations of Fed actions. Yet the Fed's moves relate to expectations about goods inflation, and these expectations are patently false, because goods inflation tracks interest rates increases, not vice versa. Is that accurate?
Canterbery: Yes it is. It's a closed circle or loop. The secondary market governs because the primary market otherwise has no basis for determining what new issue prices should be. The private players in the secondary market look to anticipated Fed actions that will alter bond prices. Meanwhile, the Fed's actions are based upon expected goods inflation. But in fighting inflation, the Fed lowers bond prices-thereby raising interest rates-and increases the corporate costs of production-costs that are usually passed along to consumers. The resulting increase in inflation signals to the Fed that it needs to bump up interest rates still more, thus adding still more to goods inflation. This process eventually comes to an end when demand and production slow or decline and unemployment rises. Then, the Fed decides it has "done its job" in fighting inflation.