Random Walk

Even at the time, the move was widely criticized by Wall Street economists, money managers, and the Treasury’s own Borrowing Advisory Committee as a stupid gamble. The rest of America was madly scrambling to lock in bargain-basement long-term interest rates. Record numbers of homeowners rushed out to refinance their mortgages. “Smart corporate America,” says Mickey Levy, chief economist with Nations Bank, “went with long-term debt. Only government went in the other direction.” Indeed, Disney even introduced the first 100-year bonds. This led the Washington Post to ask: “Who do you think is making the right call? Mickey Mouse or Uncle Sam?”

Eighteen months later, the answer to that question is the mouse. “Clearly this backfired on the Treasury,” Levy says. “It was a lousy move that may now end up costing the taxpayer money.” Over the past year and a half, both long-and short-term interest rates have risen by 175 basis points. This will raise the federal deficit by roughly $50 billion in 1996 and $80 billion by 1999, according to the Congressional Budget Office. Reducing the average maturity of Treasury notes from 6 to 4½ years will compound the problem, since the Treasury will be refinancing often, at higher rates. The problem here is that there will be interest savings in the short term, but the costs of the policy mistake won’t appear for five, ten, or twenty years. It sort of reminds me of the Clinton health-care plan.

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Even at the time, the move was widely criticized by Wall Street economists, money managers, and the Treasury’s own Borrowing Advisory Committee as a stupid gamble. The rest of America was madly scrambling to lock in bargain-basement long-term interest rates. Record numbers of homeowners rushed out to refinance their mortgages. “Smart corporate America,” says Mickey Levy, chief economist with Nations Bank, “went with long-term debt. Only government went in the other direction.” Indeed, Disney even introduced the first 100-year bonds. This led the Washington Post to ask: “Who do you think is making the right call? Mickey Mouse or Uncle Sam?”

Eighteen months later, the answer to that question is the mouse. “Clearly this backfired on the Treasury,” Levy says. “It was a lousy move that may now end up costing the taxpayer money.” Over the past year and a half, both long-and short-term interest rates have risen by 175 basis points. This will raise the federal deficit by roughly $50 billion in 1996 and $80 billion by 1999, according to the Congressional Budget Office. Reducing the average maturity of Treasury notes from 6 to 4½ years will compound the problem, since the Treasury will be refinancing often, at higher rates. The problem here is that there will be interest savings in the short term, but the costs of the policy mistake won’t appear for five, ten, or twenty years. It sort of reminds me of the Clinton health-care plan.