What did Bill Clinton tell Barack Obama last week prior to the duo's extraordinary impromptu press conference where the 42nd president endorsed the 44th's tax compromise? Looking to history, my guess is that the elder told the younger to put his ideology on the shelf and pay attention to the bond market vigilantes if he wants to get reelected.
Bill Clinton is an "intellectual pragmatist" according to former Federal Reserve Chairman Alan Greenspan. As told in Bob Woodward's Maestro, Greenspan made this judgment following a lengthy meeting about the economy with President-elect Clinton on Dec. 3, 1992, in Little Rock. It was six weeks before the Arkansas governor would take the presidential oath of office. Greenspan told the intense policy wonk that if he were to reduce the Reagan-Bush-era deficits, the bond market would respond with lower rates igniting an economic recovery.
On Jan. 7, 1993, in Little Rock, Clinton had his first meeting with his economic advisory team, which echoed Greenspan's advice: Reduce the deficit or incur rising bond rates, which would crush the economy . . . and Clinton's 1996 reelection bid. Clinton responded famously saying, "You mean to tell me that the success of the [economic] program and my reelection hinges on the Federal Reserve and a bunch of [expletive] bond traders?"
Clinton got the message and started to speak publicly about the deficit. He proposed to reduce it by $140 billion in his first State of the Union address a month later. Clinton said, "I well remember 12 years ago President Reagan stood at this very podium and told you and the American people that if our national debt were stacked in thousand-dollar bills, the stack would reach 67 miles into space. Well, today that stack would reach 267 miles."
The bond market rewarded the deficit hawk. But, as healthcare talks and Clinton's presidency proceeded, the bond vigilantes smelled a rising deficit and inflation and punished him by selling bonds and driving up interest rates. Clinton's political advisor James Carville said, "I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody."
The bond market dished out some intimidation to President Obama last week. In response to his compromise on taxes, Treasurys had their biggest sell-off in two years and interest rates jumped. Low taxes, the prospect of increased economic activity, inflation, and a ballooning deficit is a formula that scares the bond market and foreshadows economic problems. Enter Clinton. He knows that the combination of low taxes and a balanced budget is a key to attractive interest rates and prosperity. Obama is doing well on taxes, but his stack of thousand-dollar bills reaches 1,000 miles into the air.
What do you think President Clinton told President Obama? My guess: "The 2012 election is just around the corner and the bond market is telling you to reduce the deficit. Be practical, just do it."