Remember When America Needed to Cut Its Deficit? : Friday’s market plunge shows folly of ignoring crucial issue

Whatever happened to deficit reduction? Ever since budget talks between President Clinton and congressional leaders broke down in January, Washington has tiptoed around the problem, a dicey one with the presidential primaries underway. So six months into fiscal 1996, we have no federal budget. But we still have a deficit. And rather than deal with the problem, Washington has simply extended the temporary funding of government operations until March 29.

But this course is not without consequences. Until there is movement on the budget, jittery bond traders may wreak havoc on financial markets, as they did Friday. Spooked by a positive job report, they sold Treasury bonds, pushing up long-term interest rates as much as a third of a percentage point. The traders had overreacted to the job report out of fear of inflation. The yield on 30-year Treasury bonds rose to a six-month high of 6.72% on Friday but fell back to 6.63% on Monday.

A closer look at bond trends shows that yields have been rising since January as traders began to give up hopes of White House-congressional progress on deficit reduction. Now the failure to reach a budget-balancing agreement has cost us all in terms of higher interest rates on long-term borrowing for homes and businesses. It could cost us more. Enough.

Times staff writer Tom Petruno reports that the federal borrowing binge of the last 15 years has put the sum of outstanding U.S. Treasury debt at $5 trillion. As a result, we are at the mercy of faceless bond traders who can manipulate this mountain of debt securities.

Friday’s nerve-racking bond activity was a wake-up. Washington must refocus on deficit reduction and achieve a budget, tough as that might be in an election year. President Clinton and congressional Republican leaders know what it will take: compromise. Painful though that may be in terms of electoral consequences, the possibility of the bond market driving politics is even worse.

Federal Reserve Chairman Alan Greenspan warned back in November that if Washington was unable to get its fiscal house in order, there could be adverse effects for financial markets and economic growth. This is not a difficult problem for officials with the courage to take the politics out of it. Reduce the deficit to restrain further borrowing. We must move toward a balanced budget. Washington, do you read us?