Back on September 25th the Wall Street Journal published an article about nervous investors who were buying low yield, short term U.S. Treasury Bills as safe securities. [Demand for Short-Term Treasury Debt Puts a Crimp in World-Wide Supply, wsj, 9/25/08]
I remembered that because I just read another article about nervous investors buying government securities at low yields, under 1 percent. This time it is the Washington Post writing about the low yield U.S. Treasury bonds and declaring that "it’s terrible news for the economy, which relies on people’s willingness to invest and lend money." [Flight to U.S. Treasury Bonds Bad News for Economy, Wash Post, 12/2/08]
Others in the financial world are quoted. One said “The simplest way to think about this is that nobody wants to hold any risky assets.” Another said, "You can cut rates all you want, but if nobody wants to take risk, no matter how attractive an investment seems to be, no one will put up the capital for it."
But wait a minute. Buying government bonds is investing and lending money. Consider the wreckage of the last few months after a decade of mortgage lenders making billions of sub prime mortgage loans. Investment houses like Bear-Stearns and Lehman Brothers risked billions of America’s loanable funds, our savings, speculating with sub prime mortgages, but our savings did nothing except give them a chance to resell financial assets at a higher price.
Our savings could have helped fund our massive Federal deficit. Instead we owe foreign nationals who bought U.S. Treasury Bills and Bonds while Americans were on a speculative spree buying up risky assets that have failed by the billion. We want our savings to fund the production of long lived assets and valuable services. The private sector has failed to do that lately.
Government bonds earned 4 to 5 percent interest for the last 10 years. If we had invested more in the government and government had used our savings and rebuilt New Orleans we would have something to show for it and thousands of jobs in the process.
The past decade has proved in the most decisive fashion that American’s are ready to take risks and to lend and invest money, but there is nothing that makes private lending and private debt better that public lending and public debt. It all depends on the assets we buy. Remember one rule: it is not who invests, but in what.