Clinton's Bad Bet On Short Rates

As interest rates in recent months plummeted to levels unseen since the 1960s, millions of Americans raced to refinance. Scarred by memories of double-digit inflation during the 1970s, many homeowners and corporate treasurers have turned their backs on adjustable mortgages tied to short-term interest rates, deciding instead to go for 15- and 30-year fixed-rate mortgages at under 8%. In deciding to lock in long-term money, the average homeowner is showing a lot more good sense than all of Bill Clinton's Treasury team put together.

To try to reduce the budget deficit, the Clinton Treasury has sharply curtailed the number of long-term bonds it sells. By shifting heavily toward short-term financing, the President's budget experts are projecting $16 billion in interest savings over the next five years.

For all its superficial allure, the move is fraught with peril. A recent Goldman, Sachs & Co. study calculated that if the federal government had funded its debt with short-term bills yearly since 1960, it would have paid $200 billion more in interest than it did by using longer-term financing. The reason, of course, was a pickup in inflation. Clinton's new Treasury team is betting that inflation will remain low for the next three decades. We hope they are right.

But they are certainly not prudent. If President Clinton's efforts to reduce the deficit fall prey to renewed partisan bickering, rates could rise as early as next year, actually raising the government's borrowing costs. Clinton's continuing battles to get his proposals through Congress highlight the fact that Washington remains haunted by political gridlock.

The Clinton Administration would be well advised to wait before changing to a short-term financing strategy. If it puts in place a serious deficit-reduction program, well and good. But for now, since the government has to borrow money, getting it for 30 years at 7% is a bargain.

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