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No, no, you don't understand.

Bond investors have the ability to validate a country's solvency by accepting to buy its bonds. This is why the European Central Bank is barred by treaty from lending directly to European government entities, but it is allowed to buy European government debt securities from private bond investors.

Note how market discipline also ensures that corporate bonds don't need such independent validation, as the European Central Bank is not barred by treaty from buying corporate bonds at issue.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Sun Jun 6th, 2010 at 10:27:37 AM EST
[ Parent ]
that's really beautiful.

The NYT had a very nice series on the defunct US mattress manufacturing company Simmons which finally collapsed after a private capital concern purchased the firm, using the firms own debt, and then paid itself a huge fee with more debt, and then declared bankruptcy. The bond market, with its usual good sense, ate those bond issues up, as if they were delicious.

by rootless2 on Sun Jun 6th, 2010 at 02:15:26 PM EST
[ Parent ]
That process has been going on for at least 30 years.  The next step was to issue an IPO so the looters could walk away and let the stockholders take the inevitable hit.  

The 'Greater Fool' Theory in action.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Mon Jun 7th, 2010 at 12:26:55 PM EST
[ Parent ]
the US needs a postal savings bank but it also needs a federal pension fund so that at least money sunk into these destructive enterprises is not risking retirees savings.
by rootless2 on Mon Jun 7th, 2010 at 04:11:55 PM EST
[ Parent ]
I don't see how a federal federal pension fund is superior to current income financing. After all it's not like a society as a whole can save.
by generic on Mon Jun 7th, 2010 at 04:39:26 PM EST
[ Parent ]
Currently, there are billions and billions of pensions from unions, public sector workers, and even a few others, that are funneled into worthless junk by financial advisors.

For example, the California public workers pension fund just threw away $500M by participating in an insanely leveraged scheme to empty one of Manhattan's last middle class housing complexes and turn it into luxury housing.

by rootless2 on Mon Jun 7th, 2010 at 08:27:00 PM EST
[ Parent ]

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