Bond vigilantes and timing

"Who stands at the gates of Rome? Not the Etruscans, who tried to bring the tyrannical King Tarquin back to the city. Not the Carthaginian general Hannibal, whose crossing of the Alps with elephants seems as impossible today as it did to the Romans of 218 B.C. Not the Vandals or the Visigoths, who sacked Rome in the empire's declining days. None of them, nor any would-be German emperors from the so-called Holy Roman Empire. Not Napoleon or any other French commander with imperial aspirations. Not the horde of bureaucrats from the European Central Bank and the International Monetary Fund. And most definitely not the imperial democrats currently leading Germany and France. Today, the civilized people are at the gates of Rome. Unrecognized as saviors, the bond vigilantes are demanding the keys to the Eternal City. If the Italian people are very lucky and very wise, they will allow themselves to be ruled by the bond market." - Thomas Donlan

The quote above is a great way to express the importance of bond vigilantes. Have they helped the Eurozone with their actions? Absolutely. without the bond vigilantes little action would have been taken, but we also have to remember that vigilantes of today were also the buyers of bonds yesterday. The bond buyers allowed Greece to get in its current shape. The banks were the key lenders to Ireland, Spain, Portugal and Italy. They allowed bubbles to occur in the first place. Vigilantes would not exist if there was not an extreme situation which could be addressed through normal means. 

While I approve of the need for bond vigilantes to force good behavior on governments, it is the timing that is a major problem. Vigilantes usually come late in the process. They react to a problem that is at an extreme and do not prepare for the future. The willingness to wait creates the problem for markets because by the time the vigilantes start to engage, there will be clear losers; those who are not actively engaged in the process. 

Vigilantes would not be necessary if the law was enforced. Vigilantes only exist because there is a failure by governments to use regulations early. Vigilantes are only necessary if the majority are too timid or passive to address the problems that are building. 

The timing of vigilantes will be based on their market power and the power of regulation is to thwart the impact of bond vigilantes. this is the objective of financial repression. The government has to try and minimize the impact of private resources to raise interest and impose discipline on governments. The delay of bond vigilantes to have an impact on markets is related to the force of governments to protect themselves from market signals.