Of inhuman bondage: the bond market has policymakers in its grip.

• Author: Waldman, Amy
• Position: Cover Story

Stanley Druckenmiller does not come across as a life-of-the-party kind of guy. He rarely gives interviews, but when he does the word "dour" is the inevitable modifier. One profile reported that he went to bed at 8:30 p.m. on weekends. But for Druckenmiller, a lack of color is no hindrance to being heard: When he talks - or bets - Congress listens.

The Manhattan-based protege of billionaire George Soros, Druckenmiller reportedly earned $700 million last year. He now manages Soros's money, as well as that of other gold-plated investors. Managing, for Druckenmiller, does not involve looking for good rates of return on bank deposits. It involves taking the millions of Soros or his clients, borrowing even more, and then making enormous bets on the direction of stock, bond, and currency markets worldwide. He is, in short, a speculator of leviathan proportions, part of a small elite of money managers with such large stakes in the markets that their decisions to buy or sell can move those markets.

Or move Congress. After the Republicans took Congress in 1994, Druckenmiller wagered that the GOP would curb spending and force a balanced budget deal. For Druckenmiller, a bet was not a ten-spot with some friends; it meant buying millions of dollars in Treasury bonds. As James Glassman subsequently reported in The Washington Post, Druckenmiller speculated that the market would react favorably to a balanced budget deal, because as the government needed to borrow less, bonds would become rarer and thus more valuable. If the market bid up bonds in anticipation of that happening, he would make a killing.

His perfectly spun plan snagged on Bill Clinton, however, who resisted the Republican cuts and started warning of the dangers of a default because of the GOP refusal to raise the debt ceiling. The Republicans seemed poised to let a balanced budget deal slip away. So Druckenmiller began telling his Republican friends in Congress - and as a man who had given $250,000 to the Republican National Committee in 1994 he had a lot of friends - that the financial markets would tolerate any means to the end of balancing the budget, including a default. The cost of a "train wreck," Druckenmiller insisted, would be minor compared to the benefits of balancing the budget.

In September of 1995, Senator Pete Domenici (R-NM), the chairman of the Senate Budget Committee, flew to New York for a dinner at Seagram House with a dozen contributors, mostly large fund managers. Druckenmiller was among them. He told Domenici that the market would trade around a default if there were a balanced budget agreement. Domenici carried that message back to Capitol Hill. Newt Gingrich began broadcasting the same message, telling a meeting of the Public Securities Association - the bond industry trade group - that a balanced budget would be worth the price of a default. Druckenmiller and another big investor also bought a full page ad in The Washington Post that said, "let's not allow fears of temporary `market instability' to serve as an excuse for equivocating on spending cuts ... If the markets believe the chaos will finally lead to decisive action, they will rise. If the markets believe decisive action will not be forthcoming, they will decline" In November, Druckenmiller took the same message to an ad hoc Republican hearing, where he testified.

To Congress, Druckenmiller was not just another private citizen giving his opinion: He became "the voice of the market" - so much so that when Alice Rivlin, then the director of the Office of Management and Budget, warned Congress of the devastating effects a default could have on the bond market, Domenici, fresh off the New York shuttle, publicly disputed her, authoritatively citing his contacts on Wall Street.

It apparently didn't trouble Domenici or Gingrich that Druckenmiller was hardly an objective sage offering wisdom; he was an investor who had bet gargantuan sums that a balanced budget deal would be reached. Druckenmiller had a stake in getting his way, and he was willing to push the Republicans to the brink of default - or even over the edge - to do it.

Druckenmiller didn't win his bet, course, and he ended up selling off his big without reaping big profits. But his ability to convince congressional naifs that a default was no big deal is alarming nonetheless. Druckenmiller may be an extreme - perhaps the most extreme - example of how one speculator can unhinge the market for bonds (or stocks, or currencies, or futures, or wherever he chooses to lay his bets) and thus make Washington pay attention. But he is also representative: If you're looking for a metaphor for the power of money in American politics, or an explication of how private interest influences public policy, look no further than the bond market.

Bond Boors

In theory, of course, bonds are perfectly...