Fed ponders another intervention

posted at 3:25 pm on September 7, 2011 by Ed Morrissey

The good news: the Federal Reserve doesn’t appear to be considering another inflation-producing round of quantitative easing.  The bad news: what they are considering, called a “twist” strategy, won’t help much, either.  According to the Washington Post, the Fed might start buying long-term Treasury bonds but will fund the purchases through sales of its holdings on short-term bonds:

The Federal Reserve is moving toward new steps aimed at lowering interest rates on mortgages and other kinds of long-term loans, without making another massive infusion of money into the economy.

When Fed officials hold a pivotal meeting in two weeks, they will strongly consider buying more long-term Treasury bonds, which should lead to lower interest rates for those bonds and other long-term investments. This would ultimately make it cheaper for businesses to borrow money for investments and push more dollars into the stock market, in addition to reducing rates on mortgages and other consumer loans.

To pay for the bond purchases, the Fed would sell off some of the shorter-term bonds it already owns rather than printing new money.

In this case, the outrage against QE2 paid off.  The Post reports that the Fed wants to avoid a political fight over another expansion of the US dollar, especially given the wan results of QE2.  Without deflation as a serious threat, there is not much need to artificially flood the market with dollars, which would have economic as well as political repercussions.  The Fed believes that they can get “a similar benefit” from this approach — which calls into question why they didn’t try this first instead of QE2.

Besides, “a similar benefit” would be a low bar to clear.  The voyage on the QE2 didn’t deliver economic expansion, as subsequent GDP reports showed; the best the Fed can argue is that they prevented a bigger slide, a hard point to prove.  In this case, the stated goals are solutions searching for problems.  Businesses aren’t expanding from a lack of access to commercial loans — they’re not expanding because investors can no longer reliably calculate risk in the current US regulatory environment.  The Obama administration’s whimsical and aggressive push to rule by decree in ObamaCare, Dodd-Frank, the EPA, and other areas has capital rightly sitting on the sidelines.

Home buyers are also not sitting out by choice.  We already have one of the best buyer’s markets in a generation, or perhaps generations.  We have a glut of foreclosures keeping valuations down and the lowest mortgage rates in decades — for qualified buyers, and that’s the problem.  We don’t have enough qualified buyers, and with the glut of inventory and the foreclosure epidemic, current homeowners aren’t selling and looking for new digs, either.  The problem of negative equity for those who can still afford their mortgages is another problem:

The idea of shifting the composition of bonds the Fed already owns — sometimes known as a “twist” operation — is not without downsides, however. Interest rates already are very low, and pushing them down further may not have much effect. One major aim would be to encourage people to refinance their mortgages, freeing up money to spend on other things and foster economic activity. But with so many people owing more on their homes than the homes are worth, relatively few are in a position to take advantage of lower rates to refinance.

The net effect would be to shave perhaps 0.2% off of mortgage rates, according to an analyst from JP Morgan quoted in the article.  That won’t solve the problem of negative equity, nor will it qualify buyers who aren’t qualifying now.  The new Fed program won’t do any damage, but it’s not going to help, either.

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That’s as if the dog would eat its own tail. Trick. Smoke and mirrors.

Schadenfreude on September 7, 2011 at 3:27 PM

Having Treasury makes the Fed. reserve superfluous. Eliminate, pronto.

Schadenfreude on September 7, 2011 at 3:28 PM

It’s O’Bambi that needs an intervention – just like any drug addict in denial.

Step one – Step down!

honsy on September 7, 2011 at 3:29 PM

Don’t do anything, dangit. Let it find bottom so we can head back up.

rogerb on September 7, 2011 at 3:29 PM

Why do they persist with trying to control and drive the economy?

Why can’t they just get the H….. out of the way?

Chip on September 7, 2011 at 3:31 PM

It’s all about the timing. The backlash effects would be felt into the administration of the new GOP.
This will give MSM ammo.
See? The GOP economy is horrid too.

carbon_footprint on September 7, 2011 at 3:32 PM

How about a day of rage? Let’s go occupy the Federal Reserve offices in protest. Whatdayasay? Who’s with me!

Skandia Recluse on September 7, 2011 at 3:33 PM

Buying our own debt

Kini on September 7, 2011 at 3:33 PM

Does a twist in time save nine?

fossten on September 7, 2011 at 3:33 PM

The only thing that gets “twisted” is us…

PatriotRider on September 7, 2011 at 3:33 PM

It’s O’Bambi that needs an intervention – just like any drug addict in denial.

Step one – Step down!

honsy on September 7, 2011 at 3:29 PM

It’s a win-win, he gets to play golf without interruptions from all this ‘Presidenting’ he has to do and the economy recovers without his “Guidance”.

Chip on September 7, 2011 at 3:34 PM

Twist Strategy
===============

Sounds more like Changey is spiralling down into a
Hopey’s Abyss,where Political Light,and Taxpayer cash,
just vanish’s!!!!!!!!!

NUTS!!!!!!!!!!!!

canopfor on September 7, 2011 at 3:35 PM

Apparently, silly season arrived just a litte early this year…

JohnGalt23 on September 7, 2011 at 3:36 PM

Last month I was asked to run some analysis for one of our clients based on an Operation Twist-like interest rate shock scenario. Every time I had to say the word Twist or Twist-like, I lost it.

steebo77 on September 7, 2011 at 3:43 PM

We have a glut of foreclosures keeping valuations down and the lowest mortgage rates in decades — for qualified buyers, and that’s the problem.

CRA, that originally pushed unqualified buyers into purchasing homes was the culprit that got us into the mess in the first place. Perhaps Obama can recycle this disaster in his upcoming speech too.

Rovin on September 7, 2011 at 3:43 PM

End The Fed.

maineconservative on September 7, 2011 at 3:44 PM

Nice way to hand some pocket money over to Goldman Sachs by churning our portfolio.

pedestrian on September 7, 2011 at 3:45 PM

For the curious, here is a good summary of Operation Twist, its goals, and its impact, from the Federal Reserve Bank of San Francisco.

steebo77 on September 7, 2011 at 3:45 PM

I honestly think if some company somewhere started to take off and expand, they’d raid it and shut it down.

JellyToast on September 7, 2011 at 3:45 PM

Fed ponders another intervention

Apparently the Fed believes that if you drink your own urine and eat your own solid waste, you’ll never need any more food or water. And somehow the people in charge of the Fed see no problem with this strategy.

Stupid is as stupid does!!!

landlines on September 7, 2011 at 3:47 PM

Can’t we get rid of this guy? Is the fiscal Emperor?

Oil Can on September 7, 2011 at 3:48 PM

In otherwords…it’s just more government involvment that’s causing the stagnation of everything in this country, and this is supposed to heal the wounds? Good God, are these people completely stupid???

It’s very simple. Call off the pitt bulls, and let Americans be.

capejasmine on September 7, 2011 at 3:51 PM

For the curious, here is a good summary of Operation Twist, its goals, and its impact, from the Federal Reserve Bank of San Francisco.

steebo77 on September 7, 2011 at 3:45 PM

404

yeah, that’s a good summary

pedestrian on September 7, 2011 at 3:57 PM

Without deflation as a serious threat, there is not much need to artificially flood the market with dollars, which would have economic as well as political repercussions.

We have not had an issue with deflation for years!!!

Healthcare costs have skyrocketed
Gas costs have skyrocketed
Food costs have skyrocketed

The whole Deflation argument was just the regime playing games to print money.

jeffn21 on September 7, 2011 at 3:58 PM

Does the twist invlove gerbils?

singlemalt 18 on September 7, 2011 at 3:58 PM

404

yeah, that’s a good summary

pedestrian on September 7, 2011 at 3:57 PM

Sorry, correct link:

http://www.frbsf.org/publications/economics/letter/2011/el2011-13.html

steebo77 on September 7, 2011 at 4:02 PM

net effect would be to shave perhaps 0.2% off of mortgage rates, according to an analyst from JP Morgan quoted in the article.

hmmm. more market manipulation. At least unlike QE1 and QE2, we may be able to time the policies to our benefits. If one were to delay buying a house until the new rates come into play.

joeindc44 on September 7, 2011 at 4:03 PM

I will gladly pay you Tuesday for a hamburger today.

peski on September 7, 2011 at 4:03 PM

For the curious, here is a good summary of Operation Twist, its goals, and its impact, from the Federal Reserve Bank of San Francisco.

steebo77 on September 7, 2011 at 3:45 PM

Corrected link:
http://www.frbsf.org/publications/economics/papers/2011/wp11-08bk.pdf

SgtSVJones on September 7, 2011 at 4:06 PM

Boogaloo Twisteroo!!

canopfor on September 7, 2011 at 4:08 PM

The new Fed program won’t do any damage, but it’s not going to help, either.

I have to completely disagree with this conclusion. Having the Fed now concentrate their holdings into multi-decade treasury notes will force the fed to hold interest rates low for DECADES! The federal reserve will not be able to change overnight interest rates without destroying its own portfolio.

This is a very serious long term disaster in the making. Bernanke is a fool and should be replaced immediatly! Bernanke has no long term plan.

This entire debate is due to Bernanke using an obscure clause in the federal reserve charter to bypass a specific mandate of NOT MONETIZING the debt by lending money directly to the federal government.

Freddy on September 7, 2011 at 4:08 PM

This will flatten the yield curve and put more pressure on the banks’ net interest margin. A whole new twist to everything.

What’s the best popcorn salt?

Clarke on September 7, 2011 at 4:08 PM

How about a day of rage? Let’s go occupy the Federal Reserve offices in protest. Whatdayasay? Who’s with me!

Skandia Recluse on September 7, 2011 at 3:33 PM

I’d rather do a “Night of the Long Knives” who’s with me?

orbitalair on September 7, 2011 at 4:20 PM

Buying our own debt

Kini on September 7, 2011 at 3:33 PM

How does a fed debt auction work when the buyer and the seller is the same person?

slickwillie2001 on September 7, 2011 at 4:25 PM

The Ben Bernank…

JohnGalt23 on September 7, 2011 at 4:39 PM

HEY STUPID!

Um, haven’t you done enough already?

hillbillyjim on September 7, 2011 at 4:40 PM

At the supermarket just today, I saw that the Cheez-its were on sale, two boxes for $4.00. Grabbed a box, even though I’m a Cheese Nips man. Have been for years. Cheese Nips…well, never mind. Anyway, I took a look at the Cheez-its regular price and…Wha!?! $4.59?! For one box!? I almost stopped the old lady walking by to see if she could believe it. I refrained though, the combination of that price and me suddenly talking to her and she might have fainted dead away (I can have that effect on people. Especially if I come upon them suddenly with mouth agape like I had right then.) I wouldn’t even pay that much for Cheddar Goldfish, the “gold” standard in cheese crackers.

Printing money, on paper or electronically, causes inflation. Why can’t they get that through their thick skulls. Everyone loses buying power but low-to-middle income and fixed income people get hammered. They can’t buy as much, duh, Federal Reserve. If they’re just getting by then they have to get by with even less than enough for them to get by. Everything they do hurts the very people they constantly scream about helping.

Learnt about inflation’s effects in college, I did. But it was a state school, so maybe when people from those Ivy League credential-mill log-rolling academies print money it creates jobs instead reducing the value of a greenback. Who knows?

Maybe if Congress passed a law that forced Federal Reserve Board members to go out and forage for their own Cheez-its they’d get the idea. Forget the price of gas. America runs on junk food. If Cheez-its are $6.00 a box this time next year these people are Toast Chee.

curved space on September 7, 2011 at 4:49 PM

curved space on September 7, 2011 at 4:49 PM

They can’t get tax increases through Congress, so they do it the back-door way through QE.

slickwillie2001 on September 7, 2011 at 4:52 PM

Learn gardening, build a chicken coop, and if you have the acreage, get some cattle, build a pigpen, and learn the old ways. It might be handy.

Me, I’ve got it covered.

Oh, and guns. Plenty of guns, and the requisite ammunition may be required.

hillbillyjim on September 7, 2011 at 4:54 PM

Ben’s down to rearranging the furniture. Trading short bonds for long is window dressing. Enjoy the new digs Ben.

MJBrutus on September 7, 2011 at 4:58 PM

Oh, and guns. Plenty of guns, and the requisite ammunition may be required.

hillbillyjim on September 7, 2011 at 4:54 PM

If you have enough guns and ammunition, you can get all the supplies you need.

Lily on September 7, 2011 at 5:18 PM

There’s nothing the Fed can do to alleviate the paralyzing uncertainty Democrats have created through the regulatory state and a terrifying debt trajectory. Under these circumstances, it’s doubtful we would see much more activity if business and mortgage loans were at 0%. When businesses and individuals borrow money, it is an expression of their confidence in the future. Without that confidence, nothing happens.

RadClown on September 7, 2011 at 5:48 PM

hillbillyjim on September 7, 2011 at 4:54 PM

And remember if you are buying gold now and expect to need tools later… then buy the tools now. Woodworking is a useful craft, helpful for repairs and if you’re half-way decent at it then you have items you can sell. Ditto metalworking. Casting of metals. If you can cast and work metals you can start making just about anything. A decent mini-lathe runs under $800… and is the perfect machine to start working on rifle barrels and receivers. And do your own shell casings if it comes to that.

Really if the economy crashes the ATF won’t be able to do a thing about roll your own firearms.

The tools you start with today, be it a humble 1/2″ router and tablesaw or a 12″ lathe you can expand on your lonesome are great tools to have as they allow you to make what you can’t buy. Buy the Gingery books if you want the basic sketch of rolling your own equipment from junk. And if things don’t get that far then you have a perfect set of tools to CNC with and step forward to computerized machining.

Skills you can fall back on and step forward with. There are lots of them and they are worth having. If you get the skills now you then have a better idea of what you can do to not only get by hard times but help your neighbors too. If you are prepared for one step back then recover and take two steps forward… gold can’t buy you skills only tools can do that with your time. Don’t waste time now because you may need the skills later.

ajacksonian on September 7, 2011 at 6:07 PM

They are caught in the downward spiral of printed paper money. Twisting, like all the QEs, just pushes the day of reckoning back a little, at the very real cost of increasing the problem. What happens when all the short term notes have been up-converted to long term? What will they do then to prime the pump? QE. Printing money is all that’s left at the end of this tunnel.

Myno on September 7, 2011 at 6:14 PM

There are no monetary tools that will actually accomplish anything useful, because the problem isn’t monetary.
In the sixties, the Congress converted the Fed into a scapegoat for the damage done by the stupidity and corruption of federal fiscal policy. Now they are stuck in a position of being the only movable actor, so they have to be seen as moving. Even though they have no meaningful probability of accomplishing anything, they’re assignment is to do stuff that looks serious and thoughtful.
It’s like the captain of the Titanic putting on his “game face” and sternly issuing a long series of meaningful sounding orders to his helmsman….an hour after the iceberg’s been struck.
It’s theater….and they’re standing in center stage….alone in the spotlight….with no lines….and the audience wants some acting….so they dramatically read the phone book!
Good Luck!

Lew on September 7, 2011 at 9:48 PM

The housing bubble encouraged many people to “cash out some equity” when they refinanced, and its collapse mean there isn’t a lot more out there.

You can’t keep kicking the can down the road. Sooner or later, the excesses must be squeezed out. Foreclosures must proceed so the full inventory of existing homes can come to market, which is going to have to happen before the new home construction industry revives.

The excess currency must also be removed, and this cannot be done painlessly either.

Adjoran on September 7, 2011 at 11:54 PM

All of my youth it was pounded into us save for retirement and have income from the interest. Well Bernanke is throwing seniors under the bus by keeping interest rates low. If Democrats can play victim on SS, welfare, food stamps, etc. why can’t we?

Herb on September 8, 2011 at 9:45 AM

How does a fed debt auction work when the buyer and the seller is the same person?
slickwillie2001 on September 7, 2011 at 4:25 PM

You get it at the right price?

Herb on September 8, 2011 at 9:49 AM