Operation Twist

On September 21st, 2011, Operation Twist was set in motion by the Federal Reserve. This measure, with precedents as early as 1961, was announced at the conclusion of a Federal Open Market Committee Meeting and, ostensibly, is one of the few rounds left in the once seemingly endless magazine of the fed pistol. With world markets standing precariously close to a metaphorical abyss, politics are beginning to play a larger role, even on an institution which is supposed to be an independent body. The bum that is the economy is getting closer and closer, but no matter how many bullets are shot into his raggedy-cloth covered chest, he will not relent. He has an evil grimace, a terrible redness in his eyes, and poor Bernanke looks on helpless, holding the firearm near his chest with the world looking on. He knows there is little more he can do, but to spare his own anxiety, he shoots again, knowing what the outcome will be. This is Operation Twist, the next stage of the Fed’s ongoing policy to stop the Apocalypse. The American economy truly is in dire straits. Unemployment stood at 9.1 percent in August 2011; however, real numbers actually could put it as high as 16 percent, and manufacturing in the U.S., measured by the P.M.I., is slowing down or even declining. Across America people are suffering and losing their jobs—jobs which will never come back. Is it no wonder the government has so much pressure put on it to act? People are naive, believing that the feds can have any “real” impact on the economy. The only thing they can do is manipulate, creating fiat currency, shifting wealth, and using propaganda. These are not actual things, they are puppet shows put on to distract and distort, but they have to do something. They have to act to get reelected and earn their keep with the lobbyists. America, the beautiful, home to the corporatocracy—the interweaving of government, banks, and multinational corporations. With external pressures like these, no wonder Bernanke is sweating like a clown at a cannibal convention.

A Wall Street Journal Article, “The Limits of Central Bank Policy” by Alen Mattich, claims the Fed’s recent move to try an ease the panic has caused equity markets to tumble. Mattich postulates that investors could be merely disappointed with the amount the Fed is willing to do and frustrated that the reserve bank is not being more aggressive in purchasing Treasury Bonds. However, it could be something more: investors may be losing faith in the financial institutions themselves and giving into the belief that “central banks are at the limits of [their] policy” (Mattich). Might this be the return of real economics and not hyper-finance on steroids? Mattich seems to suggest so. Real assets prices cannot be trusted in the market because they are manipulated by a private bank with no oversight—whether this is a good thing or not. Mattich ends the article by saying, “governments have to unleash the harshest ravages of capitalism. [...] At the end of it, people will feel less well off than they did at the height of the boom, especially the very rich who have benefited to an unconscionable degree from both the debt bubble and from the rescue afterwards. But they will feel less hopeless, more inclined to invest in their businesses and their futures and thus more able to lift themselves out of this financial disaster.” Is the Fed continuing a policy which will lead to more misery in the long run or is it maintaining morally justifiable measures in the face of economic Armageddon?

But first, what is Operation Twist? It is a suggested alternative to quantitative easing in which the Fed sells shorter-term United States debt for longer-term bonds. Its goal is to flatten their yield curves, lowering them further than they already are. Originally employed in 1961 by President Kennedy and named after a dance craze at the time, it was long thought of as having disappointing results. However, according to an Economist article titled “Twisted Thinking”, some economists are starting to question its failure. Eric Swanson, who works at the Fed Bank in San Francisco, says that the old studies did not “properly isolate” the Operation Twist influences, and that it may have had an overall positive effect on the macro-economy. With this in mind, the Fed announced on September 21st, 2011 that it was going to enlist a similar measure. The plan, according to the Fed website, is “to sell $400 billion of shorter-term Treasury securities by the end of June 2012 and use the proceeds to buy longer-term Treasury securities. This will extend the average maturity of the securities in the Federal Reserve’s portfolio” (Federalreserve.gov). This action, the Fed says, will reduce the amount of long-term treasuries and put “downward pressure” on their and other close substitute’s interest rates.

Operation Twist has several attractive features. First, it does not require printing money, which is a good thing for a country with a dangerously high inflation rate (when things like food and gasoline prices are taken into account), and second, the Fed does not have to add to its ever growing balance sheet. Lastly, and maybe most importantly, it gives the appearance that the government is trying to do something in the face of an increasingly irritated and unemployed populace who mistrust the bankers (Nasad). By pushing interest rates lower, ‘Twist’ should encourage spending rather than saving, and hopefully American citizens will want to borrow more. Therefore, the Fed hopes this stimulus will cause upward momentum in mortgage loans and home ownership. However, as seen in quantitative easing, actions like these have had little effect on things like unemployment and the real estate industry in the past. On top of previous statistics, respected economists are echoing the same line: Operation Twist will have little effect on the macro-economy. A Wall Street Journal article titled “Operation Twist: A Solution in Search of a Problem” by Mark Gongloff quotes Joel L. Naroff, a major economic advisor, as saying:

Clearly, the emphasis on driving down longer term rates is an attempt to get mortgage borrowing and capital spending going a lot faster. But businesses are flush with cash already and it isn’t rates that are stopping them from hiring or investing more. Companies are just uncertain about the direction of the economy and demand is not growing fast enough to require greater job growth. Households are reducing their debt, not adding to it, and as we saw from today’s National Association of Realtors existing home sales report, failed contracts are growing. That is more an issue of appraisals and cautious lending practices than rate levels.

Naroff suggests that the main problem is not that the interest rates are too high or that the economy is even fundamentally unsound. The real issue is a lack of consumer and producer confidence. The environment simply does not feel safe to spend, to buy a new home, a new car, expand a business, or go on a vacation to New York City. No matter how many incentives the government gives people, it is not working because there is something greater going on. Considering that in real economies interest rates would be low if lenders had high faith that they would get their money back, maybe it is not the average citizen being irrational. To be rational in an economic market like this would be to save, not to spend. People are not getting tricked into getting rid of their fiat cash on something frivolous, even though by saving it is decreasing the value over time. People have lost faith. It is why precious metals like gold and silver are rising so quickly. It is why the Fed’s continued measures are having no effect. It is why people are protesting near Wall Street, why the Tea Party has become a prominent political presence, and why both “leaders” in the government and the people they lead are becoming increasingly agitated with each other. To only prove its futileness, the day after Operation Twist was set in motion, stocks closed sharply lower, with the Dow Jones falling 391 points (3.51%), the S&P 500 plunging 37.20 points (3.19%), and the Nasdaq plummeting 82.52 (3.25%). It is clear that on top of news of banks getting downgraded in both Europe and America, bad manufacturing numbers coming out of China, and the ongoing Greek crisis in the EU, that a small thing like ‘Twist’ is not going to gain any traction in a market still reeling from global events (JeeYeon).

Operation Twist will have an insignificant impact on the market. Picture the world economy on a roller coaster ride going over 150 mph, and the Fed is trying to put up a barricade made up of plank. It is clear this is not going to work. Everyone knows it, but the charade must continue. The government is increasingly backing itself into a corner. It is like your favorite television program. They keep on laying on twist after twist until there is finally nowhere to go (perhaps ‘Twist’ is the right word after all). The country is growing anxious with the burden of an economy which will not improve. What can be done? There are fewer beacons of hope. Europe is in a debt quagmire. Japan is reeling from a devastating tsunami, not to mention an economy still stagnated from the ‘90s. Even China revealed disappointing numbers when it came to manufacturing (not to mention their persistent inflation problem and real estate bubble). The Fed is doing the only thing it can: trying to alleviate the terrible news coming in from around the globe, but there is little it can do.

But are its policies actually creating more problems than they are helping? Yes. By distorting the numbers, creating money from nothing, and doping it all up on steroids, the central bank is delaying a future collapse which will happen, and they are making it worse when it does. Tangentially, myths from the world over tell of a dying-and-rising god. Let us take Osiris of the Ancient Egyptians as an example. The sun god was killed every day by the darkness of night, represented by Set, but in the morning he always returned. He was also fertility god. Dionysus, Mithras, Adonis, Baal, Tammuz, the Green Man of the Celts, even Jesus—they died, but by doing so they could give birth anew. Metaphorically, this tale tells us that for there to be life there must also be death. An economy which cannot fail is a zombie, a dead thing lumbering about, and that is what Mattich is saying. For green shoots to really appear, first there must be a fire which burns down the forest. A government (socialist) institution such as the Fed is not saving anything; it is only preserving a dead thing.

References:

Gongloff, Mark. "Operation Twist: A Solutin in Search of a Problem." The Wall Street Journal. 21 Sept. 2011. Dow Jones & Company, Inc. Web. 25 Sept. 2011. http://blogs.wsj.com/marketbeat/2011/09/21/operation-twist-a-solution-in-search-of-a-problem/?mod=google_news_blog

"JFK and Quantitative Easing: Twisted Thinking." The Economist. 31 March 2011. The Economist Newspaper Limited. Web. 25 Sept. 2011. http://www.economist.com/node/18486271?story_id=18486271

Mattich, Alen. "The Limits of Central Bank Policy." The Wall Street Journal. 23 Sept. 2011. Dow Jones & Company, Inc. Web. 25 Sept. 2011.

"Maturity Extension Program & Reinvestment Policy." Board of Governors of the Federal Reserve System. 23 Sept. 2011. Web. 25 Sept. 2011. http://www.federalreserve.gov/monetarypolicy/maturityextensionprogram.htm

Nasad, Nick. "FOMC Does the 'Twist', But Markets Respond With Risk-Off and USD Strength." FX Times. 21 Sept. 2011. Market Access Media, LLC. Web. 25 Sept. 2011. http://www.fxtimes.com/fundamental-updates/fomc-does-the-twist-but-markets-respond-with-risk-off-and-usd-strength/

Park, JeeYeon. "Stocks End Sharply Lower on Recession Fears." CNBC. 22 Sept. 2011. CNBC LLC. Web. 25 Sept. 2011. http://www.cnbc.com/id/44624491