Look: I am eager to learn stuff I don't know--which requires actively courting and posting smart disagreement.

But as you will understand, I don't like to post things that mischaracterize and are aimed to mislead.

-- Brad Delong

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Wednesday, September 21, 2011

Doin' The Twist

Today, the Fed announced it's plans to fiddle while the economy burns purchase $400 hundred billion in long maturity treasuries and sell the same amount in short term treasuries - over the next 10 months in a feeble attempt to wrest as much as 17 basis points difference for its efforts.  This maneuver is called Operation Twist.


Mark Thoma
1. This shifts the duration of the balance sheet, but it does not change its size. I would have preferred balance sheet expansion, i.e. QE3, as that would have a much better chance of helping the economy. But the inflation hawks on the committee will not tolerate further expansion in the balance sheet due to worries about inflation.

2. It's not big enough.

3. Even if it causes rates to fall, will consumers and businesses respond?

That is, this might help some, but not enough to solve our employment crisis -- not by any means. Thus, this does not alleviate the need for Congress to implement serious job creation programs as soon as possible.

The unemployment crisis needs to be attacked vigorously, and we need aggressive action from both monetary and fiscal policymakers. But neither the Fed nor Congress has the will to do more than half-hearted measures at this point, and even that might be too much for Congress.

I wish the people making these decisions had to face what households struggling to find a job endure daily -- the world policymakers see from their insulated shell is very different from the world of the unemployed. Maybe then they'd finally get it and, more importantly, do what needs to be done.
Tim Duy:

The Three Stooges (Fischer, Plosser, and  Kocherlakota) once again dissented.  My initial take - I didn't have high hopes for this policy to begin with, and continue to be underwhelmed.  $400 billion is too small, and, more importantly, the time horizon is too long.  Really, June 2012?  Unemployment in the high single digits and they can't speed this up a bit?  Yes, another step toward more easing, but the pace of progress just seems glacial compared to the economic need.

Brad Delong:

The problem is that such policies work, to the extent that they work, by taking duration and other forms of risk onto the government's balance sheet, leaving the private sector with extra risk-bearing capacity that it can then use to extend loans to risky private borrowers.

But buying a 10 or even a 30-year Treasury bond and selling Treasury bills does not remove all that much risk from the government's balance sheet. Much better--if you have $400 billion to spend--to buy something much riskier...

Me:  Big whoop.  If you're only going to score 17 basis points, then why even get out of bed?  Look, I'm as nostalgic as anyone for the 60's  - probably more so, truth to tell.  But a program that was marginally successful then, and took 4 god-damned years to do anything, and worked because interest rates were a hell of a lot higher, and now is approached in a half-assed way is probably worse than doing nothing.

Of course the FOMC announcement at 2:15  2:25  is what sent markets tumbling this afternoon.  How this explains the 10 point SP500 gain (about 1284 to 1294) between 2:37 and 3:12 p.m. is somewhat mysterious.  (The DJI and SP500 were in absolute lock step all day.)  We can be sure though that it definitely caused the bottom to fall out a full hour about 50 minutes after the announcement was made.  Isn't that what efficient markets are all about?  Never mind that third wave of third wave thang . . .

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