The coming failure of Operation Twist – The Federal Reserve resurrects a program from the 1960s named after the Twist Dance. Appropriate timing for a Dancing with the Stars nation.
The Federal Reserve has literally run out of ideas. Operation Twist, a throwback to the 1961 action taken by the Fed named after the Twist Dance fad at the time, is now back in 2011. This time the Fed plans to purchase $400 billion of bonds with 6 to 30 year maturities while selling bonds with shorter term maturities. The Federal Reserve continues to deal with a debt crisis with more debt. The market has quickly spoken shaving off 700 points in two days and many global markets are now solidly back in bear market territory. The problem with this program is that it assumes that the only problem with the economy is that not enough people are borrowing and spending. The Fed goes after interest rates like a lion after a zebra. Interest rates are not a problem. Rates are at historical lows. The problem of course is that household income has gone south for well over a decade. The only true winners with these low rates are the banks who can access cheap money to wildly speculate in the stock market casino.
Operation Twist largely benefits the too big to fail banks
The recent Federal Reserve move only makes it cheaper for banks to borrow and speculate. As the above chart highlights, banks already have an abundant amount of money in their excess reserves. Banks before Operation Twist had $1.6 trillion in reserves that are readily available to lend to the public. The problem is twofold:
-1. Banks are keeping this money because of their horrific balance sheets.
-2. Banks are now back to using due diligence and with the average per capita income at $25,000 not many credible borrowers are coming to the table.
In other words, these excessively low rates continue to bailout the too big to fail banking syndicate. This comes at the expense of savers and those that are prudent. The average savings account in the U.S. is paying roughly 0 percent while banks can charge 15 percent or higher on credit cards. Banks can simply keep that $1.6 trillion and actually earn interest on it. Wouldn’t you like to get free money and earn easy interest on it? The mission of the Fed is to protect the banking system and this is like rule number one of the banking Ten Commandments. The success of the overall economy is only a factor if it aligns with banking profits.
Operation Twist is also a failure because households in America are in the process of deleveraging after reaching a peak crisis in debt. Households are maxed out.
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