The Fed's New 'Operation' Is Twisted Posted 06:32 PM ET
Economy: Fed Chairman Ben Bernanke is reaching back 50 years for a "trick" to get the economy moving, but it won't work. Our problem today isn't monetary policy. It's government meddling.
The idea is simple: The Fed holds $1.7 trillion in Treasury debt. It wants to "rebalance" that by selling short-term debt and replacing it with long-term Treasuries. In theory, that would cut long-term interest rates, boosting investment in both housing and business.
Sounds good, but we've tried it before, in 1961. The strategy — dubbed "Operation Twist" — was supposed to keep rates low and give the economy a badly needed shot in the arm.
Did it work? When Operation Twist began, the 10-year Treasury traded around 3.7%. By the middle of the next year, it was above 4% — and continued rising for most of the rest of the '60s.
Even Bernanke, in a paper written seven years ago, termed Operation Twist a "failure." So why should this time be any different? The answer is, it won't be.
More recently, Japan tried something quite similar — over and over — after it fell into a protracted slump in 1990. And, just as in the U.S., Japan's government tried repeated stimulus plans. It didn't work.
The Kennedy administration tried something else, however, that did work — steep tax cuts. From a slow start, the 1960s turned into a boom decade that was later dubbed the "Go-Go Years."
Yet today we are not only watching the Fed duplicate earlier failed policy, we are also witnessing President Obama unveiling another $457 billion "stimulus" that will raise taxes by more than $400 billion and add at least another half-trillion to our nation's already massive $14.5 trillion debt.
No serious economist without a political ax to grind thinks this is a good idea. Even Democrats oppose it.
Strangely, the Fed persists in thinking its monetary stimulus will work. But it won't. It will be swamped by the White House's big-spending, Keynesian policies.
That's why Republicans in Congress wrote to Bernanke and his Fed colleagues this week warning them against further monetary tinkering with the economy.
"We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy," the letter, signed by four top Republicans, said.
Fed policies of record low interest rates, two rounds of quantitative easing and now Operation Twist — not to mention Democrats' threats of higher taxes and more debt — have chased businesses and entrepreneurs to the sidelines. Businesses create jobs and growth in this country — not the Fed or White House.
The 10-year Treasury yield fell to 1.87% Wednesday, an all-time low. But the economy eked out just 0.7% growth in the first half while unemployment remains stuck above 9%. If record low rates haven't helped so far, what makes anyone think even lower ones will?
Our problems are no longer monetary, if they ever were. They are fiscal — too much spending, too much debt, too much taxing. Until those failed Keynesian policies are reversed, nothing the Fed does will help. |
