Operation Twist: More Bad Medicine

At the FOMC meeting earlier this afternoon, Federal Reserve chairman Ben Bernanke announced the unveiling of “Operation Twist” in order to once again stimulate economic growth. Instead of resorting to the ominous and expected “QE3”, the Fed decided it needed to lower long-term interest rates by swapping out $400 billion short-term bonds for an equal amount of long-term bonds to incentivize even more borrowing and spending.

With 30 year yields hovering around 3.02%, 10 year yields at 1.88%, and short-term yields (< 12 months) at virtually zero, interest rates can’t really get much lower. Despite this, people and firms still aren’t borrowing money. Firms like Apple are sitting on billions of dollars in cash — not investing, not taking risks, and not helping the economy.

Once again, the Fed is prescribing the wrong medicine because they STILL don’t understand the problem. Firms are not investing or taking risks — we can all agree on that; but it isn’t because the cost of borrowing money is too high, it is because firms don’t know what is profitable to invest in. As more and more intrusive regulatory legislation is passed under the Obama administration’s direction, regime uncertainty forces firms into hiding. No one wants to hire because hiring someone is one of the riskiest and costliest decisions a firm can make, therefore unemployment numbers are stagnant around 9%. In particular, companies are most scared of the ramifications of Obamacare. Dr. Steve Horwitz argues this point in a blog post back in July.

Peter Schiff testified before Congress last week concerning Obama’s new job bill which of course is also aimed at “stimulating” the economy and creating jobs. He consistently hits the nail on the head by reaffirming that government cannot create jobs, especially since the jobs it “creates” do not actually create value, they only drain resources from the productive and valuable private sector. You can view the entire testimony here.

Both of these strategies in the monetary and fiscal realms have continuously been tried and tried again, yet we still remain in the same rut. Albert Einstein said the definition of insanity is doing the same thing over and over again while expecting a different result.

We are now bordering on insanity.


~ by rfreeland on September 21, 2011.

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