So the Fed has gone ahead and done Operation Twist even though the Republican congressional leaders took the unprecedented step of politicizing the Fed and trying to dictate policy. Some might say, the Fed did it because the congressmen interfered. If you go to the post with the BNN clip from earlier today, you can hear Cardiff Garcia speculating about just this possibility.
If you believed the Republican leaders, you would say this is reckless monetary policy aimed specifically at supporting President Obama, a Democrat. You saw the last post I wrote, with the court scene from “A Few Good Men” tacked on. Boehner, Cantor, McConnell and Kyl would have you believe that Ben Bernanke is the misguided and dangerous Jack Nicholson character and they are the Tom Cruise character, trying to get him to admit to his crimes.
Is Bernanke ‘almost treasonous’ then, as Rick Perry has said he is?
Here’s my take.
Bernanke is a Republican. Let’s get that out of the way. Ben Bernanke is a Republican holdover into the Obama administration first appointed by George W. Bush, much like former FDIC chair Sheila Bair and former Defense Secretary Robert Gates. Look it up. These three are exemplary public servants in that they have tried to serve their country as best they could regardless of the party in power. You might not agree with their policies, but acting like any one of the three is favoring a Democratic President for partisan reasons is preposterous. I would say it is even reckless – just like calling Bernanke ‘almost treasonous’ is.
But what about the new Fed policy, Operation Twist? Isn’t it so reckless as to be ‘almost treasonous’. The short answer is no; Operation Twist is a big yawn.
The Republicans do have one thing right. I think they are onto something when they say:
we have seen no evidence that further monetary stimulus will create jobs or provide a sustainable path towards economic recovery.
It’s not that monetary stimulus is completely ineffective. It’s that you must really jam it on and you would have to target price instead of quantity to get any measurable effect and even then the transmission channel is going to be weak.
The Fed said:
This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative.
Put simply, the Fed wants to lower rates. Lower rates have two distinct transmission channels (outside of simple animal spirits and private preferences aka the Bernanke put). First, low rates lower net interest margins for banks and returns for savers. Simultaneously, they should increase the demand for credit by lowering the price i.e. the rate of interest. If the effect of the latter outweighs the effect of the former then this policy is good in generating more credit demand and therefore more economic activity and jobs.
There are some incipient signs that the credit impulse is better than it has been and that credit is growing again. But it is certainly not that good. However, with the Fed Funds rate at effectively zero percent, the price of credit (i.e. the interest rate) is not driving the marginal consumer of credit. It is the lack of jobs and unanticipated asset price volatility juxtaposed to an overhang of large levels of household sector debt. Consumers, therefore, can neither count on income or wealth gains to deal with their accumulated indebtedness and have cut back as a result. Until this indebtedness is worked down, credit growth will be stalled.
Bottom line: Operation Twist can only move rates a few basis points. And since the Fed is targeting quantity not price AGAIN, it’s not even clear that rates will decline. Rates are already so low that these basis points won’t make ANY difference. I see this as a non-event, a big fat yawn. It’s not treason at all. It won’t even be effective.
P.S. – When the congressional leaders say “Ultimately, the American economy is driven by the confidence of consumers and investors and the innovations of its workers,” they show they know zero about economics. This isn’t about the confidence fairy. That’s the same ridiculous stuff Obama talks about. It’s about debt and jobs. If both Republicans and the President are spouting this confidence fairy palaver, then I say “God bless America,” because we’re going to need that blessing without leaders that understand basic economics.