Operation Twist is the Federal Reserve’s most recent effort to reduce long term interest rates. In selling $400 Billion in short term securities to use the proceeds to invest in longer term U. S. Government debt, the Fed is attempting to drive down long term interest rates.
Like with the Quantitative Easing programs, the Fed is using its monetary tools to influence economic growth and avoid a double dip recession.
In its misguided efforts, however, the Fed may be subjecting the economy to even more severe risks in the years ahead by creating an "interest rate bubble".
As the economy has struggled and the bubbles of the tech boom of the late 1990’s, the real estate bubble of 2000’s, and the coming student loan bubble explode, the Fed is using monetary policy in ways never envisioned when the Federal Reserve was created.
The massive expansion of the Federal Reserve in attempting to manipulate the economy is creating a situation ripe for disaster. As our economy is fueled with artificially stimulated funds in the middle a recession, businesses and governments are continuing to fund riskier projects than they would ordinarily do as a result of the "cheap" funds.
The Fed is, in essence, creating a debt style of "equity" where bond holders will face risks normally associated with owning equity. If the free market financial sector is unwilling to provide funds for investment then the Fed is irresponsible when it steps in.
The Fed is enabling governments at the federal, state and local levels to continue spending and businesses to continue restructuring balance sheets with "cheap" funds. These cheap funds to banks will cause substantial economic dislocation later since the Fed is borrowing short term and lending long term in Operation Twist.
The Chicago School of Economics and Milton Friedman are widely recognized as leading experts in monetary policy. Both monetary policy and fiscal policy have been widely taught in American universities as tools for government to use to "manage" the economy.
The Federal Reserve Act of 1913 provides that the Feds policies are the "actions undertaken by a central bank, such as the Federal Reserve, to influence the availability and cost of money and credit to help promote national economic goals."
The Federal Reserve controls or attempts to control the economy with either open market operations, the discount rate and/or reserve requirements to influence the federal funds rates which "trigger a chain of events that affect other short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money and credit, and, ultimately, a range of economic variables, including employment, output, and prices of goods and services."
At what point though, does monetary policy merely become market manipulation?
The attempts by the White House and the G-20 to influence the big banks and avoid a "too big to fail" phenomenon, have created much legislation. Monetary easing by the Fed and other central banks to limit the sovereign debt crisis in Europe and the one brewing in the United States will merely postpone the inevitable.
The Fed’s current policies are merely attempting to limit damage done by the Fed’s prior efforts to control and manipulate the economy.
Should a business attempt to control prices or control a market, the Justice Department would investigate and the Sherman Antitrust Act of 1890 and Clayton Antitrust Act would be quickly invoked.
By going beyond traditional measures with monetary policy, the Fed has inserted itself in the role of interest rate manipulator. Manipulating interest rates, wages, prices or anything for that matter only delays the inevitable crisis.
The Fed is causing economic dislocation in markets it does not understand. It is attempting to fight the current depression with the tools of the last depression.
Why someone at the Fed has not asked how one can reasonably expect interest rates to remain this low when debt is this high is beyond me. The answer to that question will give the Fed the tool in needs to help the economy right now. It’s the uncertainty stupid!
Until consumers and businesses see a clearer path to the future be it in markets, regulations, elections, government intervention in markets in health care and banking, and taxes, consumers and businesses will curtail spending perpetuating this recession even longer.
Stop the gamesmanship with manipulating interest rates and markets. Remove uncertainty in the market immediately in health care, banking, taxes, spending and debt reduction and you will see economic growth that will set the stage for an economic boom of the century.
Keep doing what you are doing and the Fed will find that it has successfully led our Nation into a depression.
Frank Ryan, CPA specializes in corporate restructuring and lectures on ethics for the state CPA societies. He is on numerous boards of publicly traded and non-profit organizations. He can be reached at [email protected]