What Good is Operation Twist?

On Wednesday, the Federal Reserve announced a new program called "Operation Twist."  It is an open market action that involves selling long-term bonds and buying short-term bonds.  The effect of this that interest rates on long-term bonds fall, and interest rates on short-term bonds rise.  Visually, that leads to a flattening of the yield curve.

In the banking industry, you learn to HATE a flattening yield curve.  This is for two reasons. First, bank profitability is pretty simple.  Banks borrow money at short-term rates (savings accounts) and then lend money at long-term rates (consumer loans).  So, when the yield curve gets flat, the spread shrinks.  If you have any bank stocks, you should know that your bank's profits are about to get a lot smaller.  Secondly, the flattening yield curve is a precursor to an inverted yield-curve.  More often than not, that means a recession is ahead.  However, it's prone to some false positives.  I believe that the inverted yield curve has predicted 10 out of the last 7 recessions.  :)

I for one, don't see very strong benefits from Operation Twist.  But I don't think it's geared towards consumer behavior.  There is some possibilty that it makes long-term savings less appealling.  Combine this with the fact that short-term rates are basically still negative.  So if near-term savings are still worth zero and now long-term money is worth less, perhaps it will get people and companies that actually have cash to go out and spend it.  But for the folks that have no money (or REALLY need to hold on to the money they have) it doesn't really make much of an impact.

Again, I'm surprised that the Fed didn't announce QE3.  My guess is that there is enough dissention inside the board that they wont announce any easing action until this situation gets worse.  I can imagine that QE3 action followed by a European crisis would fuel the critics who believe that QE3 is not helpful.   So perhaps Bernake is waiting until AFTER the "Lehman Moment" to take action.  Politically, I can understand this...but I'm disappointed that politics has any more in this.

Oh well, it will be an interesting few months.  For better or worse, it is shaping up to be an echo of the fall of 2008.  Mostly for the worst.

MONKEY BUSINESS:

Holding: AGQ ($159.70)