The Operation Twist rumors are picking up momentum. In several interviews this morning on Bloomberg both Jan Hatzius of Goldman Sachs and David Rosenberg of Gluskin Sheff mentioned the likelihood of an Operation Twist type QE3 coming perhaps as early as September (thanks to Ed Harrison at CW).

“Best guess for the form of action would be a sort of Operation Twist that is basically like QE – it’s purchases of long-term securities that are financed by the sale of short-term securities.”

If you’re not familiar with Operation Twist, the SF Fed provides the background:

“The Kennedy Administration’s proposed solution to this dilemma was to try to lower longer-term interest rates while keeping short-term interest rates unchanged—an initiative now known as “Operation Twist” in homage to the dance craze then sweeping the nation. The idea was that business investment and housing demand were primarily determined by longer-term interest rates, while cross-currency arbitrage was primarily determined by short-term interest rate differentials across countries. Policymakers reasoned that, if longer-term interest rates could be lowered without affecting short-term yields, the weak U.S. economy could be stimulated without worsening the outflow of gold.”

Will this work today?  It depends on how the Fed implements it.  As I’ve previously described, Fed policy is always about price and not size.  It’s important to understand that altering the size of the Fed’s balance sheet and the amount of reserves in the banking system is unlikely to have any real economic impact as banks are not reserve constrained and asset swaps do not change the amount of outstanding financial assets – QE2 merely changed the duration of savings.   Hence, it was a monetary non-event.

If the Fed were to announce a target rate for the long bond they would essentially be conducting monetary policy at the long end in the same exact manner that they conduct policy at the short end.  If, however, they announce a size for purchases, they would essentially be repeating QE2 – a simple asset swap that doesn’t control the long bond.  This will just flat out not work.  The only way this program can work is if they explicitly set the long bond yield.  If they “finance” (a dangerous term in this instance as it implies a funding constraint) these purchases by selling short bonds (as Hatzius mentions) they would essentially be implementing a curve flattening strategy with the hope that lower long-term rates will be easing.

The crucial point here is implementation.  In order for this to “work” the Fed MUST target the long yield.  If they target a size this program will fail just as miserably as QE2 did.  Unfortunately, the term “work” could be misleading in the event of a yield setting campaign.  If the Fed sets the long bond yield they will essentially be performing open ended QE^n. As they did during QE2, they would correctly tell the markets that they are not printing money, but the likelihood of the public understanding this complex monetary operation is close to nil.

In my opinion, open ended purchases are dangerous in this environment as it could fuel further surges in commodity prices leading to even higher cost push inflation as we saw during QE2. Misunderstanding leads to disequilibrium leads to increased economic turmoil (sound familiar?).   This does not help the broader economy and in fact only further pressures the private sector.  Pinning long-term rates will “work” in that it will suppress long rates, but I am doubtful that the Fed will do this and I am even more skeptical that it will have a substantive impact on the broader economy.  Instead, my fear is that QE^n of this sort will merely induce further cost push inflation which will actually hurt the broader economy by offsetting any positive impact.  The refinancing effect via lower long-term rates will certainly ease debt burdens on some households, but I am not optimistic that it will offset the potential risk of surging commodity prices (the refinancing effect is very focused while the commodity effect is broad across the entire economic spectrum).

On the other hand, the Fed could simply implement this program to repurchase MBS and other assets from the banks.  This would likely help to shore up credit markets (as asset alteration would ease credit fears) during a period when a credit crisis relapse looks like a very real possibility.  This, in my opinion, is not bad policy as it is proactive and could thwart future fears before they spiral out of control (although again, there is the risk of cost push inflation).  This is, in essence, more bank bailouts and unhelpful to the crux of this recession which exists on Main Street.  Unfortunately, QE of this sort (or really of any sort) is unlikely to help generate any sort of sustainable recovery given the uniqueness of this balance sheet recession.  It can cushion the fall, but it can’t build us up.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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    • So it would probably create a short-term surge in commodity prices which will actually further weaken the economy and then it will all come tumbling down on us. 2012 could be really interesting.

  1. Cullen I’ve a question for you re QE and money printing that is not clear in my head:

    The Fed credits the banks reserves when it purchases Treasuries. These reserves could theoretically be lent out, expanding the money supply via the money multiplier mechanics. Expanding the money supply.. Is this not like printing money?

    I would appreciate your view

      • I sympathize with JB because I am a self-confessed economic ignoramus. I have read and re-read your primer, but I do not “get” exactly what JB be is asking. I don’t understand why this is not the same as money printing and your primer is not helpful in explanation. I surmise that it is because I am economically ignorant and do not understand some of the economically technical terminology.
        However, I am not stupid. If there were a way someone could explain this to me in layman’s terms, I’m sure that both JB and I would be forever grateful.

        • Yes the reserves could theoretically be lent out.
          Yes credit expansion can be inflationary and expand money supply ….


          Banks are never reserve constrained. Said differently, banks will loan first and than look for reserves later. The fact that a bank has many or no reserves at a particular moment or just completed a QE transaction a moment before does not make them any more or less prone to loan. That is, if a credit worthy customer enters a bank than the bank will loan.

          Like Cullen says QE is largely a non-event and has little impact to bank lending. In fact given interest on reserves is lower than the interest on the bond that was exchanged, QE may be deflationary. (There is one Japanese study that shows after QE, banks profitabilty and equity prices increased. Though they did not find causation. So like Cullen argues, the perception that QE is “something” may increase investors confidence and cause a bid up of equities, banks and commodities etc.

          • in other words, the money multiplier now is zero, because no one want more debt. it is not simple to find profitable investments in a world where there is lack of demand e aboundance of supply….liquidity trap and balance sheet recession!

  2. Let this newbie try my hand at JB’s question:
    Loans are the result of end-user demand – not bank reserves. QE stuffing the banks full of reserves does nothing to generate demand. Near zero rates and still no one wants or needs a loan. No jobs, massive debt = no loan demand.

    Meanwhile, banks are never reserve constrained. If they had no reserves, and someone showed up for a loan, they would give the loan, then get the reserves…. not the other way around.

    M2 can grow and grow and grow – and have no inflationary effect unless or until there is private sector demand for that money.

    Also, the money multiplier is an economic myth

  3. This will only put moral hazard further. Every investor crushed this summer will rush on the long side on margin account. Greedy and animal spirit. But this time, nobody will be crushed again at the end of the program and will rush to the exit before the end. When this program will end, it will not only put a high risk on the equities again ( this time will be different – i doubt), but it will also put a higher crash risk on the long term bonds (as the rates will vary freely again).

  4. ECRI’s Lackshaman Achuthan in Bloomberg Surveillance Midday right now…

  5. About the FED buying MBS, how do they decide a price for such a security, if they are valued at a higher price than they actually are, which is probably the case,as it is difficult for price discovery, isn’t the FED essentially buying junk which everyone knows is worthless, or worth a lot less than face value.

    • Since the end of 2008, all FED operations are targeted to restore Banks balance sheet, not to fix the real economy.

  6. HOT! HOT! HOT!


    FHFA Sues 17 Firms to Recover Losses to
    Fannie Mae and Freddie Mac

    Washington, DC -­-­ The Federal Housing Finance Agency (FHFA), as conservator for Fannie Mae and Freddie Mac (the Enterprises), today filed lawsuits against 17 financial institutions, certain of their officers and various unaffiliated lead underwriters. The suits allege violations of federal securities laws and common law in the sale of residential private-­label mortgage-­backed securities (PLS) to the Enterprises.

    Complaints have been filed against the following lead defendants, in alphabetical order:

    1. Ally Financial Inc. f/k/a GMAC, LLC
    2. Bank of America Corporation
    3. Barclays Bank PLC
    4. Citigroup, Inc.
    5. Countrywide Financial Corporation
    6. Credit Suisse Holdings (USA), Inc.
    7. Deutsche Bank AG
    8. First Horizon National Corporation
    9. General Electric Company
    10. Goldman Sachs & Co.
    11. HSBC North America Holdings, Inc.
    12. JPMorgan Chase & Co.
    13. Merrill Lynch & Co. / First Franklin Financial Corp.
    14. Morgan Stanley
    15. Nomura Holding America Inc.
    16. The Royal Bank of Scotland Group PLC
    17. Société Générale

    These complaints were filed in federal or state court in New York or the federal court in Connecticut. The complaints seek damages and civil penalties under the Securities Act of 1933,similar in content to the complaint FHFA filed against UBS Americas, Inc. on July 27, 2011. In addition, each complaint seeks compensatory damages for negligent misrepresentation.

    Certain complaints also allege state securities law violations or common law fraud.
    As conservator of Fannie Mae and Freddie Mac, FHFA is charged with preserving and
    and does so on behalf of taxpayers. The complaints filed conclusion that some portion of the losses that Fannie Mae and Freddie Mac incurred on private-­label mortgage-­backed securities (PLS) are attributable to misrepresentations and other improper actions by the firms and individuals named in these filings. Based on our review, FHFA alleges that the loans had different and more risky characteristics than the descriptions contained in the marketing and sales materials provided to
    the Enterprises for those securities.

    FHFA filed the complaints under the broad authority granted to it by the Housing and
    Economic Recovery Act of 2008. The U.S. legal system provides for addressing such alleged misrepresentations through the following those legal remedies in filing these complaints and seeks to recover on losses to the Enterprises that are the legal responsibilities of others.

    Discussions regarding these matters have taken place with several of the firms receiving complaints and, where constructive, they will continue.

    • Interest rates at the long end include many components, a few of which are expected inflation, expected payback probability, government stability and these days assuming anothers debt ie private sector or foreign government bailouts.

      All of these components have become become increasingly volatile and difficult to predict. I would expect that if the Fed attempts to manipulate this it will increase the volatility of interest rates along the yield curve, increase speculation, crush confidence and accelerate the liquidity trap downward cycle that have taken hold of the free world economies.

      The government needs to put people to work by deploying initiatives that build our nations infrustructure and the longer they wait the more they’ll ultimatley need to spend. Of course we have those who beleive the government must step back and let private industry manage the economy and if this is the case what private industry is willing to step into the economic chasm to save this country at a time when private CEOs chief concern is how to employ accounts who specialize in avoiding paying us taxes.

      Rallies are to be sold with both hands until the natural forces break the grip held by the incompetent public and private leaders of what was known previously as the free economies.


    • How is this GS report not “fear mongering”?
      Pretty graphics? Or pristine brand name?

  7. JB,

    I’ll attempt to try and answer your question, which has been the question I’ve researching as well.

    All the Fed did is swap Treasuries with reserves. The money existed prior to the swap, because the banks had the money to purchase Treasuries. Treasuries and reserves are both “savings” account, and not active in the market. So all it did is do a balance sheet swap, and had zero affect.

    The Fed is also paying interest on reserves, so banks have less incentive to loan money.

    There is plenty of consumer demand for loans, but banks are not finding the risk worth it. Apparently, not when they can get a guaranteed 0.25% return right now.

    There still seems to be some sort of credit freeze going on. Banks are very adverse to risk. New regulations, new FDIC requirements, and new audits are probably making it difficult.

    Banks are like corporations, and even the big corporations are sitting on piles of cash, not wanting to spend any of it.

    • snakyjake,

      Good answer, but slightly off. The banks are never reserve constrained so the IOR has little impact on their lending ops. Instead, consumers are paying down debt instead of spending. This is leading to an unusually depressed domestic economy. This is double edged because it not only results in reduced borrowing, but it results in reduced corporate revenues which means reduced investment and spending at the corporate level. You are right that banks have tightened lending stds in recent years, but the bigger issue is a lack of demand for loans due to deleveraging.

      IOR is merely a rate targeting tool by the Fed. The money multiplier is a myth so don’t be fooled by those who say that banks aren’t lending because of IOR. That’s not exactly accurate.

      • If the Fed didn’t pay IOR the banks would probably be charging negative interest rates of -0.25% (or less) on deposits to compensate, just as Mellon Bank charges negative interest on $50M deposits today. Deposits would universally carry a safekeeping fee, and this would encourage cash withdrawls and purchases of stocks and gold. It would not, however, encourage bank lending.

      • What would happen if the Fed quit paying interest on reserves (IOR) (assuming all else the same)? I’m still trying to understand how the money system works.

        My street experience isn’t reconciling with what I’m reading. I’m still trying to believe banks aren’t loaning because of consumer demand, and not because of their risk avoidance. Why would banks loan when people are filing for bankruptcies? Or why would they loan in a deflationary housing market? Why loan to car buyers when they can easily walk away from their loan with little to no consequence?

        My colleague in commercial banking tells me stories of people who have 100% cash to back the loans being turned down for loans. I also hear stories of people learning the loop holes of foreclosures, and taking advantage of it.

        Perhaps the deleveraging I’m reading is consumers and business bankruptcies?

        I have a lot of questions, no answers, but have guesses.

        • IOR is used to control inflation by setting the lending rate to control the bank credit creation process. Either way the government to target inflation has to pay interest on bonds before QE or swaps reserves for these bank held bonds and pays a lower interest rate on reserves.

          If they stopped paying IOR, than we could expect that long rates would drift closer to zero and much more speculative loans would be created. Those heavily indebted may not qualify for further loans. But those who are better capitalized (the most wealthy) or have large cash deposits, would choose to speculate given the lower interest rate return on deposits. That is speculate meaning unproductive speculation in commodities and asset appreciation, rather than productive loans for business and job creation etc.

  8. If my understanding of MMT is correct, at this point the Fed can’t really do much for Main Street (the Fed can only at this point help out banks). Main Street help most likely needs to come from the private sector and/or productive government spending. Which neither is happening at the scale needed.

    • As I see it, an “operation twist”, QE3, whatever is nothing more than “operation deck chairs” unless it is used to do something – like back the proposed Obama super-stimulus of an automatic refi of all outstanding mortgages that are current on their payments. If the Fed drives 30 year rates down to 1% and Obama gives an automatic low-fee refi’s for all good (current on payments) mortgages at 2% regardless of LTV, that will be an annual stimulus of several hundred billion $/yr straight into the pockets of households. Now, other sectors of the economy (like pensions) will lose interest income if he does this, but the consumer will get more dollars to spend today.

      An automatic refi of all good mortgages will also have one other beneficial side effect. It will eliminate all chain of title problems with those mortgages and make them fully forecloseable and full recourse in the event of future default. However, it is unlikely that even the Great Obama can do anything for currently delinquent or defaulted mortgages. He probably can’t make Fannie or Freddie refinance those as long as F/F are still listed on stock exchanges, and the best thing to do with the bad mortgages is to seize and sell the collateral.

      An “operation twist” might also have benefit if it is used to finance a massive Federal project to rebuild crumbling roads and bridges, and build new and needed highways. That way the Gov’t can lock in its future costs at negative real interest rates on 30 year bonds. I don’t see much chance of this before the 2012 election, since we have divided control of the government and no possibility of the Parties compromising on the issue of union labor before the election. After the election (regardless of who wins), such a project becomes possible.

      • There is tons the Fed can do.
        1. They can proceed with orderly default of “bad” debt on banks balance sheet, replace the board and executive teams to strengthen and instill confidence in the banking sector
        2. They can attempt to eliminate or lower interest servicing costs (removing this budget item frees up budget space for congress)
        3. They can help establish state banks that provide lending to their specific US states much like North Dakota (and as such interest on issued debt is held by bank and paid back to the state treasury)” Interest compounding will be the factor that makes state debt unsustainable.
        4. They could implement transaction fees on unproductive lending (speculation)

        Lots of more possible out of box actions but the current monetary plans are largely unappealing.

  9. Most of the brouhaha about QE 3 involves magical thinking. Rates are already historically low and the yield curve relatively flat. Yet, there is little demand for money for either investment or consumption, and housing re-fi’s are pretty much over too. Its doubtful that dropping long-terms rate would have much of an effect in this environment. It’s also unlikely to reduce saving of USD by the ROW, so not much effect on the CAD.

    The problem is lack of effective demand resulting from continued private deleveraging and other private saving, as well as uncertainty in the face of a dysfunctional politics reflective of a deeply divided country, as well as a parlous world.

    It looks like the global economy is on the verge of recession, and if this scenario unfolds, that will mean further monetary loosening will not have a significant effect on commodity prices.

    Without coordinated fiscal intervention, the global economy faces the doldrums or worse in the event of any significant shock. In the US, the deficit is not large enough to offset non-government saving (domestic private saving and CAD), as the employment numbers show.

  10. The way the market is behaving, QE3 (twist) is already a done deal.
    Bruce Krasting @ ZH also posted a likely variant on twist in which the GSEs are involved and I’m inclined to agree that this is the way twist may go down: http://www.zerohedge.com/contributed/feds-plan-rumors-news

    Regarding QE3 in general, there are two major issues in play for Bernanke here. The first is Europe, the second is the US economy. A QE-Twist version of QE3 is targeted more at the latter than the former but we shouldn’t forget the former because it is, by far, the biggest risk right now. If we do get a QE-twist in September, it wouldn’t surprise me at all to see it getting quickly followed up by QE4 as Europe blows, which will be closer to QE2 than anything else.

    Focusing on QE-Twist, I expect it to be a total dud, regardless of whether it’s traditional or GSE. Here is what I had to say about the GSE version at ZH with some minor edits:

    First of all, the core problems (in order) are: 1) underwater mortgages, 2) excessive interest service burden. These two factors combine to push mortgagees into default or prevent people from moving (literally), thereby preventing residential liquidity from matching geographic job liquidity. A drag on recovery.

    As Bruce points out, simply twiddling the price of existing debt helps to address #2 but it does nothing to address #1, which is by far the dominant factor here. The original NYT article makes the size of the problem clear:

    “American homeowners currently owe some $700 billion more than their homes are worth.”http://on.msnbc.com/pbmJZy

    I’ve been saying it since 2008. The problem is Ponzi debts. What is needed to address the problem is principal reduction which addresses both #1 and #2 as the interest burden on a smaller principal is reduced. Home sales will pick up rapidly as the market unfreezes with people playing their get out of jail free cards, moving to another city, a rental, or a more suitable home. Payment for the write downs need to be made, as much as possible, by those who profited most from the Ponzi, which means going after the shadow banking system. The shortfall, (which will inevitably be large), would ideally be taxed out of the FIRE sector over years. the logic being that “financialization” of the economy enabled the Ponzi, so de-financialization should pay to unwind the Ponzi.

    To achieve this requires a legislature with morals, balls, and a desire to do what actually benefits the economy long term instead of benefiting their short term hooker / crack demands. In other words, we’re screwed. It will be a cold day in hell before the “financializers” pay for the mess they created. No. Instead we’ll get all losses being socialized which only makes economic problems worse as it draws cash out of the real economy to cover losses in the FIRE economy.

    So these are the two reasons why the QE-GSE-Twist idea being leaked in the NYT will not work:

    #1). The plan is positive in that it clears a lot of the legal mess caused by MERS and centralizes dodgy mortgages and MBS to a single point where they can be better handled, but it addresses debt prices only while doing nothing about the bigger problem of underwater home prices (excessive principal). Temporary minor relief in interest service and movement on foreclosures will provide a short-term boost to the economy but unemployment will remain high because the structural issues with the economy have not been resolved. Having a loan at 8% or 4% makes no difference when you’re unemployed. It also makes no difference when you’re deeply underwater and jack of it all. Defaults will continue and twist will have achieved very little.

    #2). The plan simply dilutes the shittiness of assets on the Fed’s books with shitty water. In other words, while there may be more liquid in the system, there’s also more shit. All it does is move even bigger amounts of net shit off the Fed’s books and, indirectly but ultimately, onto the Treasury’s books. By “shit” what I’m referring to is risk. This plan does nothing to reduce net risk, it actually increases it!. Refinancing to enable centralization to the GSEs (and re-establishment of title) is paid for by Treasury which swaps / sells bonds to the Fed. Because a direct sale is prohibited by law, the Primary Dealers take their cut along the way ensuring that Treasury gets stuck with a bigger bill. This will cause further distortions in bond markets and more systemic risk as fixed income must further flee the safety of TSYs in pursuit of much more risky yield. Inevitably, total Treasury debt will causing political turmoil, a likely further downgrade (with all the mess that causes), and that the burden for paying for these refi’s has now been shifted to the general taxation pool. Increased future draw from general taxation (and believe me it will be general, it will NOT target the FIRE sector which deserves it), will fly as “austerity measures” and will hammer a real economy that’s trying to recover. Said another way, any short term benefit provided by refis will be offset by the long term cost of future taxation, and the latter will exceed the former due to the middlemen in the deal taking their cut and adding a layer of expense.

    In summary, if QE3 goes down this way, all that will happen is that the real economy collapses further, mortgagees sink further underwater (negating any benefit), unemployment rises, meanwhile the financial economy inflates by the equivalent amount. Eventually it breaks and people start looting and shooting.

    Further, as pointed out by Quark earlier. Social security payouts (amongst other things) are influenced by yield on the 10y. Operation twist will artificially suppress 10y yield leading to reduced SS payment relative to the cost of living which includes clear inflation in the things that matter (food). This will cause a political backlash.

    Right from the beginning I’ve called for the Fed to stay the hell away from long-dated paper and meddle only at the short end. Messing with the long end has, in my understanding, a net negative effect. Whatever benefit is achieved by suppressing long yields is offset by a cost caused elsewhere. Suppressing long yields increases systemic risk, the opposite of what the Fed should be trying to achieve.

    Finally, on the topic of commodity inflation. I don’t have a strong opinion on what would happen. Instinct says, the two year extension of ZIRP combined with suppression of long rates will have a highly inflationary effect on commodities, but that all goes out the window if Europe collapses as a collapse in Europe will also collapse commodities. I suspect this will happen as Europe is showing more signs of breakup than unity.

    • “1) underwater mortgages, 2) excessive interest service burden.”

      I disagree that a massive refi can’t do anything about #1. If the interest rate becomes low enough and the repayment time horizon extended long enough, the mortgage payment effectively becomes a rent payment. This is especially true if the mortgage becomes transferrable to a future buyer – and if they want to do this right they will make the mortgages transferrable. Then it is operationally identical to rent. The problem a refi can’t solve is #3 – defaulted and delinquent loans. With these, the collateral must be sold.

    • So Bruce’s thesis is the reason the economy isn’t recovering is because there are all these jobs waiting for people in some far off, distant land, but they can’t move to acquire them because they can’t sell their house? So there are millions of jobs waiting to be filled right this very minute, full production is waiting in the wings, but god damn it if I just can’t sell this PoS house! I really genuinely don’t mean to be rude, but this sounds like it came straight off the Onion’s press releases. Thesis FAIL. I’ve been laughing for about 5 minutes now. Out of curiosity, has anyone asked Bruce the fairly obvious question, how exactly are these jobs waiting in the wings without the demand to create them? You mean to tell me there is all this money banging on businesses doors right this very minute for all these products they are clearly dying to hire people to create (given we’re talking millions of jobs), but they just can’t keep up with production! “We’d like to apologize to our customers, we’re just too low on staff, we cannot produce enough of what you want.” One wonders why we aren’t seeing inflation–excessive dollars fighting over too few products–occurring like priests in a cage match down at the local day care fighting over this year’s fresh breed of youngins. One further wonders why corporations, being cash rich, don’t move some of their facilities to where all this help is. I realize this costs money, but they probably have it. They could make the investment. And since this wondering is on full flow here, why is it exactly people aren’t just defaulting to go get this kick butt job? Sitting on unemployment or nothing at all is preferable? Is it because then they couldn’t buy another house and wouldn’t have anywhere to live? I guess rentals are all rented out.

      We have a demand problem, that’s it. We have a demand problem because people don’t have enough of what they use to create demand with, i.e. money. They don’t have enough money for any number of reasons; the balance sheet recession, money funneling out of the system to foreign markets, too much of the money pooling in too few spots (insufficient distribution), and so on. All that needs to happen is for people who spend money to get money. The poor, the middle class just need more money to spend. They’ll spend it, trust me they’re nowhere near where they want to be when it comes to acquiring the goods and services they’d like. They’ll create demand tomorrow. Write’m periodic stimulus checks, tax breaks, give’m research or infrastructure improvement jobs funded with printed money, do this until full production sets in and inflation is on the horizon. Then just maintain it as needed from there. Easy as one, two, three.

  11. hi,
    CR u hav been at the forfront of MMT>>> my enquiry is regarding another artcle written by martin armstrong on eurobond. your views on this and do u think martin understand mmt

  12. As long as Americans are under water on their mortgages there will be no successful tinkering by the Government or the Fed.
    Anyone who lives in a house or has family living in a house that is under water are financially stressed.
    All the neighbors who live next door to the underwater house are also at risk, though they won’t know it until the underwater household folds and they take a serious collateral hit.
    Nothing less than a macro mortgage principal reset (think no more underwater) will work with even a modest degree of success. As we continue to see.

  13. To my mind the question is not how many bonds the Fed will buy but what kind? Will they be US Treasuries or private bonds? And if US Treasury bonds how does the Fed persuade people to part with them? By paying an increasingly high premium? Oh, I get it. The lower the yield the Fed desires on longer term bonds the more it will pay for them? Right? A typical Fed giveaway to the rich?

    Having counterfeiter-in-chief sure is convenient for the rich, isn’t it?

  14. If I understand it correctly, in a balance sheet recession, the “demand” for borrowing is replaced by a “demand” for re-paying debt, reducing costs, and on saving. Without a demand to borrow, it doesn’t matter how much banks have on hand, or in future or current reserves, or even on the rate of interest they charge for their loans. If there is no demand for loans, the only functions banks serve are repositories for savings and official monitors of balance sheets. If banks cannot make a profit by lending money, their only option is to charge fees or fold.

    Using that line of reasoning, the “non-event” of QE is actually an important single-focused event; and that is to keep banks from folding by paying a modest interest on reserves. If that is true, than QE has been quite successful in its intended single focus… successful, that is, up to now. The problem lies in the fact that it is tantamount to kicking the can up a hill with an ever increasing incline. The inevitable can be forestalled for just so long — regardless of what the policy is named.

  15. Actually, since fiscal policy is what counts– the Fed should be targeting the average interest rate on publicly held debt. Its currently less than 2%, the Congressional Budget Office projects the long term interest rate to be 5.3%. As a rough approximation if Fed announced as a permanent goal to drive average interest down to 1% (that is, what it was at the end of World War II), it would cut the CBO projected deficits the next decade by $4 trillion.

    If Fed agreed to lock current 0.25% IOR/FFR target and Tsy agreed to sell nothing longer than 1 yr T-bills (Tsy can call in T-notes early on 4 months notice to really speed things along), it’s cut projected deficits by $5 trillion– now THAT’S a grand bargain. It would give the White House and Congress tremendous flexibility on fiscal policy since the CBO has already built that $4-$5 trillion into existing budget models.

    Interest rates should stay there forever, but adopting Britain’s 10 year rule for interwar defense spending would be OK (rule assumed there’d be no war– or in this case, no interest rate hikes– within the next 10 years). CBO budget scoring is only binding 10 years out anyway.