Monetary policy is twisted. Operation Twist is supposed to push bond yields closer to zero, which should reduce mortgage rates and revive housing activity. QE-1.0 was supposed to do the same thing. But it didn’t work. Housing remains in a depression even though the Fed purchased $1.24 trillion in mortgage-related securities from November 25, 2009 through the end of March 2010. Operation Twist is... [more]
Monetary policy is twisted. Operation Twist is supposed to push bond yields closer to zero, which should reduce mortgage rates and revive housing activity. QE-1.0 was supposed to do the same thing. But it didn’t work. Housing remains in a depression even though the Fed purchased $1.24 trillion in mortgage-related securities from November 25, 2009 through the end of March 2010. Operation Twist is supposed to force investors to buy riskier securities, especially stocks, with the expectation that will somehow stimulate economic growth. QE-2.0 was supposed to do the same thing. But it didn’t work either, which is why the Fed is doing the twist.
Ten-year Treasury yields and mortgage rates were already at record lows before yesterday’s Operation Twist announcement. Yet housing remains depressed. The mortgage applications index for both new and existing home purchases remained at the lowest levels since 1995, based on 4-week average. It is actually 8% lower than a year ago and 42% lower than two years ago despite the drop in mortgage rates. The housing problem can’t be fixed with record low mortgage rates.
Actually, the Fed isn’t sure how Operation Twist will work to boost the economy. And how do we know this? The Fed said so in its FAQs: “The maturity extension program will provide additional stimulus to support the economic recovery but the effect is difficult to estimate precisely."
http://blog.yardeni.com/2011/09/twist.html[less]
Response by benbernanke
over 14 years ago
Posts: 11
Member since: Apr 2010
Yardeni and his bond vigilantes friends -black swan included- have been short bonds for the past 3years (actually they've recently taken their losses) while I've been buying on behalf of the avg American and making billions on the way. Even without my purchases rates would only be marginally higher and still much lower than Yardeni and Co predicted, so rates are not far from their natural free market equilibrium. I've known since the mid 2000s that housing was overvalued nationwide (politicians at the time should have put the brakes on home ownership instead of trying to get reelected). We are not trying to push home prices back to where they were before the crisis (since the price level is at the source of the crisis); we are trying to slowy put people's balance sheet in order (will take a decade) and avoid further abrupt economic shocks.
Yardeni and his bond vigilantes friends -black swan included- have been short bonds for the past 3years (actually they've recently taken their losses) while I've been buying on behalf of the avg American and making billions on the way. Even without my purchases rates would only be marginally higher and still much lower than Yardeni and Co predicted, so rates are not far from their natural free market equilibrium. I've known since the mid 2000s that housing was overvalued nationwide (politicians at the time should have put the brakes on home ownership instead of trying to get reelected). We are not trying to push home prices back to where they were before the crisis (since the price level is at the source of the crisis); we are trying to slowy put people's balance sheet in order (will take a decade) and avoid further abrupt economic shocks.