Ben Kenobi Launches Operation Twist: Will it Save the Republic?

By Stephanie Kelton

The Federal Open Market Committee (FOMC) just announced that it’s going to begin another round of asset buying, this time offsetting its purchases of longer-dated securities with sales of shorter term holdings. The goal? Flatten the yield curve. The hope? Engineer a recovery by helping homeowners refinance at lower rates and making broader financial conditions more attractive to would-be-borrowers.  

At this point, it looks like Obi-Ben Kenobi realizes that Congress isn’t going to lend a hand with the recovery. Indeed, as a scholar of the Great Depression, he’s probably deeply concerned by the “Go Big” 
mantra that is now drawing support from people like Alice Rivlin, former Vice Chair of the Federal Reserve.  And so it is Ben, and Ben alone, who must fight to prevent the double-dip. It is as if he’s responding to the public’s desperate cry, “Help me Obi-Ben Kenobi. You’re my only hope.” Will it work?  Not a chance, but that conversation is taking place over at Pragmatic Capitalism, so drop in and find out why.  Below is a description, taken from the full FRB press release, that describes just what the Fed is going to do.  May the force be with us all.

“To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Committee will maintain its existing policy of rolling over maturing Treasury securities at auction.”

7 responses to “Ben Kenobi Launches Operation Twist: Will it Save the Republic?

  1. Lenders operate on a spread between what they have to pay for money, and what they can lend it out for. How is reducing that spread going to encourage them to make more loans?

  2. Not sure how the pancaked yield curve is going to help banks? I guess it's now up to the EU to get their house in order so as to help restore a sense of confidence on our domestic front. Fat chance that will happen.With the feckless politicians demagoguing all over the Beltway, I've got a terrible feeling the next 14 months are going to be just awful here in the states. Hope I'm wrong.

  3. LOL. I'm naively holding out hope that the 2012 election will somehow stop the bleeding. You listening Ralph Nader?

  4. My 5-yr old son just asked me — and I'm serious, word-for-word — "can I post a blog with Bill Black with a green and blue lights aber and Barack Obama with two red light sabers?" Anyone who knows how to distinguish the force from the dark side knows what that means.I'll be adding his blog to the NEP blog roll after he finishes typing.

  5. So this is how I expect it to shake down….Ben runs across a young economist, by chance, one day while walking out in the park, the young economist happens to be the son of the worst Republican of all time (insert whomever you choose) but the young economist does not know this. During their introductory talk, young economist realizes that government may be instituting policy that would lead adoptive parents to enter bankruptcy, lose their house and become unemployed.Ben and the young economist return to the young economists house to find that the local sheriff has removed parents from the home, and their employer has sent them all pink slips. They meet some uneducated moderates, one of them is very hairy, they get a ride to Washington (on credit of coarse), and Ben confronts evil Republican overlord (insert your choice), gets in public debacle and losses his job over it. Now young economist fully joins ranks of anti-austerity policy rebels, and at the last minute of a heated public debate, young economist exposes Republican agenda for what it is and destroys Tea Party secret campaign weapon!!!

  6. Anonymous — if you're not blogging for us, you should be!