How the Fed is Making a Mess of our Economy

The Fed decided last week to extend Operation Twist, a program that involves buying up short term government bonds in order to purchase long term government debt.  This is not only a waste of time and money, but it also represents yet another attempt on the part of the government to manipulate the free market and pick winners and losers in the process.

In theory, Operation Twist is supposed to stimulate the economy by lowering consumer interest rates on long term purchases such as home and car loans.  In order to do this, the Fed sells short term debt and uses that capital to purchase longer term mortgage and government backed securities.  This will both increase the price of longer term bonds and lower the yield, or the rate of return.  A lower yield rate means lower interest rates for consumers on longer term loans, such as those involving house and car payments.  The Fed hopes that by catering to consumers and making it easier for them to make long term purchases in the short run, the economy will improve in the long term.  Unfortunately, this is wishful thinking at its very finest.

Dallas Federal Reserve President Richard Fisher told Fox Business in an interview this week,   “My suspicion is Operation Twist is having a very minor effect and I have argued that the benefits do not exceed the costs; the costs exceed the benefits.” Moreover, interest rates have been at a record low since December 2008, when the Fed first started buying long and short term bonds in an unconventional process called quantitative easing.  Quantitative easing is essentially a fancy name for a process that is otherwise known simply as “printing money.”  The Fed then uses this money to buy up long and short term bonds in an attempt to lower interest rates even more.  Going back to Fisher’s point, this is what essentially makes this policy just as meaningless as it is counterproductive; moreover, the Fed is attempting to drive down interest rates that are already extremely low to begin with when, in reality, lending restrictions make it next to impossible for potential consumers to even take advantage of this policy in the first place.  In other words, without cooperation from Congress and banks to ease lending restrictions, the effect of this Fed policy is largely mute.

Another huge problem with Operation Twist has everything to do with its ambiguous title which actually sounds more like a retro 1980s board game than a federal monetary procedure.  That is, it refers to the “twisting” effect on the yield curve, or the shifting interest rates of long and short term bonds.  While buying out longer term rates will inevitably lower the interest rates on these types of payments, selling shorter term bonds also makes these types of investments more expensive.  This could affect the pricing of short-term business loans which alternatively affect hiring decisions at small businesses. This is just another example of the government acting through bureaucrats to pick winners and losers.  Whereas the housing and vehicle industries may profit as a result of this, small businesses may suffer the true price.

Not only is Operation Twist nearly useless, but it also counterproductive and dangerous in its inevitable failure to improve the economy.  This will most likely force another round of QE, effectively “kicking the can down the road.”  Quantitative easing may appear to work in the very short term; however, in the long term, it will most likely only lead to inflation with the potential to destroy our entire economy. This is yet another reason why we MUST audit the Fed.

Cosponsorship update: As of July 4th of this year, H.R.459 had 263 cosponsors, or 60 percent of House Members.

Floor timing update: We expect the House to vote on H.R.459 sometime between July 23 and August 3, 2012.

TAKE ACTION: Urge your Senators and Representatives today to join their colleagues in cosponsoring the Audit the Fed bills H.R.459 and S.202. Help us get to 290 House cosponsors in the House and 67 cosponsors in the Senate, to send a strong message to the President: It’s time to Audit the Fed!