The Fed studies the Kama Sutra
Oh goody, now the fed is reaching into the past to find a new way to fuck with us. They realized Americans are getting a little tired of being fucked in the missionary position and so now that idiot Bernanke is introducing the "twist". The geniuses that make up the federal reserve are going to sell short term treasuries and purchase long term treasuries (to the tune of $400 billion). The theory is that this move will lower long term interest rates while keeping sort term rates low as well. Most likely, it will work to some extent and long term rates will fall a little. But is that desirable?
Who benefits? That idiot is saying it will lead to lower mortgage rates so more people can refinance their homes and it will increase demand in the housing market. I think this is extremely doubtful. Mortgage rates are already at extreme lows, if you wanted to refinance or purchase a new home you would have by now. The interest rate isn't what is preventing you from doing so. There might be a handful of people who are in a situation where the rates will get low enough to justify paying the financing fees but hardly enough to make a difference. Most people who have not refinanced or purchased a house either can't because they have income problems, or don't want to. When housing prices are at an all time low and interest rates are at all time lows, the housing market is absolutely a buyers market. People are not buying for other reasons. Lowering the interest rate a little isn't going to make any more of a difference than a rain drop in the ocean.
Large banks will benefit because small banks are going to be put under extreme pressure. Banks borrow money short and lend long making a profit from the difference in interest rates. Flattening the curve and making long term rates lower will decrease the profits made from lending. Large banks that have diversified income streams will fare better while small banks will have problems making up for that lost income. No doubt the larger banks are salivating at the opportunity to purchase small banks when they run low on cash reserves. This will lead to even further constriction of the banking community especially since small banks are already reeling from the regulation of the Frank-Dodd Act and the sub-prime housing fiasco. Those of us who hate using mega-banks are going to find our options even more limited.
Another aspect of this that has been overlooked is life insurance companies. Life insurance companies invest in long term bonds to secure their long term promises. Their products generally offer a guaranteed payout regardless of interest rates. They have already been struggling with low interest rates and even lower interest rates will make meeting their obligations harder. You can expect that products like annuities will offer even lower rates of return which will really suck if you were planning on retiring any time soon.
The corporate and municipal bond markets should see more demand as treasuries become virtually worthless and the interest rates you receive will most likely be below the inflation rate- meaning that if you invest $1000 in a long term bond your money will have less than $1000 worth of purchasing power when it matures. You will actually lose money when inflation is factored in. Investors will look to alternatives that can provide similar security as long term treasuries but also provide a better return. Increased demand for corporate and municipal bonds should in turn lower the rates for those. That means it should become cheaper for municipalities and corporations to borrow money.
For the overall economy I don't see a lot of benefit and the move reeks of pure desperation. It isn't going to do a thing to encourage new investment in the economy, create jobs or solve any of the core problems we currently have. It will cause a bunch of shuffling money around on Wall Street and some people will make money while others lose money. A few more small banks will probably fail but they have been failing all over the place since 2009 and people either haven't noticed or don't care. The largest danger I see is if life insurance companies start going belly up, but for the most part life insurance companies are financially sound. They will change their product offerings, lay off some people, pay lower commissions and be able to weather the low interest rates. If I am wrong on this, the results will be devastating.
I suspect the real result of the "twist" will be a fizzle. Nothing dramatic is going to happen but inflation and unemployment will persist. Those with cash are going to continue to hang on to it and new investment will remain limited. Our GDP growth will remain anemic and we will most likely find ourselves "back" into recession. I maintain we have been in recession all along and the "growth" that technically meant we were out of recession was not real and simply an illustration of the faulty way we calculate GDP.
We simply have to admit that low interest rates at all costs is not a good thing. Sooner or later you can't lower them more and sooner or later you have to pay back the debt you accrue. Our government is obsessed with borrowing and is trying to encourage us to continue borrowing to keep the economy "growing". But when you are growing your economy with borrowed money, it isn't really growing. The more we try to push the economy today by using debt the more we are harming our economy down the road when those obligations are due. It is time for us to allow interest rates to rise and reduce the incentive to borrow- increase the incentive to save and bring our debt (both public and private) down to manageable levels. Until we do so all these acrobatics the fed is going through will only produce temporary boosts to the economy at best.
I believe that it is better to tell the truth than a lie. I believe it is better to be free than to be a slave. And I believe it is better to know than to be ignorant.- H.L. Mencken