September 22, 2011

Twisting The Money Away!


The banks are still in trouble because of the sub-prime fiasco from which they never recovered.  In 2008 the Federal Reserve injected liquidity to save the industry and economy; however, the core problem still lingers: underwater mortgages that have not been fully written down on the banks books. Until the mortgage crisis is resolved, the banking crisis will not be resolved.

The Fed's "Operation Twist" is not going to help much because it will not increase consumer demand enough to encourage the private sector to increase jobs. The consumer is scared. When the consumer is scared he hoards cash. The same is true with business. When they are not sure about the future, they do not invest in new plant and equipment. They stay liquid until they are certain that any money invested will provide a reasonable return in the future. Otherwise, they hang on to cash waiting for a brighter day. It does not matter that interest rates and prices are low; there is fear that they may fall further or worse yet, a major economic calamity may occur. Some call this a liquidity trap.

This is the problem many republicans have with the government stepping up and investing in infrastructure, oil exploration, developing other sources of energy, investing in education, implementing high speed internet and other such projects that would increase our future productivity.

If you believe in our economic future, you know that the government not only needs, but should, invest in those things that will improve our competitiveness going forward and at the same time create jobs today. This in turn will increase the demand for consumer goods resulting in business to invest and hire to meet the demand. Obama's stimulus is not enough.


One unanswered question concerning Operation Twist is what will the cost of untwisting the long term bonds when the recovery begins and the price of bonds fall? More:  http://bit.ly/ohvS83

2 comments:

  1. Also important here is the fact that Twist and other normal QE efforts depend on more people taking out private loans to put more money into circulation. Monetarists, especially, like to pretend that loans will be made simply because there are more funds available to lend or those funds are cheaper. But, again, due to not really recovering from the subprime fiasco there are few creditworthy people looking for loans. Businesses don't need it borrow to expand (they're more worried about contraction) and those people maintaining liquidity are worries that deflation will spike the price of the loans. The only market left is the unemployed and other not-creditworthy folks that are desperate for income to survive. Which means that we're looking at the makings of another bubble just as soon as the banks, desperate to make loans, figure out a new way to delude themselves into thinking that they've got the subprime risk under control. (Student loans for private institutions might be a possible path here. Or we might be back to a more classic round of market speculation on margin driven by the newest, fanciest investment software, that couldn't possibly make a bad call. (No more flash crashes, honest)

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  2. Actually, here's a good finger pointed at the current commodities market:

    http://www.nakedcapitalism.com/2011/09/randy-wray-the-biggest-bubble-of-all-time-%e2%80%93%c2%a0commodities-market-speculation.html

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