The Goofy Name
Just the fact that it's an "operation" is disturbing. Ever since the crisis began, officials have deployed the military metaphor since their only solution to social problems is to start blowing things up. We have a war on poverty, a war on drugs, a war on terrorism, and (since 2008) we've had an undeclared war on the recession.The military metaphor is crystal clear whenever analysts discuss the Fed's options to "help" the economy, since interest rates are already at zero. Typically these analysts reassure their readers or viewers by declaring, "The Fed still has plenty of ammunition." Don't worry kids, we won't end Operation Enduring Inflation until every last unemployed person is eliminated.
Central Planning
It continues to amaze me that Austrian economists are apparently the only ones who think market prices mean something. In general, when we're just discussing the generic "interest rate," Austrians explain that it helps coordinate production and consumption activities over time. When the central bank gives us an artificially low interest rate, things get messed up — consumers don't save as much and producers begin too many long-term projects. This is the unsustainable boom.One might have hoped that the bankruptcy of the rival mainstream view — in which the interest rate doesn't "do" anything except act as a brake on "total spending" — would be apparent once the Fed pushed the federal-funds rate down to basically zero. But no, when an intervention is pushed to its logical extreme and doesn't work, the "solution" is to intervene somewhere else. If pushing down the short-term interest rate doesn't seem to be fixing the economy, let's push down long-term rates and see what happens. Shucks, we might as well try! It would be a shame to not use this shiny printing press.
So for my non-Austrian economics colleagues, I have to ask, Don't you think the term spread on interest rates does something? In normal times, if one economy has a spread of 5 percentage points between 1-year and 30-year bonds, while another economy has a spread of 8 points, do you think that difference is meaningless?
If not, then how can you support Operation Twist? Won't the Fed be screwing up, whatever role you think the term spread serves in a market economy? For example, if you think the term spread relates to people's "liquidity preference" and their aversion to being stuck with long-term bonds should interest rates move up, then does the Fed's mere creation of dollars really address that underlying preference?
Speaking of interest-rate risk, another interesting twist to the current operation is that the Fed will now be even more vulnerable to insolvency. If price inflation begins rising and the Fed eventually has no choice but to allow interest rates on Treasuries of all maturities to shift up, the Fed will take a bigger hit on its portfolio now that it is more heavily skewed to longer-dated bonds. Naturally I'm not staying up at night, worrying about the Fed going bankrupt in an accounting sense, but I would have thought other "responsible" analysts would ponder these things.
