Fed Chairman Ben Bernanke announced on Wednesday that he would shuffle up the Fed's portfolio, selling $400 billion worth of shorter-term securities and buying longer-term ones to boost the economy. The latest move is aimed at lowering long-term interest rates and prompting more investment.

The move, dubbed "Operation Twist," is reminiscent of a similar maneuver with the same name undertaken by the Fed in 1960s to twist down long-term interest rates. Economists and other industry analysts shared mixed reactions to the news with DailyFinance, even as stocks plunged Wednesday afternoon after the announcement.



Mixed Reaction From Industry

Robert Rainish, a professor of finance and economics at the University of New Haven, says the "Twist" will have little impact on consumers because it does little to change the current restrictive lending environment.

"Financial institutions and regulators have tightened credit requirements to minimize possible losses rather than managing their lending portfolios for optimal profitability," he said. "Optimal profitability allows for some defaults, but the number of profitable loans can absorb those losses. Restrictive underwriting criteria reduces profitability by limiting the number of loans even with smaller losses to be absorbed. The net effect is lower economic growth."

Alan McKnight, director of global investment strategy at investment management firm Balentine, says that despite lower short-term interest rates over the last two years, the nation hasn't seen a commensurate improvement in lending, borrowing or job creation. That has left the Fed with very few options. "It is very much a "throw the kitchen sink at the problem," he said.

Will Operation Twist Encourage You to Spend More Money?
Yes320 (10.0%)
No2893 (90.0%)

The "Twist" was sexier when it was still a teenage dance move, says Terry Connelly, dean emeritus of Golden Gate University. However, he says that it could hold down longer-term interest rates and lower rates on consumer loans, like mortgages.

"Lowering the interest rate banks pay to keep their excess reserves on deposit with the Fed will also help at the margins to push them to lend, finally," he said. But he cautions, that "the step should be staged to prevent a huge wash over of deposits into money market funds and risking their valuation."

The economy depends on spending and any stimulus to get the consumer spending is a net positive, said Joseph Fichera, a senior managing director and CEO at Wall Street firm Saber Partners. "Every step in the right direction is a step in the right direction."

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savemycountry911

There seems to be hanky-panky going on at the FED. They can't account for billlions.

September 24 2011 at 9:43 PM Report abuse rate up rate down Reply
don

GOOD NEWS OIL IS DROPPING TO AROUND $80 BARRELL. BAD NEWS CHECK THE STOCK MARKET
AND YOUR POOR 401K'S. IN SHORT GAS WILL COME DOWN BUT YOU WILL BE BROKE WHEN IT DOES.

September 22 2011 at 1:08 PM Report abuse rate up rate down Reply
khdawson

To me, it appears that our Federal Reserve are not accountable to anyone for their actions. I am sure that this is not a new revelation but it is clear to me that there has to be oversight over what the Federal Reserve does, I believe that it is called Risk Assessment and it appears that this is not happening. There has to be a Standard of Performance that Bernanke is held to.

September 22 2011 at 1:02 PM Report abuse +1 rate up rate down Reply
hustonlaw

In order the FED to be effective, lenders have to actually respond to what it does, or at least understand what path is being taken by the FED. So far, the lenders have merely stuck the money made via FED policy in their pockets instead of lending to businesses. The net benefit to the economy is, therefore, $0. The net benefit to lenders' employees is loss of their jobs. The net benefit to lenders' CEOs is astronomical.

September 22 2011 at 12:45 PM Report abuse rate up rate down Reply
1 reply to hustonlaw's comment
warrenbent

Let's sayyour business was to borrow from me and use my money to make a higher return by lending to another at a higher rate. And I agree to loan you money at an extrememly low interest rate. So you borrow cheaply from me. But instead of loaning to another at a higher rate, you instead do nothing with the borrowed funds beyond "stick the money in your pocket".

You may go bankrupt more slowly than if the lending rate was higher, but you'll still eventually go bankrupt.

What has happened today is that banks have most assuredly NOT stopped lending. However, lending standards are far more conservative. So much of the money banks are investing is being lent to the government. And of course, the government is borrowing far more than they have in the past to finance their obscene spending.

In other words, lending is taking place, and borrowers are spending the funds they've borrowed. It's just that today the borrowers who are doing this spending are government goons, and not citizens.

In a nutshell, that's the problem.

September 22 2011 at 1:06 PM Report abuse -2 rate up rate down Reply
1 reply to warrenbent's comment
warrenbent

Nomorenomorebarry, I'd advise you to pick up an economics books, but it would be about as productive as suggesting you learn to speak Navajo.

Given your lack of alternatives, best you just keep bleating ignoarnce, I spose.

September 22 2011 at 3:53 PM Report abuse -1 rate up rate down
tsquare43t

Once upon a time there was a country where you could work hard, save for retirement, and spend your golden years modestly enjoying the fruits of your labor ,until you died in peace.

I do not recognize that country any longer. This is whole thing is becoming a twisted, downward spiral with no end in sight. The ones with the biggest boats are trying to circle the drain as long as they can by taking away the remaining "fuel" from the smaller boats, barely giving them a second glance as they are sucked down into the vortex.

So now we hear they want to start pre-taxing our 401K contributions, and then tax'em again when they come out during retirement!!!!!!! Come on folks when does this end. Pension plans disappear so you set up a plan with certain rules and encourage people to save for their own retirement. Then decide because you've been unable to manage the National budget that "oh look there's a bunch of money that hasn't been taxed yet, lets go after that" Every day it's another shock to the financial system that knocks the value out of all that remains of our modest savings. No wonder no one wants to invest anymore, there's no one to trust, and nothing to believe in.

September 22 2011 at 12:14 PM Report abuse +4 rate up rate down Reply
1 reply to tsquare43t's comment
warrenbent

Freedom has been under attack form both right wing statists and left wing sttists for decades.

The small and relatively inconsequential central government created by our forefathers did much for citizens, but nothing at all for the political class, who were specifically designed to be unimportant parts of citizens lives.

Of course, political goons don't like being unimportant. And the way for them to increase their importance is by growing the size and scope of government far beyond its intended role. This can only happen at the expense of citizens freedom.

September 22 2011 at 12:40 PM Report abuse -2 rate up rate down Reply
warrenbent

The one saving grace to "the twist" is that it simply doesn't do much.

In other words, while it's not going to solve any problems, it's also unlikely to create any new ones (ie, beyond those the Fed is already creating).

It's mostly window dressing, allowing the Fed to claim they "did something".

September 22 2011 at 12:06 PM Report abuse -3 rate up rate down Reply
lddjkuyk

The problem Bernanke has is that he has mis-defined the problem. He believes the current problem is another great depression. Then, beginning is 1929, dolars were scare and very valuable. Comoodites and land crashed in price. No one could get loans as the money supply was too scarce. Today, we have the opposite problem. Too much moeny supply from the fed and the debt from governmen adds to the problemt. This destroys the value of the dollar, Thus, consumers pay too mch and cannot consume more. Raw materials are too high to busienss. Therefore, they don't want to borrow. The Feds expansion policies are contracting the economy. Their herky-jerky actions have business froxzen. There fore, no job hiring, Rasie rates a little and the dollar rallies. Prices drop and business and consumer benefit. Then, the Fed needs to back off and let things work. Since 1913, the Fed has caused more problems then they have solved/

September 22 2011 at 12:03 PM Report abuse +2 rate up rate down Reply
Fred

Every time the Government takes away a dollar from someone who has earned it by providing goods or services and gives that dollar away to someone who has not earned it by providing goods or services, the value of that dollar deminishes. Unfortunately the current Adninistration in Washington either doesn't understand how currency retains value or simply doesn't care.

Fred in Colorado Springs

September 22 2011 at 11:11 AM Report abuse +4 rate up rate down Reply
1 reply to Fred's comment
warrenbent

I'm not sure this diminshes the value of the dollar per se (that is done by printing more dollars), but it does diminsh the value of incentives, which is every bit as insidious, if not moreso.

Let's say you are the parent of two teenage children.

One of your children is extremely industruous. This one has a part-time job during the school year and works every odd job they can find during summers. The child enjoys having money to buy video games, go out on dates, purchase concert tickets, or whatever else a teen might enjoy.

Your other child doesn't dislike dates or video games or concert tickets, but definately dislikes work. As a result, sleeping till noon during the summer is a lot more valuable to this child than going to work.

Let's say in your role as "government" of these two children, you decide it's not "fair" that one child gets all the dates and vidoe games and concerts, while the other is left with nothing. So you institute a "tax" that confiscates half of the industruous child's earnings to redistribute (minus an administrative fee, of course) to the other child.

Should we expect your new policy to provide more or less spending?

And more importantly, more or less productivity?

September 22 2011 at 11:27 AM Report abuse -1 rate up rate down Reply
2 replies to warrenbent's comment
warrenbent

Actually, neither are Republicans or Democrats (one redeeming characteristic they share). Instead, they're just "citizens" who place differing values on different courses of action.

There's nothing inherently "wrong" with either child. Left to their own devices, neither is violating the individual liberty of the other, or otherwise causing harm to another. Sure, each might experience different outcomes due to their behavior, but so long as each extends the same freedom to the other that they desire to excercise themselves, neither seems to care, nor should they.

The "harm" is caused when the "government" intervenes. This is invariably the case regardless of what label is worn by the sheepleherder.

September 22 2011 at 12:03 PM Report abuse -2 rate up rate down
warrenbent

Nomorenomorebarry, your flock of sheeple at the core are no different thant he flock on the other side of the fence.

You both bleat on command.

You're both led around by a sheepleherder who wants to increase his power at your expense.

You're both too stupid to recognize you are the prey.

September 22 2011 at 12:28 PM Report abuse -2 rate up rate down
ken herman

Set the interest rates very low to buy a home and expect the banks to rush to lend money when they make very little on the loan and have a ton of new regulations to complicate things so they'll hold onto the money in a lot of cases and wait for the rates to go up, mean while the government just spends more and more money trying to solve the problem and can't figure out why it doesn't go away.

September 22 2011 at 11:03 AM Report abuse +3 rate up rate down Reply
DOCTOR JOHN

Get rid of Bernanke or at least sew his mouth shut. Every time he says anything, every man, woman, child in our country takes another financial battering. Geithner, too!!
What is even worse--Obama thinks they're doing a great job!! More proof that he must go too!!

September 22 2011 at 11:02 AM Report abuse +2 rate up rate down Reply