Going Into OT

When a football game is tied up at the end of regulation, the rule book outlines procedures resolving the situation by going into overtime.  Nobody wants to see things remain all knotted up and regardless of which team ultimately wins, resolution is the desired result.  Naturally there will be a loser, but ultimately that is the whole point of playing in OT.

Our economy has been tied up for awhile.  No one like the way housing has played out.  Ditto for unemployment.  Some feel penalties should be assessed against banks.  The opposing teams in Congress are definitely at loggerheads and the crowd wants to see something get resolved.  The Federal Reserve has been forced by default to assume the position of referee despite not really having a definitive rule book to consult.  So the game is going into OT, which doesn’t stand for overtime, but something named (at least in the press) Operation Twist.

What is Operation Twist?  In general it is an attempt by the Fed to bring longer-term interest rates down by buying such paper as Treasury bonds with maturities out seven, ten, even twenty years or longer, using proceeds from the sale or maturation of shorter-term bond, primarily those coming due in three years or less.  In turn it is hoped this will keep other rates low, rates for mortgages or commercial loans for instance, encouraging more borrowing which will then fuel a new economic boom.

Will it work?  Economists argue that a similar program was initiated back in the 1960s with little effect.  It seems to us here at Atlas that interest margins at U.S. banks will probably get squeezed a bit more if they can’t get higher long-term returns.  The Fed should know that already and must have considered the fragile state of those institutions before embarking on this course.  It will also put a real crimp in returns that pension plans and insurance company annuities can expect, aggravating some plans that are already underfunded.  But how about you; does OT make you want to buy a house or does it make you wonder how much longer your savings will survive when they earn virtually nothing at the bank?  A lack of public confidence in our current direction is considered one of the problems the economy currently faces.  We fail to see how squeezing returns a growing army of retirees can expect will turn that around.