ECON3564 - CER - Operation Twist 2011


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ECON3564 - CER - Operation Twist 2011

  1. 1. Asif MalikEcon3564 – Sec002Dileonardo – TR 9:30-10:50amSeptember 20, 2011 Operation Twist 2011 The Federal Reserve has decided to put a little “twist” on the 1960s plan know as thetwist. The basic concept of this plan is to manipulate interest rates on short-term and long-termsecurities that the Federal Reserve buys. By doing so, the federal bank is able to hold a strongerinvestment portfolio. In other words, it will sell $400 billion of its shorter-term securities to buylonger-term holdings, its latest effort to boost a weak economy. In June, the Federal Reserve completed a $600 billion bond-buying program that wouldhave kept rates down; however, stocks fell immediately after the announcement. The yield on the10-year Treasury note tumbled, and its price rose. Since most investors were expecting theFederal Reserve would expand its holdings of long-term securities, along with fears of anotherrecession caused investors to buy U.S. Treasuries which in return dropped the treasury yields. According to the Seattle-Times, “the new Fed stimulus plan came amid opposition fromRepublican leaders and deepening economic concerns globally.” The Fed claims that this newpolicy will help decrease the unemployment rate, which currently stuck at 9%. Even this newplan is being criticized by many analysts who doubt the plan will do a whole lot to speed up jobgrowth. Some economists state that interest rates aren’t the problem, but job-security is becausethese rates are at all-time lows. Stagnant incomes and “depressed home values are dampeningborrowing and spending.” The Fed also stated that it would reinvest in more mortgage-backed securities, a moveintended to help depressed housing market. This action has also been made to entice businesses MALIK-1
  2. 2. who are reluctant to hire and expand in the face of “weak-demand” to expand their businesses,invest, and hire workers. The Fed will sell short-term treasuries and used the proceeds to buy governmentsecurities with longer maturities in an attempt to flatten 10-year and 30-year rates that are linkedto key parts of the economy like mortgage loans. The plan includes employer payroll tax cutsand incentives for hiring new employees; it was still expected to be challenged by Republicansbecause of the inclusion of stimulus spending on such things as an infrastructure bank andmodernization of schools. The burden of making the decision falls on the congress, putting themunder-fire. In my perspective, anything is better than nothing nowadays. If the Fed was not tryingsomething then they would be criticized even more, but even though they still face criticism ofimplementing such a drastic stimulus plan – at least they’re doing something. Businesses,especially small- to medium-sized businesses drive the economy. With our current economicstatus, small businesses are closing all over the nation because they are faced with financialburdens. Their expenses and liabilities far-exceed their revenue. In order to cope with such harsheconomical times, these businesses are laying off their workers. Whether these businesses are“mom and pop” store or mid-size employing a few hundred; they’re the driving forces in oureconomy. Without them hiring individuals or workers in certain socio-economic brackets,they’re causing negative fluctuations in the way people in the lower brackets spend money. Honestly, if I was the Fed, I would give money to the people. The United States has over254 million citizens and by giving, depending on their economic-bracket, $1000 per household;you’re bound to have the spenders spend irrationally and eventually have that money work itsway back up to the Fed. And all of that can be done at almost half the cost of the current and MALIK-2
  3. 3. previous stimulus plans combined. People are the driving force when it comes to spending in theeconomy. You give them money; at least 90% of them will spend it on some useless product.This will ensure businesses they are making money and eventually hire when the need arises. With that said, it is wiser for the Fed to invest in people than to invest in sectors orbusinesses alone. This will only cause the economic-situation to get worse and worse. Eventhough selling short-term securities for long-term securities is a great idea. My questions is –how will this help return the economy to its pre-9/11 state? My only concern is, how will thishelp businesses suffering right now? I recommend the Fed help current businesses facingfinancial instability. If the Fed can’t even help businesses who need help then how will they helpnew businesses? This new stimulus plan sounds absurd and just a stunt pulled off by the Reserveto keep people thinking that they are trying something. Even though what they are trying wasplanned and implemented in the 1960s. MALIK-3
  4. 4. REFERENCESFederal Reserve announces more stimuli despite growing criticism: Federal Reserve Statement: Reserve adds ‘twist’ to stimulus effort: in Congress’s Hands as Fed Runs Out of Bullets Meeting Takes Center Stage with Debt Crisis in The Wings, BofA and Wells Fargo Debt Is Cut by Moodys to the 1930s? Try the 1960s. MALIK-4