Seeking to boost housing and jumpstart the flagging economy, the Federal Reserve will push down mortgage rates a bit by purchasing $400 billion in long-term Treasury securities.
Operation Twist will likely raise short rates even as it lowers long rates, because the Fed will sell Treasuries with maturities of less than 3 years to purchase an equal amount of Treasuries with maturities from 6 to 30 years. Those purchases will be undertaken gradually and completed by the end June 2012
Lowering mortgage rates a bit may help, but it won’t have the salutary effect on home purchases needed to raise real estate prices and get consumers, whose balance sheets remain weak and have lost confidence in President Obama and Congress, to start spending again.
Americans are not suffering from an inability to make things but rather insufficient demand for what the U.S. economy can make.
Fiscal policy is played out—with a federal deficit of about $1.5 trillion additional, borrowing to increase government spending, or cutting in one place to spend in another as the President advocates, will not do much good.
The real problem is the annual $600 billion trade deficit—simply too many consumer dollars go abroad to purchase oil and Chinese consumer goods, thanks to lousy energy policies and China’s artificially undervalued currency, than return to purchase U.S. exports—American made goods and services. President Obama and his Treasury and Energy Secretaries, though well aware of these problems, simply won’t act.
Too little demand equals too few jobs, and not enough buyers to raise home prices by clearing out the excess supply on the market—both foreclosed houses offered by banks and others offered by owners with good reason to change residence.
Without higher housing prices, consumers are too indebted to spend as they did before the Great Recession, and unemployment languishes at 9 percent—and counting part-time workers who would prefer full-time jobs, discouraged adults who have quit looking, and underemployed recent graduates, the figure is closer to 20 percent.
Mortgage rates are already at historic lows—and pushing those down a bit more won’t change the logic of the housing market.
No job and no income, or lousy job and no raise, equals weak demand for houses, and flat or falling prices.
Ultimately, without action by the Treasury on exchange rates and the White House and Energy Department on oil and gas policy, the U.S. economy is not going to move.
Mr. Bernanke, at times, has mentioned the consequences of China’s currency for U.S. recovery—as has the President—but the rules of the game in Washington prohibit him from further commenting on exchange rates, because that is the domain of the Treasury.
No one in the Administration is permitted to comment on the fallacy of shutting down domestic oil and gas production to bank on electric cars, which won’t adequately dent oil import costs for the balance of this decade. Mr. Bernanke is not inclined to take what might be viewed as a partisan position on energy policy.
Further, inflation is heating up—more because China, flush with dollars from sales of yuan to keep its value low, is driving up global commodity prices, than anything the Fed has done. Nevertheless, Operation Twist will attract more Republican criticism that it is causing inflation to creep up.
Monetary policy can’t do much in the current environment, and to avoid damaging the credibility of the Fed, Mr. Bernanke would have done better by sitting on his hands.