The Fed has leaked news that while they really won't do QE3, they will do a $750 Billion "twist" program to sell short maturities & buy long term bonds. This, in the jargon, is known as a "sterilized" QE in which the attempt is made to make the stimuli appear to be neutral with no new additional cash printing & they want us to think there is no real risk to the Fed's balance sheet. After all, this is just another bank function in which the bank borrows short term and lends long. Under normal circumstances this might be the case. The problem here is that we have a bank with nearly $3 Trillion of risky assets now planning to shift another $ 750 Billion of those assets to the riskiest end of the interest rate curve. We know from every country that lost currency credibility - Greece being the most recent - that they also lose the ability to control interest rates. With 2% or less equity securing that $3 Trillion of risk, a loss of lender confidence might just put us where Greece finds itself - with a one year government rate above 1000%. We also know that last summer's Twist was a flop and this one will be no better.
"Twist again like we did last summer, twist again like we did last year..." Lyric from "Twist Again" by Chubby Checker