The Twist: Bernanke Learns to Dance
It was another in a line of volatile weeks with the markets ending quite a bit lower in heavy volatility and trading. The Federal Open Market Committee (FOMC) had its much anticipated two-day meeting and unfortunately failed to deliver. Analysts and investors were hoping for a magical elixir that would make everything better and instead found they had drunk syrup of ipecac. Issues in Greece continue to simmer while the White House’s solution to the weak U.S. economy is to raise taxes on the wealthy. We’ve had better weeks.
The FOMC released the minutes from its meeting earlier this week and unfortunately did not propose further quantitative easing. Instead what they proposed was to take the proceeds from maturing securities (already on their balance sheet) and reinvest them in longer term securities. This move has been done once before in 1961 and was coined “The Twist.” Some quipped that perhaps Bernanke should have called it the “twist and shout” instead. The idea is to sell short-term maturities and invest the proceeds on the longer end of the curve. However, this will not expand the size of their balance sheet and will not stimulate the economy in the same manner that the last two rounds of quantitative easing did. Instead the aim is to push long term interest rates even lower in order to reduce mortgage rates and provide a disincentive to banks holding on to their capital. Regardless how you slice it, this plan fell far short of what the markets were looking for and helped precipitate the market sell off this week.
In other news, the issues in Greece, and more broadly Europe, continue to fester. The opposition to bailing out Greece is growing at the same time spending cuts and tax increases (in Greece) are meeting strong resistance. The last round of austerity measures were rather tame compared to the ones proposed last week. In addition, Italy was hit with a credit downgrade by S&P and responded by saying they were just fine and didn’t have a debt problem. Germany and, to a lesser degree, France appear to be the only adults in the room at the moment. With potentially $400 billion in bank bailouts on the line, and considerably more if things get worse, we hope the European Central Bank (ECB) and International Monetary Fund (IMF) can navigate through this mess before it spirals out of control.
On the subject of spending cuts and tax increases, this week President Obama announced his proposal to reduce spending by roughly $3 trillion over the next ten years. He modeled his plan after one proposed by billionaire Warren Buffet who has often lamented how little the rich pay in taxes. The plan would include raising the top nominal tax bracket for those earning over $1 million a year. In fairness, this tax increase would be part of a larger plan which would reduce Medicare and Medicaid benefits (while leaving Social Security untouched). Whether the debt reduction super committee incorporates President Obama’s ideas is yet to be seen. They still have a couple of months before things get interesting again.
This has been a particularly busy week with market volatility and trading. Unfortunately, because of this I don’t have a story of the week to share with you. I’ll look for an especially good one for next week.
September 23, 2011: Market Update
Follow Us!
