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Wednesday, June 20, 2012
What is a "Twist"? It is basically trying to lower long-term rates and raise short-term rates. By manipulating the yield curve in this way, it supposedly helps the mortgage market.
But...the yield on the 10-year is at 1.65% and 30-year fixed rate mortgages are at 3.70%! How will artificially pushing rates to even lower levels make a difference?
At this point, Bernanke is exploiting the Pavlov's dog characteristic of the markets. Mention "Quantitative Easing" (or even just QE!) or "Operation Twist" and the stock market starts salivating.
Maybe I was the only one taking notes in Econ 101, but I learned there that manipulating prices leads to misallocation of resources. In the end, this ends badly - witness 2008.
Posted by Robert Wasilewski at 8:16 AM