Wednesday, September 21, 2011

Operation Twist as Further Evidence that Ben Bernanke is a Mad Scientist Playing with The Economy

Please make sure you are sitting down before you read this. The facts I am about to state are off the wall, and further proof of my contention that Fed chairman Ben Bernanke is a mad scientist playing with the United States economy. (See: The Case for Ben Bernanke as a Mad Scientist)

Operation Twist, which was announced today by the Federal Reserve, is a remix of a similar operation conducted in the early 1960's by the Federal Reserve.  The Federal Reserve of San Francisco explained what the original Operation Twist was all about:
John F. Kennedy was elected president in November 1960 and inaugurated on January 20, 1961. The U.S. economy had been in recession for several months, so the incoming Administration and the Federal Reserve wanted to lower interest rates to stimulate the weak economy...

The Kennedy Administration’s proposed solution to this dilemma was to try to lower longer-term interest rates while keeping short-term interest rates unchanged—an initiative now known as “Operation Twist” in homage to the dance craze then sweeping the nation. The idea was that business investment and housing demand were primarily determined by longer-term interest rates, while cross-currency arbitrage was primarily determined by short-term interest rate differentials across countries. Policymakers reasoned that, if longer-term interest rates could be lowered without affecting short-term yields, the weak U.S. economy could be stimulated...
Sound familiar? Here's part of today's Fed statement:
To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative.

So how did the original Operation Twist turn out? Three Federal Reserve economists in 2004 completed a study which, in part, examined the 1960's Operation Twist. Their conclusion (My bold):

A second well-known historical episode involving the attempted manipulation of the term structure was so-called Operation Twist.  Launched in early 1961 by the incoming Kennedy Administration, Operation Twist was intended to raise short-term rates (thereby promoting capital inflows and supporting the dollar) while lowering, or at least not raising, long-term rates. (Modigliani and Sutch 1966).... The two main actions of Operation Twist were the use of Federal Reserve open market operations and Treasury debt management operations.. Operation Twist is widely viewed today as having been a failure, largely due to classic work by  Modigliani and Sutch.
The economists go on to state that the size of Operation Twist was relatively small, possibly too small to determine if such an operation could be successful if carried out at on a larger scale. That experiment is now being conducted on the economy of the United States with the $400 billion Operation Twist announced today. How big was the original Operation Twist? $8.8 billion.

The three Fed economists, who seem to concur that the first Operation Twist was a failure, are sure going to get an experiment on the United States economy on a much grander scale to see if this time it will work different than it did the first time. So who are these three lucky Fed economists who are now going to be able to witness Operation Twist on a grander scale? Vincent R. Reinhart, Brian P. Sack and BEN S. BERNANKE.

Yes, the current Fed chairman is the man who wrote that the first Operation Twist was a failure and that it was possibly so  because it wasn't large enough---and he is now testing the US economy to see if a greater size Operation Twist will work differently! Since I have long contended that Bernanke is something of a mad scientist, using the United States economy as his personal laboratory, this move by Bernanke has just exploded my Bernanke mad scientist detector. I repeat, for all practical purpose, he is running a test on the entire economy to determine, if as suggested in his 2004  paper, Operation Twist might work out differently if run on a grander scale.

Think about that the next time you hear news about the volatility in the economy.


  1. You really can't make this stuff up. I'm speechless yet somehow not surprised.

    "Oh it would have worked if we just did more of it" Isn't that the typical Keynesian excuse?

    Thanks for bringing this to light Bob. I'm looking forward to not hearing the MSM raise this issue when discussing monetary policy.

  2. Vincent R. Reinhart, Brian P. Sack and BEN S. BERNANKE

    The Rothchilds own these bums. Money power by them is being exerted upon us for our destruction. See our country disintegrating before our eyes by the power they have over all of us.

    President Wilson said,"...
    A great industrial nation is controlled by it’s system of credit. Our system of credit is concentrated in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the world—no longer a government of free opinion, no longer a government by conviction and vote of the majority, but a government by the opinion and duress of small groups of dominant men...."

    See the list controlled below in the link.

    Only four countries have no central bank, Iran; North Korea; Sudan; Cuba; and Libya.

  3. Also don't forget this. This is all too freaky.

  4. Failed? just try again only make it more expensive and you'll get different results.

  5. In outlining his plan, did Banana Ben just describe his experiment or did he tip his hand that he believes things are AFU'd so bad that a 'hail Mary' pass like this couldn't hurt?

  6. As a percentage of outstanding government debt, the 1961 Twist was actually a larger operation, representing 3% of the 289 billion in outstanding debt at the time. This 400 billion represents about 2.8% of the current outstanding debt, so one could assume it would have very similar effects.

  7. I don't get it. As I understand Operation Twist, it is credit easing (toying with yields but without printing more money) not quantitative easing. No one, not even pro-monetary-stimulus advocates like Scott Sumner, think it will work.

    My conclusion: operation twist is not monetary policy, it is debt and fiscal deficit management. The objective is to keep t-bill rates low indefinitely and screw the economy.

  8. Robert,

    Ok I am a little confused. In the statement by the San Fran Fed...they mentioned that Operation Twist part 1 was to: "The Kennedy Administration’s proposed solution to this dilemma was to try to lower longer-term interest rates while keeping short-term interest rates unchanged"


    The study states that : "Operation Twist was intended to raise short-term rates (thereby promoting capital inflows and supporting the dollar) while lowering, or at least not raising, long-term rates. (Modigliani and Sutch 1966)"

    So which is it? Are they trying to lower long-term rates while keeping short term rates unchanged? Or are they trying to raise short term rates??

  9. I think Ben has just one priority and that is to enrich his friends and cronies.

  10. We'd be better off with Chubby Checker as Fed chairman.

  11. @Chris K

    Operation Twist is about the Fed selling short-term securities and buying long-term. Thus, pushing up short rates and pushing down long rates.

    That said, it's a goofy program where rates may react differently depending on countervailing trends, and it's clear from what you quote that inside the Fed they don't even know what is going on.

  12. not entirely off topic, any thoughts on this piece by tyler durden on central banks manipulating the gold market?

  13. These scumbags are just causing price inflation with their gimme-gimme money printing schemes that are destroying people's will to be productive...Are Keynesians sooo stupid and infantile that they don't recognize this? Or are they just stealing to lower the value of the government debts (defaulting)?

  14. The Fed knows exactly what's going on...The investing classes are figuring out that the entire global monetary system is a counterfeiting scam.

    This is what the central bankers fear most...Masses of People realizing that they are slaves to these terrorists.