Bernanke: Let's do the Twist!
Chairman of Federal Reserve Board Ben Bernanke listens during the open session of a Financial Stability Oversight Council meeting at the Treasury Department in Washington, D.C.
Do the Twist on any dance floor in the nation, and unless you're John Travolta or Uma Thurman, you're gonna get laughed at. And yet there are a lot of people on Wall Street hoping that Ben Bernanke is going to get up in front of the whole world and do his little dance.
"Operation Twist" is a way the Federal Reserve could attempt to lower long term interest rates by buying certain government bonds. If long term rates fall, the reasoning goes, consumers will be more willing to borrow, in order to buy houses and cars and living room sets to stimulate the economy.
Satyajit Das thinks this is a half-baked idea. Das is author of Extreme Money: The Masters of the Universe and the Cult of Risk. He points out that mortgage interest rates are already extremely low, and Americans aren't borrowing or buying. The problem isn't that rates are too high, he says, it's that there are too many houses on the market and that too many Americans owe more on the homes they own than the home is worth. People are feeling poor and frightened, and it's tough to get poor, frightened people to spend money on anything other than the basics.
Das says all the Fed's actions get back to one goal: printing money to devalue the currency and create inflation that will wipe out some of the nations' debt over time. But Das says that the U.S. should watch out, that China, India and other trading partners resent the Fed's stimulus efforts and could retaliate on currency and trade.
It all gets back to what Das says are the fundamental problems of the world economy, too much debt and not enough demand (among consumers in the developed world). Das says the International Monetary Fund status report on the world economy today, in which it practically screams for the U.S. government to stimulate the economy, is another call for action in the face of low demand among the developed world's consumers. It's ironic, says Das, that the IMF - usually the prophets of austerity and lower government debt - is now out telling the world that the last thing we need is government austerity.
Ben Bernanke may announce some sort of stimulus tomorrow, but Das says it won't be enough. Even if Bernanke gets up and does the Twist, it won't overcome the fundamental problems facing the global economy: too many people owe too much money, and too few people are willing to spend what money they have.