Operation Twist, and our housing market: Pretzel Logic


Pretzel

Image via Wikipedia

 Here we go again.. 

Operation Twist has been launched by the Federal Reserve.  The idea is the Federal Reserve will buy long-term T-Bills, $400 billion worth.  The theory is it will lower the long-term interest rates.  This is also supposed to give banks cash balances.  Sounds good, except it has been tried in the past and did not work.

The term “Operation Twist” comes from the early 1960s, when the Fed tried something similar. (It’s named for the Chubby Checker hit.) It may have had a small effect — one recent studyfound that it drove down the interest rate on Treasury bonds by 0.15 percentage points. But the effect on mortgage rates was smaller, and the effect on corporate borrowing costs was tiny.

Read Article from NPR

One problem, okay one of many problems…  Mortgage Interest Rates are already at record low levels.  This is not the problem with the housing market.  The housing market is suffering because of the high unemployment and underemployment.  You may argue: it is because of the foreclosures!  Well, sure – why are people going into foreclosure??  Maybe because of job loss and under-employment??

 I don’t care if mortgage rates are 2% or 4%, if  you are unemployed you still won’t buy a house!  

Let’s phrase this differently, someone will buy a house at 12% interest rate if they have a job before someone buys a house at 3% interest rate that has no job.

How did the market respond to this news?  Take a look at the Dow Jones chart for the day and see if you can identify what time the news was announced:

Welcome to the Lost Decade

I do hope this works, but I am not optimistic on this strategy at all…

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