Jun 21, 2012

Twisty Ben

Chairman Benjamin Bernanke and all his chubby little Fed elves say they love the twist so much they're going to keep on doing it all year long.

Judging from the hundreds of explanations on the internet, if you don't quite understand Operation Twist you have  lot of company. Let me give a shot at explaining, if you please.

The Fed says it will boost the economy by buying back its shorter-term bonds. It will pay for them with "money" it will get for selling longer term bonds.  That way it will owe less money soon and more later. It all works out to make its balance sheet look just the same even though it can immediately float more greenbacks (still backed by nothing).

It will help to think of the Fed as just another bank. It lends money and borrows* money. It can be flush or damned near broke, or even secretly bankrupt, a banking-sector Enron.

It might also help to personalize the process. Think of the Fed as yourself, a naughty little brat who ...

--wrote a bunch of post-dated checks which were worthless when you signed them and will be worthless on the imminent due date

--decided to solve your problem by redeeming the soon-to-be bouncing paper with fresh rubber checks, dated further out.

It works just fine if the guys holding your trash are dumb enough to go along with the gag.

Except that if the government catches you, you will go to jail, not because you hung ugly paper but because you are not an official government ugly paper hanger.

Clear now?


*The Fed borrowing function is enhanced by its mastery of the printing press, and if that makes you question our historic reverence for Herr Gutenberg, I understand.

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