The rigger's log

Back in September 2011, the Federal Reserve announced a new policy initiative. As part of their attempt to resuscitate the economy (with no help from Congress’ fiscal tightening), they launched Operation Twist.

The Fed wanted to “twist” the curve of interest rates for various maturities of Treasury debt. Specifically, it wanted to force down the yield for long T-bonds, by buying those while selling short-term bonds as a balance. The goal was to encourage more long-term investing, by lowering long-term interest rates. As they hoped, Treasury rates were pushed down, and commercial long-term rates fell too.

You can see in the chart that a year ago, long term rates (for example, ’10y’ means 10-year maturity) had been driven down to between two and three percent.

Without actually announcing a plan, a bit over a month ago they allowed the longer rates to start rising again. From the 5-year maturity onward, they’ve risen more than half a percent.

Partly, that was done by the market itself. The investment community is now seriously considering the timing of the Fed’s inevitable increases to the Federal Funds overnight lending rate (FF on this chart), and the effect that will have on longer bonds. The market did the work of bidding rates up, but the Fed did nothing to stop it with new Twist purchases.

From the Fed’s perspective, all is as it should be. The economy is recovering adequately, Operation Twist is over, and the Fed is letting the long-maturity part of the yield curve return to its natural market-set levels. This is the beginning of the beginning of the Fed’s removal of its extraordinary monetary policies for supporting the economy.

Hi,

I posted and emailed the May 2013 Capital Drain newsletter. If you’re on the direct mailing list for that, you should be receiving it now.

If you’re not yet on the list, but would like to be, send me an email.
If you just want to read the letter, follow this link: May 2013 CapDrain.

I hope you’ll enjoy it. You can sample from the past several years of newsletters on this page.

-R

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Megabanks are not our friends.

That probably sounds obvious to you. I know that there are no megabanks who would invite me over for dinner, nor I them. Same for you?

In economic theory, though, there’s an argument that megabanks, the largest dozen or so banks in the world, are somehow filling a macroeconomic niche, so that our whole economic ecosystem works more efficiently. It’s an Invisible Hand argument: the megabanks pursue their own interests, but we all benefit from the consequences.

That theory has been taking a thumping from many sides. Most of the arguments have been sociopolitical rather than econo-financial, but here’s a good presentation of the economic arguments against the megabanks, in the form of a rebuttal to a recent attempt at a rigorous defense of the super-sized. It’s a bit technical in spots, but I think anyone who keeps up with current events will be able to follow along. For the technically inclined, there are some good links for further reading.

Simon Johnson writes in the New York Times’ Economix blog:

The Case for Megabanks Fails

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There’s a joke among economists, “We can see that this works in practice, but we’re not sure it works in theory.”

Unlike in real sciences, economists hold on to theories long after the actual data has swept them aside.

A blogger offers a good example of a theory and the data that falsifies it.

Quote:

There’s a good reason why almost all major economies abandoned free market economics. It’s that such economies didn’t and couldn’t avoid mass unemployment.

Read the entire article here:

 UNEMPLOYMENT & THE FREE MARKET