Wednesday, September 21, 2011

A Morally Hazardous Day

Today, the Federal Reserve announced a $400 billion program called Operation Twist, which is designed to decrease interest rates at the longer end of the yield curve without printing money. This monetary action was $100 billion more than expected. Nevertheless, the stock market promptly dropped more than 2%. Like a toddler demanding a pint of ice cream, the market had wanted the Fed to announce another quantitative easing program--i.e., bond purchases that would add hundreds of billions to the money supply. In other words, the market wanted money (see And, just like a toddler denied a pint of ice cream, the market threw a hissy fit when it didn't get what it wanted. The original Twist was better. See

Don't worry. The market sold off today because the news didn't match the rumors that speculators bought on. Tomorrow is another day, with new rumors to fuel speculation.

The big question mark hangs over Europe. EU leaders are killing entire forests to put out more press releases emphasizing how much they care about the sovereign crisis, and how they won't try to get their lives back until it's fixed. If you want talk therapy, you've got it. But things in the EU, already weird, are getting truly bizarre. Today, the European Central Bank announced that it would reduce the amount of exchange listed bank debt it would take as collateral, while lifting limits on non-listed bank obligations offered as collateral. In other words, easily-valued assets are less useful as collateral, while stuff (that's the polite term) with no readily ascertainable market value has become acceptable as collateral. One detects the aroma of ink used to print money. After all, if you can't readily determine the value of collateral, you can't easily determine how much you can safely lend. When the ECB lends more than collateral may be worth, skeptics would suggest that it's printing money. Then again, maybe it doesn't care; or at least it doesn't want others who care to have an easy time looking over its shoulder.

It's doubtful Operation Twist will have much impact on the economy. And the ECB's futzing around with collateral almost approaches alchemy. That takes us back to the Middle Ages. During the time of the Black Death, when the world seemed to be falling apart, some people believed that if they banded together and danced from village to village, their "jollity" would defeat the plague. There is no scientific record as to the effectiveness of dance on this illness. But when nothing else seems to be working, why not twist and shout?

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