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Kimberly Amadeo

Fed's Operation Twist Won't Help Housing

By September 22, 2011

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The Federal Reserve announced a $400 billion program to boost the housing market and economic growth. "Operation Twist" is similar to QE2 -- but with a twist (two, really). Chairman Ben Bernanke said the Fed will reinvest the proceeds from maturing mortgage-backed securities (MBS) into more MBS. Under QE2, the Fed could reinvest them into U.S. Treasuries. Second, the Fed will sell off the short-term Treasury bills it holds and use the proceeds to buy long-term Treasury notes and bonds. This is the "twist."

The idea is to keep mortgage interest rates low. But, that won't help housing. The Fed keeps adding liquidity to the economy, because that's the only tool it has. Like the old saying goes, when you only have a hammer, everything looks like a nail.


The problem with the housing market is the same as the problem that created the 2008 financial crisis. It's lack of confidence. No matter how low interest rates are, buyers are afraid housing prices will continue to trend down. That's because of the 1.7 million housing units in the foreclosure pipeline. Until these discounted homes sell, investors will sit on the sidelines and wait. There needs to be a clear signal that housing prices will go up -- and continue to go up -- before investors return.

What It Means to You

Like  QE2, Operation Twist  keeps downward pressure on long-term interest rates and the value of the dollar. It also increases the money supply, which has increased core inflation to near the Fed's goal of 2%.

The Fed's action also depressed the stock market. The Dow dropped 391 points, joining other indices in a 3% decline.  That's because investors read the Fed's actions to mean that the economy is not getting better, and could possibly even get worse.  

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Photo: Federal Reserve Chairman Ben Bernanke (Credit: Getty Images)

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Comments

September 27, 2011 at 11:28 pm
(1) chan says:

The biggest problem of the US economy is the American people attitude and acting in haste and in arrogant.Unless this is changed the country is bound to suffer.

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