Everybody Do The Twist! More Bank Runs, and Buffet's Father a Rothbardian

As expected, Bernanke and his cohorts (there were 3 dissenters) have launched "Operation Twist":

To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative.

I was watching CNBC live as the announcement unfolded and let me tell you, the talking heads were having a field day.  The market literally pricing in the "Twist" beforehand wasn't a consideration, they finally got something right unlike that pesky housing bubble.  Zerohedge has the best summary of the plan (like always):

• FED SEES `SIGNIFICANT DOWNSIDE RISKS' TO ECONOMIC OUTLOOK
• FED TO BUY TREASURIES WITH 6-YEAR TO 30-YEAR REMAINING MATURITY
  
• FED LEAVES FEDERAL FUNDS RATE TARGET AT ZERO TO 0.25 PERCENT
  
• FED SAYS PROGRAM PUTS `DOWNWARD PRESSURE' ON LONG-TERM RATES
  
• FED TO SELL TREASURIES WITH 3-YEAR OR LESS REMAINING MATURITY
  
• PLOSSER, FISHER, KOCHERLAKOTA DISSENT FROM FOMC DECISION
  
• FED REPEATS `EXCEPTIONALLY LOW' RATES THROUGH AT LEAST MID-2013
  
• FED TO BUY $400B OF LONG-TERM DEBT, SELL $400B SHORT-TERM DEBT
  
• FED EXTENDS AVERAGE MATURITIES OF SECURITIES HOLDINGS
  
• FED TO REINVEST MATURING HOUSING ASSETS IN HOUSING DEBT
• FED SAYS INFLATION `APPEARS TO HAVE MODERATED'
• FED SEES `CONTINUING WEAKNESS' IN LABOR MARKET
• FED PURCHASES TO BE DISTRIBUTED ACROSS FIVE SECTORS
• FED SAYS 32% OF DEBT PURCHASES MATURE FROM 6- TO 8-YEARS
• FED SAYS 32% OF DEBT PURCHASES MATURE FROM 8- TO 10-YEARS
• FED SAYS 4% OF DEBT PURCHASES MATURE FROM 10- TO 20-YEARS

In other words: $400 billion in POMOs over the next 8 months or so, with the monthly at about $50 billion. Also MBS repurchases for a token amount. No LSAP as most expected, and no IOER rate cut. Goldman once again about half of what it expected.

Here were the immediate consequences *spoiler* it was a slight success:

While "Operation Twist" is expected to not have any substantial effect (Bernanke is trying to goose those long term oriented animal spirits, there is no monetary base increase), Robert Wenzel brings up some interesting history regarding "Operation Twist":

John F. Kennedy was elected president in November 1960 and inaugurated on January 20, 1961. The U.S. economy had been in recession for several months, so the incoming Administration and the Federal Reserve wanted to lower interest rates to stimulate the weak economy...

The Kennedy Administration’s proposed solution to this dilemma was to try to lower longer-term interest rates while keeping short-term interest rates unchanged—an initiative now known as “Operation Twist” in homage to the dance craze then sweeping the nation. The idea was that business investment and housing demand were primarily determined by longer-term interest rates, while cross-currency arbitrage was primarily determined by short-term interest rate differentials across countries. Policymakers reasoned that, if longer-term interest rates could be lowered without affecting short-term yields, the weak U.S. economy could be stimulated...

Here is the 2004 report from 3 Fed economists on the success of "Operation Twist":

A second well-known historical episode involving the attempted manipulation of the term structure was so-called Operation Twist.  Launched in early 1961 by the incoming Kennedy Administration, Operation Twist was intended to raise short-term rates (thereby promoting capital inflows and supporting the dollar) while lowering, or at least not raising, long-term rates. (Modigliani and Sutch 1966).... The two main actions of Operation Twist were the use of Federal Reserve open market operations and Treasury debt management operations.. Operation Twist is widely viewed today as having been a failure, largely due to classic work by  Modigliani and Sutch.

So who were those three economists that came to this conclusion?

Vincent R. Reinhart, Brian P. Sack and BEN S. BERNANKE.

Wenzel's conclusion:

That experiment is now being conducted on the economy of the United States with the $400 billion Operation Twist announced today. How big was the original Operation Twist? $8.8 billion.

Yes, the current Fed chairman is the man who wrote that the first Operation Twist was a failure and that it was possibly so  because it wasn't large enough---and he is now testing the US economy to see if a greater size Operation Twist will work differently!

Hope everyone likes their cages because in the eyes of Bernanke we are all experimental rats and "Operation Twist" is another effort to get us to run faster in our exercise wheels.  One of my former bosses told me once that he thought it was worrisome that one man can have so much power over an economy.  He doesn't even know the half of it.

Surprisingly, looks like some of the GOP leaders decided to grow a spine last night and sent an open letter to Bernanake:

Dear Chairman Bernanke,

It is our understanding that the Board Members of the Federal Reserve will meet later this week to consider additional monetary stimulus proposals. We write to express our reservations about any such measures. Respectfully, we submit that the board should resist further extraordinary intervention in the U.S. economy, particularly without a clear articulation of the goals of such a policy, direction for success, ample data proving a case for economic action and quantifiable benefits to the American people.

It is not clear that the recent round of quantitative easing undertaken by the Federal Reserve has facilitated economic growth or reduced the unemployment rate. To the contrary, there has been significant concern expressed by Federal Reserve Board Members, academics, business leaders, Members of Congress and the public. Although the goal of quantitative easing was, in part, to stabilize the price level against deflationary fears, the Federal Reserve’s actions have likely led to more fluctuations and uncertainty in our already weak economy.

We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy. Such steps may erode the already weakened U.S. dollar or promote more borrowing by overleveraged consumers. To date, we have seen no evidence that further monetary stimulus will create jobs or provide a sustainable path towards economic recovery.

Ultimately, the American economy is driven by the confidence of consumers and investors and the innovations of its workers. The American people have reason to be skeptical of the Federal Reserve vastly increasing its role in the economy if measurable outcomes cannot be demonstrated.

We respectfully request that a copy of this letter be shared with each Member of the Board.

Sincerely,

Sen. Mitch McConnell, Rep. John Boehner, Sen. Jon Kyl, Rep. Eric Cantor

This looks more like populist vote grabbing than actual monetary knowledge to me, but it's a nice effort.  And of course the left comes out and says the GOP are against any further stimulus today, as if the Fed printing money, giving it to their buddies on Wall Street, and inflationary expectations driving up the price of food is really going to help the poor.  I thought the left hated supply side economics anyway?

Perhaps the strangest news of the day when it comes to the Fed was this:

Alan Greenspan went to the Federal Reserve headquarters Tuesday as the Federal Open Market Committee began a two-day meeting on monetary policy.

He was caught on camera arriving at the Fed.

But officials claim that he wasn't there to advise on monetary policy.

He was there to get a haircut. And not a metaphorical reduction in the principal value of a bond. An actual haircut.

The Fed has an in-house barbershop.

Are you sh!tting me?  What kind of haircut is Greenspan getting? A comb over?  Either Greenspan is senile (a big possibility) or there is something fishy going on.

Yesterday, I highlighted some of the problems with Euro banking zone.  Both Chris Martenson and Gary North have great articles on this issue today.  Martenson, with the help of Charles Hugh Smith, does a good job of bringing up the fascist nature of the Euro zone and central banking in general (I highlighted the Austrian parts):

The key feature of the Neoliberal model borrowed from Classical Capitalism is that the risks of enterprise and the investing of capital are (supposedly) transferred from the Central State to the newly liberalized private sector. But this turns out to be a charade played out for public-relations/perception management purposes: when the expansion of credit and financialization ends (as it must) in the tears of asset bubbles popping and massive losses, then the Central State absorbs the losses which were supposedly private.
My definition of Neoliberal Capitalism differs significantly from the conventional view: markets are opened specifically to benefit the Central State and global corporations, and risk is masked by financialization and then ultimately passed onto the taxpayers. In this view, the essence of Neoliberal Capitalism is: profits are privatized but losses are socialized, i.e. passed on to the taxpayers via bailouts, sweetheart loans, State guarantees, the monetization of private losses as newly issued public debt, etc.
The Neoliberal model is superficially a win-win for both global corporations and Central States, as the Central State benefits from the explosion of tax revenues created by financialization and the expansion of credit, and from the schwag showered on political apparatchiks by the global corporations.
From a Neoliberal perspective, the union consolidated power in a Central State proxy (The E.U.) and provided large State-approved cartels and quasi-monopolies access to new markets..

While this is on point for the most part, the rest of the article comes off as a jab against free trade.  Not sure if this was Martenson's intention, but he really nails the privatizing gains, socializing losses aspect of our current financial system.  This can only last for so long though as demonstrative of Europe.  Politicians get addicted to easy money and make too many promises they can't keep before cashing out.  When things start crumbling, people begin trying to get out.  Yesterday, I talked a bit about the bank runs going on in Europe right now.  Chalk up another one to the list, via Bloomberg:

Lloyd’s of London, concerned European governments may be unable to support lenders in a worsening debt crisis, has pulled deposits in some peripheral economies as the European Central Bank provided dollars to one euro-area institution.
“There are a lot of banks who, because of the uncertainty around Europe, the market has stopped using to place deposits with,” Luke Savage, finance director of the world’s oldest insurance market, said today in a phone interview. “If you’re worried the government itself might be at risk, then you’re certainly worried the banks could be taken down with them.”

Expect more reports like this in the future.  I am reading Barry Ritholtz's fantastic "Bailout Nation" right now and this was the kind of behavior going on in the lead up to Bear Sterns and Lehman Brothers.

In lieu of Warren Buffet's recent call for the U.S. to raise taxes on the rich, Philip Klein of The Examiner has an interesting article out on Buffet's father.  Turns out he was more Rothbardian than limousine liberal:

Warren Buffett may be a committed liberal Democrat, but his father, Howard Buffett, was a four-term Republican member of Congress (1943-49 and 51-53), a John Bircher who fought FDR and warned that the expansion of government was eroding individual liberty.
“Today’s situation is the result of an alarming and devious governmental intervention in the economic affairs of the nation for objectives not contemplated by the men who wrote the Constitution,” Buffett lamented in a lecture excerpted in the December 1956 issue of the libertarian journal The Freeman. “Historically, in America the producer was protected by government in the enjoyment of the fruits of his labors. That protection of his property explains the glorious material progress already recounted.”

Buffett also wrote an article opposing the draft in a 1962 issue of the New Individualist, his piece squeezed in between contributions from legendary free market economist Milton Friedman and libertarian intellectual Murray Rothbard. (Rothbard had high praise for Buffett).

I love his scathing criticism of the Marshall Plan and foreign intervention in general:

He attacked the Truman doctrine on the floor of Congress, declaring, "Even if it were desirable, America is not strong enough to police the world by military force. If that attempt is made, the blessings of liberty will be replaced by coercion and tyranny at home. Our Christian ideals cannot be exported to other lands by dollars and guns."
In a 1948 article promoting the gold standard (PDF), Buffett explained his opposition to the Marshall Plan, making what today would be considered a “crony capitalism” critique.
“There are businesses that are being enriched by national defense spending and foreign handouts,” said Buffett. “These firms, because of the money they can spend on propaganda, may be the most dangerous of all. If the Marshall Plan meant $100 million worth of profitable business for your firm, wouldn't you Invest a few thousands or so to successfully propagandize for the Marshall Plan? And if you were a foreign government, getting billions, perhaps you could persuade your prospective suppliers here to lend a hand in putting that deal through Congress.”

Buffet's father must roll in his grave when he hears the types of things his son advocates for now.  While it's always great to see Rothbard mentioned in the mainstream news, Jonah Goldberg, whether he meant to or not, paid awesome tribute to him in the Los Angeles Times recently:

And now let us recall the "Fable of the Shoes."

In his 1973 "Libertarian Manifesto," the late Murray Rothbard argued that the biggest obstacle in the road out of serfdom was "status quo bias." In society, we're accustomed to rapid change. "New products, new life styles, new ideas are often embraced eagerly." Not so with government. When it comes to police or firefighting or sanitation, government must do those things because that's what government has (allegedly) always done.

"So identified has the State become in the public mind with the provision of these services," Rothbard laments, "that an attack on State financing appears to many people as an attack on the service itself." The libertarian who wants to get the government out of a certain business is "treated in the same way as he would be if the government had, for various reasons, been supplying shoes as a tax financed monopoly from time immemorial."

If everyone had always gotten their shoes from the government, writes Rothbard, the proponent of shoe privatization would be greeted as a kind of lunatic. "How could you?" defenders of the status quo would squeal. "You are opposed to the public, and to poor people, wearing shoes! And who would supply shoes … if the government got out of the business? Tell us that! Be constructive! It's easy to be negative and smart-alecky about government; but tell us who would supply shoes? Which people? How many shoe stores would be available in each city and town? … What material would they use? … Suppose a poor person didn't have the money to buy a pair?"

Goldberg goes on to defend Ron Paul against the accusations of heartlessness for his remarks about how the government shouldn't force others to pay for someone's health care who can't afford it.  This is the type of column that needs more mainstream publication.  As more and more people become dissatisfied with the status quo, eye opening examples such as the one Rothbard presented can have a substantial impact.

With tomorrow's GOP debate fast approaching, I just wanted to point out this recent Tony Bennet interview with Howard Stern.  Remember Ron Paul getting booed  last debate for correctly pointing out that the Taliban targets us because we have been screwing around in the Middle East for over half a century?  Turns out Bennet agrees:

“To start a war in Iraq was a tremendous, tremendous mistake internationally,” he said.
Stern then asked Bennett about how America should deal with terrorists, specifically those responsible for the 2001 attack on the World Trade Center.
“But who are the terrorists? Are we the terrorists or are they the terrorists? Two wrongs don’t make a right,” Bennett said.
In a soft-spoken voice, the singer disagreed with Stern’s premise that 9/11 terrorists’ actions led to U.S. military involvement in Iraq and Afghanistan.
“They flew the plane in, but we caused it,” Bennett responded. “Because we were bombing them and they told us to stop.”
Following seconds of silence, Stern said that his guest was “making some good points.”

Nicely put.  Thanks to Lew Rockwell, I am looking forward to Bennet's version of "Lady is a Tramp" with Lady Gaga.

Update- Apparently R.E.M. broke up today.  Very sad but here is a really good performance of my favorite song by them, it just so happens to be their debut on national television: