Savers once again left to 'twist' in the wind

Yields sign with arrow pointing up and dollar sign

We’ve had ZIRP and we’ve had TALF. We’ve had QE1 and QE2.

Now we have Operation Twist.

Actually, the Fed calls its rehash of a monetary policy strategy, adopted back in 1961 during the Kennedy administration, the Maturity Extension Program.

It’s yet another effort to drive down interest rates and keep them down until aging savers like me -- who actually danced to the Chubby Checker classic -- are long dead and buried.

The program will involve the substitution, on the Fed’s bloated balance sheet, of $400 billion of Treasury securities maturing in 6 to 30 years for $400 billion of Treasuries maturing in 3 years or less.

This substitution, to occur between now and June 2012, is intended to "put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative."

And this is a good thing because … ?

Because, says the Fed, it "will provide additional stimulus to support the economic recovery" -- although "the effect is difficult to estimate precisely."

I suppose if keeping stock and commodities prices inflated counts as stimulating economic recovery, the plan has a chance of succeeding. (So far, however, these prices have plummeted, partly in response to the Fed’s own negative outlook.)

But, if recovery means an improvement in housing markets, business expansion or greater consumer spending, it will fail.

And -- as a student of history -- Bernanke knows it.

In a paper co-authored in 2004, he acknowledged that the first Operation Twist "is widely viewed today as having been a failure."

But, I guess, he just can’t help stomping down interest rates whenever he gets a chance.

If the Fed wants us to return to 1961, I suggest we go all the way back.

Earlier this year, the San Francisco Fed published a study of the original Operation Twist (entitled "Let’s Twist Again") containing some interesting data.

It shows that, on April 7, 1961 (about two months after Operation Twist was announced), the yields on 3-month, 1-year, 5-year and 10-year Treasuries were 2.282%, 2.808%, 3.435% and 3.73%, respectively.

And, although I haven’t kept my old passbook (the copier industry was still in its infancy), I think I was then earning between 3 and 4% on my student saver account at First National Bank of Lake Forest, Ill.

Those rates were astronomical compared to what’s available today -- without the new Twist!
Golden oldies, I’d say.

How about it, Ben? Take us back to Camelot.

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