Following much anticipation, Fed Chairman Bernanke delivered his remarks after the recent FOMC meeting on Wednesday. In brief, there will be no QE3 for the time being; rather, we can expect more Operation Twist.
The market response was mixed. Initially, stocks climbed following the announcement, with the Dow surging over 100 points. However, it quickly reversed course, losing 100 points before a slight recovery, ultimately closing just 13 points lower than its opening value.
The next day, the Dow experienced a significant drop at the opening bell and failed to recover, closing down 250 points.
Jim Cramer attributed this downturn to concerns about commodities. “Today, investors panicked over the possibility of insufficient demand for everything derived from commodities, not just the commodities themselves,” he stated.
Cramer may have a point, or he may not. At the Economic Prism, we do not profess to fully understand the forces driving the stock market. Nevertheless, the disappointment over the absence of QE3 likely dampened traders’ spirits.
Operation Twist undoubtedly involves substantial market intervention. While it does not expand the money supply like quantitative easing, it manipulates credit markets much like a blacksmith shapes wrought iron. Essentially, through Operation Twist, the Fed aims to adjust credit markets to better fit its goals.
California Stagnation
In practice, the Fed engages in a simple exchange with the Treasury, trading one check for another. As part of this latest incarnation of Operation Twist, the Fed plans to swap $267 billion in short-term treasuries for long-term ones by the end of 2012.
The purpose of this strategy is to lower long-term interest rates, thereby encouraging more borrowing and spending. The hope is to revitalize the economy until it can sustain itself independently. Increased spending, according to the Fed, equates to greater growth and job creation.
While this plan appears sound, the past four years of easing and twisting have yielded little progress for the economy, aside from an increase of approximately $6 trillion in national debt. Currently, the unemployment rate stands at 8.2 percent, with only 69,000 jobs added last month—the lowest figure in a year.
In California, the unemployment rate is even higher at 10.8 percent, with no immediate signs of improvement.
According to the recently released UCLA Anderson Forecast, California won’t see unemployment dip into single digits until 2013, and it won’t reach 8.3 percent until 2014. In Los Angeles County, the unemployment rate is not expected to fall below 8 percent until late 2015 or early 2016.
“The basic theme is that California is roughly six months behind the U.S., and LA is likely another three months behind California,” remarked David Shulman, a UCLA economist and co-author of the Anderson Forecast.
It is clear that the journey to recovery will be a slow and arduous process, regardless of the Fed’s influence.
Money Games
Honestly, despite the Fed’s reassurances, it appears they cannot significantly aid the economy, as evidenced by the past four years. However, they can continue to bail out major banks and corporations with their financial maneuvers.
In a more transparent world, the overextended banks and failing corporations would have been allowed to collapse. Their financial managers and executives would be held accountable for their errors, facing severe consequences that would provide invaluable lessons. For instance, banks would learn not to create and trade toxic assets.
The average worker is similarly obstructed by the Fed’s financial schemes. Rather than acquiring the skills and knowledge genuinely demanded by the economy, many remain in positions supported by government intervention, becoming reliant on its stimulus.
During the housing boom, fueled by Greenspan’s low-interest policies, construction jobs flourished. Now, however, as demand has waned, many skilled workers are left without opportunities.
“California has a substantial number of workers in construction and manufacturing, but those jobs aren’t returning,” stated UCLA senior economist Dr. Jerry Nickelsburg. “While these workers have skills and a desire to work, they lack the skills currently in demand.”
Who knows? Perhaps the Fed’s renewed focus will lead to another construction boom, resulting in plentiful job opportunities.
More likely, after the initial excitement surrounding the absence of QE3 subsides, the Fed’s financial strategies will merely offer a temporary boost to the stock market.
Sincerely,
MN Gordon
for Economic Prism