The banks are still in trouble because of the sub-prime fiasco from which they never recovered. In 2008 the Federal Reserve injected liquidity to save the industry and economy; however, the core problem still lingers: underwater mortgages that have not been fully written down on the banks books. Until the mortgage crisis is resolved, the banking crisis will not be resolved.
The Fed’s “Operation Twist” is not going to help much because it will not increase consumer demand enough to encourage the private sector to increase jobs. The consumer is scared. When the consumer is scared he hoards cash. The same is true with business. When they are not sure about the future, they do not invest in new plant and equipment. They stay liquid until they are certain that any money invested will provide a reasonable return in the future. Otherwise, they hang on to cash waiting for a brighter day. It does not matter that interest rates and prices are low; there is fear that they may fall further or worse yet, a major economic calamity may occur. Some call this a liquidity trap.
This is the problem many republicans have with the government stepping up and investing in infrastructure, oil exploration, developing other sources of energy, investing in education, implementing high speed internet and other such projects that would increase our future productivity.
If you believe in our economic future, you know that the government not only needs, but should, invest in those things that will improve our competitiveness going forward and at the same time create jobs today. This in turn will increase the demand for consumer goods resulting in business to invest and hire to meet the demand. Obama’s stimulus is not enough.
One unanswered question concerning Operation Twist is what will the cost of untwisting the long term bonds when the recovery begins and the price of bonds fall? More:
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