From Marketwatch.com (bold emphasis mine)
The nation's weak labor market was "a national crisis" that required attention from the White House and Congress, Federal Reserve Chairman Ben Bernanke said Wednesday. "We've had close to 10% unemployment now for a number of years, and of the people who are unemployed, about 45% have been unemployed for six months or more. This is unheard of," Bernanke said in a question-and-answer session following a speech in Cleveland. He called for policies "that could help them find work, train for work and retain their skills." Bernanke also urged policy makers to consider "strong housing policies to help the housing market recover." Better housing policies would "clearly be very useful," and would allow the low mortgage rates stemming from easy Fed policy to have more effect and help the economy recover.
Ben Bernanke, as well as the US government, has been applying ‘strong policies’ even prior to this crisis which has essentially led to the current bubble bust conditions… through cheap credit, tax policies which skewed financing towards borrowing than equity, administrative policies via mortgage subsidies which encouraged speculation and bank capital regulation which rewarded securitization that spawned the shadow banking system
Additionally, the policy response to the current crisis has been for the Fed to buy $600 billion worth of mortgage securities in QE 1.0
The current Operation Twist has also partly been designed for this. Yet this innovative measure, will likely be another futile exercise, and at worst, with possible unintended effects.
Bloomberg’s chart of the day commentary,
The Federal Reserve’s effort to reduce borrowing costs is unlikely to help the housing market enough to bolster the economy, according to Andrew Milligan, Standard Life Investments Ltd.’s head of global strategy.
“Mortgage refinancing remains little different” from last year even though the Fed’s plan to buy longer-term debt and sell shorter-term securities sent rates on home loans to record lows, Milligan wrote two days ago in a report.
The CHART OF THE DAY compares the Mortgage Bankers Association Refinancing Index with the average rate on 30-year refinancings, as compiled by Bankrate.com. The index’s reading for the week ended Sept. 16 was about the same as last November, while the 30-year rate dropped to 4.10 percent this month, the lowest in eight years of data and down from last year’s 4.75 percent average.
Fannie Mae and Freddie Mac are doing too little to aid refinancings, according to Edinburgh-based Milligan. The mortgage-finance firms have operated under U.S. conservatorship for the past three years after loan defaults pushed them close to collapse. The lack of support is among “structural impediments to the housing market” that will limit the effectiveness of the Fed’s so-called Operation Twist, he wrote.
It’s not really about doing “too little” but rather after having done soooo sooo much with hardly any impact means that these policies have not met their targets (policy failure) and are not neutral too.
On the contrary, these policies may have lasting negative consequences.
As Professor Steve Horwitz observes (bold emphasis)
if we look at the loanable funds market, we might get a handle on the situation. If this program is designed to increase investment by driving down rates, it's not going to work if that demand for loanable funds curve is highly inelastic. Borrowers are just not going respond to the lower interest rate if they have major concerns about the future…
In other words, we shouldn't be twisting yield curves to increase the quantity of loanable funds demanded, we should be adopting a better policy regime so that the demand for loanable funds increases.
And ‘concerns about the future’ are likely to have been exactly prompted by these political interventions that has only heightened “regime uncertainty” or as per Professor Robert Higgs,
widespread inability to form confident expectations about future private property rights in all of their dimensions
Bottom line: All the measures thrown have only forestalled the necessary adjustments in the marketplace. The market’s function of discoordination and coordination has been obstructed by increasing concerns over future private property rights via various interventionist policies.
And this also reveals how the law of economics (or price controls) can’t be rescinded by political policies. And measures designed to mitigate effects of prior bubble policies, represent as band aid solutions that only defers on the day reckoning. Notice that when political intervention has been withheld, exactly the same set of problems resurfaces.
However for Mr. Bernanke, who seem to have been hobbled by mounting political opposition, appear to be using the markets as leverage. He would have you beg for more short term patches ["a national crisis" that required attention from the White House and Congress] before giving it to you. Fear signifies as the best tool to justify political intervention.
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