Operation Twist, or Operation Shout?

September 22, 2011

Op Twist and demand

The Federal Reserve announced further efforts to stimulate the U.S. economy yesterday by reapportioning the maturity of the bonds in its $2.6 trillion portfolio. The operation has been dubbed “Operation Twist” because it twists the yield curve by raising short-term rates and lowering long-term rates. This is another attempt by the Fed to goose consumers into spending and borrowing at higher levels in the hopes that it will increase demand and get the national economic engine running at a higher speed. Reuters reports:

The Federal Reserve’s latest effort to push down long-term U.S. borrowing costs may not do much for the central bank’s main worry — persistently high unemployment that could leave lasting scars on the economy.

Economists are increasingly anxious that the 9.1 percent jobless rate in the United States could become entrenched, as the skills of those out of work atrophy and their connections to the job market wane, sidelining them and chipping away at the U.S. economy’s capacity to produce.

The idea behind the move, nicknamed by investors as “Operation Twist” after a similar policy in the 1960s, is to push down long-term borrowing costs to encourage mortgage refinancing and consumer and business borrowing.

Undoubtedly Operation Twist will lower rates that municipal bond issuers will pay to raise new money and it’s likely that we will see a rush to refinance their higher interest bonds. The action will also cause municipal bonds that are already outstanding to rise in value. But the biggest question I have is will Op Twist stimulate demand from consumers? When we get the next set of quarterly state sales tax data from the Rockefeller Institute, will we see that consumers have loosened their purse strings and that they feel more confident about the their economic future? That is the true goal of the Fed’s actions to jump-start the animal spirits, which are so vital to economic recovery. So maybe a better name for the program would have been “Operation Shout.”

MSRB wants financial advisor pay details

In July the Municipal Securities Rulemaking Board published a proposal to undertake a survey on the sources and income levels of municipal financial advisors. It was allegedly done to make some determinations on how to set the proper annual fee assessment for muni FAs. But I have a feeling it was equally geared to getting more detailed information about the levels and form of municipal advisor compensation. This would be very useful data for municipalities to have as they evaluate and engage FAs to assist them with bond and derivatives financings. I’m all for this effort as the added transparency could greatly benefit municipal issuers. From an excellent article in the Bond Buyer:

The survey asks firms to disclose their total gross income from muni advisory activities between Jan. 1, 2011, and Dec. 31, 2011, as well as gross income realized from advisory business by FAs, swap advisors, guaranteed investment contract brokers, placement agents, solicitors and third-party marketers.

It also asks for gross income from non-advisory business, as well as data about advisor compensation, including the total amounts received from fixed fees, hourly fees, retainers, and transaction-size-based fees. Firms would have to disclose the amount of any fee that was contingent on completing a transaction.

The survey also seeks data about average fee and transaction size for new-issue offerings, remarketings, private placements, swaps, derivatives, GIC brokerage, and third-party solicitations.

Bank of North Dakota

The magazine In These Times has an excellent article about Oregon considering the possibility of creating a “state public bank” modeled on the 92-year-old Bank of North Dakota, the nation’s only sovereign state bank. In North Dakota the state deposits tax dollars into the Bank, which in turn lends these deposits to community banks and others for commercial, agricultural and student loans. The Bank specifically targets local borrowers to strengthen and stabilize the local economy because most national banks don’t want to lend locally unless it’s to very large commercial borrowers. From In These Times:

The state bank’s participation would expand the amount of money community banks could loan to finance small business needs. For example, the Center for State Innovation, affiliated with the University of Wisconsin, calculates that an Oregon state bank would raise annual lending by about $1.3 billion, generate about 5,400 new jobs and cost the state nothing, while bringing in $69 million in earnings to the state general fund over a decade.

A state bank would also likely boost confidence in lending during uncertain times. For example, from 2007 to 2009, when the national credit crunch was tightest and bank lending dropped farther than it had in 70 years, BND increased business lending by 35 percent, helping to counter the downturn.

The presence of more state banks in the United States could have hugely positive effects: increased lending to local and small businesses, less concentrated banking, more resilient responses to economic crises, more jobs, more state revenue and more local control of the economy.

The Bank of North Dakota is also independent from the national financial system. From the Bank’s website:

In contrast to most commercial banks, Bank of North Dakota (BND) is not a member of the Federal Deposit Insurance Corporation (FDIC). North Dakota Century Code 6-09-10 provides that all BND deposits are guaranteed by the full faith and credit of the State of North Dakota.

The deposit base of BND is unique. Its primary deposit base is the State of North Dakota. All state funds and funds of state institutions are deposited with Bank of North Dakota, as required by law. Other deposits are accepted from any source, private citizens to the U.S. government.

There are many creative ways to strengthen local economies and jump start-growth. We’ve grown accustomed to relying on federal institutions to repair our economy but maybe part of the solution is local.

@Twitter Talk

Jim Roberts @nytjim Jim Roberts
In a few short years, this South Carolina county’s poverty rate doubled, to 24%. Steepest increase in US. nyti.ms/pCRsoV
mark bergen @mhbergen mark bergen
Philly Fed study: 85% of homeowners in foreclosure mediation stay in home bit.ly/nGIYXJ (NY Fed counted 80% reut.rs/qOsIvm)
Patrick McGee @PatrickMcGee_BB Patrick McGee
just woke up, stunned by Treasury rates: 30-year at 2.84%, 10-year at 1.76%. Equity futures off more than 2%

+ Good Links +

Rortybomb: A Topological Mapping of Explanations and Policy Solutions to our Weak Economy

House Speaker: Small Business Job Creators Bear the Brunt of President Obama’s Politically-Driven Tax Hikes

Truthout: Postal Service: Death by Bathtub Drowning

House Committee on Oversight: The Issa-Ross Plan to Save the Postal Service

PressEurop: Banks lend, communities pay

Bloomberg: Build America Bonds Closing Treasury Gap May Rally

Richmond Biz Sense: Broken bonds

PE Hub: MassPRIM Loses Second PE Manager

Wall Street Journal: Port Authority Plans WTC Bond Change

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