What is the “Bernanke Twist” and “Operation Twist”? What exactly does it do?
"So ""Operation Twist"" is actually a pretty simple concept. Here's the break down: The Fed sells short-term treasury bonds that it already holds on its books. Short-term treasury bonds refer to - bonds that mature in less than three years. Then: Uses that money to buy long term treasury bonds. Long-term treasury bonds refer to -  bonds that mature in six to 30 years The reason: The fed buys these longer-term treasuries to lower longer-term interest rates and encourage more borrowing and spending. Diving deeper into how it works: So the Fed can easily determine short-term rates by using the Federal funds rate this rate has a direct effect on the following: However this does not play a direct role in influencing the rate of long-term loans (what you might pay on a 30-year fixed mortgage). Instead, long-term rates are determined by investors who buy and sell bonds in the bond market, which changes daily. These bond yields fluctuate depending on the health of the economy and inflation. However, the Fed funds rate does play an indirect role in these rates. So now that we know a little more about what effects what rate, why does lower long-term rates in treasuries influence my 30yr fixed mortgage? Well when you are looking for a loan you are entering a market and competing against other people, by people I mean anyone looking for money (e.g: my grandmother, companies, or the US government). The bank that lends you money has to decide weather the deal you are offering them is better then another deal on the market. If the risk of lending to one person is the same as the risk of lending to another, the bank will make whichever loan yields the higher interest rate. The U.S. government is considered a very safe borrower, so much so that government bonds are considered almost “risk free”, but because of the lower risk the rate of return is lower. So now the bank has to factor in this risk and make its decision weather to lend you money, or the government. So, if the government were to go to the market and buy its own long-term bonds it is adding demand in the market causing the price of the bond to rise in effect lowering the interest rate (when price goes up, yield goes down). So when you go back and ask for a loan it has to re-evaluate and decide ""Is it worth giving this money to Joe McFreeBeer instead and collecting a higher yield?"" (After all, Joe McFreeBeer is a nice guy). Here's an example: Lets say the US has a rating of 10 out of 10 and its bonds pay a 2% yield. Now lets say for each lower mark in rating the bank will lend at a minimum of 1% higher and your rating is 8 of 10. So if you go to market, the lowest rate you can get will be 4%. Now lets say price rises on the US treasury and causes the rate to go down by 1%. In this scenario you will now be able to get a loan for 3% and someone with a rating of 7 of 10 would be able to get that 4% loan. Here's some more info and explinations: Why is the Government Buying Long-Term Bonds? What Is 'Operation Twist'? A Q&A on US Fed Program Federal Reserve for Beginners Federal Open Market Committee" "To understand the Twist, you need to understand what the Yield Curve is.  You must also understand that the price of debt is inverse to the interest rate. So when the price of bonds (or notes or bills) rises, that means the current price goes up, and the yield to maturity has gone down.  Currently (Early 2012) the short term rate is low, close to zero. The tools the fed uses, setting short term rates for one, is exhausted, as their current target is basically zero for this debt. But, my mortgage is based on 10yr rates, not 1 yr, or 30 day money. The next step in the fed's effort is to try to pull longer term rates down. By buying back 10 year notes in this quantity, the fed impacts the yield at that point on the curve. Buying (remember supply/demand) pushes the price up, and for debt, a higher price equates to lower yield. To raise the money to do this, they will sell short term debt. These two transactions effectively try to ""twist"" the curve to pull long term rates lower and push the economy."
The severity of wealth inequality- more so than its existence- is what I'm getting at when I talk about the Fed. The cantillon effect is a theory that essentially states that the first recipients of stimulus are far better off than those 2 or 3 degrees of separation later.  So if you look at Fed policies, where monetary stimulus is directed only towards the financial system and credit markets, certain parties will benefit disproportionately first before others later. In this case, that would be those employed by the industry (bankers, investors, etc), institutions in that industry (banks, hedge funds, pension/mutual funds), and owners of securities (the wealthy). Spillover effects impact the stock market, real estate, art, etc. and they are not a result of fundamentals, but rather of mis-allocated capital.  What I'm getting at is we don't need central planners (i.e. the Fed) to make decisions regarding the market for money - interest rates - or pursue dubious financial experiments at best to somehow fix problems that they themselves caused in the past (through extended low interest rate environments). Central banking could take a very serious hit if cryptocurrencies become mainstream- which I do not expect for a long time- but it's the best emergent challenger to the existing paradigm. Yeah it's called the Fed buying shit mortgages that the banks invented to make money, then got bailed out on 100 cents on the dollar for, and with an underhanded deal that the banks will then buy Treasury bills with the magically prestidigitated money the Fed creates out of nothing that the banks receive in order to prop up federal debt prices, and thus keep interest rates down, so the dollar can limp along a little while longer until the bottom drops out because they are out of ways to keep the money cheap because at some point government debt will become massively discounted no matter what they do.  Only, how does this bizarre circlejerk process end?  It ends with consumption ramped up consuming things for a large war, is how it ends.  Edit: I'm wasted.  Fuck you. "Had they made a billion dollars it still wouldn't be arbitrage. The definition of arbitrage is ""the simultaneous purchase and sale of similar commodities in different markets to take advantage of price discrepancy"". What they did was take advantage of a loophole where they took free money to buy more free money. I believe the American government calls that Quantitative Easing. Bazinga." "left out of the pictures is the degree to which the ECB is buying their own bonds.  At least with the FedResInk, we know what sort of ""open market"" action is being taken to keep interest rates held as close to zero as possible.  I coke dealer can make sure his ""sales"" are through the roof by using his own product, but eventually he has to buy more supply.  I think people are confused about central banks being that coke dealer or being his supplier." As far as i understand the big companies on the stock markets have automated processes that sit VERY close to the stock feeds and continually processes these with the intention of identifying an opportunity to take multiple small lots and buy/sell them as a big lot or vice/versa and do this before a buy or sell completes, thus enabling them to intercept the trade and make a small profit on the delta. With enough of these small gains on enough shares they make big profits and with near zero chance of losing. Let me explain this for you:   - Massive decrease in sales from 2009-2010= bad government (Obama/Bernanke).  - Even bigger increase in sales from 2010-2013= substantive economic growth due to a well-run company.  - Later downturn in 2013-2014= bad government (Obama/Bernanke)  Basically, when a company is increasing overall revenue and profits, that's because economics and free-markets. When a company is losing sales and revenues, that's because Obama. If their stock-price goes up when it shouldn't, that's also because Obama.   Stock prices that are high right now are only high because Obama/Bernanke, except when they are high because of something else. When stock prices go down, it will also be because of Obama/Bernanke.   Hopefully that clarifies things for you. Sorry, but I am absolutely correct.  Fractional reserve lending (banking) is simply that when someone deposits money into a bank, the bank is allowed to loan that money out, so long as they keep a reserve.  If the reserve rate is 10% (it's much lower in reality), and someone deposits $100 into the bank, the bank can then loan out $90.  That is fractional reserve lending at its most basics.  Now fractional reserve lending does have a multiplier effect.  And this effect is exactly how I described it.  Let's go back to the example.  Person A deposits the $100, the bank then loans $90 to person B, person B spends it with person C, person C takes the money and deposits back to the bank.  Now the bank has the $100 cash back, $90 in loans and the $190 in deposits, so they need to hold onto $19 as a reserve and can loan out $81.  Assuming the money cycles with 100% efficiency, the bank can continue loaning out the same money until they are left with $1000 in deposits, $900 in loans, and the original $100 is the reserve.  This is the multiplier effect. I am just a C student with no hope for grad school, so you are going to have to walk me through this... The ECB (until recently), Japan, and the Swiss have been running QE programs equal to that of the Fed's in 2009 for the last couple of years.  That's an extraordinary amount of money being created... what's more, is that the Swiss are even buying shitloads of American equities with it.    Perhaps my understanding of M2 is flawed, but how would the Swiss national bank buying $63B in equities change M2?  It's not like the fed is printing the money specifically for the transaction.  The amount of QE being pumped into a healthy economy over the last couple years should be concerning, if only because it's unprecedented, especially since some of it is being directly invested into equities.  I don't think there is a viable argument that can truthfully say that it isn't a pretty large variable in the market today.... but I could be wrong.  Also, I've read enough, and heard enough, on how the inflation rate is measured to cultivate a healthy skepticism for the entire metric. The way they choose baskets, while obviously the best possible, is not something that lends itself to precision.    Please be kind to my grammar. "The default scenario that we're talking about in the Summer of 2011 is a discretionary situation where the government refuses to borrow money over a certain level and thus becomes insolvent. That's an important distinction, because the US has the best credit in the world and still carries enormous borrowing power -- so much so that the massive increases in borrowing over the last decade of war and malaise have not affected the nation's ability to borrow additional money. From a personal finance point of view, my guess is that after the ""drop dead date"" disclosed by the Treasury, you'd have a period of chaos and increasing liquidity issues after government runs out of gimmicks like ""borrowing"" from various internal accounts and ""selling"" assets to government authorities.  I don't think the markets believe that the Democrats and Republicans are really willing to destroy the country. If they are, the market doesn't like surprises." "I think it's an argument for Keynesian economic policy, basically an abridged version of this paragraph from the Wikipedia article: Keynesian economists often argue that private sector decisions sometimes lead to inefficient macroeconomic outcomes which require active policy responses by the public sector, in particular, monetary policy actions by the central bank and fiscal policy actions by the government, in order to stabilize output over the business cycle. ""private sector decisions"" are bottom-up: millions of businesses and individuals make economic decisions and ""the economy"" is the sum of what they do. ""monetary policy actions by the central bank and fiscal policy actions by the government"" are top-down: central institutions implement measures that are intended to have a positive effect (such as reducing unemployment) on millions of individuals." "I'm still very new to the world of finance. I'm learning about all of the derivatives and how money is made off of them, but it's crazy to me that everyone involved neglected the risk aspect of this. In hindsight, it's so easy to explain what was happening. I guess when everyone is making money hand over fist, it's easy to look the other way. Even the federal gov't played a tremendous role in the crash. Looking at that FRED graph is probably the easiest way to explain the ramifications of the crash.   I'm reading [All the Devils Are Here](https://www.amazon.com/All-Devils-Are-Here-Financial/dp/159184438X) right now that was recommended to me by my GF's father. It gives context to the crash in a digestible way, but isn't too dumbed down. I highly recommend it.  The man played for the USA on the ""Miracle"" team and then went on to become a successful bonds trader. I've learned more from my conversations with him than I think I'll ever learn in school. Dude is brilliant and can go for hours on anything finance related." "I've mostly seen this term peddled by those with large portfolios in gold/commodities. The incentive for these guys, who for example may have a large portfolio in gold, is to drive demand for gold up - which in turn drives the value of the gold they're holding up and makes their assets more valuable. The easiest way to get a large amount of people to invest in gold is to scare them into thinking the whole market is going to fall apart and that gold is their best/only option.  I personally think that the path we're on is not particularly sustainable and that we're heading for a large correction/recession anyways - but for other reasons.  **Example:**  [Peter Shiff YouTube Channel called ""The Economist"" with conspiracy videos](https://www.youtube.com/user/PeterSchiffChannel/videos)  [Actual ""The Economist"" magazine researching the market](https://www.youtube.com/user/EconomistMagazine/videos)  (edit: formatting)" A Ponzi scheme takes investor money and lies about where it is invested. New investor money is then used to pay dividends to current investors to attract more investors. However there is a fundamental lie as to where the investment is and how much money is under control. The Fed satisfies none of these requirements.  You're pretty confused on the terms. See my post above on how the Fed works. This might be a question better suited for r/askeconomics or just r/economics. Ben Bernanke is an excellent source on the Great Depression, however, and he's very good if you want to understand these crises from an economic point of view. Investing in mutual funds, ETF, etc. won't build a large pool of money. Be an active investor if your nature aligns. For e.g. Invest in buying out a commercial space (on bank finance) like a office space and then rent it out. That would give you better return than a savings account. In few years time, you may be able to pay back your financing and then the total return is your net return. Look for options like this for a multiple growth in your worth.