Effectively what the Fed did today was nothing more than a punch in the face of their constituents (the banks) as banks make money by lending long term and paying for that money on the short term. Hence, why they say that a steep yield curve turns idiots into banking geniuses. The steeper the yield curve, the more money banks make on their loans, and the faster they repair their troubled balance sheets.
Helicopter Ben announced a measure whose intent is to lower long term rates.
What he fails to understand is that he is tackling the wrong issue (doesn’t he read the papers?), the impact of lower long term rates on the economy is marginal. What we need is to restructure the balance sheets of consumers and of governments. What they achieved with operation twist is that the banks will be even less likely to lend money to the real economy or that they will demand higher spreads in order to make the same profit margin that they used to make when the curve was steeper.
None of which is good for the economy.
The author is Pedro Noronha, Fund Manager at Noster Capital.
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