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Twisting in the Wind

Ben Bernanke’s diminishing returns.

Oct 3, 2011, Vol. 17, No. 03 • By JAMES PETHOKOUKIS
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But impotence is hardly the worst-case outcome to Operation Twist, especially in light of an emerging financial crisis overseas that could spread to America. To the extent that the Fed’s gimmicky maneuver works, a flatter yield curve cuts into bank profitability by shrinking the interest margin between borrowing short and lending long. That, along with the impact of Dodd-Frank financial reform, could weaken a U.S financial sector that may soon come under intense stress if its opposite number in Europe begins to implode from the impact of a Greek debt default. Indeed, the Fed’s super-low interest rate policy actually heightens the risk of more market volatility, giving investors access to deep pools of cheap money that can be rapidly shifted between various financial assets.

Markets used to believe in the Greenspan Put, that the Fed would save them in times of crisis. Bernanke has done his best to try and justify that faith. But attendance at the Church of Easy Money is starting to thin, and Operation Twist won’t be the miracle needed to restore the flock or the economy.

James Pethokoukis is a columnist for Reuters.

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