This article references "Operation Twist" which was thought-up in the early 1960's under the administration of JFK, then officially in a recession. Simply put, Operation Twist involved the Fed selling its short-term securities, and buying longer-term ones, which would drive long-term rates down, and send short-term rates up.
Currently in our economy, long-term interest rates are at record lows, and short-term rates are nearing zero. You might think that with this knowledge, firms would be borrowing left and right, expanding their businesses. However, it is just the opposite. Firm's are hesitant to borrow and invest in new capital etc. because people are just as hesitant to spend what little money they have left.
Implementing another "Operation Twist" in our current economy could help, but only very slightly (0.5% increase in economic growth according to Goldman Sachs). Different from the 1960's however, short-term rates are already near zero, so selling them off (in order to buy long-term ones and thus decrease long-term rates) might deal a lethal blow to our economy.
While 0.5% growth is better than nothing, it is not nearly enough to save this economy. With nearly all of their ammo (stimulus spending) exhausted, the Fed is loosing its power to turn, or in this case "twist," the economy around.
This article makes me feel bad for Bernanke. The FED, to my understanding, has executed almost every logical monetary policy to grow the economy, none of which have worked. The economic theory that says low interest rates yield increased firm spending doesn't take into account mass unemployment and rock bottom consumer confidence. Having said this, I think that this 'Operation Twist' is worth a shot. I just don't see how it could worsen the situation.
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