Sunday, September 7, 2008

The Plan Revealed

"But let me tell you a little secret, folks. Even though they're scurrying around like everyone else in this game, I think the crisis managers at the [Fed] and the Treasury have quietly adopted a technique that has helped us deal with previous financial crises--what I call the 'play and pray' approach. ... The idea: You play for time by keeping things afloat long enough for your prayers to be answered by the markets' turning in the right direction", Allan Sloan (AS) at Fortune, 1 September 2008.

I agree with AS, the plan is simple. "Twist" the yield curve, pushing down the short end to enable the banks to "ride the yield curve" to profitability. At savers' expense. Shades of "Operation Twist", see my 11 August 2008 post. Yield curve manipulation has saved the banks before and might again.

1 comment:

Clint Athey said...

I agree about the yield curve analysis. The entire banking industry, as is endemic with fractional reserves, is geared towards borrow short and lend long, i.e. the carry trade. The game works until the curve inverts.--great blog by the way--Clint Athey