Wesbury: More Harm Than Good in Fed Action

Scott Burns: Twister 2's impact on the market.

Hi, there, I'm Scott Burns, coming to you live from Morningstar's ETF Invest 2011 Conference. Joining me today is Brian Wesbury, Head Economist at FT Portfolio Advisors.

Brian, thanks for being here.

Brian Wesbury: Thank you, Scott. Great to be with you.

Burns: So, I call it Twister 2, because the original Twist was in 1961. How did that one work?

Wesbury: It didn't. The most you can give the Fed was--and the Treasury, they combined their efforts back in the 1960s--was that maybe they got a 15 basis point drop in interest rates. We got that today when the Fed announced this new operation Twist.

I don't think it's going to last, in fact what's fascinating about this is that sure, we have a little bit lower long-term interest rates, but the big banks got slammed, banks got slammed across the board today. It's hard for me to understand how lowering long-term interest rates and at the same time undermining the capital of banks is supposed to help the economy …

Burns: It definitely doesn't sound like it's something that's going to increase mortgages or home purchases, right?

Wesbury: The real problem with getting a mortgage these days is you have to have 20% down or more. You have to have stellar credit scores, and the process is extremely painful. On top of it all, what bank wants to put a 30-year mortgage on its books at 4.5%, with inflation climbing. So, the only ones lending are Fannie and Freddie, and they can write the rules. They can make you strip naked and go to a TSA cavity search in order to get a mortgage. So, what really is happening here is we keep lowering interest rates, but we've made it very difficult to get mortgages, and those obviously work at contra odds to each other.

Burns: Right. So, that's the impact on the individual investor and debtor out there, but you discussed the banks a little bit. For the viewers out there, how is Twist really going to be wrecking havoc with these balance sheets? Do you think the government has it out for the banks right now, for Wall Street?

Wesbury: This is fascinating, because obviously flattening the yield curve ... how do banks make their money? They borrow short and they lend long. It's the way, in a sense, every financial institution, if you will, at some level makes its money.

So, if what we are always doing is trying to flatten this yield curve, we are taking earnings away from the banking system, which actually hurts the banking system. So, I'm trying to figure out why anyone at the Fed or the government thinks this is positive. I hate to be a cynic or a black helicopter person, but you wonder if they just want to come in and rescue them some more. I mean, haven't we done enough? I think we should be doing everything we can to help the banks rebuild capital, not hurt them, not sue them, not tear them down today, and it looks like our government is not listening to that advice anyway.

Burns: So, you think Twister 2 doesn't really have a lot of legs to it? Would you hazard a prediction for how long this process is going to last before they unwind it?

Wesbury: I think, the Fed is stuck in this kind of process. They've already announced they're going to hold interest rates near zero until the middle of 2013. I believe all of this Fed easing--quantitative easing I and II, and Twister now at zero percent interest rates have actually hurt the economy. So far we've been able to stay out of a double-dip. I think, we will stay out of one.

I don't want the Fed to do any more. I mean, they're hurting us so good, in essence, they need to stop this activity and let the economy heal. What worries me is that if they keep going down this road, we'll actually hurt the economy so much that they're going to keep at it.

Burns: Well, Brian, thank you for your thoughts on Twister 2.0. Sounds like another government-led debacle. Thank you for watching, and hopefully we'll see you next year ETF Invest 2012.