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Why Operation Twist May Signal an End for Ben Bernanke

Chris Preston

Operation Twist has been extended through the end of the year. The Federal bond-buying program was set to expire this month, but Ben Bernanke and the Federal Open Market Committee elected on Wednesday to extend the life of the program another six months.

It was a bit like shuffling the deck chairs on the Titanic. It was also the latest sign that Ben Bernanke may not have his heart in this whole Fed chief thing anymore.

Time and again, Bernanke and the Feds have responded to the clear signs of another economic slowdown with painfully feeble attempts to quell it. Simply keeping interest rates near zero hasn’t been enough to stop the economic slide. And as Wall Street’s collective indifference after the Fed’s Wednesday announcement revealed, Operation Twist amounts to more of the same.

Your faithful Resource Prospector Kevin McElroy says the move signals a beginning of the end for Bernanke.

“My thoughts are that Bernanke has about 18 months left in his term,” Kevin told me this morning. “I don’t think he wants another one. So he just wants to keep this house of cards more or less upright for the remainder of his term. He won’t take big risks unless he’s forced to. So unless we see a huge market downturn, he’ll stay the course, and do these little tap-dance moves to keep things moving sideways. Operation Twist Part 2 (‘Twist Again Like We Did Last Summer’) is just moving America’s huge debts from one hand to the other – like refinancing your house debts so you can afford a car payment.”

Bernanke’s actions – or lack thereof – lately sure feel like the work of a lame-duck Federal Reserve chief. Investors including the world’s foremost bond expert Bill Gross have been clamoring for a third round of quantitative easing of late. Quantitative easing is a monetary policy through which the Federal Reserve prints money for the purpose of buying billions of dollars of Treasury bonds and mortgage-backed securities when interest rates are near zero – as they have been. In effect, it’s a way to artificially lower rates below zero percent…

The Fed executed a first round of quantitative easing – called QE1 – to stimulate the sluggish economy back in March 2010. QE2 came almost exactly a year ago – on June 30, 2011.

As the stagnating unemployment rate, mounting national debt and slowing retail sales suggest, the U.S. economy still needs a lot of help. After a fast start to the year, stocks have fallen sharply since the beginning of May – just as the unemployment rate rose for the first time in almost a year. The last time that happened was last June – right before QE2 was instituted.

Gross has noted stocks have fallen and the U.S. economy has slowed in recent years when central banks have halted their quantitative easing efforts. That’s why investors have been begging for QE3 – and why stocks have dropped 2% in the 48 hours since the Fed’s poorly received Operation Twist announcement.

Bernanke simply won’t give investors what they want. Worse – he won’t give the economy what it’s begging for right now.

As yesterday’s sell-off suggests, now investors just want out.

So does Bernanke, it seems.