Nassim Taleb, the author of Black Swan, coined a term called “illusion of control”.
I can’t find the exact text in his book in a short while, but to paraphrase, here is what he meant:
In 19th century or so, a patient going to a doctor had a higher chance of dying, so for most part the best course of action if you got ill would be to, I don’t know, pray?
Just anything to keep you away from the doctor.
Medical treatments in those days are often hurting people more than curing people, but a doctor would be very compelled to do something on the patient when a patient came to see the doctor because, well, he’s the doctor.
Now this is what the Federal Reserve is doing: it sells short-end and buys long-end.
Even before that, the long-end is at historical low rates, so the bond market lowered the rates by themselves.
Also, the Fed is not adding more money for now (which will not help either). With growth slowing and unemployment still high, the Fed is so compelled to do something on the economy, so it does, even though everyone knew beforehand that it isn’t going to work.
So Operation Twist? That’s Operation Illusion.
This article originally appeared here: Operation Twist? That’s Operation Illusion
Also sprach Analyst – World & China Economy, Global Finance, Real Estate
- United States: Federal Reserve Decides To Do Operation Twist
- FOMC Minutes For August 2011: What To Do Next?
- US rates: Up or flat?
- Ben Bernanke’s Press Briefing 22 June 2011 Highlights
- FOMC Minutes: QE3 or No QE3?
Read more posts on Also Sprach Analyst »
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.