Without directly addressing the slides that Tyler linked to, I want to make a quick comment about the Fed's new Operation Twist. The idea is to twist long and short rates by buying more long-term securities and paying for them with sales of shorter-term ones. The hoped-for reduction in long term rates would benefit mortgage holders and others on the consumer side, but also spur investment.
In class this morning, I made two points about this:
1. The Fed is like one of those movie characters who empties all the bullets in his gun to no avail against an advancing bad guy, leading him to grab anything he can find nearby to use as a weapon: throw a vase or a bowling ball or a chair, or whatever's to hand to try to fend off the bad guy. Your normal weaponry does not work. That's where it seems to me the Fed is right now.
2. More important, if we look at the loanable funds market, we might get a handle on the situation. If this program is designed to increase investment by driving down rates, it's not going to work if that demand for loanable funds curve is highly inelastic. Borrowers are just not going respond to the lower interest rate if they have major concerns about the future. It's worth noting that the slideshow Tyler linked to does not really deal with the question of corporate cash. Why are they sitting on so much if it's not about some form of uncertainty? And how will driving the opportunity cost of holding cash even lower get them to get rid of it?
The problem, I would argue, is that we shouldn't be trying to twist the yield curve, but shifting the loanable funds demand curve. If we want to increase the market-clearing quantity of borrowing/lending taking place, anything that convinced firms that there was sufficient predictability to think they had profitable uses for their existing cash and new funds they might borrow would help. I suspect that even if recovery really picked up, firms would finance new activity with their own cash before anything else. But for any of this to happen, we need that change in the demand for loanable funds that would come from less uncertainty, regardless of the source. Over time, that demand for loanable funds curve might well start to twist in the direction of more elasticity. That would be a twist worth having!
In other words, we shouldn't be twisting yield curves to increase the quantity of loanable funds demanded, we should be adopting a better policy regime so that the demand for loanable funds increases. It's Econ 100 folks.
PS: I'm not persuaded by the slide on capital and software purchases for the same reason as J Oxman - after being so low for a couple of years, it's no surprise that in a rapidly changing area like technology that investment expenditures there are picking up. I'd be surprised if that sustains unless the environment changes. And Koppl is correct in noting a tension/contradiction in the argument.