It is becoming far more evident that the true purpose of QE2 is not to hold down interest rates. It is, instead, to raise asset prices, especially stock prices.
Since 1987, conspiracy theorists have maintained that the government operates a secret “plunge protection team” (PPT). Like most conspiracy theories, the PPT is hogwash and not much different from the guy who screams “the race was fixed” when his horse lost. I have listed the many reasons why the PPT is all smoke and mirrors over the years. So to save space, I won’t repeat.
That having been said, QE2 is beginning to look like an open-air multi-month version of the PPT. It looks like one of the primary assets the Fed wants to inflate is the stock market. That might produce a wealth effect as 401Ks heal and higher highs make the economy appear to be moving even as it plods along.
We’ll try to explore this further in coming days.
Meanwhile doubts about the efficacy of QE2 and the risks inherent in it continue to mount. Here’s a bit from Phil Izzo at the WSJ.com
QE2 Criticism: Martin Feldstein is worried about the effects of more Fed asset purchases. “The Federal Reserve’s proposed policy of quantitative easing is a dangerous gamble with only a small potential upside benefit and substantial risks of creating asset bubbles that could destabilise the global economy. Although the US economy is weak and the outlook uncertain, QE is not the right remedy… Like all bubbles, these exaggerated increases can rapidly reverse when interest rates return to normal levels. The greatest danger will then be to leveraged investors, including individuals who bought these assets with borrowed money and banks that hold long-term securities. These risks should be clear after the recent crisis driven by the bursting of asset price bubbles. Although the specific asset prices that are now rising are different from last time, the possibility of damaging declines when bubbles burst is worryingly similar.”
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