Ben, Yves and El-Erian

"This approach eased financial conditions in the past and, so far,
looks to be effective again.
 
Stock prices rose and long-term interest rates fell
when investors began to anticipate the most recent action.
 
Easier financial conditions will promote economic growth.
 
...lower mortgage rates will make housing more affordable
and allow more homeowners to refinance.
 
Lower corporate bond rates will encourage investment.
 
And higher stock prices will boost consumer wealth and help increase confidence,
which can also spur spending.
 
Increased spending will lead to higher incomes and profits
that, in a virtuous circle, will further support economic expansion."
 
Ben Bernanke
Chairman of the Board of Governors of the Federal Reserve Bank of the United States of America

 
...This is the classic wealth effect argument, that if you goose asset values,
people will feel richer and spend more.
 
The problem is it was an abysmal failure the first it was put into effect as a policy idea,
in Japan in the later 1980s.
 
The result was rampant asset speculation followed by a twenty year bust.
 
And the assertion that QE1 was a success of any sort is a canard.
 
Unemployment is still stuck at just shy of 10%,
with job additions still too low to absorb workforce increases.
 
...the low mortgage rate inducement is a con.
 
The Fed hopes to create inflation.
 
That means higher interest rates.
 
If the Fed succeeds in its goal of achieving modest inflation (2-4%),
the increase in funding costs for homebuyers would cycle back into less affordability.
 
...the idea that a Fed induced rally will fool anyone into opening their wallet is spurious.
 
Trading volumes are weak, the opposite of what you’d expect with a bona fide market rally.
 
Retail investors increasingly are withdrawing from stocks,
perceiving the market as manipulated.
 
And many pros stress that equities are now driven by technical rather than fundamental factors.
 
Yves Smith

 
"QE2 blunderbuss likely to backfire
 
...liquidity injections and financial engineering are insufficient
to deal with the challenges that the US faces.
 
Without meaningful structural reforms, part of the Fed’s liquidity injection
will leak right out of the US and result in yet another surge of capital flows to other countries.
 
The rest of the world does not need this extra liquidity,
and this is where the second problem emerges.
 
Several emerging economies, such as Brazil and China,
are already close to overheating;
and the euro zone and Japan can ill afford further appreciation in their currencies.
 
...other countries are likely to counter
what they view as an unnecessarily disruptive surge in capital flows
caused by inappropriate and short-sighted American policy.
 
The result will be renewed currency tensions
and a higher risk of capital controls and trade protectionism.
 
...No wonder commodity prices surged higher
and the dollar weakened markedly in anticipation of QE2,
pointing to increased input costs for American companies
and unwelcome pressures on their earnings.
 
The unfortunate conclusion is that QE2
will be of limited success in sustaining high growth and job creation in the US,
and will complicate life for many other countries.
 
With domestic outcomes again falling short of policy expectations,
it is just a matter of time until the Fed will be expected to do even more.
 
And this means Wednesday’s QE2 announcement
is unlikely to be the end of unusual Fed policy activism."
 
Mohamed El-Erian
chief executive and co-chief investment officer of Pimco