Stimulus by Fed Is Disappointing, Economists Say

Here's the bottom line:  printing $3 trillion for quantitative easing and permanent open market operations (both policies create currency out of thin air) have produced about $400 billion in economic growth.  The law of diminishing returns is at work, and why economists coin the Fed is "pushing on a string."  Those massive mortgage-backed securities and US Treasury bond purchases by the Fed have offered very low returns, and some would argue negative returns, because many of those mortgage bonds are underwater.  In an exit strategy (tightening monetary policies), the Fed would have to sell those mortgage banks back--at much lower prices.

In other words, in the aftermath of the bank bailouts, the Fed essentially purchased these bonds at par value, when they were actually worth much less.  The balance sheet risk was merely transferred from commercial banks to the Fed.  Essentially, taxpayers own these worthless securities.

The question of whether the Fed will end QE 2.0 at the end of June is becoming much more cloudy.  Tighten too early, and the economy would tank due to rising interest rates.  Continue QE, and we could have runaway inflation, which would have a huge dampening effect on the economy.  The Fed has cornered itself.

The elephant in the room that nobody wants to acknowledge is the US is insolvent, as our debts are unsustainable.  And there is still way too much leverage in financial markets due to over-the-counter derivatives which are still unaccounted for.

Even the language of mainstream Keynesian economists is flawed.  What they refer to as "stimulus" is actually just issuance of more debt.  And massive debt levels are why we're in deep trouble economically in the first place. 

http://www.nytimes.com/2011/04/24/business/economy/24fed.html?_r=1&nl=todaysheadlines&emc=tha2