QE2 AND THE ENSUING DISEQUILBRIUM

"I’ve spent a great deal of time analyzing and attempting to explain the possible ramifications of QE2 since it was first announced a year ago. My research led me to believe that there was no real substantive transmission mechanism through which QE2 could possibly impact the real economy given the current economic environment (balance sheet recession). But there was something else occurring as a result of QE2 and I believed it was causing severe distortions in the markets and resulting in a massive disequilibrium that threatened the real economy.
Before QE2 was inititated, Brian Sack, Executive Vice President of the NY Fed made the following statement:

“Nevertheless, balance sheet policy can still lower longer-term borrowing costs for many households and businesses, and it adds to household wealth by keeping asset prices higher than they otherwise would be.” (emphasis added)

Brian Sack and the other proponents of QE2 have justified the program in large part due to its portfolio rebalancing impact, wealth effect and other various market impacts. I have repeatedly stated that these effects are largely overstated and that the program was highly misguided, was misleading the public and likely resulting in a market disequilibrium that put the real economy at risk. In my opinion, false conclusions from decades of neoclassical economics has resulted in little to no distinction between markets and the real economy due to the efficient market hypothesis and the general belief that markets fairly represent the real economy. I think this is terribly flawed.
In my paper titled The Destabilizing Force of Misguided Market Intervention, I said:

“we are still at risk of a major dislocation due to the Fed’s severely misguided policy of QE2 and the market’s dramatic misinterpretation of it.”

What occurred when QE2 was inititated was one of the most fantastic market misinterpretations I have ever witnessed. A relatively harmless program (QE2 was nothing more than an asset swap with no true transmission mechanism that would alter either the private sector money supply, private sector net financial assets or the real economy) was incorrectly described as “debt monetization“, “money printing“, “stimulus” and other descriptions that implied QE2 was having a massive impact on the real economy through various channels. This couldn’t have been farther from the truth..."

at http://pragcap.com/qe2-and-the-ensuing-disequilbrium