November 3, 2010 12:00PM

Bubbles, Uncertainty, and QE2

Within the Federal Reserve System, there is a tug of war over QE2 (2nd Quantitative Easing). Some, mostly outside the system, are calling for $1 trillion‐​plus purchases of long‐​term bonds. Within the Fed, there is little taste for purchases that large. I expect a compromise, with an initial purchase perhaps as low as $100 billion.


There is widespread doubt as to the efficacy of further purchases of long‐​term bonds. They will supply additional liquidity, but liquidity isn’t what is needed. Businesses and banks are suffering from fear and uncertainty: new taxes, new regulations, new mandates, and, for financial services, the uncertainty of the Dodd‐​Frank banking bill. 


Lower interest rates on long‐​term bonds will do nothing to diminish fear and uncertainty. Instead, QE2 will further inflate the bond bubble and the commodities bubbles.