When it Comes to QE3, Ben Should Have Tried the Helicopter

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At last Thursday's Fed meeting, Ben Bernanke finally played his last card.

With an open-ended promise to buy $40 billion a month in agency-guaranteed mortgage bonds, the Fed Chief turned QE3 into a much larger gift called "QE Infinity."

But the truth is he would have been better off if he had tried the helicopter.

For those who forget the reference, Ben's first foray into national fame came in November 2002, when he delivered his famous "helicopter speech" at the National Economists Club in a Washington, DC Chinese restaurant.

Little did I know that day that I was about to witness history as Bernanke said the risk of deflation was so great that the Fed should drop interest rates to zero and consider using further measures -- such as dropping $100 bills from helicopters -- to "stimulate" the economy.

Of course, I blotted my Fed copybook for the next decade by asking a snotty question since I objected to his central premise that the risk of deflation was either imminent or would be disastrous when it happened.

The idea that deflation was imminent at the time was simply ridiculous. Consumer price inflation, on official BLS statistics which consistently understate it by about 1%, was 2.5% in 2002, 2.0% in 2003 and 3.3% in 2004.

Even then, Bernanke's economics weren't that well connected with reality.

The Problem with QE1...QE2...QE3 and QE Forever

The reality today is that it just doesn't work.

Bernanke's various "quantitative easing" policies have benefited primarily Wall Street; the mechanism by which they have fed through to the real economy is at best very indirect.

Currently for example, the Fed is now set to buy a total of $85 billion a month in long-term bonds, through the new mortgage bond purchases as well as the remains of his "Operation Twist" strategy.

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