For those who missed it, Helicopter Ben (Bernanke, the Hed Fed), was on 60 Minutes again on Sunday. In a brash moment, he said that if QE2 did not work, he was prepared to take further action; this was widely interpreted to mean that he was prepared to do QE3 if QE2 fails (and it will).
QE stands for Quantitative Easing; in the old days, we called this printing money. Actually, Helicopter Ben does not actually print more cash, but he simply walks over to Excel, tappity-tappity at the keyboard, and voila: $600 billion appears out of thin air. The goal is this: the Fed buys Treasuries, forcing retail and institutional investors out of Treasuries and into stocks, bonds, business investment, and housing, increasing economic activity.
Well anyway, this is the theory. Problem: this did not work the first time he tried it. Instead of using the money, the banks simply deposited the cash back at the Fed. So, there is a $1 trillion on ice at the central bank. What makes Helicopter Ben think that QE the sequel will work any better than the original movie?
In an even more brash moment, Helicopter Ben stated confidently that he can withdraw the cash from the banking system before inflation sets in. Really? Right now it seems reasonable: deflation is a real threat, while inflation seems to be dead and buried. But I wonder: when the cold, hard cash on deposit at the Fed starts to thaw, it will be like a damn bursting. The cash will come flooding out all at once, rather than a manageable stream that Helicopter Ben seems to be assuming. I have no confidence that he can act fast enough or strongly enough to stem the flood.