Quantitative Easing QE3 - Won't Work?

One of the more remarkable stories out of the recent market turmoil facing the globe is Ben Bernanke and the Federal Reserve's decision to introduce quantitative easing for a 3rd time. The big ticket question is what makes a 3rd tranche of quantitative easing likely to work? 

Lance Roberts, CEO and chief strategist of Streettalk Advisors, says there is nothing more certain than QE3 and the potential for another recession. "The trend of the data is all negative, so barring any quantitative easing program from the Fed, we will probably be in a recession by the end of the year."

The Fed will step in to help stave off another recession, but the potential for it to work after QE1 and QE2 is not great due to the law of diminishing returns.

To top that off, markets, not consumers, will feel all the benefits if QE3 should come to pass. Consumers will actually take a beating because commodity prices -- oil and food prices -- will jump as the Fed pumps more dollars into the economy.

So if quantitative easing is not going to help consumers and moreso markets, what message is this sending to the markets. These are unconventional measures in efforts to put a stop to the crisis. Unfortunately this radical remedy is bound to have more unintended consequences. For example, the Fed is sending a clear message to the financial markets that for a 3rd time it will do almost anything and everything to prevent a financial crisis from spinning out of control. This is very reassuring, however it creates moral hazard on a grand scale. So as a result Banker confidence has plummeted in the US's ability to repay debt and manage an economy. The cost of borrowing for America has increased to approximately $100 billion more each fiscal year. As a result banks are now hoarding cash and buying long-term stable, low-risk yields, and tightening lending to the average business or consumer. 

The problem the US economy has created for itself, is that every time investor sentiment plummets, markets crash due to temporary global flat-lining of developed economies, and the Fed bail the markets out, thinking this resuscitation of the markets will prop up business and consumers to re-charge a sloth-like slow economy. Capitalism without bankruptcy or consequences is like Christianity without hell, as a famous Eastern Airlines chief in the 1980's once professed. 

In 2008-2009, the Fed has a clear exit strategy. When credit conditions improve, the financial system's dependence on easy money will subside. However the level of intervention has not subsided and we are in 2011. The Fed is no longer purely managing money supply, it is now a subsidizer of the financial markets every time, a shock occurs.  

The government needs to focus on it's primary ability to tax and spend in crisis economics. Rather than disbursing new bundles of money to prop markets up and not consumers which are the very root cause whilst the economy is heading into a double dip recession.