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Wednesday, October 13, 2010

Bernanke's QE2 Could Lead To "Titanic Trouble", Says Westwood's Alpert

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The stock and bond markets have soared in recent weeks on the expectation that the Federal Reserve will soon embark on "QE2"--a new "quantitative easing" plan in which the Fed buys debts like Treasury bonds and mortgage bonds in an attempt to inject more cash into the banking system and restart the economy.

But this QE2 voyage could "set a course towards Titanic trouble," says Daniel Alpert, managing partner at Westwood Capital.

QE2 will not help the real economy much, Alpert says. What it will do is (temporarily) inflate asset prices--just as we have seen over the past few weeks as the market has concluded that QE2 is on the way.

But these asset-price gains will not be permanent, Alpert says. And they won't be enough to allow the economy to reach "escape velocity," in which cheap money and improved confidence lead companies and consumers to start borrowing and spending again.

Why not?

Because our banking system and economy have not yet worked off the massive bad debts that we accrued in the boom years. As a result, we still have too much productive capacity and too much debt, and no amount of cheap money can fix that.

(What will fix it? The restructuring of the debts, often through defaults).

Thus, Alpert says, the Fed's "QE2" will fail, just as the prior attempts to prop up the housing market and stimulate the economy have failed. And it will only drag out the process by which the economy will eventually heal itself.

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