I already argued that QE2 is more of a slogan than a policy, and will not repeat those criticisms here. Rather, I will deal with the two most important issues and misunderstandings surrounding quantitative easing. The first concerns the consequences of injecting another $600 billion of excess reserves into the banking system. The second is associated with the Fed’s attempts to lower long-term interest rates through purchasing treasuries. Both of these issues are in turn connected to the belief that QE2 will devalue the dollar and threaten its status as the international reserve currency. That, however, is a topic for another column.

All developed countries’ central banks now operate with an overnight interest rate target (the fed funds rate in the US). To hit this rate, they must supply reserves more or less on demand. We can think of the supply of reserves as “horizontal”, that is, as an infinitely elastic supply at the target interest rate. The simplest way to operate such a system is to offer “overdraft” facilities at the central bank, lending on demand at the target rate (this is done in Canada). Knowing that they can obtain reserves any time they want, banks would never hold substantial excess reserves, since they could borrow them as needed.

The Fed has never explicitly operated this way, preferring to supply most reserves through its open market operations (purchasing treasuries) while imposing “frown” costs on banks that come to the discount window. Most of the time, this does not really matter. However, when the financial tsunami hit, the fed funds market froze up as banks refused to lend to one another, even on the basis of good collateral. There was a general run to liquidity, and no bank felt it could get enough reserves to see it through the crisis. The Fed played around with an alphabet soup of auction facilities rather than simply announcing that it would supply reserves on an unlimited basis to all comers. That cost the economy dearly by dragging out the liquidity crisis.

Fortunately, the Fed finally stumbled upon the obvious: supplying reserves in sufficient quantity. The liquidity phase of the crisis passed, and the Fed got the short-term interest rates down to its near-zero target.

So here is where Bernanke’s pet, quantitative easing, came in. Conventional wisdom is that the once the central bank takes the short-term rate to zero, it has shot its wad. Nayeth, sayeth Bernanke — the Fed can continue by flooding banks with excess reserves, which they do not want to hold. Some commentators have said that banks would eventually begin to lend out the excess reserves, seeking a higher interest rate than the Fed pays them. One hopes Bernanke never made that mistake — banks do not lend reserves (except to one another), since they exist only as entries on the Fed’s balance sheet. Only an institution with a “checking account” at the Fed can hold reserves, so there is no way a bank can lend these to households or firms (which do not have accounts at the Fed). So Bernanke presumably understood that if for some reason holding excess reserves caused banks to want to increase lending, this would simply shift the reserves around the banking system while leaving the outstanding quantity unchanged. But that means that offering Canadian-like overdraft facilities, promising banks they can have reserves anytime they want them, would have had the same impact as quantitative easing. Rather than actually holding excess reserves, the banks would have been just as happy knowing that they were safely “locked up” at the Fed and available anytime they were needed. In other words, pumping about $1.5 trillion into the banks would be no different than telling them the Fed would supply any amount at any time.

In sum, adding excess reserves to bank portfolios will not, by itself, do anything if the overnight interest rate has already been driven down to its near-zero target. QE2 proposes to add another $600 billion of excess reserves — but whether banks have $1 trillion or $10 trillion in excess reserves will have no impact.

So why would QE have any impact at all? Because to get those excess reserves into the banks, the Fed buys something from them. What did the Fed buy? Good, safe (mostly short-term) treasuries, and bad, toxic waste: mortgage backed securities. Now, treasuries are effectively reserves that pay a higher interest rate; they are like a saving account at the Fed, rather than a checking account. So when the Fed buys treasuries from a bank, it debits the bank’s checking account and credits its saving account. This will have no appreciable impact on the bank’s behavior and thus will have no discernible economic effect.

But if the Fed buys trashy assets, and at a nice price, the banks are able to shift junk they don’t want off their balance sheets and onto the Fed’s. And if the Fed were to do that in sufficient volume, it could turn insolvent banks into solvent ones. In truth, the Fed did buy a lot of junk, but banks were left with trillions of dollars of toxic waste assets — probably much worse than the trash they sold to the Fed — so they are still massively insolvent.

Thus, while QE1 was useful, it did not come close to resolving the insolvency problem. It bought time for some of the trashiest banks, which they devoted to ramping up their dangerous and largely fraudulent activities, digging the hole ever deeper …

…the Fed is running a money laundering operation.

We have a situation where the Federal Reserve engages in a widespread international campaign to devalue the dollar, to make it cheap and generate revulsion overseas – 75% of US currency holdings are overseas – and to call it home where it can be swapped for worthless securities.

The corporate insiders running our country’s publicly traded companies have been heavily selling their stock, which some market pros say speaks volumes about the veracity of the current rally.

The market has moved sharply higher since August 27, when Fed Chairman Ben Bernanke suggested that he and his allies on the FOMC might consider another bond purchase program in order to juice economic activity. The SPDR S&P 500 ETF (SPY), which includes holdings like Exxon (XOM), Apple (AAPL), Microsoft (MSFT), IBM (IBM), and Bank of America (BAC), is up 11% since Bernanke’s speech.

But, even as hedge funds and prop traders at the big commercial banks might be buying, one group of investors has carefully side-stepped this rally: corporate insiders.

The MBA-stamped professionals with the most knowledge and insight about their company’s prospects — the chief executives and chief financial officers — have been busy selling their shares.

Alan Newman, editor of the Crosscurrents newsletter, recently surveyed insider activity in three sectors. Newman says the selling he’s seeing among the C-suite crowd right now is some of the most dramatic in years.

Specifically, the stats show 238 sellers and only two buyers over the last six months, a ratio of 119 sellers for every buyer. Share purchases totaled 9,500 against a total sold of 88.9 million. That’s a ratio of 9,354 shares sold for every share purchased.