The Federal Reserve's latest quantitative easing may lead to disaster

QE2 may create the very conditions for a bubble and a new collapse that the Fed dreads

Larry Elliott

Federal Reserve board chairman Ben Bernanke speaks to an economics class at Jacksonville University, Florida, last week. Photograph: Mark Wallheiser/Getty Images

The Guardian, Monday 8 November 2010

It's November 2012 and Barack Obama is living out the last few weeks of his one-term presidency. History is being made for a second time: the first black commander in chief replaced by the first female holder of that exalted office after Sarah Palin's victory.

After his defeat, Obama is asked when it all went wrong. Looking back, he says, the key moment was 3 November 2010, the day after mid-term elections went badly for the Democrats, when the Federal Reserve took the decision to pump an extra $600bn (£370bn) into the US economy by creating new electronic money.

The Fed was warned at the time that what it was doing was high-risk stuff and took no notice when the former Ronald Reagan staffer David Stockman said it was injecting high-grade monetary heroin into the financial system. Instead of accelerating the US economy's recovery, the Fed created the bubble to end all bubbles. And when the bubble burst in late 2011, the game was up for Obama.

This, of course, is conjecture. Obama's poll ratings remain reasonable despite the economy, and Democrats are confident moderate voters will be put off by the stridency of the Tea Party when they vote in the 2012 race for the White House.

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