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QE2: The Sequel Is Not an Improvement

COLUMBUS, Ohio ( TheStreet) -- The Federal Reserve's round of quantitative easing (known as QE2) may have looked like a logical decision, but below the surface the Fed may actually be increasing the pressure on the economic recovery beyond next year.

QE2 should not have come as a surprise, given the Fed's fear of a liquidity trap and deflation. Add in an underwhelming recovery and, to some observers, the action of buying large quantities of Treasury securities appears to be a no-brainer.

QE2
Some significant risks have arrived with the possible benefits of the Fed's QE2 quantitative easing plans.

By supporting the recovery through lower interest rates, this will further facilitate the healing process and eventually stimulate borrowing and spending by consumers and businesses. In all fairness to the Fed, there is a strong likelihood QE2 will lift growth a notch or two next year and help repair balance sheets. It's a logical move for a central bank looking to jump-start growth.

But with the possible benefits of QE2 come some significant risks -- risks that may be unintended and have long-term effects.

For instance, quantitative easing has already been contributing to upward pressure on commodity prices and downward pressure on the dollar. There's also an increase in the risk of asset bubbles developing in the U.S. and global markets. The evidence early on was unsettling, and if the patterns continue the benefits will be more than wiped out by the costs of an overly aggressive Fed.

Unfortunately, the push by the Fed contributed to a lack of discussion on the real issues affecting the economy -- issues monetary policy cannot offset.

The weak recovery is not due to high interest rates or inadequate liquidity. It is due to structural problems in the United States that only time can heal. The housing boom, the deleveraging of the household sector and ongoing fiscal policy woes are the real dynamics weighing down on the economy.

It's simply not clear that the Fed has the ability to offset these issues with more monetary easing. The real solution to easing the heavy restraints on the recovery are time and better fiscal policy management at the state, local and federal levels.

While the markets initially welcomed the Fed's actions, we've seen that a bit of caution is warranted and been reminded: These are unprecedented steps entailing real risk.

While retail inflation is not on the horizon, other pressure points are emerging. If left unchecked, asset bubbles will re-emerge, commodity prices will continue to soar and the recovery could be adversely affected.

Let's be honest with ourselves. The focus on monetary policy as the "magic bullet" to fix all that ails the economy was clearly misplaced.

We're all better served facilitating the adjustments required in the housing market, sorting through taxes and spending at all governmental levels and trying to lessen the regulatory burden we have created if we really want to keep the recovery moving in the right direction.

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Paul Ballew is senior vice president of customer insights and analytics at Nationwide Mutual Insurance in Columbus, Ohio. Ballew previously served as a Fed economist, a partner for J.D. Power and a senior executive at General Motors.

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