Jon Markman: What the fed wants, and why

The Fed recognizes that the legislative branch of government is paralyzed, providing virtually no chance of new fiscal stimulus to the economy. So it has decided to do the whole job of reigniting the American fortunes itself. It can only really do one thing to effect policy now that interest rates are essentially zero -- buy debt, increasing the money supply -- and so it is doing that one thing in a very big, public and well communicated way.

The Fed wants everybody out of shorts, out of cash, out of government bonds and into high-yield bonds, equities and real estate. It wants to increase the public's wealth so that the middle class purchases more things, requiring companies to rev up factories to build inventories and hire more people. So simple, right?

Technically at the Fed they call this the "portfolio balance channel effect." It has never been tried on this scale, and the financial media can muster 100 experts, including ex-Fed chief Paul Volcker, who will say with authority that it won't work. And you know, it might not. But it might. No one knows. It's an incredible bet and at the very least you have to give credit to Chairman Ben Bernanke for having the guts to try it.
---Jon Markman, Markman Capital Insight