As long-term U.S. interest rates rise and negative global reactions roll in to the Fed's Nov. 3 announcement of a further $600 billion round of "quantitative easing" purchases of Treasury bonds, to the inquiring mind one question becomes uppermost: Even though there's a huge amount of competition for this title, is it indeed possible that this Ben Bernanke masterstroke was the most foolish economic policy move ever?
 
Even a mere 10 days after its passage, and before significant implementation, it's clear that Bernanke's move, in terms of adverse effect compared to the size of the policy move, is well up there. The Fed's buying program will be concentrated on medium-term Treasury bonds, for two reasons. First, the Fed's loss of principal if interest rates rise will be less on those. Second, the Fed, when looking at the market's inflation expectations, looks at the five-year forward rate on five-year Treasury securities—thus buying five-year Treasurys maximizes its impact on its favorite inflation-expectations indicator.
 
The problem is that the market, being manned by traders and investors rather than academic economists, is more simple-minded. When determining its expectations on future inflation, the market looks at the yield on 30-year Treasurys, possibly comparing it with the yield on 30-year Treasury Inflation-Protected Securities (TIPS).  So the Fed's Treasury bond-buying program, by raising yields on 30-year bonds (which were more or less excluded from it) increased both long-term yields (and hence home mortgage costs) and the market's expectations about inflation. The move was directly counterproductive, in other words.
 
It was also highly counterproductive indirectly. Within days of its announcement, the policy had been denounced by China, Brazil, Germany and various other countries, all of whom accused the U.S. of competitive dollar devaluation—with some reason. The gold price shot though $1,400 and is likely to continue rising as long as the policy is in effect. No less a panjandrum than Robert Zoellick, president of the World Bank, suggested that gold should be reintroduced to the international monetary system. For us long-term gold bugs, this was deeply gratifying, but I'm dang sure it's not what Bernanke intended.
 
The final verdict on QE2 will not be given until we have seen its long-term effects. Still, it seems likely that it will eventually rank among history's classic bungles, at least on the economic front.