Washed Away on the QE2

Imagine that your water pipes have holes, and that, not wanting to pay to repair them, you tell the plumber to turn up the pressure instead. Replace pipes with banks, and you have the logic of the US Federal Reserve's policy of quantitative easing.

NEW YORK – Imagine that you get in the shower, turn on the water, and nothing comes out. You call a plumber, who tells you that there are holes in the pipes, and that it will cost you $1,000 to repair it. You tell him to turn up the water pressure instead.

Sound sensible? Well, this is the logic behind the United States Federal Reserve’s second round of “quantitative easing” (QE2), its strategy to keep flooding the money pipes until credit starts flowing freely again from banks to businesses.

You wouldn’t expect this to work in your shower, and there is little reason to expect it to work in the commercial lending market. The credit-transmission mechanism in the US – and elsewhere – has been seriously damaged since 2007. Small and medium-size businesses in the US depend on small and medium-size banks for access to vital credit, yet too many of these banks remain zombies, unable to lend because their balance sheets are littered with bad commercial and real-estate loans from the boom years.

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