After September’s Federal Open Market Committee meeting which formally revealed “Operation Twist”, the sell-off in risk assets accelerated. This negative market reaction to a Fed easing manoeuvre is unusual and suggests investors were disappointed by the absence of further quantitative easing, or QE3.

If so, the reaction was myopic and mistaken. QE2 was almost certainly a mistake with problematic unintended consequences.

With the luxury of hindsight, it is possible to argue that QE2 did more harm than good to both the economy and the polity. The underlying defect in QE is that it stirred investors’ fears of monetary inflation, whilst stimulating the wrong sort of inflation in the wrong places. The early positive economic effects were subsequently overwhelmed by a negative inflationary blowback that played a key role in disrupting the recovery.