John Hussman of Hussman Funds has a new post titled Bubble, Crash, Bubble, Crash, Bubble…:

Rising home prices were further promoted by a combination of lax credit standards, perverse incentives for loan origination, a weak regulatory environment, and a Federal Reserve that sat so firmly on short-term interest rates that investors felt forced to reach for yield by purchasing whatever form of slice-and-dice mortgage obligation the financial engineers could dream up. Rising home values provoked more debt origination, and even higher prices. What seemed like a “virtuous circle” was ultimately nothing but an overpriced speculative bubble with devastating consequences.

In Hussman’s apparent view, which I share, there has been a malignant growth of the Ponzi sector at the heart of the US economy over the last two decades. Before the global financial crisis, the banks didn’t need much help in expanding the “sector”. But now the Fed has become indispensable:

Bubble, Crash, Bubble, Crash, Bubble …

We will continue this cycle until we catch on. The problem isn’t only that the Fed is treating the symptoms instead of the disease. Rather, by irresponsibly promoting reckless speculation, misallocation of capital, moral hazard (careless lending without repercussions), and illusory “wealth effects,” the Fed has become the disease.

Hussman, a highly successful investment manager who appears to have been caught with too conservative a stance in the last 12 months amidst all this madness, accuses the Fed of trying to blow a bubble in stocks, shows that such a bubble cannot last, and then demonstrates quantitavely that the impact of rising stock market prices on consumption is negligible and evanescent. He goes on to assess QE2:

With no permanent effect on wealth, and no ability to materially shift incentives for productive investment, research, development or infrastructure (as fiscal policy might), the economic impact of QE2 is likely to be weak or even counterproductive, because it doesn’t relax any constraints that are binding in the first place. Interest rates are already low. There is already well over a trillion in idle reserves in the banking system. Businesses and consumers, rationally, are trying to reduce their indebtedness rather than expand it, because the basis for their previous borrowing (the expectation of ever rising home prices and the hope of raising return on equity indefinitely through leverage) turned out to be misguided. The Fed can’t fix that, although Bernanke is clearly trying to promote a similarly misguided assessment of consumer “wealth.”

His entire article is worth reading here.