QE3 not about interest rate

One popular argument against more QE is that the interest rate is already so low, there is little to be gained by QE3.

If there is QE3, interest rate is not the thing. In fact, just like the immediate aftermath of QE2, long-term interest rates may actually rise!

European debt crisis has done a remarkable job of lowering the US interest rates for the Fed. This is part of the economic reality that we're in a global liquidity trap.

The main channels for QE3 are something else: raise risky asset prices and depreciate US dollar.

Too much money is parked with treasuries, not enough risk taking. Wealth-based consumption is now the most effective means to spur aggregate spending, given the spending power of the luxury consumers (~70% of retails), and given slow income growth for workers. You'd better hope that the luxury group continues to spend, to help create jobs, because the other groups are all de-leveraging and trading down.

Foreign consumption and US export are another promising channel that QE3 can tap into. Indeed, export has been a striking contributor to the little growth that there is in this anemic recovery. We need more of that.

Adequate amount of QE3 can be very effective because of these two channels, while at the same time it may do little to lower the interest rates.

The goal of QE1 was providing liquidity, and that of QE2 was to comeback deflationary risk. The goal of QE3 should be what it ought to be: lowering the unemployment rate.

There won't  be diminishing returns, which is a myth that commentators like to talk about. QE1 was far greater than QE2 and most effective. There is no clean way to measure the returns of QE. The Fed should do whatever necessary to get us out of this depressing economy. If not, we all lose, except for a small group of power-hungry individuals.

Housing market is bottoming. The housing recovery is at best sluggish given the high unemployment and tight credit. This is a crucial area where QE3 can help by purchasing mortgage-backed securities, and by increasing asset values in general. Lending can only increase in force when there is a sustained value increase in homes.

The real job creators are small businesses, whose sentiments are highly correlated with the stock market. So, even though the Fed cannot say it in public, it should try to pump up the stock market given the circumstances. It should do so by chasing the like of Pimco and Blackrock out of the treasuries and into equities.