The intended purpose of the program is two-fold. First, the bulk purchase of longer-term Treasuries by the Fed should help to lower interest rates, which would add more liquid capital to institutional balance sheets. Purchasing agency bonds should have a similar effect on the mortgage market – pushing down mortgage rates and pumping more cash into the system for lending purposes.

The real question is: What are the long-term effects?

It’s almost certain that no purchases of any consequence have been made yet and as I write this, yields are down slightly in the three to five year range and slightly up on longer maturities. I would suspect that’s the result of buying at the middle of the curve in anticipation of a “pop.”

On the heels of the FOMC announcement, the dollar gave up almost five percent and was headed for the biggest weekly decline this year as the Fed began flooding the market with dollars. However, it has rallied quite a bit on Friday as many seem to suspect that the Fed won’t be able to maintain such a massive buying program.

I don’t see how the Fed will have any difficulties though. It’s a matter of simple accounting transactions currently and the Fed has clearly signaled that inflation is the least of its worries.

What’s most worrisome is the fact that since the Fed has resorted to blatant quantitative easing, I’d say they’ve run through their bag of tricks. The government has been firing blanks through its fiscal effort and the effects of spending programs are still probably a year away from being absorbed. This really is a last ditch effort to save the banking system and the economy through cheap money.

What strikes me as funny is the fact that regulators are still treating the crisis as a liquidity problem rather than an outright solvency issue. Banks are awash with cash and the government has been pumping it into the system through lending programs and securities purchases. Many a bank balance sheet are still in shambles that, much like AIG, they’ll just keep soaking up the cash with little effect on lending. Add that to the crack down on credit standards by lenders and it’s a seemingly counterintuitive notion to fix a problem caused by excessive lending by encouraging more lending.

Instead of just throwing cash at the problem willy-nilly, regulators need to finish the bank stress tests and actually figure out those banks that are worth saving and those that aren’t.

I still don’t buy the argument that the government doesn’t have the know-how or the resources to take down the major banks if need be. Nationalization would boil down to leaving current management largely intact and there would just be government overseers in place to ensure an orderly windup of the problematic operations.

Continuing to print money and throw it at the problem is just going to further weaken the dollar. China, our largest creditor, and other major holders of US debt are expressing notions of worry over their holdings. On top of that, a United Nation’s panel of currency experts is meeting next week to discuss reserve currencies and it’s widely expected to recommend dropping the dollar as the world’s reserve currency in favor of a basket.

Realistically, it’s all saber rattling. China and the US are essentially attached at the hip since China is estimated to hold at least $1 trillion in US government debt and more than 21 percent of their exports end up on US shores. It wouldn’t serve any purpose for one to alienate the other at this point. And implementing a basket currency reserve system isn’t without its merits but it would be tough to implement, especially since most commodities are priced in dollars.

But the fact that China is grumbling isn’t good and if it should ever come to pass that the dollar loses its reserve currency status, we as a nation wouldn’t be able to finance our trade or budget deficits.

And while I’m not a Keynesian at heart, I am a realist—and if it looks like we would legitimately spend our way out of crisis I will complain but go along with the flow. However, the Fed balance sheet is now at a ridiculously heavy $2 trillion and the federal budget deficit for fiscal 2009 projected to hit $1.8 trillion, we’re beginning to butt up against Einstein’s definition of insanity. Plus, foreign purchases of US debt, as measured by TIC flows, are beginning to show worrying signs of slowing as the Treasury is dumping a glut of the stuff onto the markets.

It’s time for legislators to step up and make some hard decisions instead of throwing up smoke and mirrors with battles over AIG bonuses, no matter how annoying AIG may be.

If all of this continues, it’ll make me feel more secure in the argument I made in the January 2009 issue of Louis Rukeyser’s Mutual Funds, “How Safe Are Your Treasuries.” In that article I was making the point that after billions of investor dollars had flowed into Treasuries, we’d see a sharp drop off when those dollars were put back to work earning some real money. Now, Treasuries are facing the even more existential threats. Never mind the fact that returns on Treasuries will now never be able to outpace inflation once the economy gets its legs back under it.

And while Treasury yields are off their lows of last year, they’re still too rich to be attractive. In you’re an investor looking for the security of government bonds, you should definitely be looking to something like Fidelity Ginnie Mae (FGMNX).

Loaded up with GNMA’s and other agency bonds, at least you get a decent 4.8 percent yield here. Plus, that’s backed up by the full faith and (what little there still is) credit of the US Government.

Gold isn’t a bad option either, particularly the exchange-traded fund SPDR Gold Trust (NYSEL GLD).

Don’t let last week’s up markets and this week’s down markets fool you. Structurally, nothing has changed with the US economy between now and then.  You’d be prudent in taking steps to protect yourself.

Speaking Engagements

Make plans to join Roger, Elliott, Gregg Early and me at the 18th Atlanta Investment Conference. Sponsored by Friends for Autism, the conference is held in a mountain setting north of Atlanta from Thursday, April 23, to Saturday, April 25.

Roger, a steady hand through many market events such as the one we’re dealing with now, will talk about Canadian income and royalty trusts as well as his new service focused on exploiting the greatest spending boom in history, New World 3.0.

Elliott will detail the new direction for Personal Finance and provide insight into his approach to stock selection and portfolio management. What’s required now amid these difficult times are clarity and focus, qualities Elliott has demonstrated in these pages and through The Energy Strategist for years.

Gregg, a constant at PF for nearly two decades, will be there to address recent developments with the publication. He’ll also discuss the Smart Grid, an endeavor he’s exploring as part of his role with New World 3.0.

Ben, editor of Louis Rukeyser’s Mutual Funds and Louis Rukeyser’s Wall Street, the in-house mutual fund expert, will discuss efficient, cost effective ways to simplify the investing process.

Be sure to bring your questions. These guys love to talk markets and everything that impacts them.

Attendance is limited to 175 of the most enlightened, savvy individual investors. Go to http://www.aicatchota.com/?kloc=NONE&kloc=NONE for more information. Meals are included for the Friday Market Wrapup discounted price of $459 for a single and $599 for couples. Call 770-952-7861 or e-mail altinvestconf@mindspring.com to register.