…just sits in the bank vaults, and has none of the sort of velocity that creates economic growth.

The Fed believes it can speed up the velocity of money by playing the role of private industry for awhile — investing in banks, buying credit and providing loans at extremely low rates. Fed governors believe this process the economists call "intermediation" — I would call it intervention — should just be a stopgap measure until the financial system gets back on its feet and deflation fears subside.

Is it a good idea? Well, the market decided over the past week that this might work, that's part of the reason stocks rallied. One of bulls' main arguments is that a flood of money has never failed to rejuvenate the economy, and that if you don't buy now to the full extent of your capacity you will miss out.

As you might expect, however, I think there's reason to be skeptical. It didn't work in Japan in part because prolonged recession gutted the demand for money. The problem here might be a little different: Americans are going to want to see instant success for all this spending, and if it doesn't start to show up in earnings growth quickly — and I mean, by the start of the next quarter — then I think investors will get upset, decide the plan was a big waste of money, and sell stocks heavily.

In short, optimism that the Fed's plan will work is going to reach its apex soon, if not right away. And you know what happens when expectations get out of whack.
My best-case scenario in the QE 2 world is that a big range trade develops now with a top around the 1,050 to 1,250 level of the S&P 500 and the bottom around the autumn lows of 750 to 850.

To move higher, the trillions of dollars of federal dollars flooding into the financial system has to find traction at banks, be loaned out, get turned into corporate plant and employment expansion and hiring, and from there into consumer wealth growth. To move lower…