Why quantitative easing isn’t working

December 11, 2012, 3:00 PM UTC

Ben Bernanke

FORTUNE — The Federal Reserve may soon steal a catch phrase from Buzz Lightyear: To infinity and beyond.

The Federal Reserve is meeting this week, and it looks likely that Bernanke & Co. will announce that it will boost its latest bond buying effort, which has been dubbed QE Infinity. So called quantitative easing, which is what happens when a central bank buys its own country’s debt, is supposed to drive down interest rates. And low interest rates are supposed to stimulate the economy.

But it hasn’t quite worked out that way. The economy is indeed improving, but not nearly as fast as one might have expected given that Bernanke kicked off the first round of quantitative easing more than three years ago. Companies are indeed borrowing, taking advantage of the lower rates. So that part of the Fed’s plan seems to be working.

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The problem is that companies appear to be using that cheap money to pay off old debts, or just hoarding it, instead of spending it on new hires, building factories or other types of business investments, which is normally the way low-interest rates boost the economy.

The question is, why? Robert Buckland, the chief global equity strategist at Citigroup (C), has an interesting answer. In short, Bernanke is turning the stock market into the bond market, or at least it may be starting to feel that way.

One of Bernanke’s hopes from quantitative easing is to push investors who normally would buy bonds and other less-risky assets into riskier assets, namely stocks. And that appears to be happening. The S&P 500, which is up nearly 13% this year, is performing much better than the actual economy. That’s supposed to make us all feel better about the actual economy, and spend more money.

Unfortunately, Buckland says that pushing all those risk-averse bond investors into the stock market has a downside, too. Corporate executives get more risk-averse, too, not wanting to alienate their new more conservative investors. That’s why they haven’t been spending money on acquisitions or expansions.

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It’s an interesting argument, but I don’t fully agree with it. If this was the case, you would see more CEOs returning cash to their shareholders. Instead, the amount of cash on corporate balance sheets has continued to grow. What’s more, as my colleague Scott Cendrowski recently pointed out, despite talk of companies rushing to do shareholder payouts ahead of the fiscal cliff, dividends are not up that much.

Most CEOs are pretty confident people, and it would be hard to suddenly make them overwhelmingly afraid of risk. A new group of shareholders could throw out corporate management teams that they thought were taking on too much risk. But that would take time. And stocks have only truly become interesting to income investors within the last year or so. So if what Buckland describes is happening, it’s probably only happening at the margin, which might matter, but isn’t a great explanation why the economy is only producing 146,000 jobs, nearly three and a half years after the recession ended.

I think the reason companies aren’t spending money is probably the obvious one – because executives think the economy will continue to be weak. That makes it harder to pin the weak recovery on Bernanke and his loose money policies. And it’s less interesting than Buckland’s theory, but that doesn’t mean it’s incorrect.