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Club Fed: Why Warren Buffett and PIMCO's Bill Gross Want Ben Bernanke to Unplug QE2

Rough day for Ben Bernanke -- Warren Buffett and Rep. Ron Paul each criticized the Federal Reserve's policy of quantitative easing. The Texas Republican accused the Fed chairman of unleashing inflation, while the billionaire investor told CNBC that the U.S. economy no longer needs propping up. Said Buffett:

I don't think we need as much either monetary or fiscal stimulus as is going on. I think we needed -- the American public, the whole world -- needed to see two years ago that the federal government when the world was going to try and deleverage and people were panicked over every kind of financial instrument, they needed to see the federal government there big time, and the government really did its job there in the fall of 2008.

I have enormous respect for Ben Bernanke. He knows way more about the Fed than I do by a factor of 100 to one. But in the end, I don't think we need more of that now.

Buffett has previously questioned the Fed's move last fall to start buying $600 billion worth of long-term Treasury bonds as a way to boost the economy. He expressed doubt that the program, dubbed QE2, would have much impact and raised concerns that it could spur inflation.

While Buffett is eager to see the Fed pull the plug on QE2, another top investor, Bill Gross of mutual fund giant PIMCO, is even more worried about what will happen to the economy when that occurs. The Fed is expected to shut down the program this summer. Eliminating QE2 would be like "ripping a Band-Aid off a partially healed scab," he writes in his latest investment newsletter:

Investors should view June 30th, 2011 not as political historians view November 11th, 1918 (Armistice Day â€"- a day of reconciliation and healing) but more like June 6th, 1944 (D-Day -â€" a day fraught with hope for victory, but fueled with immediate uncertainty and fear as to what would happen in the short term). Bond yields and stock prices are resting on an artificial foundation of QE II credit that may or may not lead to a successful private market handoff and stability in currency and financial markets. 15 percent gratuities may lie ahead, but more than likely there is a negative two-bit or even eight-bit tip lying on the investment table. Like I did 45 years ago, PIMCO's not sticking around to see the waitress's reaction.
Fine, so comparing the wheeling and dealing of giant investment firms to the heroic self-sacrifice of American soldiers is, even allowing for dramatic license, a little crass. Especially since rather than storming the beachhead Gross is proposing to cut and run.

But his larger point is valid. Although by some measures QE2 appears to be working, including boosting consumer spending, to date it hasn't done much to bolster what is arguably the most important yardstick of progress -- jobs. That remains stubbornly resistant to the Fed's shock therapy. And for now no one -- including Bernanke -- can say for sure what will happen to the economy when the electrodes are removed.

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