He didn’t know how worldwide bond investors might respond.

He couldn’t begin to guess to what degree his actions might rekindle their inflation fears or damage their trust in the credit of the U.S. government.

He had no basis for estimating how many investors would shun or dump U.S. bonds … how far they could drive down bond prices … or how far they might push up long-term interest rates.

Worst of all, if, for whatever reason, his new venture truly upset the equilibrium between the supply and demand for bonds, he had no Plan B.

In a nutshell, on March 18, Ben Bernanke jettisoned his balancing poles, abandoned any policy safety net and launched a stunt that would make the most daring tightrope walker tremble with fear.

And unfortunately, right now, even before all the moneys have been spent, the enterprise is already beginning to fail.

The critical events …

Event #1
Huge Fed Purchases of Treasuries

Since March 25, the Fed has been buying Treasury notes and bonds like they were going out of style.

The Fed kicked off the program with a purchase of $8 billion and followed up with another $7.5 billion two days later. Since then, the Fed has jumped into the Treasury-bond market with average purchases exceeding $5 billion at least 10 times per month.

Total bought so far: $130.5 billion.

Event #2
Despite the Fed’s Giant Purchases,
Treasury Bond Prices Have
Continued to Plunge

Instead of rising or stabilizing as Bernanke had hoped, Treasury bond prices have fallen sharply.

Sure, bond prices momentarily jumped higher in the wake of the Fed’s landmark March 18 announcement. And yes, they have typically enjoyed mini rallies whenever the Fed bid up the market with some more big bucks. But in the final analysis, bond prices have wound up sharply lower and long-term rates sharply higher.

Event #3
Mammoth Fed Purchases of Mortgage Bonds

The amounts the Fed has poured into the market for mortgage-backed securities (MBSs) make its Treasury purchases look small by comparison: The Fed launched the program with a $10 billion purchase on January 7, ramping it up quickly from there, and buying up to $33 billion a pop by late March.

Total bought so far: A whopping $507 billion!

Event #4
Despite the Fed’s Mammoth Mortgage
Bond Purchases, We’ve Just Seen a
Sudden Collapse in Mortgage Bond Prices

For a while, it seemed the Fed was able to hold the line, keeping the price on a benchmark long-term mortgage bond near the 100 level.

But last week, the market collapsed.