Ramesh Ponnuru, one of the smartest conservative commentators, finds some of the arguments for a second round of quantitative easing “persuasive.” A 2% inflation rate wouldn’t be so bad if the Fed could achieve it, he observes today at the NRO site.

But read what Bernanke actually said:

Stock prices rose and long-term interest rates fell when investors began to anticipate this additional [quantitative easing] action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

Just the opposite occurred: Stock prices since have tanked and long-term interest rates have risen. That began in earnest at last week’s G20 meeting in Asia, when some of America’s biggest creditors (the ones who have been buying US Treasuries at a $900 billion annual rate this year) said they might impose exchange controls to keep out the septic tide of dollars.

Bernanke (and the economists Ramesh is reading) think in terms of a closed-economy, one-period model: force a negative rate of return on cash and investors will shift their portfolios into stocks and long-term bonds, creating the wealth effect of which Bernanke wrote. But this is NOT, NOT a closed economy. The US is part of the world economy and the dollar is the world’s reserve currency. Shoving more and more money into the world market—increasing the dosage of amphetamines because the patient remains unresponsive—has consequences. These might include exchange controls and severe damage to free markets.

When investors see that sort of thing happening, they decide to accept a small negative return on cash in order to avoid a big negative return on risk assets. And that’s what we saw when the world refused to foot the bill for QE2—also known as Titanic One, as I said last night on CNBC’s The Kudlow Report.