The Federal Reserve, in the recent announcement of its policy direction, slashed the target fed-funds rate to a range of 0 to 0.25 percent. This didn't come as a huge surprise, because the effective rate was already well below the previous target of one percent. So to get extra mileage they said that the essentially-zero rate will be kept in operation for the foreseeable future.

But the traditional monetary policy of low interest rates is not having much effect in a world of ongoing deleveraging. As a consequence, Bernanke is resorting to quantitative easing to counter the possibility of a deflationary outcome that he fears so much.

It is well known that he is obsessed with the problem. His academic contributions include studies of the depression years of the 1930s, and an examination of policy measures that could have prevented such an outcome. That's fine and dandy, except that today's world bears only passing resemblance to that of seventy years ago. Consequently, not all the conclusions drawn from a study of the past may apply today.

And Bernanke's record, both as governor and chairman of the Fed, inspires little confidence. We won't bore you with the details, but only mention a few things. He sided with Greenspan's excessive credit expansion in the boom years, denied there was a bubble and thoroughly misread the risks of an overleveraged financial system with a large shadow-banking sector.

Now he is embarking on a policy experiment that is unprecedented in the entire history of the US central bank. The message from the recent Fed announcement is that they will be extremely aggressive in implementing unorthodox means of quantitative easing. Unlike the pussy-footing efforts of the Japanese authorities in the 1990s, the Americans are going to do it whole hog.

Essentially, the Fed is engaged in debasing the currency, artificially manipulating asset prices and eventually financing the government's huge deficit. These policies may soften the blow that the current recession will deliver, but they will also create major distortions in the economy that will cause problems for a long time to come.

Recessions are painful. These policies will not eliminate the pain but merely spread the pain over a longer time period and redistribute the adjustment costs among different groups. So, for example, errant bankers and homeowners will be favoured relative to taxpayers-at-large, and creditors will be fleeced to pay debtors. The idea that these policies will allow the US to come out of this mess with a balanced economy poised for solid, stable, non-inflationary growth is a fantasy.

Bernanke and Geithner, the incoming Treasury Secretary, have yet to spell out their exit strategy. In reality, it is particularly difficult to unwind the quantitative easing strategies and the Treasury largesse that are now being implemented. Policy mistakes will generate more volatility and unexpected outcomes. There are major implications for asset allocation strategies.

The US dollar index has plunged like a waterfall, recently. Notably, the decline commenced ahead of the Fed move. Inevitably, the euro and the swissie featured prominently in the action. But even sterling, which is the ugliest dog in the currency park, managed to bark at the greenback and force it back a few steps. Given the size of the index's move, we should expect some sort of a short-term dollar rebound, but the longer-run outlook for the US dollar continues to be cloudy.

Bernard Madoff surely has the most appropriate name in the investment world, having made off with untold billions. As you all know, he didn't so much pilfer the money as commit fraud on a massive scale. The remarkable thing about this whole episode is the extent to which so-called investment experts failed to see glaring problems, and wealthy investors were conned.

The rich folk weren't stupid. But they were very gullible, thinking that they had found an investment wizard with special connections and information on Wall Street. Madoff cleverly nurtured the image of exclusivity and accepted new money ostensibly on the basis of referrals by current clients.

As for the feeder funds and banks that placed large sums with Madoff, they failed to carry out proper checks that would have revealed enormous risks. The inadequacies of the broker-dealer relationship, the custodian and the auditor are now well documented. And over the years, there have been plenty of sceptics raising pertinent questions.

More importantly, the strategy that Madoff claimed to be using to generate the returns would have been hard-pressed to produce the reported results. It was a simple collar strategy, which involves investing in the underlying, combined with buying puts and selling calls. In addition, the size of the funds that he was managing meant that the options market for the S&P 100 (the index he claimed to be trading) wasn't large enough to adequately accommodate the scale of his options trading.

Those involved in this debacle are trying to deny responsibility and pass the blame. Meanwhile, investors with big losses are looking for entities with deep pockets to sue. Predictably, the lawyers will have a field day with this case. As for Madoff, he will eventually have a lot of time in jail to write a bestseller. And the rest of us will have a great holiday season.

Iraj Pouyandeh is a strategist and senior portfolio manager at LOM Asset Management. He manages the LOM Global Equity Fund. For more information on LOM Asset Management please visit www.lomam.com