Investors (and the Fed) are addicted to liquidity

With long-term bond rates as low as they are, is there really a need for the Fed to try QE3 to push them down further?

NEW YORK (CNNMoney) -- The best you can say about "The Godfather: Part III" is that Sofia Coppola recognized her limitations and now spends more time behind the camera than in front of it. "Superman III" proved that Richard Pryor was no Gene Hackman.

And "Return of the Jedi?" I defer to Dante from "Clerks." All that had was a "bunch of Muppets."

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The third time is rarely the charm in Hollywood. But don't tell that to investors and central bankers who are loudly calling on the Federal Reserve for a third round of bond buying to help stimulate the economy.

Fed vice chair Janet Yellen, Fed governor Daniel Tarullo and NY Fed president William Dudley have all hinted in speeches recently that another so-called quantitative easing program, or QE3, could be possible.

Why? The Fed has already pumped trillions of dollars into the economy with the first two renditions of QE. It has left its key interest rate near zero since December 2008 and has pledged to keep rates low until the middle of 2013.

And the Fed is buying even more bonds now through Operation Twist, a program that allows the central bank to sell short-term Treasuries and trade them in for longer-term ones so it doesn't have to add more to its already bloated balance sheet.

What has this accomplished? The economy is still in a sluggish growth phase that feels more like a recession than a recovery. Unemployment remains above 9%. QE ad infinitum isn't going to change things. Only time will.

"People believe, despite all evidence to the contrary, that there is this omnipotent being at the Fed who can push the right buttons and get the best outcome for the economy," said Bob Gelfond, CEO of MQS Asset Management, a global macro hedge fund based in New York.

"There is a refusal to just let things in the economy play out," Gelfond added.

Is Operation Twist already a failure?

But the 10-year Treasury yield is at 2.17%, not much higher than its record low! So it's a great time to refinance or buy a home .. if you can find a bank to approve your loan. Oh yeah.

More liquidity is not the answer. The economy isn't being constrained by the affordability of credit. Turning the U.S. into Japan so we can have even lower rates isn't going to help.

"Quite frankly, the problem existing in the economy right now is whether or not businesses feel confident enough to ask for loans or for consumers to qualify for one," said Terry Clower, director of the Center for Economic Development and Research at the University of North Texas. "Do we want to encourage borrowers to take on more debt they can't afford?"

Another possible consequence of more easing is that it could devalue the dollar and lead to higher commodity prices. Even if that isn't textbook inflation per se, the last thing the U.S. consumer needs is to pay more at the gas pump and grocery store.

Dan North, chief economist with Euler Hermes, a credit insurer in Baltimore, worries that the Fed might be willing to risk that in order to prove it is trying everything it can to get growth back on track.

"It's possible we'll get QE3 because it seems like the Fed always has to be doing something," North said. "But the problem is that you can't erase injecting that much money into the financial systems without some inflation concerns."

However, the Fed might be able to help matters with a more targeted form of easing.

Doug Cote, chief market strategist with ING Investment Management in New York, said if the Fed were to only buy mortgage-backed securities, that could push mortgage rates lower without the potential nasty side effects of creating pricing pressures. Tarullo has in fact proposed such a plan.

But Cote said that the Fed would also have to work with mortgage buying agencies Fannie Mae and Freddie Mac as well as banks to loosen some of the constraints on who can refinance. Dudley has said this is something he favors too.

Lower rates still won't help if nobody can take advantage of them. Cote argues that any borrower current on their mortgage should be allowed to refinance, even if the value of their home has plunged.

"I am against the concept of indiscriminate bond buying. That exposes taxpayers to a lot of risk," Cote said. "But broadening the base of borrowers that can refinance by eliminating constraints on people with underwater mortgages can only help consumers."

Brazil cuts rates. Is China next?

That may be true. Still, the Fed would be foolish to keep throwing money at the problem. It can't stay in firefighter mode indefinitely.

The latest gross domestic product figures will be released by the government on Thursday. According to 21 economists surveyed by CNNMoney, GDP for the third quarter is expected to rise at a 2.5% annualized pace.

That's still not fantastic, but it would be a major improvement from the first half of the year. And as long as the economy is in slow growth mode as opposed to a full-blown crisis, it's just greedy to expect the Fed to step in all the time with more bond buying.

Sure, investors may want and crave more quantitative easing. The market, to paraphrase Robert Palmer, might as well face it: It's addicted to liquidity. (Cue the tall girls with the pulled-back hair and short, black dresses!)

Anything that pushes borrowing costs down further, makes bonds less attractive and weakens the dollar is like manna from heaven for the earnings power of big multinational companies. But the Fed should not bow to the demands of traders.

After all, the hole we're still trying to dig out from was partially created by a period of easy money that lasted too long.

"All of the QE3 talk is just trying to put Humpty Dumpty back together again so we can go back to 2006," Gelfond said. "It just prolongs the inevitable."

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks.