Ever since the U.S. Federal Reserve lowered its benchmark rate almost to zero and embarked on a series of large-scale asset purchases, Chairman Ben Bernanke has been using his pulpit to explain how it all is supposed to work.

In a nutshell: The Fed buys risk-free Treasury securities, depressing the yields. The public is goaded into buying riskier assets, such as stocks and corporate bonds, sending those prices higher. Businesses financing themselves with equity have more money to invest. Consumers feel wealthier and spend more.

Whenever I hear the bit about risk-taking, I wonder what the dividing line is between encouraging higher asset prices and creating froth in asset markets. How does the Fed know when asset prices have gotten out of whack?

Good question. The Fed can't control how its money creation gets allocated. It hopes the money flows from asset prices into the real economy, but that isn't always the case. For example, an individual's decision of what to buy -- goods and services versus stocks and bonds -- depends on the expected return, said David Beckworth, an assistant professor of economics at Western Kentucky University in Bowling Green. "I might put off buying a new car if I could get a great return on buying a new home," he said.

That's exactly what happened in the last decade, when home prices became untethered from their anchors.

"The value of housing went up more than the real value determined by the flow of services people get from it," said Michael Bordo, a professor of economics at Rutgers University in New Brunswick, New Jersey.

David Fuller's view As I recall and Fullermoney reported, Mr Bernanke was elevated to Chairman of the Federal Reserve because he was the academic authority who said he could prevent a Japanese-style deflation. Understandably, that has been his priority.

I think he will succeed, but investors in US long-dated government bonds appear to have disagreed with my conclusion for much of the Bernanke reign, judging from the low at 1.3790% reached by US 10-Year Treasuries (historic, weekly & daily) on July 25th 2012. There is no current evidence that this milestone will be retested, despite all the Fed money that is still flowing into Treasuries.