1. Ben Bernanke said that QE works mainly though the portfolio balance effect (i.e., essentially, it increases the price of longer-dated debt by reducing the amount of Treasury debt held by investors). That is no surprise — he has said as much before.
  2. However, QE cannot have worked through the portfolio balance effect. The US has been issuing more longer-dated debt than the Fed has been buying. So investors now hold more than they did before QE2.
  3. As I said last year, I think QE has mainly worked through its effect on expectations. Embarking on QE shows that a) the Fed is committed to fighting deflation, and b) that interest rates will not rise for a long time. With those ideas established in people’s minds, leveraged players lever up and money flows into financial assets (which, at least in the short term, is of benefit to the real economy).
  4. When QE ends, point (b) becomes more doubtful. And because the bar for QE3 has been set quite high, it is reasonable to think that the Fed has shot its bolt on preventing deflation for the time being — so (a) is also in doubt.
  5. Thus, if QE ends and the economy looks strong, fear of interest-rate hikes will derail the flow of money into financial assets. If QE ends and the economy looks weak, investors will fear that the authorities are out of ammunition and will pull back from financial assets. 
  6. So the end of QE is followed by falling financial asset prices in any scenario.
Sorry, I’m in a hurry and couldn’t find any of the relevant links.