Insight: The ECB Danger

The European Central Bank (ECB) started its Quantitative Easing (QE) program early 2015, where they buy sovereign debt from countries in need of liquidity to help the Eurozone economy recover and to control inflation. There have been many discussions about whether the ECB should have stepped in. Of course, only time can tell if the ECB made the right decision about QE, but it may be wise to be aware of the dangers of QE.
First, QE may seem safe, as it is helping the Eurozone economic stability, it may in reality create higher risks. The QE program lowers yields on bonds, making them less interesting investments. As a result, investors may look for other assets which have a higher expected yield such as stocks, which drives the stock prices up. But this higher stock price is not a real reflection of the underlying value of a stock, its price is only inflated due to the higher demand for higher yielding assets. But the QE program can't be continued for ever, so when the ECB announces to gradually stop the QE program, bonds will become more attractive as their yields go up again. Meanwhile, the stock market will suffer as stock prices were over-optimistic and investors start selling their stocks to switch to the bond market again. The question that remains is not if the stock market will react badly towards the end of the QE program, but how badly it will react.
Second, there may be low interest margins for financial institutions. We learn from the experience of the US and Japan QEs that margins tend to be narrower, which gives banks less space to manoeuvre in the financial markets. This puts a strain on their liquidity creation, because banks become less willing to lend to more riskier clients (this can also be positive as the risk of defaults declines, but that's another story). The major pitfall is the harm it may cause the small and medium-sized sector, which is the major part of the economy. This is contrary to what QE is supposed to achieve.
In the end, QE will definitely have some (short term) advantages, but it remains unclear whether the long term effects of this program will be that positive as well. Be aware of the pitfalls of QE!