When the Fed is the first buyer of risk

Brad wants to know why QE is a bad thing.
In a DSGE model, the purchase of risk by the Fed happens independently of other risk buyers.  In a period of moderate growth, the order of the purchase makes a big difference. When the Fed buys the first chunk of risk, then the law of diminishing returns applies.  If the Fed buys the largest chunk of the riskiest assets first, then the seigniorage risk rises. The Fed transforms  interest rate risk into inflation risk. But, wait, you say. Inflation is small.  Yes, but you end up with a few large banks buying risk after the fed take the largest chunk of riskiest assets off the market.  Private banks are buying less risky assets, and their spread is smaller, relative to inflation. The total risk remains the same.