Mark Carney and the Art of Deflecting Blame

Had this article posted at LvMIC Daily today, here is an excerpt:

In what has to be one of the most nonsensical and counterintuitive statements since Lawrence Summers, former economic advisor to U.S. President Obama and former President of Harvard University, declared that though the financial crisis was caused by too much confidence and debt run-up, the cure involves more of the same imprudent spending habits, Carney offers this muddled statement:

The challenge for the crisis economies is the paucity of credit demand rather than the scarcity of its supply. Relaxing prudential regulations would run the risk of maintaining dangerously high leverage—the situation that got us into this mess in the first place.

Read it twice for the full effect. You see, the problem isn’t a deficiency of available credit; central banks around the world have made sure of that. It’s the demand for credit that remains an albatross on a robust spending boom. Yet, and this is the best part, regulations that ensure that credit expansion, a driving force in fractional reserve banking, doesn’t finance more reckless debt amassing can’t be expunged as it would lead to another deleveraging bust.

Carney wants his cake and to eat it too. While he warns of lack of credit demand, he also worries that an increase will lead to another boom and bust. This double talk- wanting success while worrying about too much success- is typical central banker speech.

Carney is not alone in this sentiment. Public officials all over the world, namely in the U.S. and Europe, are desperate for a return to the boom years. The drug of easy credit and debt monetization had them addicted to the good times.

Like any good central planner, Carney speculates on how to best unwind the private debt load in order to run it up again. He paints himself as a deep thinking central planner struggling to find the exact formula where the BoC can use its printing press and discover the perfect equilibrium for credit expansion without blowing up another bubble.

Over the same period, Canadian households increased their borrowing significantly. Canadians have now collectively run a net financial deficit for more than a decade, in effect, demanding funds from the rest of the economy, rather than providing them, as had been the case since the Leafs last won the Cup.

It cannot entirely be business as usual. Our strong position gives us a window of opportunity to make the adjustments needed to continue to prosper in a deleveraging world. But opportunities are only valuable if seized.

First and foremost, that means reducing our economy’s reliance on debt-fuelled household expenditures.

Though Canada saw tremendous growth with public spending reforms adopted in the mid-1990s, the cyclical pattern of private overindebtedness has begun to rear its ugly head. This isn’t unexpected as the BoC, like central banks all over the world, took interest rates to anorexic levels following the financial crisis of late 2008. As I have noted, this orthodox reaction has set the stage for what looks like a housing bubble that will inevitably pop. Even Carney alludes to such as he states one of the hallmarks of the Austrian Business Cycle theory where the discoordination brought on by credit expansion leads to malinvestment in specific capital ventures and consumer goods:

Moreover, much of the proceeds of these capital inflows seem to be largely, on net, going to fund Canadian household expenditures, rather than to build productive capacity in the real economy. If we can take one lesson from the crisis, it is the reminder that channelling cheap and easy capital into unsustainable increases in consumption is at best unwise.

When the day of reckoning arrives, the market correction will undermine an already flimsy recovery. Not only will private balance sheets containing mortgages and real estate take a hit due to reduced prices but also the Canadian Mortgage and Housing Corporation will be ravaged as it guarantees about 90% of the whole housing market. As Chris Horlacher points out, the CMHC’s leverage stands at almost an astounding 100:1. A burst of the housing bubble will likely require a massive bailout via the Canadian government to keep the CMHC functional which in turn will require further debt monetization. The probability of this chance event coming to past is further emphasized by Carney’s earlier comments on the inseparable nature of the private sector from governmental dominance.

Some Problems with the Tobin Tax

LvMIC:


With backing from both the George Soros-supported Occupy Movement and French President Nicolas Sarkozy, the tax on financial transactions, otherwise known as the Tobin Tax, is looking more and more like a real possibility.  Though the proposed rate is seemingly miniscule (Sarkozy wants a .1% rate starting in August), the economic implications are disastrous.  From the Peterson Institute for International Economics:

The Swedish Social Democratic government enacted a transaction tax on stocks, bonds, options, and some other securities in 1983. The tax, named after the economist James Tobin, was abolished by the new nonsocialist government in 1991.
The tax rates varied from 0.1 percent on ordinary stock trade to 0.15 percent on treasuries and 1 percent on options.
1. The expectation had been that the tax revenues would be 1.5 billion Swedish krona (SEK), but they stopped at SEK80 million.
2. Most Swedish trade in securities disappeared and went abroad, mainly to Oslo and London, and never returned. Soon after, the previously tiny Oslo stock exchange overtook the Stockholm stock exchange, and it is still the larger of the two stock exchanges.

And from the Adam Smith Institute:

Almost 60% of trading volume of the 11 most actively traded Swedish shares migrated to London during Sweden’s attempted Tobin tax. The temptation, and indeed relative ease, with which capital flight and cross border arbitrage can occur would spell disaster for the UK.

Sweden is the only country to have tried a “pure” Tobin tax, of 0.5%. It raised only one thirtieth of the proceeds predicted by its proponents and was scrapped after five years. The taxes sparked an exodus of financial activity from Sweden. By 1990 60% of the trading volume for the top 11 most traded Swedish stocks had moved to London. Trading for over 50% of Swedish equities had moved to London by 1990.

All market participants would be subject to the tax; a Tobin tax is unable to discriminate between de-stabilising trades and those which provide liquidity, information and tradefinancing. With short-term trading providing invaluable liquidity to the market, an incapability to segregate individual trader motivations will therefore lead to a reduction in both liquidity and welfare-enhancing trade, in addition to increasing market susceptibility to individual shocks.

Financial Atlases shrugging is no surprise.  There are plenty of other developed countries out there that would gladly welcome an influx of capital from countries with politicians delusional enough to believe a predictive model based on static behavior.  It’s as if public officials truly believe people are submissive and will take their various attempts at pilfering with little, if any, protest.  Should the Tobin Tax be enacted in France, or worse yet the U.S., the short term trading industry will suffer a serious blow.  Since short term trades occur more frequently, they are disproportionately affected by such a tax.  As the study from the Adam Smith Institute shows, the Tobin Tax drove away short term liquidity traders who provide much-needed relief during downturns.

But the core issue with a financial tax goes much deeper than the immediately observable effects.  Market transactions aren’t just exchanges of goods or services, they convey vital market information as prices which represent profits and losses.  As Mises noted:

Profits and losses are essential phenomena of the market economy.  There cannot be a market economy without them.  It is certainly possible for the police to confiscate all profits.  But such a policy would by necessity convert the market economy into a senseless chaos.

The Tobin Tax starts small but one should never doubt the extent to which such taxes are increased in times of fiscal stress.  The income tax enacted in 1913 in the U.S. was first levied at 1% for most incomes and between 2% and 7% for higher incomes.  There is no telling the kind of economic growth America could have seen had these rates been kept.

So while the Eurozone continues to implode and the Occupy Movement campaigns on the behalf of increased taxes, the Tobin Tax should be feared by all market participants, not just investors.  The greater the chains of burden placed on the market, the greater the long term impoverishment for all.

(ht to Mike Shedlock for the studies)

Keynesian Mercantilism In Action?

LvMIC:

In the New York Times “Economix” blog, Binyamin Appelbaum writes (in reference to the U.S.):

Foreign buyers purchased more than $2 trillion in goods and services, the first time exports have topped that threshold. And those exports accounted for almost 14 percent of gross domestic product, the largest share since at least 1929.

Source: Bureau of Economic Analysis

The reason for this jump in exports?

The value of the dollar has declined, so that foreigners save money when they buy American. Businesses, struggling to find customers here, are focusing on foreign sales. And a boom in commodity prices, which has raised the price of life for most Americans, has produced a windfall for those who trade in commodities.

Now has the dollar really seen that much of a decline relative to other industrialized competitors which has in turn served as a boon to exporters?  Take a look at some dollar exchange ratios with major economic players such as Canada, Japan, the Eurozone, and Sweden:






From the above charts, it’s clear the Federal Reserve’s multiple engagements of quantitative easing and dollar debasement have succeeded in lowering the dollar’s value in terms of other major competitive currencies (China of course has an active currency peg whereas it keeps the yuan undervalued compared to the dollar).  With financial crisis hitting in late 2008, the dollar saw a boost in terms of investors looking for a save haven.  It has since seen a downward trajectory albeit few bumps along the road.



Orthodox Keynesiansim suggests that inflation is the correct remedy for downturns as it empowers exporters whose goods are cheaper in foreign markets.  As Paul Krugman wrote last May:

First, what’s driving the turnaround in our manufacturing trade? The main answer is that the U.S. dollar has fallen against other currencies, helping give U.S.-based manufacturing a cost advantage. A weaker dollar, it turns out, was just what U.S. industry needed.

But of course this came at the expense of a 3% annual increase in the Consumer Price Index, an almost 10% annual increase in gasoline prices, and a 4.7% increase in food prices according to the Bureau of Labor Statistics.  Funny how Krugman claims to care for the poor yet advocates for policies that disproportionately affect them on a negative basis.

But as Henry Hazlitt points out, inflation isn’t all that it’s cracked up to be:

An inflation is initiated or continued in the belief that it will benefit debtors at the expense of creditors, or exporters at the expense of importers, or workers at the expense of employers, or farmers at the expense of city dwellers, or the old at the expense of the young, or this generation at the expense of the next. But what is certain is that everybody cannot get rich at the expense of everybody else. There is no magic in paper money.

Inflation through government decree is nothing more than glorified mercantilism on the part of politicians looking to buy votes and campaign donations from bankers and favored industries.  Nothing better brings rounds of dimwitted applause from ignorant votes than speaking on the importance of “manufacturing” or “boosting exports.”  Inflation impoverishes the public which thinks it’s getting a free lunch.  Even the manufacturing worker who takes comfort in a briefly secure job potentially pays for it with every gallon of gas or loaf of bread he buys.

If John M. Keynes endeavored at duping the public into thinking that economic cures spring froth from the printing press, consider him a success.  Meanwhile, the dollar devaluation seen over the past three years will inevitably hit a cliff of no return where inflation will take off and lead to more misallocations of resources and distortions and thus paving the way for another bust.
 -----------------------------------------------------------

Also of note, had an article at the American Thinker today entitled "How China Transformed Its Economy."  It is a reiteration of a previous post of mine.

Krugman Sinks to a New On-Star Guided Low

LvMIC (and possible draft for the American Thinker):

With every New York Times column, it’s getting harder and harder to differentiate Princeton economist Paul Krugman from an unabashed political hack.  Certainly Krugman has always played the role as champion of the Democratic Party, but this latest attempt to defend President Obama takes the cake.  This week’s crime in unsound economics?  Offering nothing but praise for the bailout of General Motors and Chrysler.  Krugman writes:

The case for this bailout — which Mr. Daniels has denounced as “crony capitalism” — rested crucially on the notion that the survival of any one firm in the industry depended on the survival of the broader industry “ecology” created by the cluster of producers and suppliers in America’s industrial heartland. If G.M. and Chrysler had been allowed to go under, they would probably have taken much of the supply chain with them — and Ford would have gone the same way.
Fortunately, the Obama administration didn’t let that happen, and the unemployment rate in Michigan, which hit 14.1 percent as the bailout was going into effect, is now down to a still-terrible-but-much-better 9.3 percent.

So how many jobs did the bailout really save?  Paul Roderick Gregory at Forbes estimates around 4,000.   Obama and the White House claim at least 1 million jobs saved.  Somehow I doubt their sincerity on such a rosy number.  Whatever the number of jobs supposedly saved, the cost to taxpayers has been an estimated loss of $14 billion according to Obama’s ex-Auto czar.  What’s $14 billion among friends?  And by friends, I am of course referring to the United Auto Workers whose price tag has been satisfied in return for some much needed votes come this November.

What Krugman doesn’t, or won’t mention, is the real reason GM and Chrysler survived- that is a successful bankruptcy process.  There is absolutely no reason in the world to believe that had Uncle Sam not come to the rescue with a sack of taxpayer dollars, that GM and Chrysler would have ceased to be auto companies today.   Markets have tendency to self correct when push comes to shove.

Yet even the bankruptcy procedure initiated by the Obama administration wreaked of favoritism.  From David Skeel, law professor at the University of Pennsylvania, writing in the Wall Street Journal:

But the “sale” also ensured that Chrysler’s unionized retirees would receive a big recovery on their $10 billion claim—a $4.6 billion promissory note and 55% of Chrysler’s stock—even though they were lower priority creditors.
If other bidders were given a legitimate opportunity to top the $2 billion of government money on offer, this might have been a legitimate transaction. But they weren’t. A bid wouldn’t count as “qualified” unless it had the same strings as the government bid—a sizeable payment to union retirees and full payment of trade debt. If a bidder wanted to offer $2.5 billion for Chrysler’s Jeep division, he was out of luck.

Basically, if private creditors looking to use their own funds wanted to save either auto company, they had to appease the UAW’s retirement fund.  Funny how bailouts, financed by money not belonging to bureaucrats, work.

Krugman goes on to cast a blanket over capitalism itself as being wholly reliant of government to exist.

But the current Republican worldview has no room for such considerations. From the G.O.P.’s perspective, it’s all about the heroic entrepreneur, the John Galt, I mean Steve Jobs-type “job creator” who showers benefits on the rest of us and who must, of course, be rewarded with tax rates lower than those paid by many middle-class workers.

Unfortunately for Mr. Keynesian, capitalism does not exist in a vacuum of rugged individualists in a constant state of ruthless competition.  Certainly producers fighting for market share and profits are great in terms of seeking innovative ways to lower costs for consumers.  But markets are always the product of social cooperation no matter how reclusive or self reliant an entrepreneur wishes to be.  Just like in tango, it takes two in order to offer remuneration for a consensual transaction.

The idea that free market types remain entranced with the fantastical entrepreneur as the building blocks for a productive economy is a blatant smear on Krugman’s part.  No surprise from him there.  What he fails to specify is that every participant in the complex system known as the market acts as an entrepreneur in forecasting their own financial conditions.  Steve Jobs and the teenager at McDonald’s both make subjective decisions based on their own ability to satisfy demand.  Capitalism is a function of economic actors collaborating en masse in the constant pursuit of improving their own standards of living.  Starkly dividing a free economy’s success by individual or collective factors is pure demagoguery.

Not only does Krugman disingenuously define a system of free enterprise, but he fails in accounting for the unseen consequences and price of the bailout.  While to shallow eyes it may seem like the bailout saved the auto industry, it merely papered over some losses for the sake of buying votes.  The ultimate price paid won’t be the bill forced on the balance sheets of taxpayers but the perpetuated system of cronyism and corporatism that is has become the Obama legacy.  Bankruptcy ends up not being a process to fear but embrace as it serves as a clearing mechanism for inefficient production.  Like investor Peter Schiff notes, “Bankruptcy is a good thing. It’s the way the market cleanses the economy of companies that shouldn’t be there.”  Krugman not acknowledging this phenomena speaks volumes on his credibility.

And the Global Liquidity Binge Continues

LvMIC:

Forget Fed chairman Bernanke and his central planning cronies “considering additional asset purchases,” the unsettling truth is right before your eyes (charts via Bianco Research at The Big Picture):




Here are some comparative charts (note the first is scaled in terms of U.S. dollars):


And perhaps the most worrisome chart of all:

Prior to the 2008 financial crisis, the eight central bank balance sheets were less than 15% the size of world stock markets and falling.  In the immediate aftermath of Lehman Brothers’ failure, these eight central bank balance sheets swelled to 37% the capitalization of the world stock market.  But keep in mind that the late 2008/early 2009 peak was due to collapsing stock market values combined with balance sheet expansion via “lender of last resort” loans.

Recently, the eight central bank balance sheets have spiked back to 33% of world stock market capitalization.  This has come about not by lender of last resort loans, but rather by QE expansion (buying bonds with “printed money“) even faster than world stock markets are rising.

The fundamental question needs to be asked: after punting on a necessary market correction following the U.S. housing bubble and financial crisis, has the world economy been solely propped up by major central banks alone?  Is it even possible to determine an answer to such an incredibly complex question?
Because money disperses through hands and economies in an unpredictable manner, one can’t possibly have enough knowledge to give an exact answer on the proposed question.  While the banking sector has been practically zombified with multiple adrenaline shots of liquidity, it is certainly possible that some sectors are seeing market-driven growth despite increasingly crippling government regulation and cheap money slowly, but surely, finding its way to investors.  Markets are forever resilient to some degree.   But with all this cheap liquidity running amok, there is little doubt subsequent distortions in relative prices and production structures have occurred and will continue to till another correction inevitably manifests itself.

This is already apparent as governments, predisposed to rakish spending in economic times good and bad, are still able to fund themselves cheaply (with the exception of the Eurozone which still fumbles along despite increased cost of borrowing not including Greece) and draw more and more amounts of already precious capital from a deprived private sector.

Though inflation remains comparatively low in terms of consumer goods for most of the observed countries, excluding China whose falling prices are even more evidence of the property crack up boom presently occurring, eventually a turning point will be reached where the demand to hold cash balances falls in favor of accumulating goods and investments as time preferences heighten.  This occurs on an individual subjective basis but behaves as a type of domino effect as increasing amounts of dollars/euros/yen/yuan etc. chase fewer goods.  The chain reaction, while boosting some prices first, could very well be seen as a savior-like bubble that will be celebrated as a sign of a growing recovery.  By the time the purveyors of the printing press realize what’s up, it could very well be too late.  This is even further suspected given the recent disclosure of FOMC minutes from 2006 showing the complete incompetence Fed officials displayed with a bursting housing bubble right in front of their supposedly well-educated eyes.

As the global currency race to the bottom continues, one can be sure that the path to reaching sound economic footing will be further avoided as these policies remain in place. Much like Hayke ironically observed in 1932:

“Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion.

“To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection – a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end.

“It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the depression. We must not forget that, for the last six or eight years, monetary policy all over the world has followed the advice of the stabilizers. It is high time that their influence, which has already done harm enough, should be overthrown.”

---------------------------------------------------------
I should also mention my piece published at the Mises Institute today entitled "Mr. Rubenstein, You're No Adam Smith" which has gotten a load of compliments as well as my first piece published at PolicyMic.com yesterday entitled "Ron Paul's Impact Will Last Long After the Florida Debate."  I am not overly satisfied with the Paul piece as what I saw as the best parts were edited out but the editor asked me to write it so I took a couple of hours to do so.

The New Soros Plan on How to Save Italy and Spain

LvMIC:


Much like his last plan, Mr. Oligarch Insider once again makes another plea for the European Central Bank to intervene on behalf of the governments of Spain and Italy.  Writing in the Financial Times, Soros stays infatuated with infinite liquidity provided by the printing press:

My proposal is to use the European Financial Stability Facility and the European Stability Mechanism to insure the ECB against the solvency risk on any newly issued Italian or Spanish treasury bills they may buy from commercial banks. This would allow the European Banking Authority to treat the T-bills as the equivalent of cash, since they could be sold to the ECB at any time. Banks would then find it advantageous to hold their surplus liquidity in the form of T-bills as long as these bills yielded more than bank deposits held at the ECB. Italy and Spain would then be able to refinance their debt at close to the deposit rate of the ECB, which is currently 1 per cent on mandatory reserves and 25 basis points on excess reserve accounts. This would greatly improve the sustainability of their debt. Italy, for instance, would see its average cost of borrowing decline rather than increase from the current 4.3 per cent. Confidence would gradually return, yields on outstanding bonds would decline, banks would no longer be penalised for owning Italian government bonds and Italy would regain market access at more reasonable interest rates.

Soros’ scheme amounts to nothing more than backdoor monetization at a more aggressive rate than is happening currently with the ECB’s  LTRO program.  Take one look at the rise in the ECB balance sheet since the program kicked into gear (ht Zerohedge)

The resulting backdoor quanto easing in Eurozone is clear from the recent surge in the ECB’s balance sheet relative to the Fed’s. Thus, the ECB’s total assets have risen by 38% from €1.94tn on 1 July 2011 to €2.69tn on 6 January 2012. While the Fed’s total assets have risen by only 1% from US$2.87tn to US$2.9tn since July 2011.

And Soros wants more of this?  Just think about it, in order for Spain and Italy to refinance their debt “at close to 1%,” the ECB must be willing to buy treasuries from Eurozone banks.  These banks must be guaranteed virtually risk-less profit to play along, hence keeping the rate above the .25% currently paid for excess reserves at the ECB (which took a page from Bernanke’s play book).  With the ECB ready and willing to eat up more government bonds, suppressing yields shouldn’t be a problem outside a hyperinflationary event.  With fresh funds flowing from the banks, which have pretty much become wards of the state at this point, debt will be effectively monetized to the happy benefit of bailout out member state governments and banks looking to dump toxic securities.  As Martin Sibileau points out, this process can be aided in part with the Federal Reserve’s recent advent of cheapening dollar swap lines.

The new Soros plan is the same kind of bailout, money printing extravaganza that central bankers, politicians, and their friends love to resort to in times of fiscal trouble.  Not only does it direct further capital away from capital constrained banks into bloated and unproductive bureaucracies, it would further perpetuate the belief that mistakes bear no consequences in the world of central banking.  Soros wants economic growth in the Eurozone but also wants the resources to fund such increases in productive capacity to instead be directed toward governments.  If the authorities just have enough “sufficient resources” to deal with their overspending, then all will be well.  Never mind that their profligate spending, overregulation, and inability to recognize the boom-bust cycle engineered by central banks lead to this crisis.  The plan is essentially one long punt to give these so-called leaders a chance to come up with further band aids to save their own jobs.
Soros wants an end to the “deflationary vicious circle” but, like any good Keynesian, doesn’t have the courage to admit such deflation is only in response to previous inflationary practices.  He surprisingly concedes his true intention at the close:

The stimulus must come from the EU because individual countries will be under strict fiscal discipline. It will have to be guaranteed jointly and severally – and that means eurobonds in one guise or another.

And with that Soros admits his desire for fiscal integration; the very next step toward centralizing statist power.  Elitist puppeteering has a name, and it's George Soros.

More Evidence That The Housing Bubble Has Yet To Be Liquidated

LvMIC:

Government interference with the present state of banking affairs could be justified if its aim were to liquidate the unsatisfactory conditions by preventing or at least seriously restricting any further credit expansion.  In fact the chief objective of present day government interference is to intensify further credit expansion.  This policy is doomed to failure.  Sooner or later it must result in a catastrophe. (p 445 of Human Action)

Despite claims from some confused commentators, the malinvestment built up during the boom years of housing is still weighing down a significant portion of the economy some five years after the bubble burst.  From Reuters:

In a letter sent on Friday to the Republican and Democratic leaders of a U.S. House of Representatives government oversight panel, the Federal Housing Finance Agency explained why it has long opposed principal reductions for borrowers who owe more than their homes are worth.
It said it had determined that such reductions would be more costly for the two firms than allowing those troubled borrowers to default.
The regulator has been under pressure from Democrats to permit the write-down of principal by the two government-controlled mortgage finance providers as a way to help some of the millions of U.S. homeowners who are “underwater.”
About 22 percent of U.S. homes have negative equity totaling about $750 billion, according to CoreLogic.
Fannie Mae and Freddie Mac were taken over by the government in 2008 as mortgage losses mounted. Millions of soured loans issued during the housing bubble remain on their books and delinquencies on those loans continue to rise.
Fannie Mae and Freddie Mac own or guarantee roughly half of all outstanding mortgages in the United States. Out of the approximate 30 million mortgages guaranteed by the two firms, close to 3 million of those loans were held by underwater borrowers as of last summer, according to analysis provided in the letter.

With these toxic mortgages still on the books, it should come as no surprise that financial capital remains tied up in money losing assets such as underwater mortgages.  This is just one of the consequences of stabilizing nationalization maneuvers which rather than setting the foundation for a sustainable correction continues to exacerbate the problem.  Fannie and Freddie have effectively become zombie institutions forcefully backed by taxpayers when cutting their life line was the truly sensible course to take.  Despite close to $200 billion in tax funds used to prop up the housing giants, further writedowns will put more public funds at risk.  The vicious cycle continues precisely due to the unwillingness of politicians and regulators to embrace short term pain now in return for long term growth.

As grating as it is to hear, the run up of prices in the boom must inevitably be met with a fall in prices.  The propping up, or the attempted propping up, of prices via the government prevents the market from clearing and a sound footing from being reached in order for increasing growth to take place.  Shoving wads of cash onto the hemorrhaging balance sheets does nothing to solve the core problems associated a central bank engineered boom.  It leaves less capital to be invested in actual sustainable lines of production.

Even the Fed recognizes the moral hazard associated with such a policy:

The Federal Reserve, in a white paper to Congress earlier this month, said writedowns “had the potential to decrease the probability of default” and “improve migration between labor markets.”
However, the Fed stopped short of endorsing such an initiative and noted concern that writing down loan balances would create a moral hazard – the concept that rescue efforts breed further behavior that exacerbates the existing problem – and could prompt other borrowers to stop making timely loan payments.

Ironic words coming from the institution which drives perhaps the biggest moral hazard of all as the lender of last resort to both Wall Street and the federal government.   As President Obama pushes for further writedowns, such a policy is more about buying votes than an actual understanding of how markets liquidate themselves.  If Obama really wanted to clear the housing market, he would have let it occurred years ago when he assumed office.

While writedowns will be expensive, they would have been much less expensive for taxpayers had they occurred years ago such as the market dictated.  The housing market would have been much healthier by now.  Defaults will happen; it’s only a matter of time.  The longer the children in the FHFA continue to not take their medicine, the longer sluggish progress continues.  And the art of can kicking continues much to the detriment of everyone involved.