Your money supply increases and low interest rate policies will delay the recovery in this cycle of economic destruction and lay a solid foundation for the next, one that will inevitably happen if your policies are followed.

Who knows what the next bubble will be. It may be stocks or financial assets, maybe commodities, maybe real estate. It won’t matter because it will still cause major economic damage and transfer of wealth.

Bubble markets need to deflate to re-establish a realistic relationship to the other goods, services and wages in the market that can support them.

Sheila Bairs’ solution may help some homeowners keep their homes, and it may be a feel good political soluion. It does not, however, get to the core problem. The core problem is that inflationary credit policy caused the prices of houses to rise far above the level that real wages and real goods can support. Irresponsible people bought into a bubble market.

People can’t afford to buy a home and will not be able to until prices are allowed to deflate. The bubble has burst and recovery depends on the market adjusting to reality. The longer the government intervenes in the markets, the longer it will take for the necessary adjustment, the deflation in prices, to bring homes in line with what normal, responsible people are able to pay for them. For every homeowner who’s home price has been propped up, there is a young newly wed couple who cannot buy because they are financially responsible and can’t afford it.

As prices come down, people will be able to afford to buy.

Maybe a lot of people will default, maybe a lot of people will declare bankruptcy. That is the fault of irresponsible government policy. Piling on more irresponsiblity will not make it better.

As far as Obama creating jobs, that is the perfect application of the “broken window fallacy.” The money he takes from taxpayers to create a job is no longer available for job creation by the people he took it from. If he creates make work programs, that is not creating wealth or recovery for the economy. He is merely re-directing dollars from private jobs to public jobs.

If the government makes investments to create new business and new productive jobs, his jobs are competing against existing business with the force of government coercion. Private businesses cannot compete. If that is the case, then what is the point of the recovery plan? Private businesses cannot recover.

If his investments make alternative energy companies profitable, that means they put conventional energy company employees out of work.

Whatever he does in job creation, he is still damaging the private sector, the only true wealth generators in any economy. Government manipulations of the markets always backfire, as we are finding out again with the mortgage meltdown. We will find out the same thing with his 2.5 million “new” jobs.

Velocity of money has crashed as confidence has plummeted. Quantity of output is dropping, as are prices. And as asset values fall, M is effectively further reduced. To turn this around, we have to create massive amounts of M- as inflation becomes anticipated, V will increase.

We must also uphold the rule of law, or velocity will erode further, and people will continue to pull money out of making investments- and hoard it. By forcing reduction in principle, contracts are effectively negated, and rule of law is greatly weakened, so forced reduction in principle is a terrible idea.

Loan modification plans should do the following:

1. Lower or postpone interest payments in return for a portion of future home sale profits when the market recovers;
2. Allow some missed payments because income will remain variable;
3. Maintain the home collateral and principle amount;
4. Require the homeowner to list the home as available on the MLS, but with a price acceptable to the homeowner.
5. If the homeowner cannot show any income to support at least a minimum payment equivalent to rent, or will not agree to sharing some of the sale profits, then they should be forced to vacate the home in a reasonable time- 12 months max. after they’ve gone into (and remained) in default.

Then, as the money supply increases, home values will ultimately recover sooner rather than later. We’ll be paying more for gasoline and Chinese goods, but at least this cycle of economic destruction will be arrested.