I don’t think you’ll have to worry about ‘stability’. This fix is only temporary. My personal opinion is that Bernanke is trying to handle the economy at too fine a grain level. Either way, there is a lot of equity to balance out. You can do it by inflating everything else up to it.. or deflating the over inflated asset.
Deflating the inflated asset:
This can cause ripples where said assets were levered to purchase other assets. It becomes a house of cards issue. It will take down other assets that are fairly valued in the process as people have to liquidate to cover. Innocents get hurt on this one through the indirect effects (as well as the complicit).
Inflating everything else than the overpriced asset:
Biggest problem here is keeping wages and tax structures adjusted during the inflation. The other thing is to stay out of cash during this period because the value of the currency gets deflated. It has the advantages of also devaluing accumulated imbalance of trade. The complicit in this scenario often have their ‘proceeds’ devalued.
I think the real solution is to place mortgage brokers and RE brokers/agents under similar guidelines as Stock brokers. Houses and stocks are assets that can be invested in. Margin requirements are required for stock. Likewise, margin requirements (LTV) should be required in buying a house. Disclosure requirements exist for stock, they should exist for the state of housing. Stock brokers have to be very careful about pushing a stock as an investment (in particular if they don’t have a CFA/CFP cert) because it can cause them to lose their license. RE brokers should be regulated in the same manner.
In terms of getting the guilty.. this is going to be hard. There are too many. The underlying problem is that they guilty sold off the securities.. a long time ago. They mis-represented the condition of these securities. With the CDOs/MBS(s) being devalued, it is harming innocents instead of the guilty (who are now looking for the next scam) Basically, when a CDO/MBS’s risk factors have been misrepresented, the investor in the security can force the originator to buy it back at face value (as opposed to real value). This has been happening, and is causing the bankruptcy of many of the sub-prime lenders. The problem is that once a sub-prime has gone under, the other people who are trying to force the buyback for misrepresentation, can’t. The company no longer exists.
NOTE: The reduction of interest rates is not really a bailout. The guilty have already flown the coop. I anticipated a drop about this time.. but anticipate further tightening down the road. Bernanke is in a bind. He has to prevent a total collapse, while getting deficit spending financed for Congress and preventing inflation. The only tools he has to do this are; the prime rate, fractional reserve rates and money supply.
