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Mortgage Settlement Term Sheet: Bailout as Reward for Institutionalized Fraud

But the fallacy of their thinking is that addressing and cleaning up this rot would lead to a financial crisis, therefore anything other than cosmetics and making life inconvenient for the banks around the margin is to be avoided at all costs. But these losses exist already. The fallacy lies in the authorities’ delusion that they are avoiding creating losses, when we are in fact talking about who should bear costs that already exist. The example of Japan, confirmed by an IMF study of 124 banking crisis, shows that leaving a banking system full of overvalued dud assets ultimately costs more than the painful exercise of writedowns and renegotiation. And we may be well on our way to producing worse than Japan outcomes. Using super cheap credit to shore up prices of dud assets is producing all sorts of levered financial speculation. We know this movie ends always ends badly, and with the authorities already using all their firepower to keep asset prices aloft, they will have nothing left in reserve when things eventually unravel. There is a an extremely aggressive push underway to get a deal inked.

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