Wealth distribution ante raised, Obama administration proposes mortgage distribution scheme.

In a world that is progressively getting crazier by each day and the facade that is the American "recovery" peels away news like this no longer surprises, but instills a lot of hostility.

Wall Street Journal reports that the Obama administration is seeking to strike a "mortgage deal".  More specifically, Obama in his infinite wisdom will now mandate banks (most of which are technically insolvent) to pay out 20 Billion dollars to underwater mortgages.  So good news for those individuals whose mortgages are now less than the actual value of the home, a gift is coming!

Terms of the administration's proposal include a commitment from mortgage servicers to reduce the loan balances of troubled borrowers who owe more than their homes are worth, people familiar with the matter said. The cost of those writedowns won't be borne by investors who purchased mortgage-backed securities, these people said.
If a unified settlement can be reached, some state attorneys general and federal agencies are pushing for banks to pay more than $20 billion in civil fines or to fund a comparable amount of loan modifications for distressed borrowers, these people said.

In case the apparent stupidity of this proposal is not obvious, let's hear what the opinions of the bank executives happens to be, putting aside their obvious conflict of interest.

Bank executives say principal cuts don't necessarily improve payment patterns, and have told other parties involved in the talks that principal reductions could raise new complications. First, it will be difficult to determine who gets reductions and who doesn't. And even if banks agree to a $20 billion penalty, the number of mortgages that can be cured with that number is limited, one of these people said. 

That is exactly right, because something like that has already been tried!  It was dubbed the "Obama Mortgage Modification Program" no doubt to raise his popularity, also known as HAMP.  HAMP was initially heralded as a brave and wonderful initiative to rescue the ailing real estate market, we now know that half of these modified mortgages failed!  Why would it work, considering that fundamentally speaking the houses were extremely overvalued and with a persistently high unemployment where exactly would the money come from in the first place?

This really leads us into the main problem with this insane solution, the money that is being distributed is an inane attempt at righting a wrong.  The wrong is called Quantiative Easing, and occurred when Ben Bernanke printed 1.5 Trillion dollars and flushed bank reserves with freshly printed notes while buying up worthless securities.  This not only provided banks with a mechanism to invest in equities, commodities, etc thus paving the way for worldwide inflation, rioting and death, but realized record bonuses - and not just the parasites of the world like Goldman Sucks, but giant commercial banks like Bank of America.

This move, further exacerbated by QE2 has made everyone in the world poorer by flooding the world with money pushing up prices.  Now to add insult to injury we are going to reward people who made bad decisions with funny money, thus further delaying the one thing that can cure housing - price declines.  Instead of allowing the inflated house prices to deflate this administration has thrown everything including the kitchen sink at the problem.

First buyer home credit, QE1, QE2, HAMP, etc and they have simply extended the pain in the process while going further into debt and printing additional money into the system.  Yet the only thing that can actually fix a bubble is a burst of the bubble and prices bottoming out such that actual capital can buy up the remnants.  This proposal will not only further delay this by allowing people to stay in homes longer than necessary, but could potentially destabilize the banks further.  As of now, banks are alive primarily because FASB changes has allowed the majority of the bad bets taken during the bubble to continue to go unrealized.   Instead of allowing bad banks to fail and good banks to succeed we are continuing to paper over all the losses and to distribute money into the economy while postponing a natural and organic housing decline.

Disgusting.