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What do you get when you combine a foreclosure recall, Helicopter Bernanke bucks and praise for higher home prices? A triple dip in the housing market.

Welcome down the Rabbit Hole, where economic principles don’t mean anything and politics rule the day. Yesterday we noted how the foreclosure recall over some paperwork problems is likely to cost upwards of $6 billion dollars to banks, not to mention untold chaos, anxiety and loss for home owners and buyers for months. The recall, we argued, wasn’t sound economic policy, or even good operational policy, but the overreaction by scared banks to the political threat by 30 – now all 50 – attorneys general threatening investigations and lawsuits.

Since then, armchair economists with cameras and microphones have actually started calling the foreclosure recall a “good thing” for the housing market. Our friend Steve Harney was first to point out these pundits, in his blog this morning. Once again, some professors not unlike those at the Fed and White House are making the case that less competition by reduced foreclosure supply is good for consumers because existing home inventory prices won’t face more downward pressure. Only an Ivory Tower or mercantalist intellectual could possibly argue that less choices in the marketplace and higher prices is a good thing for consumers. How this is a formula for a recovery in the middle of the longest recession in sixty years is beyond mere lemonade-stand thinkers like me.

Finally, there’s Helicopter Ben Bernanke who’s gearing up to drop more dollars into the economy with a second round of quantitative easing. For normal folks, that fancy terms means “printing more money” which makes the existing money supply worth less. More money doesn’t change the quantity of goods in the system, either, so that means more dollars will be chasing the same amount of goods (or less, as things like moratoriums on drilling in the gulf hold back future supply). All of which leads to inflation, which, according to the Federal Reserve Chairman is exactly what we need:

In his remarks, Bernanke said inflation is currently too low and the unemployment rate is too high given the central bank’s dual mandate of maximum economic growth and price stability. (MarketWatch)

Bernanke and others argue that what Americans need right now is higher prices. They back these claims with half-truths of data: We’re suffering from deflation, the argument goes, pointing to the Consumer Price Index which rose .1 in the last month, and is up 1.1% in the last year. But that’s a composite figure – an averaging of multiple items in the basket of items that include many things that are falling, but almost always excludes the cost of food and energy. Two things that have been rising in cost and which almost no American can go without daily. In fact, gasoline alone is up 5.1% in the last 12 months; food is up 1.4%. And some items are absolutely soaring: medical care is up 3.7%, used cars and trucks are up more than 12% and heating fuel oil is up 11.8%.

So there’s clearly plenty of inflation, in key areas that affect all Americans every day. Yet the Chairman thinks prices aren’t high enough, and is prepared to take them higher.

Which leads us right back to the housing situation. The current housing downturn started with a huge fall: Let’s call it the Big Dipper, so the Fed tried to prime the pump by printing “tax credits” that artificially inflated both prices and sales volumes for a year and a half. Then, we saw the Little Dipper once the housing credits ended and the inflation left the system. Buyers predictably returned to the sidelines once they realized there the potential for getting a better deal – because the tax-credit-induced pricing wasn’t a good deal. In fact, some people have noted that many buyers did better in terms of price and mortgage interest rates during the months just before and immediately after the tax credit period.

A Big Dipper and a Little Dipper have already hit housing. What’s left in the constellation of possibilities? With the prospect of supply interference, monetary inflation and pricing distortion, it looks like there’s a black hole on the event horizon.