That's true.  I do believe there is that risk. However, the UK pursued a policy similar to this when they removed themselves from the EURO Exchange Rate Mechanism (ERM) in the early 90's.  It resulted in a huge rebound in their economy and it had the effect of outsourcing economic flabbiness to other countries.  That is largely what I would expect to see here. 

The larger problem is that with housing being such a huge sector in the economy, the Fed cannot risk an implosion -- which it seems increasingly worried about.  Were that to happen, inflation wouldn't be the worry.  After all, you can't have economic expansion without capital markets.  And, right now, the Fed is hoping to overstimulate to power out of this dive in the housing market. 

Frankly, had they overseen the banking sector better in the first place - along with the Office of the Comptroller of the Currency - we wouldn't be in this mess. 

In my humble opinion, the issues are:

1. The media overhyping the situation - 97% or better of mortgages are just fine.
2. The bankers having intricate derivative instruments that promulgate the problem to the point where purchasers of the mortgage backed securities have no idea how to value them. So, no one buys them in the secondary markets, which means: lack of liquidity.  That's where we are today.

It's really sick, but that is the life with which we are dealing right now.

Michael