Loading...
Symbols:
Authors:

Bill Gross: The Housing/GSE Bill Is Best Way Out of Credit Crisis

by: Bill Gross July 24, 2008    
Bill Gross

Bill Gross

Become a Contributor Submit an Article
  • Font Size:
  • Print

In PIMCO Managing Director Bill Gross's monthly market commentary for August 2008, the 'Bond King' comments on what will ease the credit crisis:

Aside from cyclical contractions and a brief bout of deflationary monetary policy in the Volkerian 80s, credit has always been available and at a relatively cheap price. Credit and debt finance is, in fact, the mother’s milk of capitalism: without it, entrepreneurs may transact, but economic progress would be most difficult with seashells or gold bars for mediums of exchange...

While the ultimate explanation rests with a host of factors associated with leverage, financial derivatives, lax regulation, and indeed the sociological willingness of the investment public to take excessive risk in search of diminishing returns, let’s just simplistically point – in keeping with our bovine analogy – to the one asset that best typifies all of these fragilities. Let’s blame it on the barn, or if you must, home prices. Here is one asset that all observers can agree is going down in price for justifiable reasons. Maybe not Donald Trump’s Palm Beach mansion at $95 million big ones – thank you very much – but everybody else’s. They’re going down because quite simply, they went up too much and were financed with excessive debt...

Make no mistake, the current conundrum that must be solved is: how to make the price of 120 million U.S. barns stop going down in price and then to make them go up again... 

Up until this point, the joint efforts of the Fed and the Treasury have been directed towards maintaining the stability of our major financial institutions, recapitalizing their balance sheets in “current form,” and lowering the cost of mortgage credit. All are crucial to any solution, but it is this third and last point where markets have failed to cooperate. With Fed Funds having been lowered from 5¼% to 2%, it would have been logical to assume that the price of mortgage credit would go down as well and that the price of homes would at least slow their current descent. Not so...  the yield on a 30-year agency mortgage-backed loan has actually risen since the Fed somewhat unexpectedly began to lower Fed Funds in early September of 2007. Add to that of course, the increased fees, points, and total spread that an actual homebuyer pays to finance his purchase now as opposed to then, and it is obvious that homes are not the bargains that starving realtors claim they might be... lowering the cost of mortgage credit via the omnibus housing/GSE bill now placed before the Congress and the President is the best way to begin the long journey back to normalcy.

Related Articles

This article has 24 comments:

  •  
    Jul 24 08:38 AM
    "Make no mistake, the current conundrum that must be solved is: how to make the price of 120 million U.S. barns stop going down in price and then to make them go up again..."

    Wrong Bill. In fact the market is trying to bring the price of housing back down to the long term average of 3X J6P's income so it will be affordable again. Mispriced risk and abnormally low interest rates led to the bubble in housing prices which should now be allowed to correct without government intervention. That is what markets are for- price discovery. What we have here with the housing bailout by Congress, that Mr. Gross is such a cheerleader for, is something closer to Fascism. Unfortunately the Congress and your buddies on Wall Street obviously, being at the top of the food chain, are fine with that.
    Reply
  •  
    Jul 24 09:12 AM
    "lowering the cost of mortgage credit via the omnibus housing/GSE bill now placed before the Congress and the President is the best way to begin the long journey back to normalcy."

    If normalcy equates to the continued fleecing of the middle class through a government sponsored bailout, then I agree with your statement. Go get your sheers Bill for it's obvious that you will continue to be selling my wool!
    Reply
  •  
    Jul 24 09:24 AM
    I was actually hoping we'd give the market a little more time to self-correct.
    Reply
  •  
    Jul 24 09:28 AM
    PIMCO is largely pink and Keynesian, if you read their columnists. That's cool though, since I'm long in FNM, and believe that you should take what society gives you, though I am voting libertarian again this year...
    Reply
  •  
    Jul 24 10:26 AM
    beat me to it, strad. don't you just love how one guy (or maybe a small group of guys at pimco) know that houses are too cheap and need to be "made" to go up? i trust the thousands of people out there buying homes. do you think a couple decades of success has contributed to mr. bill's "fatal conceit"?
    Reply
  •  
    Jul 24 10:29 AM
    What Bill Gross does not mention is that PIMCO is holding a huge amount of mortgage paper. How the legendary Bill Gross got PIMCO into such a pickle is never discussed. This post is vintage corporate welfare bum Bill Gross (his real persona) masquerading as intelligent investor Bill Gross (his public alter-ego).
    Reply
  •  
    Jul 24 10:42 AM
    He's making the rounds with his bullshit...about to appear on CNBC any minute as I write..
    Reply
  •  
    Jul 24 10:45 AM
    sorry but i am convinced Bill is RIGHT that if you have thousands of people being forclosed the whole U.S.A. suffers
    Reply
  •  
    Jul 24 10:46 AM
    If the government were to focus its attention on helping the middle class--not with a $600 handout, but with health care, education funding, and the kinds of programs that made the New Deal such a success for most Americans--then more of us could afford to buy homes. Focusing on the profit instead of the customer is building on sand.
    Reply
  •  
    Jul 24 11:06 AM
    Alan, good post and O so true. Bailing out (protecting) middle America is the Governments job-1 and it has been woefully neglected in the last decade.
    Strad, there has been a lot of fascist corporate protection, bailouts and "welfare during this administration (no bid contracts, inability of Medicare to negotiate with drug companies, etc.) and by definition has nothing to do with a the few crumbs tossed middle America.
    Reply
  •  
    Jul 24 11:32 AM
    Exactly Aalan. I advised the Pres in May that the iBanks and housing agencies would soon be crying for more lube right before elections.

    Corrupt people think they are so slick, but they are highly predictable in there behaviors. My stongest advice was in March to the Administration: Subsidize heavily in energy and higher education to create skilled jobs. $150 B subsidy, with $50 B going into the SBA, the rest managed by regional banks whom demonstrated fiscal responsibility these last four years. This would spur global investment back into the USA and give the banks legit business and fix balance sheet. Higher net income for citizens means they can afford to pay the increasing costs of risk for loans in the mid-term. Cheaper energy by adding supply means we export a hell of a lot more of what America has and what the globe needs: raw commodities to continue a sustain emerging markets and restore ours, such as metals, agr, coal, etc.

    But NO! This bailout is going to suck out half a trillion of possible capital deployment in infrastructure that could have been turned into ten trillion of wealth over a decade, creating the necessary two trillion of annual tax revenues to pay for our promises to U.S. citizens in social security and medicaid. Medicaid benefits will be seeing steep cuts over the next four years as well at this point. While the cost of oil has dropped and will continue to some degree, it will not be enough for reduce costs of NECESSARY products such as home heating oil. There will be casualties this winter! And Barny Frank says while no one liked doing this, it showed our government can govern?!?! What an ass.

    Chronie capatalism has reached epidemic proportions. We will wind up like Russia and at some point in a few short years our nations credit rating dropped, default on debts and be called something else besides the United States. It's going to be real ugly but it always is when the top leadership has become corrupt.

    Thank you Mr. Bush and Republicans (who voted against 3-1) for the attempt to force accountability on this issue. I disagree with many that 'this bailout had to be done'. No, let the banks wither for another quarter and then they sell large patches of equity at firesale prices. Yes, some will be to foreigners whom will not be so forgiving to our chronie capatalistic practices. When the Chinese get it and we don't, there is a real problem!!!

    That is what capatalism is, it punishes poor management and rewards the responsible. This one big bailout will now suck the life out of the middle class (think innovators and entrepenuars) taxpayer in the 3-4 years as well in increased taxes. Horrendous!

    Mr. Gross, your type have lost all honor and understanding of public service to protect your countrymen. You people took it out of the little guy. Again, no honor. Where are the days we men waged competitor wars against each other? They are gone, because we innovate practically nothing anymore, all we can sell is paper pushing paper!!! That's why it was taken out of the little guy, you people are lazy, selfish and incompetent!

    Many of us will not forget this crop of leadership. 545 people run this government and 100 run the banking system. Don't think we will not be able to appropriately assign blame even as selfish ivory tower types and politicos attempt to slink off into the sunset when the real shit hits the fan around 2011, that is what databases are for. Have a wonderful day, you egotistical jerk.
    Reply
  •  
    Jul 24 12:06 PM
    Why use the tax payer's dollar to bailout the GSE? I've a big fan of Bill Gross on his analysis of the economy and future predictions. However, Mr.Gross has to cheer for the bailout because Pimco owes a big shares of bonds in mortgage securities issued by GSE. If Fed doesn't step in to guarantee those bonds, his portfolio will suffer bigger losses.

    I am a middle-class worker who lives in New York City. For the past 5 years housing has gone up so much that a $100k salary will not sufficient to buy a 1 bedroom condo in Manhattan. Let the housing bubble burst and let younger middle class buyers get a home to start his/her family. Rather than using our tax dollar to stabilize the credit market and support high home prices.
    Reply
  •  
    Jul 24 12:10 PM
    When I was growing up, my family owned a shoe store on Main Street, USA. Up at 5 am to sweep the sidewalk and wash the windows, close at 9 pm and do it again; hard work, perseverance and the will to succeed, which was the recipe for success.

    Now it’s hand-outs, bail-outs, $600 checks… Government guarantees for businesses and people alike who make bad decisions. BS. No parent rewards the bad child at the expense of the good child. Let these bastards fail and feel the pain of their poor choices. The rest of us will buy up their assets when the price is right.

    Guarantee you they will never do it again. At the same time send a message to Wall Street and Main Street, you will pay for your mistakes, not the taxpayers who are trying to do it the right way and not just trying to make a buck overnight, regardless of risk.
    Reply
  •  
    Jul 24 12:16 PM
    You commenters tell it like it is more than Bill Gross does. Let us not forget that capitalism is the exploitation of man by man, whereas socialism is the opposite.

    Either way, the vast populace gets screwed, and now the U.S. is the world's largest capitalist/socialist economy.

    Or as the band Guns N Roses once famously sang "Welcome to the jungle. We take it day by day."
    Reply
  •  
    Jul 24 12:26 PM
    At the bottom of a recent Bloomberg article, Pimco holds a significant amount of mortgage-bonds guarantee by Fannie Mae. That's why Bill Gross supports Fed's bail-out program.

    Eight of the top 10 holdings in Gross's $128.8 billion Total Return Fund were mortgage-backed securities guaranteed by Fannie Mae, according to data compiled by Bloomberg News as of March 31, the latest date for which figures are available. Mortgage securities made up 61 percent of the fund as of June 30, up from 53 percent a year earlier, according to Pimco's Web site.

    www.bloomberg.com/apps...
    Reply
  •  
    Jul 24 12:55 PM
    Mr Gross has an axe to grind he is a owner of FRE FNM and GSE debt, both bonds and pfd stock.
    Reply
  •  
    Jul 24 03:06 PM
    I wonder if all of this government attempts at support fade in November after we have a new president in place (either Dem or Repub)? What would the then incumbent party have to gain in fighting the tide and holding up the economy, as opposed to letting it crumble dramatically and then hope for a recovery before 2012... I bet 2009 & 2010 will present a world of hurt.
    Reply
  •  
    Jul 25 11:20 AM
    Maybe we should accept a simple basic premise: no magic bullet and no quick correction.
    Reply
  •  
    Jul 25 02:15 PM
    Inflation expectations and the expected volume of federal deficit financing now represent the principal factors determining long-term interest rates. If current projections of federal deficits materialize in this and the next few years, interest rates (both long and short-term) will be driven up sharply by the increased demand for loan funds. Any recovery in the economy will present a “catch 22” situation. An upturn in the economy will add increased private demand for loan funds to the insatiable demands of the federal government. The consequent rise in interest rates will effectively abort any recover.
    Reply
  •  
    Jul 25 05:45 PM
    "Make no mistake, the current conundrum that must be solved is: how to make the price of 120 million U.S. barns stop going down in price and then to make them go up again... "

    The only way to accomplish this would be wage inflation that lowered the value of housing relative to incomes. One of these days, the government is going to get past this $600 check thing and just write all our creditors electronic checks for the $10-60 trillion of debt we have accumulated.

    Then the average income will be $500,000, oil will be $2000 a barrel (except you won't be able to buy it with dollars) and all those mortgages will be trash.
    Reply
  •  
    Jul 25 08:12 PM
    I read someplace. The only acceptable form of socialism is, socialism for the rich.

    Our government proves it more as time passes.
    Reply
  •  
    Jul 26 03:50 AM
    Very intelligent and perceptive comments above, chastizing the so-called king of bonds. Patent self-interest shows how the king is shameless in touting what he needs at the cost of the American tax-payer. Incredibly unintelligent of him to think he could get away with this!
    Reply
  •  
    Jul 26 06:04 AM
    I am encouraged by the comments to this and so many other articles. I think most commentor's would agree with me that main Street America is being fleeced by the career politician royalty to the benefit of the super wealthy who in turn, and in numerous ways, benefit the career politicians. Have you noticed that in this game of greed and power there is no difference whatsoever between Republicans and Democrats? WHAT CAN WE DO ABOUT IT? What if a growing segment of voters begin to vote for any party other than a Democrat or Republican? Starting this election I will do just that. Please think about this for a moment. It may be that we never build any other party to the stature of a national contender but if our royal Democratic/Republican politicians begin to feel that real political competition is starting, they may start to realize that they actually work for all the people of this country, not just the super rich. It will require we give up our nieve political hopes and thoughts. But I do believe the politicians will hear the message loud and clear. (If you must vote for your favorite Democrat or Republican for one office or another, like President, go ahead and do so. Just do not vote for any other Democrat or Republican.) If enough of us and do this I guarantee you the politicians will get the message. And if it so happens and we wind up with a third viable political party, so much the better!
    Reply
  •  
    Jul 27 11:54 PM
    My solution is simply to never vote for an incumbent.
    Reply
More by Bill Gross

Investment Resources
Money Management 

Research 

Seeking Alpha provides these ads as a service to its leading contributors
Articles on related themes
Economy 

Housing & Real Estate 

Bonds 

Dollar/Currencies