Bill Gross: If Housing Prices Decline Further, So Does the Economy 13 comments
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From PIMCO Managing Director Bill Gross's monthly market commentary for April 2008:
Credit Markets, Reregulation, and Home Prices
In my opinion, the private credit markets have forfeited their privileged right to operate relatively autonomously because of incompetence, excessive greed, and in minor instances, fraudulent activities. As a result, the deflating private market’s balance sheet is being re-nationalized in some cases with increased regulation, in others with outright guarantees and agency lending. Ultimately government programs which support private credit market assets may be required in order to prevent an asset deflation of significant proportions. Authorities must act quickly, with a shot of adrenalin straight to the heart of the problem: home prices. Since homes are the most highly levered and monetarily significant asset that American consumers own, if they decline much further they will drag the rest of the economy with them. Supporting home prices goes counter to the thinking of Republican orthodoxy. President Bush and Treasury Secretary Paulson argue that markets must "clear" in order to avoid similar mistakes made by Japanese authorities in the 1990s. Yet we may have passed the point of no return for "clearing" markets. Home price declines of 20% are in fact much more of a shock to the American economy than the popping of the Internet bubble and NASDAQ 5000, because the amount of homeowner leverage is so much greater. A 20% negative adjustment not only wipes out all ownership equity for millions of Americans, it turns their homes "upside down" – incentivizing them to let their gardens grow weeds instead of lettuce. The decline needs to be stopped quickly in order to avert additional crises.No Bailouts?
Politicians – especially those on the Republican side of the aisle – are adamant about not using taxpayers’ funds to bailout Wall Street or housing speculators, or whoever the current devil may be. The public seems to nod in agreement while at the same time not noticing that their watch is being lifted or their pocket being picked. Let’s see: Twelve months ago the yield on your money market fund was 5%+ but your next statement will probably feature something closer to 2%. Did your money market fund (which in aggregate approaches 3 trillion dollars) experience any capital gains in the process? Absolutely not. So it looks like your (the taxpayer’s) contribution to the bailout of banks, or Florida condominium speculators can at least be quantified: 3% foregone interest per year on whatever you own. In addition, as pointed out in a previous section, the reflationary (inflationary) implications of all this suggest your contribution to the bailout will be even greater, since you’ll likely wind up paying higher prices for many of the things you’ll buy.Ah, government sometimes works in mysterious ways. There’s more than one way to have taxpayers bailout Wall Street!
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This article has 13 comments:
Perhaps it would be best for the market participants who created the credit crunch for us to shoulder the burden? Perhaps if they are punished for it, they won't do it again? Perhaps we shouldn't bail them out.
Economics, of course, has to do with how humans pursue incentives. I'd like to see less incentives to moral hazard. No bailouts.
Mr. Gross makes several valid points. I would add, retirees are struggling in this inflationary economy. The prices of food, electricity, gas, health care are soaring while personal savings is dwindling. Gas prices have gone up 3 fold in the past 4 years while interest rates for savings accounts have stagnated at around 2-3% resulting in an erosion of buying power. For many now, their primary nest egg, their home has lost anywhere from 10 to 50% of equity IF they can sell their home at all. Also, for baby boomers approaching retirement, the outlook is especially bleak. Corporate retirement plans and 401k’s have been cut, personal retirement plans have seen huge losses and investments in real estate and the stock market have been set back for years. Those people in their middle years and younger will at least have some time to rebound but those looking for social security to save them may be sorely disappointed and I would certainly not want to bet on the U.S. economy being some kind of super power in the decades to come. Food and energy costs will never moderate and will be the primary driving forces in world economy for the foreseeable future.
The fat cats who really created the sub-prime mess are getting off much too easy thanks in large part to our government and the culture of the rich protecting their own. Those blaming small time investors and homeowners for this mess are just plain ignorant. Loans were made that should not have been made, developers and builders grossly overbuilt and overbought, interest rates were kept artificially low by the Federal Reserve, construction costs (labor and material) were on a rapid increase and all of this was made possible and sustained by easy money. With plentiful amounts of money to loan, lenders relaxed credit underwriting standards in an effort to get as many loans booked as possible. Lenders knew these loans were going to be packaged and sold off as securities. They weren't going to be on the hook for any defaults. Big investment and commercial banks eagerly invested in and sold these blocks of high yielding loans to willing greedy investors. While it lasted, the wealthy elite made billion's but now the taxpayer and the average American family will ultimately pay the price. Rest assured our government is not going to punish the wealthy elite or in other words the hand that feeds them.
Nor do I see any direct connection between diminished money market yields and bailout of the home loan industry. However, I do accept that in the end, in an interconnected economy, we all take a haircut (indirectly) when speculative bubbles pop. Which is why there needs to be re-regulation and sanctions for those who fueled it and profited.
Self interest is OK, incentives are OK, but blatant greed is antisocial and like insurance fraud, is not a "victimless crime".
Nobody should expect to get rich off their home appreciation. There are no guarantees of real estate appreciation. Some people are learning that lesson now.
In the end, there is a loss to be taken. The loss should be taken by those who gambled and lost, and not the taxpayers.
We need to hold the Fed responsible and not give them more power.
It's true I only bought my car in order to sell it and walk.
Uh....well, you know, it was an investment, sort of.
This is a serious threat. Imagine, $5000 gone, suddenly (or over a year or two).
If every income earning in the US would just contribute $5000 personally to prop up home prices it should do the trick! (Ok, that's not quite $1Trillion, but....hey, *you* have to pay, right?)
Also, like Bill Gross, I would benefit a great deal if my asset prices that I am holding, whether bonds, or just my humble auto title, would get taxpayer support.
It's a crisis!
Gross is just another elite with his hand out. He just wishes he could benefit more from the bail out personally. The people who end up upside down or with no equity simply don't own thier homes. I don't want to buy the houses for everyone who decided to buy too much home.
Bail outs will only incentivize more of this type of behavior.
Hey GROSS why don't we fix the problem and get rid of the Federal Reserve. Over all the Federal Reserve is just one big Moral Hazard enabler.
I also strongly agree with on commentor earlier who suggested that housed prices can't be propped up. The market simply won't support it. Its like trying to rig prices by buying up the supply. As soon as you unload the supply to the market the prices will crash far below where your originally purchased because while you were busy trying to corner the market the suppliers tried to keep up.
Also this whole business is being way overblown. That vast vast majority of home owners purchased thier homes before the housing boom so the ascertian that everyone's equity will be wiped out is just wrong. Heck here in Florida even if houses prices fall 20% more most of use who bought before 2003 will still be in profit territory. That is if they didn't keep pulling money out of thier house with home equity loans.
I think perhaps the reason their is such a clamour for a bail out is that its the financial people who stand to lose everything. I say let them lose everything. I shouldn't have to fund their millionaire life styles. I want to work for my own family not for the &$#&& bankers.
Sure we will have a recession but my gosh why are we fighting the business cycle so much. Recessions come and go. But the Fed and people like Gross who want things to simply go straight up are the ones who are going to eventually cause a great depression. We need small recessions to CLEAR things out.