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

by: Articles About Bill Gross

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.