Bill Gross' Bailout Call: Wise Man or Fool?

Bond king Bill Gross is back preaching socialism today, stating U.S. Must Buy Assets to Prevent Tsunami.

The U.S. government needs to start using more of its money to support markets to stem a burgeoning "financial tsunami," according to Bill Gross, manager of the world's biggest bond fund.

Banks, securities firms and hedge funds are dumping assets, driving down prices of bonds, real estate, stocks and commodities, Gross, co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co., said in commentary posted on the firm's Web site today.

"Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami," Gross said. "If we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury."

The government needs to replace private investors who either don't have the money to buy new assets or have been burned by losses, Gross said. Pimco, sovereign wealth funds and central banks are reluctant to fund financial firms after losses on investments they made to support the companies, Gross said.

My Comment: It is preposterous to propose the government should bail out private investors. It has been tried many times and it has failed every time. The Greenspan Fed frequently bailed out banks and investors. We are now bearing the fruit of past misguided bailouts. The housing bubble we are in is a direct result of the Fed attempting to bail out banks in the wake of the dotcom bubble. The dotcom bubble was fueled by an imaginary threat called Y2K as well as a previous bailout of Long Term Capital Management. Banks do stupid things when they are constantly being bailed out of their mistakes.

In 2002 banks were in deep trouble over loans to countries like Argentina. Banks were also stuffed with bad loans to dotcom companies that were never going to turn a dime of profit. To bail out the banks in the wake of the dotcom bust, Greenspan slashed rates to 1%, praised derivatives as method of spreading risk, and gave his blessing to ARMs at the very bottom in interest rates.

The biggest global financial party in history ensued. The end result was a housing bubble of epic proportion. That bubble has finally popped. Now, Bill Gross is expecting the cure for the housing tsunami to be exactly what caused the housing tsunami.

Gross' call is nothing but misguided socialism. If socialistic central planning worked, Russia would never have collapsed.

The question on my mind now is: How many times do the Fed and Treasury have to make a mistake for Bill Gross to stop calling for more of the same mistake?

Gross cast a bleaker view for the prospects of the world's financial markets than in previous notes to clients. The fund manager has previously called on lawmakers to support housing with legislation passed in July that allows lenders to forgive some of homeowners' debt and then refinance them into government-insured loans.

My Comment: Gross desperately needs to read a book on Austrian economics. One does not cure problems by throwing money at them. The housing boom, the commercial real estate boom, and the shopping center economic model are all malinvestments that resulted from the misallocation of capital. The Shopping Center Economic Model Is Now History and a Growing Herd Of White Elephants is left in its wake.

Throwing more money at housing does not create lasting jobs or productive capacity, nor does it create wealth. All throwing money at housing would do is squander what little capital is left in the system.

Furthermore, Bill Gross's proposal for lawmakers to forgive debt is unconstitutional (not that Bill Gross or anyone else cares much about the constitution these days). Banks, pension plans, individual, and foreign investors are owed that debt. It is not Congress's place to forgive that debt, it is the creditor's place to forgive or not forgive that debt. Yes, much of that debt will be defaulted on, and when that happens it will be forgiven the correct way, in bankruptcy court.

Giving money to homeowners is highway robbery of legitimate homeowners who would have to foot the bill for the bailout. Besides, the true purpose of any handouts would be to bail out banks, not the consumer.

The reality is banks need to fail and financial wizardry needs to come to a screeching halt. The party is over and the spiked punch should be put away. The best way (in fact the only way) to cure malinvestment hangovers is to save capital for productive purposes and not squander that capital in foolish attempts to prop up the markets.

Treasury should support not only mortgage finance providers Fannie Mae and Freddie Mac, but also "Mom and Pop on Main Street U.S.A.," by subsidizing rates on home loans guaranteed by the Federal Housing Administration and other government institutions, Gross said. A new version of the Resolution Trust Corp., which bought assets from failing institutions during the savings-and-loan crisis of the 1980s, may also work, he said.

My comment: By asking for bailout of "mom and pop", Bill Gross appears to be asking for a bailout of Pimco.

There's a Bull Market Somewhere?

I am not sure why Gross has it as a question, but the Bloomberg quotes were from Pimco's September Outlook entitled There's a Bull Market Somewhere? Those looking for another scathing attack on Gross' commentary (but from a completely different angle) can find it on Naked Capitalism, where Yves Smith is writing Bill Gross Says Nothing is Going Up, So Treasury Must Intervene.

Mooooooo!

As long as we are dissecting Bill Gross, we may as well take a look at a statement he made in his August Outlook called Mooooooo!

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. That, however, is easier said than done.

One of the wisest men I know has this serious but admittedly impractical solution: have the government buy one million new/unoccupied homes, blow them up, and then start all over again.

One of the wisest men Bill Gross knows is a complete fool.

How many times does the broken window fallacy need to be debunked? A good writeup on the complete insanity of building houses and blowing them up, paying ditch diggers to dig holes just to fill them up again, or, as some have proposed, burying money and having people search for, it can be found in The Broken Window Fallacy Reapplied or Economics in One Lesson by Henry Hazlitt.

Comments

[Donald Johnson:]

Great piece. Totally agree.

2008 Sep 05 09:28 AM

[whidbey:]

Nothing new from Gross.Bryan always was a closet socialist, as are many of the well-off capitalists on Wall Street. They want their play pen cleaned up and the children sent out to play in the games they organize. It is all about pushing for control of the economy so that it works for his book. We have more, Hank and GS, not to mention the rest of the investment banks, are on the side of quick fix, even if it does not work. Gross as his breast in the wringer and in those circumstance one grabs at anything for help. Let him twist in the wind!!
!

2008 Sep 05 10:46 AM

[The Jackal:]

YOU SAID: "My comment: By asking for bailout of "mom and pop", Bill Gross appears to be asking for a bailout of Pimco."
I TOTALLY AGREE WITH YOU, GROSS NEEDS A MASSIVE GOV'T BAILOUT TO SAVE HIS PORTFOLIOS.

2008 Sep 05 12:54 PM

[Socialism c...:]

THANK YOU!!! Bailouts = socialism...and that does *not* solve the problem...it only shifts the burden. It reduces the risk on the offenders, thereby making it likely they will reoffend! Meanwhile...you and I pay for others' mistakes...and *we* therefore have less to invest in *other* areas.

Let the failures happen. It's the only way to get housing priced where it should *really* be...thereby making it actually affordable for the middle class without the level of default risk that is entailed by purchasers in over their heads due to inflated home prices. As someone who has waited to purchase until pricing adjusts...it is patently unfair to see the government bailouts prop up inflated prices!

2008 Sep 05 03:08 PM

[wpdragon:]

Everyone screaming for intervention ought to be careful what they ask for. This nationalization of Fannie and Freddie is not exactly an endorsement of our capitalist system, in fact it indicates more a frightened administration that is utilizing socialist tactics to try to hold together the markets. Yes, SOCIALIST engineering of the markets.

This intervention, manipulation and bailing out of the financials we have seen this year may be swell for the market short term, but longer term it may be another matter... it sure isn't capitalism, or financial darwinism, where the weak, corrupt and flawed should be allowed to die so that the strong can grow and prosper, and capital can be more efficiently re-allocated to the companies and industries that are healthy and contributing to the national and world economies, and to the FUTURE.

The only thing that should be considered too big to fail is capitalism itself... everything else should be fair game NO MATTER WHAT... that is the only true path to strong, open and healthy markets, and retention of America's leadership position in the WORLD economy.

Not that Paulsen, Cox or this administration give a damn about fair or open markets.

And what will it cost the ordinary taxpayers, especially those who live decent lives, pay (and pay and pay) their taxes, don't run games, but play by the rules? They will pay for the sins of others while the slime gets bailed out to do it all over again.

Who of Paulsen, Cox and the administration's friends do they bail out or prop up next? This latest nonsense about changing short selling rules is ridiculous... it will restrict liquidity, prevent true price discovery, and restrict the markets' ability to bring buyers and sellers together in a fair and open forum... short selling was NEVER the problem... NAKED short selling by the hedge funds was the problem, and that was an ENTIRELY different situation, which evidently most so-called "investors" don't seem to have a clue about.

The vast majority of the naked short selling done the last 10 years was done by hedge funds, entities that were spawned for the most part by the large investment and money center banks who needed dirty tricks squads that weren't subject to regulatory oversight to operate under the cover of darkness and do the stuff that their masters weren't allowed to do. And they did it well, and everyone made a killing.

Who on this board could just call their broker and tell him to short 1000 shares of DRYS or NUE without a loan of shares or requirement to pay margin interest? No one I would venture. But the hedgies sure could, because before they started their fund they worked on the trading desk next to the guys who are now putting their naked shorts through for them, and sharing a 4 figure dinner with them tonight.

And that practice went on for a decade and decimated the fortunes of many small and medium size investors who found the shares of good, growing, profitable companies they had invested in eviscerated by hedge fund naked shorts as they whipped them up and down, making huge profits in both directions while driving the little guy straight into the ground.

But then, those same cretins turned on the financials, so Cox, borne of and beholden to Wall Street, suddenly got religion, and a boot inn the ass from Paulsen and Co., and when he got the heat put on him big time he bailed out his 19 biggest friends.

Contemptible hypocrisy and favoritism of the highest order.

Capitalism? I think not.

People who blindly and cavalierly spout utter nonsense such as "they ought to tack on 10 cent uptick rules across the board to prevent short selling" really ought to do some reconsidering, and learn the difference between short selling and NAKED short selling, because we took another very big step down the slippery slope to economic mediocrity with that con job against the American taxpayer yesterday, and Cox, Paulsen and the boys are gonna keep playing that game as long as nobody stands up to them on this short selling con they want to run.

I'm afraid the train's leaving the station, and capitalism ain't on it.

2008 Sep 06 11:18 AM

[Tom Lindmark:]

Gross is up to his eyeballs in agency debt and preferred stock. He's just trying to protect his investments. When we see the details of the bailout of Fannie and Freddie tomorrow we will know if he was successful. My bet is that he wins. There is too much coincidence between all the noise he made late this week and the announcement that the administration is going to invoke conservatorship for the GSE's.

In the interests of brevity my other thoughts can be found here blog.metro-real-estate...

2008 Sep 06 12:13 PM

[rm:]

[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.]

Why? Why do so many people feel like we *have* to backstop artificially high housing prices?

I'm in the camp that says, "Let's just get this thing over with... the sooner the better."

[A good writeup on the complete insanity of building houses and blowing them up]

Insane as it may be, a local treasurer in our state is being heralded as a pioneer in his creation of a "land bank" that systematically condemns inner city houses and tears them down.

Rather than take houses that have better bones than anything built in the last 20 (30?) years and rehab them, they ARE "blowing them up."

I suppose it's in the public's best interest to put folks into a Habitat house with "bottom of the barrel" parts that has a life expectancy of 10 years.

2008 Sep 06 12:28 PM

[Brahm:]

When the winds are favourable, the Bill Grosses of this world know no humility to crow over others and offer gratutious comments. When the sailing gets dangerous for their little boats, these guys send the SOS out for bail-out nobody is entitled. Even bailout at the cost of everyone else. Must take a certain mindset to have such level of arrogance to be able to think that they are entitled.

2008 Sep 06 03:04 PM

[carey_jim:]

It's like bailing out your brother-in-law one more time after ten times of promising that he will quit drinking.

We've all done it. We're all liberals in that sense, somewhere for someone or some group.

But we know it's wrong and we know it wont work.

Cold turkey is always the answer, sad as it is sometimes.

As our grandfathers said before they spanked our fathers, "This is going to hurt me more than it hurts you," and I think we all know what they meant.

2008 Sep 06 11:10 PM

[elwind45:]

First of all come monday, the discount window will be opened wider.good money tossed after bad. Gross is sweating his book, no doubt. I think BILL's days are numbered at PIMCO, rest assured! The real BS is the lack of real employment growth the last 10 years. The economy has been fueled by funny money. Which is not so funny now! You and I know that as long as a TAX SYSTEM rules the country, the money interest will use it to bail-out themselves and their friends. Now the money supply is being restricted (inflation scare) to make room for bail-out "CASH". The unemployment being created by fed policy is putting pressure on everybody(including all homeowners). The central bank will pass the rest of its blame on to treasury monday. I believe this is the perfect time for all Americans to call there reps. and demand ABOLISHING THE FEDERAL RESERVE!

2008 Sep 07 03:43 AM

[sumosama:]

Here's an idea...CHARGE people to throw rocks, use bulldozers, and BLOW up the vacant houses. Might just work!!!

2008 Sep 08 01:37 PM

[Socialism c...:]

wpdragon - right on, chief! I *hate* this downward spiral into socialism!! we are seeing it in other industries than finance as well...how about "universal healthcare"? oh, doesn't that sound great? not. it's all about having certain things paid for by the middle class to reduce the cost overhead of the oligarchy at the top...who thereby increase their margins. the new feudalism is not enforced by the sword but by economics.

2008 Sep 08 04:35 PM