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Thursday, September 04, 2008 11:31 PM

Bill Gross Wants Treasury To Buy Assets To Prevent Tsunami

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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 does 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 houses 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.


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.

Mike "Mish" Shedlock
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