Pimco's Gross Urges Bush to Bail Out U.S. Homeowners... with taxpayer money

[Finster]

Today Bloomberg published the following report.

Pimco's Gross Urges Bush to Bail Out U.S. Homeowners

By Patricia Kuo

Aug. 23 (Bloomberg) -- Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co., urged the Bush administration, rather than the Federal Reserve, to bail out U.S. homeowners to avoid ``destructive housing deflation.''

Let’s dig into this a little bit.

Pimco's Gross Urges Bush to Bail Out U.S. Homeowners

No, Bill. Bush doesn’t have that kind of money.

Gross advised President George W. Bush to set up a ``Reconstruction Mortgage Corporation'' and ``write some checks'' to bail out homeowners

Oh … I see. You want Bush to use MY money. How generous of you.

``Fiscal, not monetary policy should be the preferred remedy,'' said Gross, who manages the $103 billion Pimco Total Return Fund.

You skipped a crucial question. Why does there need to be a "remedy"?

Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co., urged the Bush administration, rather than the Federal Reserve, to bail out U.S. homeowners to avoid ``destructive housing deflation.'

Destructive to whom? Sellers? What about buyers? How can we bemoan the "unaffordability of housing" for buyers out of one side of our mouths and then take the side of sellers out of the other?

Only deflation is destructive? Inflation is not?

``This rescue, which admittedly might bail out speculators who deserve much worse…''

Glad you were able to admit that.

There are precedents from previous crises in the 1990s, Gross said. The U.S. government created the Resolution Trust Corp. to rescue the insolvent savings and loan industry and the Fed organized a bailout to prevent billions in losses from rippling through Wall Street after the collapse of Long-Term Capital Management LP hedge fund in 1998.

You don’t see the connection? It’s called "moral hazard," Bill.

So now you want to sow the seeds of the next crisis. We do this by taking money away from people who did NOT speculate, leverage up, and try to get rich quick, and give it to the ones who did.

``Even cuts of 200-300 basis points by the Fed would not avert a built-in upward adjustment of adjustable-rate-mortgage interest rates,'' Gross said. ``Nor would it guarantee that the private mortgage market, flush with fears of depreciating collateral, would follow the Fed down in terms of 15-30 year mortgage yields and relaxed lending standards.''

Now you’re talking. The way to "avert a built-in upward adjustment" would have been to not issue credit at artificially low rates to begin with.

Not that there isn’t anything that should be done. Maybe some kind of bail-out is in order. How about handing the tab to the lenders who extended credit to people they knew wouldn’t be able to pay it back? Allow no foreclosures on loans made under circumstances of fraudulent lending? Given the creativity of the American tort industry, heck, probably no legislation would be needed. Sure, probably see quite a few more hedge funds would go belly-up, but betcha a truckload of bonds that it would be a long time before we had another crisis like this one!