Quote of the Day: Bill Gross on Credit Markets
Bill Gross on the current credit situation:
"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."
-Bill Gross, Pimco
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Gross goes on to note that "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," and therefore any further decline needs to be stopped quickly in order to avert additional crises.
This explains all of the Fed's recent machinations . . .
>
Source:
When I'm Sixty-Four
Bill Gross
PIMCO, April 2008 http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2008/IO+March+2008.htm
Wednesday, April 02, 2008 | 03:30 PM | Permalink
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Comments
But they need to decline much further to become affordable to the average buyer.
A 20%-30% fall in prices is necessary for home prices to get back to the traditional mean. Without that there will be a greater and greater decline in sales.
Above 3X income, homes are a poor buy.
The LAST thing that needs to be done is prop up home prices to their current bubble level.
Posted by: edhopper | Apr 2, 2008 3:39:14 PM
wait till you see what the house is proposing, a $10K tax credit to homebuyers.
http://www.marketwatch.com/news/story/house-lawmakers-propose-10000-home-buyer/story.aspx?guid=%7B17F20A28%2DD032%2D4581%2DA0C2%2DC2467DA09A48%7D&dist=hplatest
and I read gross's outlook the other day and was grossed out by it.
Posted by: karen | Apr 2, 2008 3:44:35 PM
You can't re-inflate a bubble that has burst. The Fed tried with the NASDAQ and that didn't work out to swell.
Why should the Government bail out homeowners? Should they also bail out renters?
Posted by: Dexter | Apr 2, 2008 3:45:37 PM
I can't find the source of this quotation running through my head:
I can summon the tide,
And so can any man.
But will it come?
Somehow it seems relevant.
Posted by: attobuoy | Apr 2, 2008 3:45:39 PM
How can home prices be propped up if they are still so far above the level of affordability in most regions. Will the Fed being giving everyone a huge rise in income? Or will we be returning to selling people houses they can not afford with loans they can not repay?
Posted by: Franco | Apr 2, 2008 3:46:47 PM
Where was Bill Gross when house prices and mortgage securitization were heading towards the moon?
Amazing that these billionaires need JoeSixPack to keep them in the clover. Now that we know all these financial institutions balance sheets are not what they claim to be should we fall for their fear tactic that middle class Americans will be destitute if we don't pony up and make sure that estate in the Hamptons does not get a margin call.
Posted by: malabar | Apr 2, 2008 3:50:25 PM
Gross may as well be giving his advice to the crew of the Titanic;
He can run around on deck screaming orders to anyone who will listen, but there is nothing they can do to prevent the ship from going down...
Posted by: Pool Shark | Apr 2, 2008 3:52:17 PM
One cannot just snap their fingers and halt the decline in home values for crying out loud... Home values need to find a new pricing equilibrium between too little demand and far too much supply; prices more inline with normal debt to income levels. Bill Gross's suggestion is to interfere and maintain artificially high prices, and is another in your face piece of evidence of the dire situation we're in. For those who understand home values are at the epicenter of the credit squeeze and still have further to correct, they're acknowledging not a damn thing can be done to halt the duress the bank's balance sheets are under until then.
Posted by: Stuart | Apr 2, 2008 3:53:52 PM
> "The (house price) decline needs to be stopped quickly in order to avert additional crises. "
Bill Gross knows more about money than I do, but wouldn't supporting house prices at a level above historical income and rent ratios cause other crises? And doesn't it rob the little guy to pay the big guys?
My blood pressure would go down if I had a good explanation for why (mostly wealthy) people think this is a good idea beyond what appears to be self-interest.
Posted by: pmorrisonfl | Apr 2, 2008 3:55:34 PM
"Where was Bill Gross when house prices and mortgage securitization were heading towards the moon?"
Buying MBSs, maybe?
Malabar, your post was very well stated.
Posted by: karen | Apr 2, 2008 3:56:02 PM
So we're going to prop up home prices, in effect bailing out people who bought more than they could afford at bubble prices, at the expense of people who've been saving money and waiting out the bubble? Socialism doesn't come close to describing how rotten this idea is.
Posted by: John F. | Apr 2, 2008 3:56:17 PM
Falling house prices are the solution, not the problem.
Talk about intergenerational warfare.
Gross has typically been magnanimous with regard to being on the front wave of the boomers, but now he wants X-r's and Millenials to become debt slaves.
No thanks.
Posted by: sunsetbeachguy | Apr 2, 2008 3:56:18 PM
So, basically, he's saying the US government needs to do everything it can to fix prices (contrary to the GSE's missions of affordability, might I add).
When has price fixing ever worked out? (hint: never).
Posted by: patient renter | Apr 2, 2008 3:57:28 PM
The horses have already left the barn. Too late Gross. Let supply and demand rule and see what happens.
Posted by: Kuds | Apr 2, 2008 3:57:31 PM
The problems are not because housing prices are falling. The problems exist because housing prices rose too far too fast.
Posted by: John | Apr 2, 2008 4:01:38 PM
all i can think is that Mr. Gross ALSO has some large position that needs to be made whole....
gross
Posted by: jojo (brion) | Apr 2, 2008 4:01:40 PM
I'm with sunsetbeachguy on what's a problem and what's a solution.
Sounds like some bubbles still exist . . . and Bill Gross is living in one.
If this were the Soviets such talk would at least be part of a larger rhetoric as opposed to an ideological 180. That makes it grind on the nerves all the more.
Posted by: Darkness | Apr 2, 2008 4:06:01 PM
Ironic that Gross says that, considering that HE was the one whose rampant greed was fed by the housing bubble. His company's desire to purchase "AAA" securities due to their yield was precisely what drove the MBS securitization boom, not private credit.
There wouldn't be a housing bubble without the desire of hedge and bond funds to hold supposed AAA-rated high-yield securities.
Posted by: Unsympathetic | Apr 2, 2008 4:08:28 PM
I used to have a great deal of respect for Bill Gross. A couple of things he should consider: Is propping up asset prices a real solution? Is anyone harmed when you (or govt bureaucrats) do so?
The truth is that keeping housing overvalued hurts our children and grandchildren. First time buyers today will be debt slaves. Boomers like Bill keep overvalued assets and shackle the next generation.
Hey Bill, how about letting this generation deal with its own mess?
Posted by: Mike M | Apr 2, 2008 4:10:18 PM
I went and read the whole thing.
He is clearly talking his book. At least he is consistent and opportunistic.
Not bad characteristics for your money manager.
In the public interest?
Not in the least!
Posted by: sunsetbeachguy | Apr 2, 2008 4:10:29 PM
i'm not sure how the hell it could be done, frankly. gross knows as well as anyone that house prices were inflated by increasing the purchasing power of homebuyers by 1) providing negative real interest rates, 2) eliminating any and all underwriting standards, and 3) tapping huge pools of "safe" capital via a ratings agency fraud under the rubric of securitization. 2006 prices are sustainable only under those conditions maintained in perpetuity, as far as i can tell. is that what he's proposing?
mcculley's idea of writing down mortgage principal to keep home"owners" out of negative equity as house prices fall -- problematic as that is -- is a vastly better idea simply because it would allow a necessary normalization of debt-to-income to take place (indeed would probably encourage a more rapid decline in home prices). i accept that a socialization of losses must come, as it always does in major financial crises. but let it be a smarter one than attempting to sustain the unsustainable.
Posted by: gaius marius | Apr 2, 2008 4:10:49 PM
"He is clearly talking his book."
Absolutely. With both hands wide open looking for his bailout.
Posted by: Stuart | Apr 2, 2008 4:12:34 PM
Bill Gross is talking his book, but at a very macro level. The dinosaurs of finance are willing to make a compromise, but it's too late.
They know that when home prices drop another Roubini-described twenty percent that the financial system as we know it - as they know it, and profit from it - will be vigorously re-regulated. Think FDA and the IRS combined.
When the Right's best solution is today's WSJ opinion piece by Holman Jenkins to blow up all the excess housing (maybe coax the terrorists into doing it?) You know they don't have any ideas, however...
…the leftish Obama, eager-to-please McCain, or earnestly caring Clinton will join with a Democrat Congress to put a yoke on 'em (a well-deserved yoke I might add.) All these finance positions will go the way of the buggy whip business. The whole finance business should be up on the web, indexed, and run by highly regimented clerks checking to see your all-World index fund is still there
I don't know what the best investment is to avoid the upcoming mess though it's definitely non-US. But I will bet the worst investment over the next ten years will be Manhattan real estate.
Posted by: VennData | Apr 2, 2008 4:13:40 PM
Bill,
Why is it that you are Free Market....until it affects you?
Are you really Free Market, or just interested in making money any way you can, even if it means that someone else makes less?
Posted by: Jonathan | Apr 2, 2008 4:17:26 PM
A simple substitution in Gross's statement would make it correct. Simply replace "prive credit markets" with "Federal Reserve" in his sentence below:
"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."
Posted by: Robert Beatty | Apr 2, 2008 4:18:41 PM
