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The US government needs to step in now and start mopping up surplus assets, says Bill Gross, the head of Pimco, the world’s largest bond fund, in a commentary on the Pimco website. The alternative is a “financial tsunami”. The government and the US can pay for the current crisis now, by bailing out the markets, or it can pay later – it will probably be cheaper to pay now.
Gross, managing director of Pimco, a part of Allianz, says the US is in an unprecedented liquidation panic. Banks, securities firms and funds are offloading assets, driving down prices. Banks are repossessing homes and then dumping them on a failing market so driving the prices down even further. US assets – stocks, bonds and housing –are falling faster at a rate of 10% per annum than any time in the past 20 years – faster than in the crashes of 1990, 1994 and 2001/02. Housing alone in the US has fallen over 15% in the past year.
“This rarely observed systematic debt liquidation is what confronts the U.S. and perhaps even the global financial system at the current time” said Goss, “unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami.”
Central banks are doing their bit and $400 billion has been raised by financial institutions, but this still leaves a lot of unwanted assets. If the government does not step in a mop up some of these, liquidity will dry up. With institutional investors’ risk appetite to acquire more assets “anorexic”, and with no other investors, there will be a continued downward spiral in prices.
| Late news: As forecast, on Sunday the US Government took over control of US mortgage giants, Fannie Mae and Freddie Mac, in what is effectively the world’s largest nationalization of financial institutes.” |
Gross concluded his commentary by saying “While some will compare current government bailouts to Slick Willie*, citing moral hazard, near criminal regulatory neglect, and further bailouts for Wall Street and the rich, common sense can lead to no other conclusion: 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 US Treasury – not only to Freddie and Fannie but to Mom and Pop on Main Street USA, via subsidized home loans issued by the FHA and other government institutions.”
(Slick Willie: Willy Sutton, a famous depression-era bank robber, who, when asked why he robbed banks said “because that’s where the money is!”)
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