U.S. Must Buy Assets to Prevent ‘Financial Tsunami,’ Gross Says (Sept 4 – Bloomberg)
Sept. 4 (Bloomberg) — The U.S. government needs
to start buying assets to stem a bourgeoning "financial tsunami,”
according to Bill Gross, manager of the world’s biggest bond fund.
A process of "delevering,” where banks are shrinking and cutting off
lending, is sapping demand for loans, bonds, stocks and commodities,
driving down prices of assets of even `"mpeccable quality,” Gross
said. The decline may continue until the government steps in as a
buyer, he said.
"Unchecked, it can turn a campfire into a
forest fire, a mild asset bear market into a destructive financial
tsunami,” Gross of Newport Beach, California-based Pacific Investment
Management Co. said in commentary posted on the firm’s Web site today.
"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.”
Wow – talk
about chutzpah! A few months ago, Bill Gross and PIMCO went on a big
buying spree of Fannie and Freddie (GSE) debt. At the time, they knew
they were taking a risk, but they thought everybody was pricing that
debt too low and they could make a few bucks by being cleverer than the
next guy.
Turns out the next guy knew what he was
doing, and PIMCO did not. At this point, you might think that they
would re-evaluate their stance, lick their wounds, and promise their
investors not to be so fool-hardy next time.
Instead, Bill
Gross comes out swinging, essentially saying that "if the US government
(taxpayers) doesn’t bail us out of our bad decisions, worse things are
going to unfold in the economy."
I happen to agree with his
assessment of the risks to the economy (they are severe), it’s just
that I wholeheartedly disagree with the notion that the Treasury needs
to step in and bail out those who made bad decisions during these past
few months and years. At this point, somebody is going to have
to take a loss. Mr. Gross is hoping that the losses will be shared by
everybody so that gains can be preserved for his relatively (and
proportionally) few clients. What does need to happen? House prices
need to realign with incomes, and everybody who took a gamble that
"this time it would be different" needs to learn to be more careful
next time. Of course, that outcome will be fought tooth and nail.