Thursday, August 23, 2007

It's the house prices, stupid!

That, in essence, is the message of Bill Gross's latest Investment Outlook. The top fixed-income guru (a well-deserved title, I might add) and head honcho of PIMCO estimates that house prices may fall 10% over this cycle, leading 2 million household to lose the roof over their heads.

It's a theme I've also insisted upon (see here). While the current market turbulence is worth undestanding and addressing, in the grand scheme of things the real danger lies in a housing-led spending collapse.

Gross discards the idea that rate cuts are the real remedy since their effectiveness is not guaranteed in the current panicky environment. Oh, there's also the small matter of a possible run on the U.S. dollar.

Instead, he proposes that the federal government implements a massive bailout for homeowners threatened by foreclosure.

Get with it Mr. President and Mr. Treasury Secretary. This is your moment to one-up Barney Frank and the Democrats. Reestablish not the RFC or the RTC, but create an RMC – Reconstruction Mortgage Corporation. If not, make some modifications in the existing FHA program, long discarded as ineffective. Write some checks, bail ‘em out, prevent a destructive housing deflation that Ben Bernanke is unable to do. After all “W”, you’re “the Decider,” aren’t you?


Irony aside, even if we had a better president than the current one it would not be easy to design and get a program of this nature enacted. Start with the fact that U.S. is not in a good fiscal position, so offsetting spending cuts might be needed (Any volunteers? Didn't think so). But I wouldn't be surprised if this comes the top issue in the 2008 election.