Saturday, August 25, 2007

Bill Gross is Either Joking or He's Nuts

So he doesn't understand why the RFC (the Reconstruction Finance Corporation), RTC (the Resolution Trust Corporation), and his RMC (Reconstruction Mortgage Corporation) were/would be a problem. No wonder world finance is in such a mess.

His latest recommendation is for the government to bail out 2,000,000 hamstrung borrowers, just as they bailed out banks and almost bailed out a hedge fund a few years ago.

[Thanks to for the image.]

To bail out 2,000,000 unwise borrowers may sound like no worse an idea; but what he doesn't seem to notice is that it would signal the end of America as we know it. It would risk leading ultimately to an international monetary crisis of proportions that we cannot even imagine.

Instead, he should be yelling at the Federal Reserve and other central bankers who are responsible for this mess in the first place. He should be crying out that mismanagement of our monetary unit is at the source of this whole problem.

And just a detail: He says that "[t]he resultant impact on housing prices [if the government does nothing] is likely to be close to -10%, an asset deflation in the U.S. never seen since the Great Depression." Well, did he notice that housing prices have risen up to 300% in some cases within the last 5 years? Doesn't he realize that bailing out 2,000,000 borrowers will prevent these outrageous prices from deflating?

And what about tomorrow's borrowers, many of whom are responsible people who actually pay their mortgages? Their salaries are not about to rise 300%, so a bailout will just condemn millions of people to renting for years to come. (Maybe Gross has got stock in those companies who'll be supplying the rental housing?)

His shortsightedness is typical of the kind of thinking that got us into this mess in the first place.

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