Gross on credit markets: No more autonomy
Monday, March 31, 2008
Bill Gross, managing director at Pacific Investment Management Co., or PIMCO, is never one to hide his real thoughts on the markets and the U.S. economy – and he came out slugging in his most recent monthly commentary to clients. This time, he argues that greater scrutiny of the credit markets is a foregone conclusion.
“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,” he said. “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.”
The housing downturn, of course, is the main reason why the credit market is shaking in its boots these days. And the solution, Mr. Gross said, must come from the quick response of authorities, even though a helping hand from government runs counter to deeply held Republican beliefs.
That's because a 20 per cent decline in U.S. home prices could spell catastrophe, since most homeowners have substantial debt loads that make a downturn far more of a shock to the U.S. economy than the pop of the dot-com bubble at the start of the decade.
“Ultimately government programs which support private credit market assets may be required in order to prevent an asset deflation of significant proportions,” Mr. Gross said. “A 20 per cent negative adjustment not only wipes out all ownership equity for millions of Americans, it turns their homes ‘upside down' – incentivizing them to let their gardens grow weeds instead of lettuce. The decline needs to be stopped quickly in order to avert additional crises.”
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© Copyright The Globe and Mail
Monday, March 31, 2008
Bill Gross, managing director at Pacific Investment Management Co., or PIMCO, is never one to hide his real thoughts on the markets and the U.S. economy – and he came out slugging in his most recent monthly commentary to clients. This time, he argues that greater scrutiny of the credit markets is a foregone conclusion.
“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,” he said. “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.”
The housing downturn, of course, is the main reason why the credit market is shaking in its boots these days. And the solution, Mr. Gross said, must come from the quick response of authorities, even though a helping hand from government runs counter to deeply held Republican beliefs.
That's because a 20 per cent decline in U.S. home prices could spell catastrophe, since most homeowners have substantial debt loads that make a downturn far more of a shock to the U.S. economy than the pop of the dot-com bubble at the start of the decade.
“Ultimately government programs which support private credit market assets may be required in order to prevent an asset deflation of significant proportions,” Mr. Gross said. “A 20 per cent negative adjustment not only wipes out all ownership equity for millions of Americans, it turns their homes ‘upside down' – incentivizing them to let their gardens grow weeds instead of lettuce. The decline needs to be stopped quickly in order to avert additional crises.”
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© Copyright The Globe and Mail