I like to read Bill Gross’ column every month (and podcast) and have mentioned it here on more than one occasion. He is a smart man and the zen-god of the bond market via his firm PIMCO. He is not without his critics and his columns have a lot of extra style stuff inserted that blur their clarity, but they are still worth reading. And the Beatles, of course, are still worth listening to.
This month Gross touches on asset-backed lending in his column, When I’m Sixty-Four, a tried and true (sort of) form of mortgage lending where the lender actually understands who they are lending too, something lost in the recent surge in securitization run amok. Of course, keep in mind that JP Morgan was a robber baron.
I’ve had a famous picture of J.P. Morgan on my office wall for 25 years. Even now, the old man seems to be staring at my back and taunting me with his famous quote written just below his vest with pocket watch in full view: “Lending is not based primarily on money or property. No sir, the first thing is character.”
If there is not swift action at a Federal level, we’ll likely slip into a significant economic downturn.
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. 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. Ultimately government programs which support private credit market assets may be required in order to prevent an asset deflation of significant proportions. Authorities must act quickly, with a shot of adrenalin straight to the heart of the problem: home prices.
Think of the recent Federal Reserve rate cuts as a bailout.
Politicians – especially those on the Republican side of the aisle – are adamant about not using taxpayers’ funds to bailout Wall Street or housing speculators, or whoever the current devil may be. The public seems to nod in agreement while at the same time not noticing that their watch is being lifted or their pocket being picked. Let’s see: Twelve months ago the yield on your money market fund was 5%+ but your next statement will probably feature something closer to 2%. Did your money market fund (which in aggregate approaches 3 trillion dollars) experience any capital gains in the process? Absolutely not. So it looks like your (the taxpayer’s) contribution to the bailout of banks, or Florida condominium speculators can at least be quantified: 3% foregone interest per year on whatever you own
Now think about how free markets work. How can they perform freely if no effective standards or guidelines are in place? It’s not about more regulation, it is really about effective regulation and removal of distractions or those that provide a false sense of security.
You only need to look at the state of the current credit markets. Investors do not trust the packages being sold, and that is why we are in the mess we are in.
Tags: Bailout Nation