Sunday Edition: August 26, 2007
The Great American Bailout, Part 3
Earlier this month, U.S. Senator and 2008 presidential hopeful Hillary Rodham Clinton proposed the establishment of a $1 billion fund to bail out homeowners in danger of losing their residences to foreclosure. Now, famed bond fund manager Bill Gross said this week that the White House should bail out millions of American homeowners who are facing foreclosure. The founder of the fixed-income investment firm PIMCO and columnist for Fortune wrote in his monthly investment outlook on PIMCO’s web site:
If we can bail out Chrysler, why can’t we support the American homeowner?… This rescue, which admittedly might bail out speculators who deserve much worse, would support millions of hard-working Americans whose recent hours have become ones of frantic desperation… Write some checks, bail ‘em out, prevent a destructive housing deflation that (Fed Chairman) Ben Bernanke is unable to do.
Gross’ policy recommendations including creating an agency to coordinate bailouts or aid for homeowners, and modifications to the Federal Housing Authority program. He argued that a bailout would also benefit Wall Street. Gross predicted that, “Your stocks and risk-oriented levered investments will spring to life like the wild flowers in Death Valley after a flash flood.”
And I thought the Clinton plan was nuts. Peter Schiff does a fine job at explaining the negatives behind such a proposal in Friday’s Market Oracle:
Setting aside the constitutional or ethical arguments against it, the cost of such a bail out would be staggering. My guess is that the price tag would exceed one trillion dollars (Gross estimates the cost at only around $200 billion). Even if Gross’ numbers are accurate, it still represents a significant sum which we would likely have to borrow from abroad. What Gross fails to consider is the moral hazard implicit in such a bail out. Were the government to create a program whereby anyone falling behind on their mortgage could have their loan restructured to some lesser amount with lower payments, one would have to be an idiot not to take advantage of it. If such a nutty plan were ever implemented, it would not be 2 million homes going into foreclosure as Gross fears, but 20 million.
And guess who’ll be stuck with the bill…
Goldman Sachs Housing Study
According to Friday’s Wall Street Journal, the chief U.S. economist at Goldman Sachs feels home prices remain relatively expensive when compare to typical family income. Jan Hatzius says that during the housing boom years of 2000 to 2005, the ratio of the median-price home to the median family income rose 42% above the mean ratio of the previous 25 years, mainly due to escalating home prices. Even though housing prices have declined since, the price-to-income ratio still remains 32% above the mean. “Unless household incomes start rising rapidly, housing prices could have a lot further to fall,” said the Journal.
Have a wonderful week,
Christopher E. Hill
Editor
editor@boom2bust.com
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