Pimco bond manager Bill Gross stole the Treasurys show at the Obama administrations mortgage-fixing summit Tuesday.
Gross suggested that the White House give new four-percent fixed-rate mortgages to all Americans who are current on their home loans, including to millions of borrowers whose houses are worth less than what they owe. He billed his plan as a pain-free stimulus, first because Americans would spend the extra money $50 to $60 billion in the economy, and second because the deal would give house prices a five-to-ten-percent boost.
But there is still no free lunch.
Grosss plan would, in fact, create yet more debt in an economy still heavily in hock. How? New home buyers would have to borrow more money to buy houses at the higher prices Gross is trying to stimulate. But in much of the country in particular the Northeast house prices are still above historic levels and out of reach for the first-time buyer. Hence, the new-found popularity of Federal Housing Authority (FHA) mortgage insurance, which allows buyers to get away with 3.5 percent down payments and leaves them vulnerable to the slightest faltering in prices.
The real stimulus would be to allow house prices to find their natural market level and thus encourage people to make new investments not in over-expensive residential real estate but in something more productive.
One is sympathetic to another element of Grosss reasoning, though. Thanks to the Fed, large financial institutions are able to borrow at near-zero interest rates and use the money to hang onto assets that arent worth what they seemed to be worth in 2005, avoiding losses. So why shouldnt regular Americans be able to do the same with their houses?
The problem here, though, is that zero-percent rates are already damaging the economy. People who save their money rather than spend it cant get any return without taking big risks. Investors, desperate for any return, are lending bundles of money to the economys supposedly riskiest companies at very low rates. Junk-bond issuance reached record levels last week.
The answer isnt to unleash mass-scale refinancings of overvalued houses. That course would only allow todays super-low rates to distort an even greater share of the housing market and the overall economy, further retarding recovery.
Plus, as people learn that theres no reward for saving and no reward for paying down credit-card balances, they would indeed spend the money that Gross wants to unleash. Consumer spending, though, still has to fall too, to a level Americans and their government can maintain without borrowing too much.
Gross should question the overall premise that more cheap debt can fix a crisis that abundant and cheap debt created in the first place.
Original Source: http://www.nationalreview.com/corner/244147/gross-has-no-mortgage-market-magic-bullet-nicole-gelinas