Gross Urges ‘Full Nationalization’ of Housing Finance
Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said the U.S. should consider “full nationalization” of the mortgage- finance system as the Obama administration plots the revival of a market that was at the center of the 2008 credit crisis.
“To suggest that there’s a large place for private financing in the future of housing finance is unrealistic,” Gross said today at a U.S. Treasury Department conference in Washington. “Government is part of our future. We need a government balance sheet. To suggest that the private market come back in is simply impractical. It won’t work.”
Treasury Secretary Timothy F. Geithner and Housing and Urban Development Secretary Shaun Donovan gathered housing- industry stakeholders to seek advice as the administration prepares a housing-finance overhaul to be delivered in January. The position taken by Gross, whose firm is among the biggest holders of U.S.-backed mortgage debt, is at odds with industry and government officials who have urged a smaller federal role.
Geithner said the government must reduce its role in housing markets and ensure Fannie Mae and Freddie Mac, the mortgage-finance companies operating under U.S. conservatorship, won’t require future bailouts.
“We will not support returning Fannie and Freddie to the role they played before conservatorship, where they took market share from private competitors while enjoying the perception of government support,” Geithner said today at the conference.
My take: Fannie Mae and Freddie Mac are now being used by government to prop up the housing market artificially when we need price discovery. House price inflation adds nothing to a nation’s productivity; it is merely a transfer of income from buyers to sellers and encourages the accumulation of debt. In general, Fannie and Freddie distort markets and should be liquidated entirely. The video of Gross is below.
Bill Gross has taken a huge gamble on GSE debt. He is trying very hard to make sure that he wins that gamble. I believe that once the Federal commitment to cover GSE losses ends (2012?) the GSE debt should be cut loose from Federal support. Anyone holding GSE debt at that time will deserve whatever losses they take. Of course, I don’t there should have been any Federal support to begin with, but it is too late for that now.
Gross has gambled that the Federal government will not let holders of GSE debt take any losses. I hope he loses that bet.
I agree with Edward’s post that we need to liquidate Fannie and Freddie as well as Matt’s post. Gross is talking his book. If he offloaded these bonds, he would scream for a private market.
This is getting out of hand now that F/F are backing NYC luxury apartments, requiring just 3% down. At some point, the government may let them go if losses grow, and we are forced to restructure our debt. That is probably years away, but we are heading that way with the massive unfunded liabilities heading our way.