Bond Boom Good for PIMCO, but Not for U.S. Economy, El-Erian Says

In late August, PIMCO Co-CIO, managing director and founder Bill Gross urged the Treasury Department to put in place a mass refinancing plan for all non-delinquent mortgages backed by the federal government.

“Taxpayers would be protected through tight regulation, adequate down payments, and an insurance fund bolstered by a 50-75 basis

point fee attached to each and every mortgage. Seemed commonsensical to me,” he wrote in his September online commentary.

“If you eliminated the private incentive and provided a tighter regulatory watchdog, we would have no more ‘liar loans’ or ‘no docs’ and a much sounder foundation for future homeowners and investors. The private market, to my mind, had really lost its claim as the most efficient and judicious arbiter in this particular case,” Gross explained.

“Ninety-five percent of existing mortgage creation over the past 12 months were government guaranteed. The private market was nowhere to be found, because they charged too much. It was the cost of private origination and securitization, perhaps more than any other factor, that justified government involvement,” he concluded.

Also in August, PIMCO managing director and portfolio manager Paul McCulley shared his views online about what U.S. monetary leadership should be doing to improve the country’s economic conditions.

“When the economy suffers from Post Bubble Disorder, characterized by private sector deleveraging and a fat-tail risk of deflation, conventional monetary policy is not enough,” McCulley wrote.

“In such circumstances, the central bank has a profound duty to act unconventionally, ballooning its balance sheet by monetizing assets, either government or private, or both,” he wrote. “The central bank has a profound duty to meld itself with the fiscal authority, until the fat risk of deflation is eliminated.”

His overall conclusion is that now is not the time to exercise fiscal restraint: “To generate increased growth in aggregate demand, some sector of the economy must be willing to pro-actively lever its balance sheet. And that must be the fiscal authority, if the private sector is intent on delevering. Yes, I know all about the perils of long-term fiscal unsustainability. But I also know that in the long run, we are all dead. I see no reason to die young from fiscal-orthodoxy-imposed anorexia.”