By Jody Shenn
Sept. 4 (Bloomberg) — The U.S. government needs to start buying assets to stem a bourgeoning “financial tsunami,” according to Bill Gross, manager of the world’s biggest bond fund.
A process of “delevering,” where banks are shrinking and cutting off lending, is sapping demand for loans, bonds, stocks and commodities, driving down prices of assets of even “impeccable quality,” Gross said. The decline may continue until the government steps in as a buyer, he said.
“Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami,” Gross of Newport Beach, California-based Pacific Investment Management Co. said in commentary posted on the firm’s Web site today. “If we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury.”
The government should be used to support not only mortgage finance providers Fannie Mae and Freddie Mac, but also “Mom and Pop on Main Street U.S.A.,” through subsidized home loans issued by the Federal Housing Administration and other government institutions, Gross said. A new version of the Resolution Trust Corp., which bought assets from failing institutions during the savings-and-loan crisis of the 1980s, may also work, he said.
Pimco, sovereign wealth funds and central banks are reluctant to participate in new capital raising by financial companies after losing money on more than $400 billion of investments, Gross said.
To contact the reporters on this story: Jody Shenn in New York at firstname.lastname@example.org