In a recent investment outlook published by bond guru Bill Gross of Pimco, he describes in easy to understand detail, the problems besetting the United States financial and housing markets as a result of the sub prime mortgage lending fiasco.http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2007/IO+September+2007.htm
For the moment we can leave the cause of the problem to the rise in alternative, lesser regulated investment strategists who came up with various mortgage derivatives that in recent months few people have been able to value never mind find buyers of.
So far the primary victims of the subsequent liquidity crisis have been some smarty pants hedge fund managers who were touting their strategies as market neutral with ability to make money in up or down markets. Once again the markets have proven that no one is immune from getting a spanking in the wood shed of turbulent conditions.
It would be nice if they are the only victims however with foreclosure rates rising rapidly on the underlying properties securing the derivatives it won't be long before a large number of Americans homeowners are dramatically affected.
The fundamental point of the Gross argument is this "If we can bail out Chrysler, why can’t we support the American homeowner? The time has come to acknowledge that there are precedents aplenty in the long and even recent history of American policy making." The examples Gross uses go beyond Chrysler to include the Long term Capital Management and S&L bail outs in the 90's.
The stakes involved in the current situation are much higher than the previous situations. At risk are as many as two million American home owners who have gotten caught up in the squeeze of raising rates and falling values that is a cocktail likely to result in more and more foreclosure actions.The travails of those two million homeowners will reverberate throughout the rest of the U.S. economy if they are left to sink or swim on their own.
Apparently President Bush is a reader of Bill Gross or just by coincidence the White House has arrived at some of the same conclusions Gross has. On August 31st, President Bush announced a plan to intervene in a way that is likely to greatly assist those home owners who have the greatest threat of losing their homes.http://www.whitehouse.gov/news/releases/2007/08/20070831-4.html
It is inevitable that some of those Wall Street wizards who helped create this problem will likely be bailed out as a by product of federal intervention in the housing market. No matter how distasteful that is, it can't be a reason to oppose this type of legislation. A wholesale collapse of the U.S. housing market and the financial instruments used to support it must be avoided at all costs. In terms of over all impact from a social and financial stand point, this crisis might be the defining moment in the Bush presidency.
