More Bailouts Could Bring Disaster Down the Road

These comments from PIMCO's Bill Gross, head of one of the largest bond funds in the world, on the need for the “government” to bail out homeowners and the mortgage industry and thus the overall economy:

“Reestablish not the RTC (Resolution Trust Corporation created to bail out the S&L industry) or the RFC (Resolution Funding Corporation to fund the RTC), but create an RMC (Reconstruction Mortgage Corporation). If not, make some modifications in the existing FHA program, long discarded as ineffective. Write some checks, bail them out, and prevent a destructive housing deflation, that Ben Bernanke is unable to do."

In my humble opinion Mr. Gross is right about only one thing: that Mr. Bernanke is unable to eventually stop a destructive housing deflation. At least now the pundits are admitting that a housing deflation is at the heart of the economic problems. That is a watershed event.

But for the “government”, which I thought was using taxpayer money (except for the $9 trln in debt it has borrowed), to bail out malinvestment is only to increase the problem. If you don’t punish your child for playing with matches, he may one day burn the house down.

Of course Mr. Gross, being worth $500 mln plus, really doesn’t worry about how much of his tax dollars are going into the abyss; he just wants to keep earning his fees. I don’t mean to insult such a smart man, but it continues to amaze me that even those that should know better believe the solution is more of the problem.

We have to at some point start thinking about our kids. We may escape a disaster now by more bailouts, but we only make the problem worse for our kids. Each bailout has a cost, but if you haven’t noticed there is not really much money left in our “money supply”. Today only about 1-2% of what we call the “money supply” is real money, real wealth not backed by debt. The rest is all debt. So we just keep increasing the debt our children must pay back through higher future real interest rates.

Essentially that robs their standard of living tomorrow so we can live better today. So enough of the bailouts. Let’s think of our children and what we will leave in our wake.