Bill Gross on CNBC (1/8/2009)

William Gross, founder of Pimco was interviewed on CNBC today about the federal government’s role in solving the financial crisis. Obviously, Mr. Gross is a very smart man, and he discussed a number of issues.  I do, however, have to take issue with one of his points:

If you have to put 20% down on a new home, that becomes a struggle in these times and to the extent that the FHA can come in there and allow a 3 or a 4% down payment, then that combination–I think–can support the housing market.

Certainly it is true that there must be liquidity for the economy to come back, and many leading economic thinkers such as Paul Krugman believe the US Economy is in a liquidity trap and needs a sustained, extremely loose money supply. Even so, it is difficult to accept that the solution to the mortgage crisis is to create new, unconventional mortgages with little payment upfront and huge amounts of debt. Gross is certainly right that loosening the standards for loans will keep housing prices high, but perhaps prices before the crash were just unrealistic, the product of fervor and lax appraising standards. Does chasing these inflated prices risk another wave of foreclosures in the future?

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