Pimco's McCulley spills much digital ink displaying a stunning lack of reality, in a vain (and vile) attempt to justify pumping asset prices - in this case, houses.
His claim is correct - that if everyone tries to deleverage in a given asset class at once, and therefore prices for that asset fall even more, that paradoxically leverage can actually increase because the denominator (the value of the assets) can fall faster than you can disgorge the numerator (the paper you allegedly have "secured".)
The problem is the underlying premise that McCulley shows in his pugnacious and repugnant book-talking exercise, focusing on the trees and missing the forest entirely.
Let's go back to first principles - the oft-repeated proclamation by politicians and other "wonks" who assert that it is a public good for us to have a maximum attainable level of sustainable home ownership in America.
Simple premise, right?
Ok.
Now let's call houses DVD players.
You want to have the maximum number of people able to own a DVD player.
How do you this?
You find ways to make them CHEAPER.
In fact, we have nearly 100% penetration of DVD players because they cost $30 at WalMart. When they were $500, and it wasn't that long ago, not very many people owned them.
Cell phones. When they were $1,000 (not all that long ago) and service was $50/month for 100 minutes - 50 cents/minute - few people owned them. Now, with $50/month for 1,500 minutes, with free weekends, and the phone "free" (with contract), virtually everyone has one.
Houses?
Hmmmmm....
You want lots of people to experience sustainable home ownership? Is that really the goal of the politicians?
If it is, then each and every one of them should be doing everything in their power to encourage deflating home prices.
Period.
This is even true if it forces people through foreclosure. Yes, foreclosure is nasty on your credit, but think folks!
If your payment is $2,000/month now, you can't afford it and foreclose as prices deflate, you can then buy the house back at half-price - and at a lower payment! While your credit may be trashed for seven years, are you better or worse off if you own the same (or a similar) house but with half the level of indebtedness?
That's an easy question to answer, isn't it?
So why doesn't McCulley advocate this path forward?
Because he doesn't give a good damn whether or not you can afford your house. Neither do the politicians, including George W. Bush, Henry Paulson, and Ben Bernanke, along with both Houses of Congress.
These people are all trumpeting this so-called "foreclosure prevention" housing bailout bill which is intended to do exactly the opposite of that which would promote sustainable home ownership.
Whatever their true agenda might be (and they sure haven't shared it with us!) their actions are in fact intentionally damaging sustainable home ownership by attempting to hold home prices above their historical average as a percentage of income!
You want to see sustainable home ownership?
Deflate home prices.
Period.
ALL of the politicians who claim they are "for" sustainable home ownership yet who did nothing to stop the housing bailout bill are LYING.
Their actions are diametrically opposed to sustainable home ownership, and the sooner you, as Americans, wake up to this reality and do something about it, the better off we all shall be.
