PIMCO, headquartered in Newport Beach, Cali, is one of the asset management firms I respect. it said the most important thing for an asset manager is to control the risk exposure on its web front page, which is very true. Bill Gross, one of the companies, just published a report on stopping the decline of asset prices as a way to revive U.S. economy. Very interesting theory, just want to share.
PIMCO’s thesis for several years has held that the levered global economy long ago morphed from a banking-dominated regime to one that hid behind securitized lending and structures resembling a “shadow banking” system. SIVs, hedge funds, CDOs and increasingly levered mortgage and investment banks fueled asset appreciation in all investment markets, which in turn propelled real economic growth and employment to unsustainable levels.
To PIMCO, the remedy for this deflationary delevering and mini-depression is simple and almost axiomatic: stop the decline in asset prices.
That is the same thing as saying that current yields must come close to matching the economy’s embedded cost of debt if default is to be avoided.
PIMCO’s advice to policymakers is as follows: you can’t bail out everyone, yet economic recovery is not possible unless certain critical asset sectors are not only reliquefied, but rejuvenated in price.
Capitalism at its philosophical and practical center depends on credit, and while new loans can be and are being advanced via the banking system, it’s a much more difficult task to force shadow banks to lend. That lending depends on securitization which in turn depends on stable and eventually higher asset prices than currently exist.
The original text is here.