PIMCO's Bill Gross Tallies Cost of Credit Mess

Last Updated Apr 12, 2008 3:59 PM EDT

I hate to keep harping on the Bear Stearns bailout but hey,Pimco Logo everyone else is and it is surely the biggest financial story of the year (or if it isn't we're worse off than we think).

But now comes Bill Gross, a managing director at PIMCO and the best known bond investor in America. He's penned his monthly investment outlook and sent it to PIMCO clients. And true to form he has some interesting takes on the bailout of investment banks. The $30 billion that the Fed put up to back Bear Stearn's errors is just the beginning.

Let's see: Twelve months ago the yield on your money market fund was 5%+ but your next statement will probably feature something closer to 2%. Did your money market fund (which in aggregate approaches 3 trillion dollars) experience any capital gains in the process? Absolutely not. So it looks like your (the taxpayer's) contribution to the bailout of banks, or Florida condominium speculators can at least be quantified: 3% foregone interest per year on whatever you own.
But wait. Gross is just getting started. That vanished interest is being more than matched by the specter of inflationary pressures.
Because of this lender-of-last-resort operation, subsequent inflationary trends may have been fertilized because the debts that caused the crisis are now primarily in another private portfolio and not liquidated (the Fed having absorbed only 10% of the collateral). These debts have to be validated by policy makers through attempts to increase cash flows in the finance-based economy, which is another way of saying they are trying to reflate, which is another way of forecasting an increasing probability of higher inflation.
Regulatory intervention may save the markets from themselves, but it comes with a cost. This time the cost is landing on taxpayers, investors in money markets and consumers. But let's not dwell on that. Instead, let's look at the silver lining: Congratulations to all those financial institutions who had the good fortune (and influence) to dodge a bullet!
  • Kevin Kelleher

    Kevin Kelleher writes a regular stock column at TheStreet.com and is a contributor to Wired, Popular Science, and GigaOm. He has previously worked as a reporter and editor at Bloomberg News, Wired News, and The Industry Standard.