It's isn't easy for co-heads of a firm to always stay on the same page. But it's rare that they contradict each other. Yet Co-Chief Investment Officers of PIMCO William Gross and Mohamed El-Erian appear to do just that if you compare two prescriptions that they recommend for the U.S. economy. At first, they may appear to agree, since they both want the government to do more. But the different type of stimulus each recommends conflicts.
Let's start with Bill Gross. A few weeks ago, at the Future of Housing Finance summit at the Treasury, he recommended that the government use Fannie and Freddie to stimulate the economy by allowing refinancing for borrowers whose loans are backed by the entities at rates even below the already record lows. He said:
The American economy is approaching a cul-de-sac of stimulus, both monetarily and fiscally. It will slow to a snail's pace incapable of providing sufficient job growth going forward. Unemployment rates will approach and remain at double digits unless a positive fiscal stimulus is provided in the next six months. This home financing to my way of thinking and to PIMCO's way of thinking where you take 5%, 6%, and 7% and turn them into 4% mortgages, basically will provide a push, a stimulus of $50 to $60 billion of consumption.
This is a terrible idea, as explained here. One reason why is labor mobility. To mostly rehash the example I used, if you lock in a 4% mortgage rate, you'll never want to move if it means stepping up to even a usually reasonable 6% rate. If your monthly payment was $1,000, then you would have to move from a home worth $209,500 to one worth $166,800 to keep your payment level at the new mortgage interest rate. So if you have a new job opportunity in another city, then you'll be less likely to take it. Your ultra-low mortgage interest rate will keep you glued to your home.