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.
Now let's turn to Mohamed El-Erian's stimulus suggestion, via Bloomberg:
"This country has very weak safety nets," he said in a radio interview today on "Bloomberg Surveillance" with Tom Keene. "It is built on the assumption that our labor markets are very flexible, that if you lose your job in California you move somewhere else, you get another job, and what we're seeing is structural unemployment."
"It needs other agencies to help and in particular, it needs structural policies to be there, " he said. "Put another way, you need to stimulate not just demand, but also you need to make supply more flexible."
In other words, we need better labor mobility. But, as just shown, the stimulus proposal that his colleague Bill Gross championed a few weeks ago is in direct conflict with the end that El-Erian sees as so vital to a healthy U.S. economy.
Indeed, even on a less specific level, El-Erian's point about the importance of labor mobility conflicts with Gross' view of the mortgage world. Gross said he essentially wanted to nationalize the mortgage market, so to keep interest rates low and homes affordable. By the government opening up home ownership to a broader population, it pretty much by definition provides mortgages to borrowers who aren't as financially stable as those who would buy a home without its help. As a result, they're the very ones for whom labor mobility matters the most and would often be better off renting.
In fact, El-Erian's view is right here. Labor mobility is important, and the government should do what it can to keep the work force as flexible as possible. One way to do that, however, is for the government to stop encouraging home ownership. Even without the government's help home ownership is sufficiently desirable for Americans who can afford a mortgage under normal market conditions. Having the government increase the ranks of homeowners to those on the margin will ultimately just make them worse off.
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