Bill Gross Sounds like Yogi Berra

Strange piece by Pimco's Bill Gross in the FT today.  The article's headline reads: "Zero-based money risks trapping recovery."  Along those lines, he writes:

...lenders require and are incentivised by a yield premium for longer-term loans, historically expressed as a positively sloping yield curve.

A flat yield curve, by contrast, is a disincentive for lenders to extend intermediate or long-term credit unless there is sufficient downside room for yields to fall and bond prices to rise, resulting in capital gain opportunities.

In other words, Gross paradoxically concludes that nobody makes loans anymore, interest rates are too low. Hearing those words, you can't help but think of Yogi Berra's famous witicism: "Nobody goes there anymore it's too crowded".

 

Update on February 6, 2012 at 3:07 PM by Stag Staff

Paul Krugman has a good response to Bill Gross' suggestion that we have to raise interest rates to encourage lending (I know, but that's what the man said).  Here's the key part:

The policy problem is that for whatever reason — in current conditions, mainly the deleveraging taking place after an era of debt complacency — the interest rate that would match savings and investment at full employment is negative. Unfortunately, that’s not possible, because rather than lend at a loss people can just hold cash. So we have an “incipient” excess supply of savings, which is eliminated not via a fall in interest rates but via a fall in income, i.e., a depression.

That might be a bit wonkish to understand, but here's the gist: households are deleveraging, which means that their demand for debt is diminished by their need to fix their balance sheets.  Hence, what they need to be incentivized to borrow is a really, really low rate.  In fact, they need a negative interest rate, but as Krugman aptly points out, no lender would lend at a negative interest, they can just hold cash.  

That's where Gross is wrong (or just mad about his return prospects for his clients!).  He thinks we have a money supply problem: low rates are keeping lenders on the side lines; raise rates and they will lend more! But no, no, no. As PK points out, it's a demand problem - borrowers just need a much lower rate than the zero bound can afford.