Mark Trahant: Deflation a threat to U.S. economy

"Deflation happens when consumer prices decline over time. It's especially hazardous for a society in debt (because your assets are worth less while your debts remain the same). The way it could work now is that as more houses are repossessed, and sold at a discount, those houses compete with houses already on the market, pushing prices down. For most of us, our home is our most important financial asset.

We are not there yet. Housing prices have not declined that much.

But Bill Gross, who manages PIMCO, the nation's largest bond fund, said one of the problems is we don't know what we don't know.

Gross said a certain amount of "discipline in the form of lower prices might even be healthy, but market forecasters currently project over 2 million defaults before this current cycle is complete. The resulting impact on housing prices is likely to be close to -- 10 percent, an asset deflation in the U.S. never seen since the Great Depression."

There are three huge ideas in that one sentence: Two million defaults, housing prices declining 10 percent and echoes of the Great Depression. Gross wrote that the White House should create a new version of the Resolution Trust Corp. to rescue homeowners at risk. That agency rescued the savings and loan industry during the 1990s -- and financial markets from a huge fund's collapse. "If we can bail out Chrysler," Gross said, "why can't we support the American homeowner?"

Bail out mom and dad? Yes because we're all at risk if there is a significant decline in home prices."

Get the Story:
Mark Trahant: Biggest danger of mortgage crisis: Deflation (The Seattle Post-Intelligence 9/3)

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