According to Bill Gross, the decline in home prices must stop if the U.S. economy is to revive, and Washington must act immediately — even though supporting home prices flies in the face of traditional Republican thinking. "President Bush and Treasury Secretary Paulson argue that markets must ‘clear’ in order to avoid similar mistakes made by Japanese authorities in the 1990s,” Pimco’s Gross says. "Yet we may have passed the point of no return for ‘clearing’ markets.”

Gross observes that the debts behind the crisis remain un-liquidated — now primarily in another private portfolio since the Fed absorbed only 10 percent of the collateral — and must be validated by increased cash flows.

He points out that the current 20 percent decline in home prices is a much bigger shock to the American economy than the Internet bubble burst or the NASDAQ 5000 simply because the amount of homeowner leverage is so much greater.

"A 20 percent negative adjustment not only wipes out all ownership equity for millions of Americans, it turns their homes ‘upside down’ — incentivizing them to let their gardens grow weeds instead of lettuce,” Gross observes. "The decline needs to be stopped quickly in order to avert additional crises” that may well lead to economic collapse.

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As for Wall Street, Gross says that the Bear Stearns crisis, emblematic of the difficulties a shadow banking system creates, shows it's high time Wall Street got a good dose of regulation.

Private credit markets, Gross argues, gave up their right to operate relatively control-free because of the incompetence and excessive greed they fostered and should now be controlled even though controls increase the chances of inflation.

Investment banks — which currently have only 50 percent of the capital base of commercial banks — will simply have to meet the same requirements that commercial banks do, which will reduce the profitability of investment firms like Goldman, Lehman, and Merrill Lynch. Narrowing the differences between commercial and investment banks means the latter will almost certainly have to raise expensive capital as well as reduce their bottom lines — costly moves, but ones that will help both stock prices and bond spreads.

Though politicians remain adamantly opposed to Main Street bailing out Wall Street speculators, they keep overlooking the fact that the average 5 percent yield on money market funds so common only a year ago has been reduced to a mere 2 percent.

"It looks like (the taxpayer’s) contribution to the bailout ... can at least be quantified,” Gross notes. "Three percent foregone interest per year on whatever you own — and your contribution to the bailout will be even greater since you’ll likely wind up paying higher prices for many of the things you’ll buy.”

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