October 1, 2007 (LPAC)-- PIMCO (Pacific Investment Management Co) manager Bill Gross has penned a monthly investment "outlook", which begins to express the magnitude of the problem facing the Federal Reserve, and--by extension--the US Congress. First, the modern credit markets have "done an end run around the banks," he says, since the days when loans were based roughly on dollar deposits of the institution. Now, in this "brazen new world," public policy has taken a back seat to the needs of private institutions. Thus the screaming rant of Jim Cramer, that "they know nothing!"

But, most of America's economic activity comes from main street, and not Wall Street, he says, and "stock prices do not dominate the spending habits and confidence of its consumers in the same degree as do home prices." That leads him to re-coin a Depression-era phrase: "if a recession is when home prices in a neighboring state go down, a depression will be when the price of your home [goes down]. Well, if that be the definition of modern depression," he continues," then 70 million American homeowners will soon be residing in Bush, not Hoovervilles."

While ultimately favoring continued Fed rate cuts, he expresses clear concerns about the collapse of the value of the dollar. Either way, he says, "the downward path of home prices, however, will dominate Fed policy over the next several years-- as will the lingering unwind of related financial structures and derivatives that have yet to be discovered..." [emphasis and punctuation added]