Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co., urged the Bush administration, rather than the Federal Reserve, to bail out U.S. homeowners to avoid "destructive housing deflation."

"Fiscal, not monetary policy should be the preferred remedy," said Gross, who manages the $103 billion Pimco Total Return Fund. "This rescue, which admittedly might bail out speculators who deserve much worse, would support millions of hard working Americans whose recent hours have become ones of frantic desperation."

Fed interest-rate cuts won't lighten the extra mortgage payments for homeowners as lenders may not follow with cheaper rates, he said. Lower Fed rates would likely weaken the dollar, Gross wrote in his monthly commentary on Pimco's Web site. The unexpected 0.5 percentage point cut last week on the rate the Fed charges banks and the addition of cash to ease access to capital may provide short-term relief to markets, he said.

Meanwhile, a hedge-fund manager called for changes to bankruptcy laws to allow U.S. homeowners facing foreclosures to refinance with smaller loans, with the difference being forgiven, a hedge-fund executive says.

A government bailout of U.S. mortgage borrowers would mostly benefit Wall Street firms, hedge funds and foreign banks and governments that helped create the crisis, Kyle Bass, a managing director at Hayman Capital Partners LP, wrote in a letter to investors yesterday. The Dallas-based firm runs a hedge fund that was up 305 percent in the first seven months of this year, thanks to bets against subprime-mortgage bonds.

Treating consumer debt more like that of distressed companies would avert a "taxpayer bailout of colossal proportions — somewhere in the vicinity of $150 to $300 billion," Bass wrote.

Gross also called the fed funds rate at 5 1/4 percent "restrictive." "The economy is slowing. They're going to have to" cut rates in the next several months. He also said his firm has been buying high-yield assets. Gross has been predicting for about a year that the Fed will lower rates in 2007.

U.S. homes facing foreclosure almost doubled in July to 179,599 notices as property owners with adjustable-rate mortgages saw payments rise and were unable to refinance because of the subprime crisis, RealtyTrac Inc. said. Analysts expect defaults to rise to more than 2 million, which would likely dent housing prices by 10 percent, Gross wrote.

There are precedents from previous crises in the 1990s, Gross said. The U.S. government created the Resolution Trust Corp. to rescue the insolvent savings and loan industry, and the Fed organized a bailout to prevent billions in losses from rippling through Wall Street after the collapse of Long-Term Capital Management LP hedge fund in 1998.