In his latest note to investors, bond guru Bill Gross highlighted the severity of asset deflation -- geekspeak for "falling prices." Not since the Great Depression has the aggregate of housing, stocks, and bonds been so depressed as it has in the last year.

"The bill for our collective speculative profligacy, obvious in the deflating asset markets, can be paid now, or it can be paid later," Gross said yesterday. "The tab will be less if paid up front, than if swept under a rug …"

The Great Depression? Seriously?
Yes. But how have things become so dire? Not necessarily because the assets are worth such paltry amounts, but because so many assets were leveraged to the gills in debt. Add in investors' overwhelming fear, and the selloff gets magnified beyond what actual losses might justify.

Joe Investor sells his assets, which brings down their price. That gives Jane Investor a margin call, causing her to sell, again bringing down the price. That gives Jack Investor a margin call, causing him to sell … it's a vicious cycle.

Ergo, the same investors most needed to purchase assets, cauterize the bleeding, and provide a floor might be ready to throw in the towel. Why step in to buy assets that might look like "values" if you're nearly certain that the selling will continue and prices will keep plunging?

As Gross put it, "We, as well as our [sovereign wealth fund] and central bank counterparts, are reluctant to make additional commitments." Yikes. "There may be a Jim Cramer bull market somewhere," he said,  "but it’s primarily a mirage unless and until we get the entrance of new balance sheets, and a new source of liquidity willing to support asset prices."

In comes Hammering Hank
The solution to this neverending wave of selling, according to Gross, is more government intervention. Not unlike the Treasury Department's authorized power to prop up Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE), or the backstop the Federal Reserve gave JPMorgan Chase (NYSE:JPM) when it acquired Bear Stearns, sometimes Uncle Sam is the last guy in the room brave enough to step in and buy assets of questionable character.

Gross's plea calls for the Treasury to open its arms to more avenues, such as subsidized home loans for "Mom and Pop on Main Street U.S.A." Not only would that provide much-needed relief for the housing market, but it'd help stop the hemorrhaging from banks like Bank of America (NYSE:BAC), Citigroup (NYSE:C), and Wachovia (NYSE:WB). In turn, that could unclog the logjam in the debt markets and get healthy lending practices back on track. Even better, it would lessen the need for banks to sell prized assets in a desperate race to raise capital, a la Lehman Brothers' (NYSE:LEH) possible sale of its Neuberger Berman division.

"Unchecked, [these problems] can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami." Gross warned. Yep, it's so much worse than you think

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Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. JPMorgan Chase and Bank of America are Motley Fool Income Investor recommendations. The Fool has a disclosure policy.