Friday, July 11, 2008

Putting $1T Subprime Mortgage Loss in Perspective

I'm in Las Vegas at Freedom Fest 2008 and heard Steve Forbes speak yesterday. In his talk, he put the subprime mortgage meltdown in perspective by comparing the global subprime losses of $1 trillion (Reuters story here) to the $56 trillion of U.S. household net worth. Sure, $1 trillion is a very significant loss, but it's relatively insignificant compared to the significant value of U.S. household wealth, less than 2%.

George Soros characterizing the subprime mortgage situation as "the most severe since the Great Depression." I'm not sure there is data on household net worth in the 1930s, but I'm pretty sure the stock market losses and the losses from 9,000 bank failures (about 1/3 of all banks) in the 1930s was a lot bigger than 2%.

25 Comments:

At 7/11/2008 10:58 AM, Blogger Paul said...

Numbers. They just seem to feel kinda good. But really, they also add a bit of perspective to the hyped "disaster" that is fed to the public to drive political agendas.

 
At 7/11/2008 11:05 AM, Anonymous Anonymous said...

What Mr. Forbes doesn't realize is that putting things in perspective does nothing to improve the experience of the poor slob that can't afford to pay the mortgage/rent, buy groceries and buy gasoline to go to work.

Not only are we seeing fewer cars on the road but people are parking them and letting them sit and deteriorate. That eventually means a huge decrease in all car prices across the board.

That $56 trillion in household net worth includes the very rich so the numbers regarding household net worth are distorted AND what's worse is that is in U.S. dollars. Which one of Christie Brinkley's 18 homes in the Hampton's counts as a household in these numbers?

What does the U.S. produce that the world wants anymore? What do we make that can't be made anywhere else for less money? The only thing we have left are our increasingly worth less U.S. dollars and we are exporting those as fast as we can.

Oh yeah it's all good. No need to run for the door in panic or start hyperventilating yet.

Look for $170 oil, $5.20 gas and general strikes this fall as the cooler weather sets in and heating costs become yet another straw on the Camel's back.

Maybe Glenn Beck was right when he encouraged his audience to bury food, guns and gold in their back yards...

 
At 7/11/2008 11:17 AM, Anonymous Anonymous said...

Anon. 11:05,

Must congratulate you on presenting a classic Joe Canadian rant. Would appreciate if you could provide links to support any of your claims namely:

Fewer cars on the road?
Parked, deteriorating cars?
the assertion that a 14 trillion dollar economy produces nothing that any country wants?(gee, wonder why it is a 14 trillion dollar economy?)

It is difficult to take such lack of content seriously.

 
At 7/11/2008 11:26 AM, Blogger Walt G. said...

Paul, I don't see the hyped disaster. We've got big problems that are readily quantifiable, so even if you remove political agendas from the discussion, the problems remain. Here's some more perspective from the Soros' article in Rueter's:

""We are in a period of financial wealth destruction ... and now we have deleveraging," he said." [Soros]

"Soros blamed the lack of transparency in the credit default market, which he calculates at $45 trillion, as the root of the curtailing of bank lending and hence the credit squeeze."

"All told, investors are facing the "worst financial crisis of our lifetime," said Soros."

I don't know how much the drop in the stock market since October of last year is due to the sub-prime crisis, I'm sure crude oil prices are also a big driver, but I doubt that the sub-prime stock market loss is included in the $1 trillion figure that Forbes and Soros talk about.

 
At 7/11/2008 11:34 AM, Blogger Mebane Faber said...

A better chart would be worldwide household net worth vs. worldwide subprime losses, just to compare apples to apples.

 
At 7/11/2008 12:39 PM, Anonymous Anonymous said...

So, I'm not sure, do you agree or disagree with George Soros that the subprime mortgage situation is "the most severe since the Great Depression."?

 
At 7/11/2008 12:41 PM, Anonymous Anonymous said...

Everything is rosy for Forbes. He'll be one of the buyers at the bottom when the rest of us are struggling to survive.

Yep. Fannie Mae, Freddie Mac, Bear Sterns, Lehmann Brothers, and at least 266 finanacial/lending institutions are either out of business or on the verge of bankruptcy.

http://ml-implode.com/

Nothing to see here...move along.

 
At 7/11/2008 1:21 PM, Anonymous Anonymous said...

Forbes' credibility is in tatters and ought to be ridiculed.

He does not consider the second-order effects. What if household net worth declines $10 trillion; $5 trillion stock market decline and $5 trillion residential real estate decline. Both asset classes are about half way there.

And there is the third order effect of a decline in aggregate consumption which feeds rises in unemployment and a decline in economic growth.

Does that put the mortgage loss in a different perspective?

 
At 7/11/2008 4:42 PM, Blogger juandos said...

Hmmm, I thought I smelled the stench of liberal class warfare here: "That $56 trillion in household net worth includes the very rich so the numbers regarding household net worth are distorted AND what's worse is that is in U.S. dollars"...

Oh boo! hoo!

How many supposed adults (and what % of them were victimized by the government run madrassas in this country?) bit off more than they could chew when they went off and bought a house?

Did you figure that part of the problem in your comment anon @ 11:05 AM?

BTW America produces quite a bit that the rest of the planet wants and more importantly needs...

Just the wee bit of research on your part would've shown you that...

"Everything is rosy for Forbes. He'll be one of the buyers at the bottom when the rest of us are struggling to survive"...

Steve Forbes knows that basic rule I'm sure, "buy low, sell high and its easier to buy it from a chump...

"Yep. Fannie Mae, Freddie Mac, Bear Sterns, Lehmann Brothers, and at least 266 finanacial/lending institutions are either out of business or on the verge of bankruptcy"...

I wonder how much federal pressure (if any at all) mandated that these outfits named had to make sure that a certain % of the customers were known losers but fell into one quota category or another?

"What if household net worth declines $10 trillion; $5 trillion stock market decline and $5 trillion residential real estate decline. Both asset classes are about half way there"...

Sounds like a good time to buy then don't you think?

 
At 7/11/2008 6:00 PM, Anonymous Anonymous said...

Sounds like a good time to buy then don't you think?

Only if you are a knife-catcher. Did you catch this one?

 
At 7/11/2008 6:04 PM, Blogger juandos said...

"Only if you are a knife-catcher. Did you catch this one?"...

?!?!?!

Hey compadre, businesses fail everyday...

 
At 7/11/2008 7:09 PM, Anonymous Anonymous said...

businesses fail everyday

The significance of this failure (the largest since Continental Illinois in 1984) is that Indymac specialized in Alt-A mortgages, supposedly a step above the subprime mortgage crowd. And the band marches on.

Perhaps Forbes will put that in his revisionist perspective.

 
At 7/12/2008 5:31 AM, Blogger OBloodyHell said...

> the poor slob that can't afford to pay the mortgage/rent, buy groceries and buy gasoline to go to work.

The "poor slob" who is in that situation is partly at fault for his failure to grasp what he was signing on for.

That does not mean he's totally at fault, but most people (not all, but most) will gleefully play the role of "sucker" for sharps of all kinds, by looking for a better deal than they have any right to expect. If they are smart, they learn better.

I also question whether that person is even in that situation unless they've had kids they cannot afford (a popular past-time with people these days, I note), itself an issue of relevancy, showing a history of foolish decisionmaking. Assuming $1000 a month payment, groceries on the order of $100 a month (call it $150), and $150 a month Gas (=35 gals, at 20mpg, we are talking 30 miles per day round trip), we are looking at 1300 a month in expenses. Before taxes we are talking about $1600, so, four weeks at about $10 an hour covers that. If you weren't making $10 an hour (i.e., ca. 20k/yr), you should have had a friggin' clue that you had no business buying a house. If any of those numbers don't seem right -- I repeat: you should have figured out on your own that you had no business buying a house.

That's not to be a jerk and go "too bad, so sad", but, in reality, it's an unfortunate lesson. And I don't think those housing people are going to get rich off repossessing the homes and re-selling them in the middle of a market glut. If you are smart, you will approach them with a plan to get BOTH of you out of the whole you've both dug. Most companies will probably fall over backwards for someone willing to bust their ass to try and actually keep the home for themselves.

> What does the U.S. produce that the world wants anymore?

What are you, a moron? A clueless frigging idiot? A twit, a loon, a... descriptors fail.

The US produces *IP* you pinhead. It's where wealth COMES from nowadays, not "manufactured goods". The margins on manufactured goods, like the margins on Ag products a century ago, are heading rapidly towards fractions of a penny to the dollar. You have to have a very UNwealthy country to justify having people do it at all (the long-term future is in robots, which are to factories what mechanized ag was to farms).

At the moment, it pays to let other countries raise themselves out of the muck using manufactured goods, rather than fully roboticizing -- so far.

In the course of the next century, that is going to change, however -- and any nation which figures to make itself wealthy by "making things", better figure out a way to make something robots can't do faster, cheaper, and easier. Hand-crafted goods might manage it, if said nation can develop an artisan class. Anything else isn't going to cut it.

> The only thing we have left are our increasingly worth less U.S. dollars and we are exporting those as fast as we can.

Yes, things are Sooooo horribly, awfully bad here that foreign investors are happily returning in droves to invest in our sucky "recessionary" economy -- you know, the one which is in "the worst recession in decades"... Well, excepting for the fact that there's no recesssion at all, as you'd damned well know if you had any clue at all and weren't talking out your ass.

As I've noted elsewhere:
Head<>Ass.
Try and keep the two apart.

yeesh.

 
At 7/12/2008 5:37 AM, Blogger OBloodyHell said...

> George Soros

Soros is a halfwit jackass with what is probably the worst case of BDS in all of The Left.

He would sell his own children for a chance to embarass the Bush family (I'm not fan of them, either, but I know when someone is talking as a rational actor and when they are not).

You can trust anything Soros says about as far as you can spit upwind in a class-5 hurricane.

 
At 7/12/2008 5:42 AM, Blogger OBloodyHell said...

> Yep. Fannie Mae, Freddie Mac, Bear Sterns, Lehmann Brothers, and at least 266 finanacial/lending institutions are either out of business or on the verge of bankruptcy.

Yeah, and in the 80s the same could be said of S&Ls.

Perhaps you remember them? Not a lot of them left around, are there? It's called "bad management". It's how the capitalist system works. Bad managers don't get to manage money for long, because good managers take it away from them.

And the world? Well, it's still here. ...And it's richer than ever.

 
At 7/12/2008 8:10 AM, Anonymous Anonymous said...

The US produces *IP* you pinhead. It's where wealth COMES from nowadays, not "manufactured goods".

You may want to revisit your theory.

Utilizing the market capitalization of the S&P500 as a proxy, information technology is 16.44% of the economy. Materials, industrial production and energy account for 31.17%, financials and health care account for an additional 26.17% of the economy.

 
At 7/12/2008 1:35 PM, Blogger juandos said...

anon @ 7:09 PM said: "The significance of this failure (the largest since Continental Illinois in 1984) is that Indymac specialized in Alt-A mortgages, supposedly a step above the subprime mortgage crowd. And the band marches on"...

Well this is very true and NOT unimportant but there's been some new developments since yesterday...

From the New York Times: The run on the bank came after a critical letter about the bank from Senator Charles E. Schumer, Democrat of New York. Federal regulators said on Friday that Mr. Schumer’s letter had prompted the collapse by causing the run and scaring away potential acquirers.

“The senator made comments in his letter questioning the viability of the institution,” John M. Reich, director of the Office of Thrift Supervision, said in a phone call with reporters. “When a member of the United States Senate makes such a statement, it frightens depositors.”

In the days after Mr. Schumer’s letter was released on June 26, IndyMac customers withdrew an average of $100 million a day from the bank, or a total of $1.3 billion, the government said. Before Mr. Schumer’s letter, the bank had been receiving net inflows of money from depositors, Mr. Reich said.

Mr. Schumer, who has been critical of bank regulators for months, released a statement criticizing Mr. Reich’s agency.

From the WSJ: The director of the Office of Thrift Supervision, John Reich, blamed IndyMac's failure on comments made in late June by Sen. Charles Schumer (D., N.Y.), who sent a letter to the regulator raising concerns about the bank's solvency. In the following 11 days, spooked depositors withdrew a total of $1.3 billion. Mr. Reich said Sen. Schumer gave the bank a "heart attack."

"Would the institution have failed without the deposit run?" Mr. Reich asked reporters. "We'll never know the answer to that question."

Mr. Schumer quickly fired back.

"If OTS had done its job as regulator and not let IndyMac's poor and loose lending practices continue, we wouldn't be where we are today," Sen. Schumer said. "Instead of pointing false fingers of blame, OTS should start doing its job to prevent future IndyMacs.

 
At 7/12/2008 2:11 PM, Anonymous Anonymous said...

It would not surprise me one bit that George Soros is attempting to tank the US economy so he can get his guy into the presidency.

George most likely has his arbitrage strategy set up to profit billions betting the US economy continues to go down or linger in malaise.

He's not a credible source and doesn't give a rat's backside about the US economy unless he's able to make extreme profits from it.

For the record, I don't think that Mr Forbes is saying things are rosy for everyone - he's giving perspective.

We aren't in a depression.

Only a small percentage of borrowers hold subprime mortgages that are in trouble or at risk of foreclosure.

The subprime mess largely wouldn't have happened if the real estate bubble had never happened or hadn't burst. I've never seen or heard of a bubble of inflated prices based on irrational reasons not eventually burst. Hype, fads and irrational valuations are temporary.

Cost of energy is probably a bigger problem than the subprime mess, but that's fixable IF CONGRESS GETS OUT OF THE WAY and lets free enterprise go after solving the energy supply problem.

Hey anonymous 10:15!

I don't agree with anything you've written.

A great job of selling the USA and Americans short.

BTW - it's a GREAT time to buy a car or buy a house or even start a business! Prices will not get lower.

Seize the opportunity! hehehe

 
At 7/12/2008 5:24 PM, Anonymous Anonymous said...

Thanks for the update juandos.

Isn't this a case of the pot calling the kettle black? Reich is a Bush appointee after all.

The bottom line: 5% of IndyMac's $20 billion in deposits jumped ship and the FDIC is called in to bail out at an initial estimated cost of $4 to $8 billion.

 
At 7/13/2008 2:49 AM, Blogger juandos said...

anon @ 5:24 PM says: "Isn't this a case of the pot calling the kettle black? Reich is a Bush appointee after all."...

I'm not sure what you mean by this statement... Are you saying its Bush's fault that IndyMac went bust?

Was Reich incompetent at running OTS, hence IndyMac was allowed to works it way into going out of business with bad business practices?

In comments released to the media, the OTC said a June 26 letter by New York Sen. Charles Schumer expressing concern about the bank's viability was the 'immediate cause' of the thrift's closure.

Depositors withdrew more than $1.3 billion in the 11 days after Schumer's letter was made public, the OTC said.
...

Right now the question I have is which came first (ala the chicken and the egg question), the run on the institution because insiders knew something or did Schumer's desire to see his name in print again (most dangerous stunt in Washington D.C. is to get between a microphone and Schumer) cause the run to start?

This is NOT to say that IndyMac wasn't going to go out of business but I'm wondering if Schumer's big mouth made of hash out of what could've been an orderly drawn down of the bank?

 
At 7/13/2008 4:45 AM, Anonymous Anonymous said...

Are you saying its Bush's fault that IndyMac went bust?

No.

Was Reich incompetent at running OTS, hence IndyMac was allowed to works it way into going out of business with bad business practices?

Perhaps. A congressional investigation will make that determination.

The bank has been under close regulatory supervision since January. Reich will be the sacrificial lamb when the OTS is merged out of existence.

 
At 7/13/2008 6:03 AM, Blogger juandos said...

"A congressional investigation will make that determination"...

Hmmm, do we need more Schumer types trying to make an assessment on something they know less than nothing on?

None the less thanks for the answers...

BTW you may find the following from the FDIC interesting: This list includes banks which have failed since October 1, 2000

 
At 7/13/2008 10:36 AM, Blogger OBloodyHell said...

> Perhaps. A congressional investigation will make that determination.

Oh, yeah, NOW pull the OTHER one.

LOL.

Congressional investigations associated with Scooter Libby failed to find he did much of anything (but still That He Did Something) but managed to find almost nothing wrong with Sandy Berger and his pants.

Stealing classified documents and actually LOSING TRACK OF THEM, that's nothing.

But not revealing any information about Valerie Plame -- at all -- which was not openly public information? "Off with his head!!"

Congressional investigations are worth less than the hot air that they are composed of.

Suppose you were an idiot. And suppose you were a member of Congress. But I repeat myself....
- Mark Twain -

 
At 7/13/2008 11:29 AM, Anonymous Anonymous said...

Congressional investigations are worth less than the hot air that they are composed of

Obloodymoron's wordsmithery is worth less than the hot air that it is composed of

ROTFLMAO

 
At 7/14/2008 9:49 AM, Anonymous Anonymous said...

Try looking at the original unemployment, GDP and inflation stats. Not the cooked up numbers from the recent political quacks. Those numbers make everything look rosy.

 

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