Too Many Zeroes For Paul Krugman

by: Tom Brown

Did Paul Krugman actually write that “the bursting of the housing bubble means that someone, somewhere, has to accept several trillion dollars in losses.”?

Several trillion? Really? Numbers, please!

Here goes: Inside Mortgage Finance reports that total 1-4 family mortgage debt outstanding—prime, subprime, Alt-A, you name it—stands at $10.4 trillion. Let’s say that when he says “several trillion,” Krugman really expects just $2 trillion in mortgage-related losses. But to get to $2 trillion in losses, you have to, after allowing for partial recoveries via foreclosure sales and foregone borrower equity, assume something like $4 trillion in mortgage defaults, or around 40% of all mortgage debt outstanding. I don’t buy that. You shouldn’t buy that. I can’t believe anyone in his right mind would buy that.  

Meanwhile, back here in the real world, the estimates I’ve seen for eventual losses in subprime mortgage (which is where virtually all the losses will occur) range from $75 billion to $150 billion, or around the aggregate price change of the combined U.S. equity markets in a single day.

Yes, the subprime mortgage mess has been disruptive. But let’s go easy on the Carl Sagan routine, shall we?