Putting $1T Subprime Mortgage Losses in Perspective 30 comments
July 11, 2008
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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 is 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%.
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This article has 30 comments:
That said, subprime is a small fraction of real estate. Prime defaults are currently on the rise. When you add everything up (all housing losses, stock losses, and government debt used in bailouts), we'll see how things compare. In the end, it's pretty obvious that $1T really is a drop in the bucket.
"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%."…
Thank you for understanding correctly the phrase "since the…". If the current situation was as bad as the Great Depression I am sure George would have said "as bad as". He might have even used the phrase "worse than" if that is what he meant to say.
It's been around 70 years since the great depression so George saying the current environment is "the most severe" it has been during the past 70 years then that means things are pretty bad.
sociology.ucsc.edu/who...
Granted, these numbers only go up to 2001, and I'm sure the progressive policies of the Bush administration have helped that wealth to "trickle down" to the masses over the intervening years, but you get the picture. How many sub-prime loans do you think were taken out by the rich?
So yes, Perry you are quite correct: Normal folk can all pretty much go directly to the poor house at this point (do not pass go) & it won't materially affect US household wealth.
1.8% is not insignificant. But it certainly is smaller than the 3% decrease in U.S. household net worth in the first quarter alone.
money.cnn.com/2008/06/...
But you knew that already.
mjperry.blogspot.com/2...
Doesn't seem like anyone bought your whitewash the last go-round, either.
Or is this another figment of my imagination, as the Republicans are so quick to point out.
This country was destroyed by Wall Street. Other countries will remember the experiment called free market capitalism and remember -- if you don't have tight government oversight and let the top 1% run everything -- it'll end in utter failure.
We live in a reflexive world, as Soros himself would put it.
If some paper somewhere lost 1T of the value, it certainly doesn't mean that that can be called a "global subprime loss".
Think of what is derived from what and how this 1T came to be exactly. I think if you really consider the reflexive relationships as Soros would do, you would understand why he considers this such a serious crisis.
Lastly, given he teaches at the University of Michigan--one of the most depressed states in the US (there, I said it, depressesion), but I would imagine that he can probably walk out of his front door and see the effects of a few billion of lost value. Go to some parts of Detroit, stand on a corner, and preach your message there. I'd be curious to see the reception you receive.
Or not. Maybe he is a big fan of "The Secret".
While we're at it, the $1 trillion isn't even a real number. It's Soros' estimate, and given the roundness of the estimate and the lack of supporting data I'm assuming it's a pretty rough estimate. He states, and anyone with a brain can observe, that the crisis isn't over. But let's stick our heads in the sands rather than trying to observe more precisely how bad things are.
FWIW, I think people usually worry too much about these things and exaggerate the risk of the total collapse of our financial system. But this article is just not valid.
Does he really think that everyone in the USA can just walk to some bank and convert everything back into the 56t?
ot:
Gee, I wonder if China will soon begin to dump is vast holdings of US treasuries, if they haven't begin doing so already...
The USA is about screwed right now.
I'll bet if "us" bloggers could rate the quality of his work the results would be less than Congresses approval rating. Now that's a resume item.
I feel sorry for the poor kids who take his classes and confuse economics with political philosophy.
Moreover, his analysis ignores the multiplier effect of the $1 trillion dollar decrease in the bank's aggregate capital. A trillion dollar reduction in the networth of the banking sector should lead to a multi-trillion dollar reduction in loans outstanding. There is an equilibrium ratio between bank capital and loans outstanding. Reductions in equity should effectively make banks more risk averse and hence lend less.
I suspect that if a Democrat was President (George Mason is notoriously conservative), the author's analysis would be less foregiving ...
Most of the stock markets around the world are getting murdered right now...how much of those trillions of dollars in losses could be directly attributed to the U.S. housing market crash?
The relevant issue isn't just subprime losses, but the collateral damage to everything else - those who are about to abandon their negative equity house, those who have lost almost half of the value of their stocks.
That's great, because I remember this "beauty" from Steve Forbes:
www.wealthdaily.com/ar...
I held my COP shares long after *that* prediction. But, thanks anyway for the tip, Steve!
2 years ago someone in government convinced the powers that be that the housing bubble (increase in values) needs to be slowed.
The same powers decided that to accomplish the task, they would raise the Fed fund rate from 1% to 5% over a 6 month period thus killing the housing market completely. ( We are all feeling the ripple effect of this decision until today and ????). Mission accomplished.
However there was another way to curb the rise in housing prices and that being the tightening of the mortgages written so freely.
Regulating the mortgage market so as to not lend $$$ to anyone who could walk or talk. This would have accomplished the easing of home prices without causing the economic ripple effect being felt worldwide.
Now we want to raise interest rates again, after lowering them back to 2%. This is not an effective tool anymore in our economic state.
Rates must remain stable for a much longer period of time.
Placing regulations on lenders abusing the system must be stronger.
Oil will remain above $100 as to make investment in alternative sources financially attractive, PERIOD. Get used to it.
Global losses in subprime should not be compared to US housing market alone.
A huge amount of equity has disappeared in the US. The greater question is who owns the equity, (foreign investment is huge & growing). America is not owned by Americans.
Does nothing more than underscore how the Ward Churchills have had the ability to exist in the world of education.
Rather, it is merely a point focused on the recent guarded optimism being pushed upon the American public by the mass media and indivduals like Mr. Forbes. It is sort of reminiscent of the crew on the Titanic telling the third class passengers everything will be ok and that they should remain locked below deck because the ship is unsinkable. We all know how that ended!
In other words, these Wall Street talking heads believe we can talk this economy and this market in from the ledge before it plunges. If that is the case, as these folks keep telling the masses and the little investors not to panic, I suggest PANIC!!!!
As many market gurus over the years have pointed out, market bottoms are not hit when there is still any kind of hope or optimism in the air. That is exactly what Mssrs. Forbes and Perry still represent, although all indicators are pointing to recession. In other words, sentiment is just not suggesting enough misery yet.
I take this as yet another good reason for those conservative investors to remain on the sidelines and wait for an entry point into these markets and to the aggressive investors keep shorting the short squeeze bounces! In fact, I think we will see a dandy by the end of summer.... For what it's worth!
Fact: the top 10% of this country controls 90% of its net worth.
The top 10% are not the ones in trouble here.
The average american family has approx. $35K in mutual funds per the latest released data from companies such as Fidelity, Vanguard. etc.
If americans are so wealthy why are we almost at $1 trillion in revolving credit card debt owed?? (that is purely credit cards, not HELOC's, 1st mortgages, car loans, etc) If Americans are so wealthy why not pay it off, thus saving 20% in yearly interest to the card companies and banks, especially when the stock market doesn't even return that?
I will tell you why. Because the majority of americans are broke. They live week to week, have very little cash on hand, have very little in terms of real liquid investments, and though some americans are in favorable equity positions in their homes, many, many families are not.
The media, who have zero accountability, are allowed to flat out lie and tell you "everyone" is wealthy, and that there are so many millionaires out there today. It is all a bold faced lie, to get you spend more and more, to pretend you are wealthy, for the benefit of the elitists who run our country.
This Mr. Perry is just another moron.