Will Subprime Fallout Lead to a Depression?

by: Roger Nusbaum

roger nusbaumRoger Nusbaum submits: One of my favorite SNL bits of all time was a game show parody called What's The Best Way with Adam Sandler, Glenn Close and Phil Hartman. It was about driving directions in Boston, with the accents in full-on mode.

I had the You Cahn't Get There From Here thought (think thick Yankee accent) as a I read a very gloomy post from Bill Cara that a reader pointed out to me.

Bill sees a depression coming to the U.S. Based on how I read the post, he lays a lot of the cause at the feet of the subprime market. He has a zillion charts and tables to help make the case.

I tend to view this sort of thing in terms of probability. Any outcome could be possible I suppose, but what is the realistic probability of any particular outcome?

One thing I don't think I saw in Bill's post was how many people are impacted by all of the loans made that are part of the problem. What I mean is (making numbers up here to make a point) if 50% of every loan written last year was subprime, and half of those sub prime loans default, how many people are impacted? If 1000 loans were made, and 250 of them default, who cares? Obviously more than 1000 loans were written, but does this issue effect even 1% of homeowners? I really don't know, but the number of people facing default is either significant or it is not, and per the post by Bill we don't know the number.

Bill is worried about rates going up, causing adjustable mortgages to reset, causing people to lose their homes. Again how many families does this effect? Are there 3 million of these loans out there (1% of the U.S. population)? How many of those 3 million (or whatever the real figure is) are impacted? One chart shows that in 3Q 2006, 4.8% of subprime mortgages are 90 days or more delinquent.

Five percent of 3 million (again a number I made up) is 150,000. Is this enough for a depression?

He could be right, but I don't agree with him. His discussion is not complete with out knowing how many people are impacted. He cited that 20% of 2006 originations were subprime, but again how many people is that?

To me, the bigger threat is subprime as one small-ish piece of global liquidity constraint.

I am not saying that real estate and lending are not facing some problems, but I do question that a depression has as high a probability as Bill gives it.

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