E-mail conference continued ...
my 2 cents: ~US$1.3trln in sub-prime mortgages written...assume 50% go bad (a heroic assumption in my view)= US$650bn. so how will this affect credit markets? Remember, the banks got rid of the mortgages (both prime and subprime) as fast they could write them, so it won't affect them much. the guys hit will be the CDO holders, that is to say, HF, pension funds, some wealthy individual guys and MFs....so spread nicely around the table=likey little impact to financial system. I believe the entire CDO market is about 400bn and that the riskiest loans are contained within that, the other loans were packaged off in different MBS type instruments. The financial guys getting hit now are the subprime lenders (such as New Century) which were undercapitalized to begin with and wrote shoddy mortgages and engaged in questionable practices and quite frankly deserve to go under, in my opinion.
Also, bicoastal real estate market is still hot, stuff in the middle is cr*pping out, even in Cali....but who cares? That segment of the market is the mid/low end anyway and the people that buy them don't amount to all that much consumption....last figs I remember is that subprime=4% of all homeowners and those account for 8% of total consumption. Alt-A probably a similar amount in terms of consumption, although I'm guessing.
I remember the S&L crisis (which, btw, was bigger proportionally as a % of the economy that went bust then, ~14-15%, than the subprime loan mkt would now even if you assume a 50% default rate) and that didn't cause a recession, it was high oil prices that spiked in the wake of Saddam's invasion of Kuwait. If we assume even US$1trn in defaults, that is still less than the S&L crisis in terms of % of GDP. Moreover, employment growth remains strong across all sectors (less real estate) and that is the KEY for maintaining housing stability.
Will the economy slow down? of course, but this is the 6th year of expansion, we are due for a slowdown. Is this a major disaster? I may be wrong but I highly doubt it. I think the US muddles through this w 2%-2.5% gr. What it is bad for, is Asia, esp export dependent China, becuase less widgets will be sold this side of the pond.
Lastly check out the chart below, it clearly tells you that sub-prime defaults are highly correlated with fed funds....last time I checked, ir were not going up, so we're probably seeing the worst of it as we speak.....
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