I've been reading the Wall Street Journal as it thoroughly dissects the subprime loan mess. I've discovered how the loans were made, who took them, where they were concentrated geographically, which banks are suffering the most, how it's affecting the housing market and so on. Earlier this week there was an article describing how a pair of British bankers developed a technique for reselling bundled mortgages as securities. Their technique became a widely-used, multi-hundred billion dollar investment spread across many institutions. The article went on to describe how some of the major banks are unwinding these bundled mortgages.
This is all very interesting in a technical sense, but I'm afraid that it obscures the basic picture. It's not the technologies or processes or loan instruments or mortgage securities that caused the problem. It was just greed on all sides. The borrowers wanted real estate they hadn't earned and the lenders wanted more and more interest payments from more and more loans.
What has been interesting about the sub-prime market is to take a look at that in comparison to all loans in the US and what part of the economy it underwrites. The worst part of the crisis effects a fraction of 1% of all loans, the majority being industrial and commercial loans with consumer loans coming in third. While home mortgages to have an effect on capital goods for individuals and families (the mechanical utilities and such in the home), they are also as a part of the overall picture tiny. As part of the overall economy that gets you to less than 5% and most likely less than 3% of the overall GDP of the US being involved in the sub-prime market. What you get out of those are business downturns and plateaus in the economy, not an across the board economic meltdown.
ReplyDeleteAs a counter-example, pre-Bubble Japan (where small condos in downtown Tokyo were over $1M and you could get a 99 year mortgage) had 10% of its GDP underwritten by bad loans and Non-Performing Loans (NPL). That indicated a deep industrial problem in Japan and its late 1980's to 1990's meltdown has only turned the corner in the last few years. The other 'Asian Tigers' (S. Korea, Taiwan, Indonesia, etc.) had similar problems and between 12-15% of their economies were also based on NPLs. They, too, have only recovered as the global need for goods has brought their economies back, and they are expanding but far more slowly today.
When folks write about doom-n-gloom on the US for a something as small as the sub-prime home loans in the US and ignore historical examples, we are misguided for various reasons. Contrarily we can also see a nation with, to be generous, *only* 30% of its GDP based on NPLs and most speculation is that 60% is more likely. If the US groans and complains about an economic plateau or minor downturn at 3% of GDP being threatened and the Asian Bubble Economies took nearly a decade to recover from 10-15% of their GDPs on NPLs, then what can be said of 30-60% of GDP based on NPLs?
You would think: frightening, pathetic, due for a long-term meltdown, unsustainable, ready for implosion. Wouldn't you? That is a house of cards built on whipped topping. But you do not hear that, instead you hear: Next Superpower, dominant, even world class. That Nation is China, and those exact same folks with their hair on fire about the US sub-prime loan market then turn 180 degrees around and put forward that China is a huge global threat.
That is fear mongering for economic and political reasons. It also ignores, completely, the resiliency of the modern US economy which took the similarly sized 'internet bubble' swallowed it and two years later was growing structurally and that would take two more years to show up in the DJIA. We don't mourn for companies started up and folded during 1998-2001, yet their impact was as large on the speculative capital and NPL area as the sub-prime mortgages are today... larger, actually, when you consider the huge infrastructure investments that went on. I did not cry then for those that invested in bad start-ups and I do not cry today that invested in bad home loans. My worry is what happens when China implodes... because we do not talk about it, do not reference it and think that 'product output' means sustainable economy. Just as Japan was the 'wave of the future' before its meltdown, we now hear the same about China. And the US economy in that pre-Japanese Bubble was also seen as lack luster and wayward...
Here we go, again, but this time larger.