Parallels With Subprime Mortgage Melt-Down

“The U.S. economy’s output is roughly $18.4 trillion per year. Total exports to China are very roughly $120 billion per year. That’s a lot of hamburgers, but it’s roughly seven-tenths of one percent of the U.S. economy. If our exports to China fell by 20 percent — a large number — that would have only trifling effect on the U.S. economy — very roughly one-tenth of one percent of U.S. output, trivial even for an economy as big as ours.”

–“Ben Stein:  Don’t Blame China For Stock Market Woes“; CBS News (Aug. 30, 2015)

ben_steinThose with long memories will recall that Stein said something very similar about the collapse in subprime mortgages — and the risk it posed to the housing market and broader economy — just before the bottom fell out back in 2008:

“The total mortgage market in the United States is roughly $10.4 trillion. Of that, a little over 13 percent, or about $1.35 trillion, is subprime ” certainly a large sum. Of this, nearly 14 percent is delinquent, meaning late in payment or in foreclosure. Of this amount, about 5 percent is actually in foreclosure, or about $67 billion. Of this amount, according to my friends in real estate, at least about half will be recovered in foreclosure. So now we are down to losses of about $33 billion to $34 billion.

The rate of loss in subprime mortgages keeps climbing. In time, perhaps it will double, maybe back to $67 billion. This is a large sum by absolute standards, and I would sure like to have it in my bank account.

But by the metrics of a large economy, it is nothing. The total wealth of the United States is about $70 trillion. The value of the stocks listed in the United States is very roughly $15 trillion to $20 trillion. The bond market is even larger.

Much more to the point, the fears and terrors about subprime mortgages have helped knock off 6.7 percent of the stock market’s value in recent weeks. This amounts to about $1.1 trillion, or more than 30 times the losses so far in the subprime market. In other words, these subprime losses are wildly out of all proportion to the likely damage to the economy from the subprime problems.”

–Ben Stein, “Chicken Little’s Brethren, on the Trading Floor”; The NYT (8/12/2007)

OK, now you can officially worry . . .

About the author

Ross Kaplan has 19+ years experience selling real estate all over the Twin Cities. He is also a 12-time consecutive "Super Real Estate Agent," as determined by Mpls. - St. Paul Magazine and Twin Cities Business Magazine. Prior to becoming a Realtor, Ross was an attorney (corporate law), CPA, and entrepreneur. He holds an economics degree from Stanford.

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