Thursday, October 25, 2007

Up to $4 Trillion Decline in U.S. Household Real Estate Value Predicted

Back in August we had a post, Ben Stein and the Markets (nutshell: Ben's wrong) that led off with a little alliteration (please, someone, help me):
On Sunday Ben Stein wrote an Op-Ed for the New York Times that was conflating, confusing and confounding.I'll have some comments following these exerpts from:...
and continued:

...Mr. Stein is glossing over, at minimum, three issues that the sub-prime mess raises.

1) To the extent that sub-prime losses are held by publicly traded companies or their affiliated funds, the amount that should be subtracted from their market capitalization is not the recognized loss but the loss times their P.E. multiple (I shouldn't have to make an argument by definition, Ben knows this stuff). This gives you a much larger number.

2) The banks are reporting that they can't quantify the extent of their losses. What? Who are these guys?

They trade based on models. Here's a must read on modeling,
"Numerical Models, Integrated Circuits and Global Warming Theory",
it was written in regards to climate models but if you read it to the end you will:
a) have a pretty good understanding of some of the problems of modeling in general; and
b) you will think "This guy knows what he's talking about".

Short version on modeling errors? As Alfred Korzybski said "The map is not the territory"

3) With the lifting of the curtain, investors are able to take the measure of the Great and Powerful Oz.
A lot of these Wall Street types are revealed as arrogant windbags. See "hubris" (or see David Gaffen's MarketBeat post yesterday. He skewers 'em like a Canadian guide gutting fish. Very efficient.)
Goldman, Bear, Paribas are the peak of the finance world (and paid like it)
This revelation was not re-assuring to the markets and worthy of a P.E. haircut on the market all by itself.
I'd like to see Senator Levin get these guys under oath and ask "What were you thinking?"

I like Ben. He's usually a sharp straight-shooter.
I'd have liked to have the chance to win his money.
All of it.
I was wrong. The situation is worse than I thought.
Our original post was focused solely on losses in securitized mortgages.
There's a bigger picture.
This is the polluted sea that energy/alt-energy swims in.
(to garble Chairman Mao)
Calculated Risk explains; better than I could.
Update: Dean Baker says maybe up to$8 Trillion. (hat tip Lindsey)

Last week, in the comments, I noted that some economists were predicting financial losses of $100 Billion from the mortgage crisis. I joked that maybe they dropped a zero - and I also noted that that estimate didn't include the $2 Trillion or more that will be lost in U.S. household net worth.

The NY Times had an article this morning that provided new estimates for these losses: Reports Suggest Broader Losses From Mortgages.

Note: Tanta excerpted part of the same NY Times article this morning on Foreclosure Predictions.

The article includes these projections of financial and household losses:...MORE (it's worth the click)