The financial crisis in numbers

Someone said that “to understand something, you must be able to explain it.” This certainly applies to our current financial crisis. Today, we are not going to go very far in shedding light on that topic; we’ll just look at some numbers. Of course one of the big challenge is to keep these figures into perspective, because they’re simply so huge. On a previous blog I was suggesting a practical comparison between numbers and years; you might want to revisit it… At any rate, with a gross domestic product of $13.84 trillion, a public debt of $8.5 trillion and an outside debt of $12.2 trillion, you may wonder how much money is represented by loans that are secured through real estate; the answer is a staggering $16.7 trillion (about $10.2trillion in mortgages and $6.5 trillion in so-called “mortgage-backed securities;”) that’s much more than our GDP! Of that, $5 trillion is held by the now infamous Fannie Mae and Freddy Mac. You should keep in mind that mortgage-based debt is roughly half the assets of the entire U.S. commercial system. With this in mind, it’s easy to see that if real estate prices keep on plunging – and there is so far no sign contradicting that trend – and go back to their “pre-bubble” level; I’m not talking about a “catastrophic” drop here, just a return to regular market values, we are up for some very interesting times. Now if we estimate that the bubble constitutes an over-appreciation of 50% since 2003, and that the “post-bubble” values could drop by at least 30%, the impact on banks assets could easily – by my own estimation - fall between 5% and 10% of the $16.7 trillion, which might equate to around $1 trillion worth of potential losses to our commercial banking system. That would be a far cry from the $20 billion taxpayers’ liability announced to justify the “bail-out” of Fanny Mae and Freddy Mac. Fortunately for our government, no on can really tell the difference between “billion” and “trillion”…