One dollar koi and such

One dollar koi_new ver. side by *orudorumagi11
Other than a brief perusal of the NYT, I've been offline and fallen behind on my regular level of info-saturation. As I make up for lost time, I thought Mitchell’s recent comment was well worth highlighting for further discussion:
Mitchell said...
Pardon me for being boring but I'd like to brood aloud on this GSE bailout thing for a moment. It's all good; half the effect here comes from the conjunction of koi-eating octopi and mortgage securitization, right? So someone has to step up and post a comment as if this were just another housing-bubble econoblog. (Actually, it's just a lot more fun to talk about this stuff here than at the more serious places.)

So, at first it sounds bigger than subprime, much bigger. You have these two New-Deal-era institutions which own or securitize half the country's mortgages, $6trn worth. Those are their assets; but their liabilities, in the form of promised payments to bondholders, are just as big. And since housing prices are still falling, the value of their assets will shrink, and their balance sheets will end up massively in the red - which may add several trillion more dollars to the already huge ($10trn) federal debt.

Now hold on! - says the counterargument. Yes, houses may fall a lot further in value, but the GSEs own the mortgages, most of them originated pre-2005. A decline in the paper value of the house does not affect the value of the mortgage, unless it increases the risk of default, and that should only apply to people who have already tried to cash in a large part of the alleged value of their house, e.g. by taking out home equity loans. Which will be some of them, but overall the mortgages owned by the GSEs are a whole lot more reliable than the subprime ninjas were, right? So maybe their asset base won't decline too greatly in value after all.

But consider this (says the counter-counter-argument): this is the year of the great food and fuel crisis, in which the price of everything basic is going through the roof. Even if we ignore the effects of asset deflation, the simple increase in the cost of living is going to affect the ability of many people to keep up the mortgage payments, and some of them are going to default.

That's where my ability to argue with myself runs out, because to go any further you need some numbers for prospective default rates and I don't have them. Maybe someone at Calculated Risk does. Meanwhile, I'd like to point out the amazing facts about who the GSE bondholders are, i.e. the people they owe that $6trn to. It seems bizarre that the Chinese and Russian central banks should each own a slice of the American mortgage market, supposedly just as valuable as 10% of their entire national economies. It seems bizarre, and yet I feel that if I keep digging, eventually I'll come upon some set of relationships which sum up the totality of the global economy: who owns what, who owes what. It'll be like when Neo first gets his "Matrix vision". And then, as the world's foremost financial shaman puts it, the money will burn in my head forever after.
July 14, 2008 5:44 AM

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