Apocalypse Now?

Dean Foust

No secret that subprime is the story of the day. A Wall Street Journal story from today (registration required) said that economists polled predicted subprime would depress housing activity this year, but wouldn't create a recession.

But there is a school of doomsayers who argues that Armageddon lies ahead--that the loose credit conditions that lead to the subprime mess was the tip of the iceberg, and that we're headed not just for a recession, but possibly even a depression. That's the view that this blogger, Bill Cara, takes in this recent piece. (If you're wondering, 'Who is Bill Cara?,' he provides his bio here.)

To quote Cara: "...Yes, I believe there will be a US economic recession, but the elements are now in place for the first time in 80 years for America to sink into a depression. Should a depression unfold, there will be big name financial houses that will fail. Accordingly, the owners and managers of wealth ought to be researching today how to protect themselves beyond FDIC-insured accounts..."

Cara throws a lot of tables at the reader to make his case that the subprime mess will not only cause a recession, but that we may be hurtling toward a depression. I admit that there are some issues facing America that concern me -- namely, the mountains of public and private debt, plus the unfunded liabilities -- but I'm not convinced that he makes his case here, and for these reasons...

To be clear, I'm not denying that we've got a subprime mess that is ugly, and could impact not just a lot of financial players (including the big Wall Street investment banks like Merrill and Bear Stearns) but also the economy. And admittedly, the charts of subprime activity all look scary -- subprime loans in 2006 supposedly represented a high percentage of all loans, and of all lending volume. But there are few hard numbers numbers here that show me what percentage of all loans outstanding are subprime, and what percentage are delinquent or even facing foreclosure. What percentage of all households have facing foreclosure? I have a hunch that the real number of subprime loans is less than we're being led to believe.

Reason? Churn. We read a lot about how aggressive mortgage brokers put low-income borrowers into subprime mortgages they couldn't really afford, and then when, inevitably, they started missing payments, they refinanced them right back into another loan. So I think there's a lot of double-counting, and perhaps even triple-counting going on, as some subprime borrowers took out two and perhaps even three mortgages in the course of a year.

What do you think? I'd like to get a discussion started here. Recession? Depression? Or just a really bad case of the flu that passes by the end of the year?

Before it's here, it's on the Bloomberg Terminal.