blue trane's Journal: Some figures on the housing bubble

http://www.milkeninstitute.org/pdf/riseandfallexcerpt.pdf provides some numbers:

The total value of housing units in the United
States amounts to $19.3 trillion, with $10.6 trillion
in mortgage debt and the remaining $8.7 trillion
representing equity in those units as of June 2008.

Of the approximately 80 million houses in the
United States, 27 million are paid off, while the
remaining 53 million have mortgages. Of those
households with mortgages, 5 million (or 9 percent)
were behind in their payments and roughly 3
percent were in foreclosure as of mid-2008.

So, say 10% of $10.6 trillion was at risk of default, or $1 trillion.

The notional amount of CDS
increased from less than $1 trillion in 2001 to slightly
more than $62 trillion in 2007, before declining to
$47 trillion on October 31, 2008.

So the derivative market inflated the real value of the mortgages by about a factor of 6, and then magnified the size of the possible default problem by a factor of 15.

I'm reminded of a sentence from John Lanchester's book, I.O.U. (another journal of mine on the book):

"Even once it's explained, however, it still seems wholly contrary to common sense that the market for products that derive from real things should be unimaginably vaster than the market for the things themselves."

Note that the total value of derivatives, according to the May 2014 BIS Statistical Release, was $710 trillion. So the $62 trillion 2007 figure has been increased by a factor of 10, again.

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The Fed bought up trillions of the MBS assets, thereby letting off the hook the CDS holders who had insured them, I think. Pension funds held a lot of CDSes, so a SIGTARP report stated that it was prompted to action to save retirement accounts. Yet when Detroit experienced a dramatic increase in its liabilities due to an interest-rate swap with UBS, the Fed and the national government did not step in to help. Why not?

Fed Chairman Bernanke stated somewhere that helping state and local governments were too political for the Fed to get involved in. So it is the realm of fiscal policy. Why couldn't he say outright that the government can run a deficit to help out state and local governments? It worked for the Fed helping banks; why shouldn't it work for the government helping states and cities?

Clickable link

[blue trane]

http://www.milkeninstitute.org/pdf/riseandfallexcerpt.pdf [milkeninstitute.org]