I got a question the other day that has me puzzled. The sub-prime mortgage market makes up about 15 percent of the total market. Within the sub-prime market the default rate is still well less than 5 percent and in the mortgage market as a whole, the default rate is less than 1 percent. So if all of these mortgages have been bundled into securities, and only 1/2 of one percent of the backing of these securities are in default, then why are we seeing such a huge impact?
Since ai am a bit behind in reading PEN-L (about 18,000 messages), I did go back over the past few weeks and found Doug Henwood's new piece from LBO. In that he seems to indicate that most of the problem is "animal spirits" , anxiety and panic. If that is the case, then if the Fed can calm people down, the crisis will end. But it seems to me that the crisis is much more fundamental than that. Someone else suggested that leverage plays a role, which is of course very true, but it would take an enormous amount of leverage for a 1/2 of one percent drop in value to force a massive sell off. Can anyone provide some thoughts? Thanks, Doug Orr
