Any hard look at the likely costs of this mess will have to include assumptions like Mike Morgan explains here. The numbers he uses are conservative, since it is not just recent vintage mortgages that are in trouble (truth be told, housing was already rising above trend by the late ’90s), and prices will be down a lot more before this is over.

Paint by the Numbers - We don’t need many numbers, but it seems like we have thousands of them bouncing around the media in order to justify one statement or another, or for the traders to have the ability to push the price of the common up, down, up, down, and up, down at will. It’s funny how Paulson went after short sellers in July for supposedly manipulating the markets, but he doesn’t think it is a problem for traders to push markets up when there is no basis for the move, other than number being manipulated . . . and the real numbers being silenced by the Fed. His blank stare at this type of market manipulation will eventually lead to a blow off and a much harder fall, instead of logically and systematically allowing the markets to work. As for the numbers we do need.

1 - $5 Trillion - Mortgages guaranteed by Fannie and Freddie

2 - $1.5 Trillion - Low end of the number for mortgages in Fannie and Freddie’s portfolios

3 - 65%* - Current value of property for mortgages made between 2003 and 2006.

4 - 30%+* - Percentage of Fannie and Freddie mortgages made between 2003 and 2006.

5 - $500 Billion - How much Paulson needs to come up with for Fannie and Freddie to stabilize
the markets.

6 - $5Trillion - How much Paulson needs to come up with for the banks and lenders to solve the problems or we could refer to this as how much was scammed out of the system during the
Housing/Commercial Ponzi Scheme.

*These two are conservative estimates. If we ever want to talk real numbers, these two are much worse, but they will do for this example. When you take apart the portfolios, even giving them the very best of the best, you are staring at a trillion dollar loss on $6.5T in mortgages. That is the very least Paulson needs to come up with to stabilize the Fannie and Freddie problems . . . temporarily.

Quick Fix - Fantasy Numbers - I say temporarily because housing prices are still declining . . . no matter what Case-Schiller (CS) or the National Association of Realtors (NAR) say. In fact, the leading home building analyst, Alex Barron, came out with a report on the Case-Schiller index this week . . . The Case Against Case-Schiller. . .

Case-Schiller does not properly account for foreclosures and new construction. Huh? Yeah, you heard it right. And for those of you still following the bouncing ball, foreclosures and new construction are the two central players in the housing and financial crisis.

I would add that that last estimate of $5 trillion in scammed money / wasted capital is just the real estate component of the debt binge. The actual misallocations are much larger, since debt has been used for virtually everything lately. People buy groceries with debt and pay for worthless educations with debt, and the corporate world came to rely on debt rather than earnings or equity for expansion.

As of last year, the total private debt outstanding in the US was approaching $50 trillion. The question is how much that has gone to money heaven.

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