Thursday, March 26, 2009

Credit Default Swaps vs Poor People Getting Houses : FIGHT!

A friend on the Facebooks recently got into a political internet slap fight (I always think of this XKCD) that ended up with a bit that essentially blamed the economic crisis on "Bill Clinton and his subprime mortgages". Never mind that a) what they are probably referring to is the government push to get more of those less well off able to buy houses b) that was actually done under Jimmy Carter, I believe and c) the whole "Democrats helped poor people get houses and that caused the crisis!" is very un-classy and a drop in the bucket compared to the Credit Default Swap Mess.

So I decided to but in a little on her comment about that thread.
Two great videos that help explain what credit default swaps are and how they nuked the economy.

CDSs are important because they were completely unregulated, meaning banks bought very heavily into them. Essentially many "too big to fail" financial institutions made a bet that the housing market would just keep going up forever. An unrealistic expectation. When housing prices finally started to fall, the whole house of cards came crashing down.

The Credit Default Swap market was worth $62 trillion recently (down from it's peak certainly given the way things have crashed). It was worth $900 billion in 2000 with Phil Gramm (R-SC) deregulated the CDS market.

The median home price in the united states in 2005 was $213,900. If you want to compare that to the size of the CDS market, that would mean the current CDS market would avearge out over 289,855,072 2005-median-value homes. According to the 2003 census bureau housing survey there were 105,842,000 households (which includes apartments)

Given there are some date differences in my data and some very rough math, still the CDS market outweighs even the value and number of homes in the united states. The government helping a few more poor people get houses is a drop in the bucket compared to the failure of CDSs and the "too big to fail" banks' involvement in that mess.

There's possibly a math mistake in there, or an oversimplification. It was done in a rush on a Facebook comment thread. The main point stands though that "poor people getting houses they can't afford" is a drop in the bucket compared to the size of the Credit Default Swap mess. It was bad deregulation in 2000 and a failure to patch that hole for this long that led us to the mess we are in. And for that, yes, you can blame greedy corporations and our representatives in Congress that did nothing to undo the mistake of not regulating those CDSs.

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