What Were We Thinking?

| October 15, 2006

As Webster has mentioned, some time early in 2006 I started tracking several pieces of the financial sector using a new tool I invented that we named “Boomerang”. Suffice to say it was originally conceived as a tool for intelligence fusion for things like the war on terror. Unable to find a vehicle inside the DoD or the Intelligence Community, I took it to the commercial world, and we have been doing fun and lucrative things with it for our customers.

One trend became clear from the data – the US (and to some extent the world) is about to undergo a period of tremendous deflationary pressure. The economy for the last 12+ years has been operating on a series of asset bubbles, the most recent one being in housing. There are some wonderful write ups as to how this happened, but the roots of this came from the mass infusion of money into the credit markets. As a result over the last 5+ years, the prices of homes have gone crazy pretty much everywhere in the country, some places more than others. Prices were fueled by cheap credit, and the cost of homes continued to soar. A decade ago, funding mortgages were largely the realm of government sponsored enterprises like Fannie Mae. Since then, a huge and growing number of companies are into the “MBS” game. This has bypassed some of the controls that used to exist, and the era of cheap and easy money was born.

The net result is a huge amount of “Sub Prime” lending funded by strange sources such as pension plans and hedge funds. What does one of these “Sub Prime” loans look like? A great example would be this house in Carlsbad, CA. 4,180 sqft, 5 bed/4.5 bath in La Costa Oaks. This property is currently under foreclosure on its 100% financed ~$1 Million mortgage. (Hat tip to Bubble Markets Inventory Tracking). Yes, someone was dumb enough to take on almost $10K / Month in payments. This is not a one off event. It is being repeated thousands of times across the country.

Below is a graph of the estimated amount of Sub-Prime lending over the last few years. Imagine what it will mean to take a good percentage of this much money out the US economy. When I say “take it out” I mean gone, deflation, wealth removal (some would argue the wealth never existed).

Sub Prime Lending

Thanks to Calculated Risk, a great econ site, and where the original info for the graph was sourced.

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Category: Commentary, Credit Backlash, Economics, Information Technology, Main, Recession Watch

About the Author ()

Bruce Henderson is a former Marine who focuses custom data mining and visualization technologies on the economy and other disasters.

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