Maybe there is something they aren't telling us

Apr 9 2009 by Peter Jackson, The Journal

PERHAPS the only good thing about the credit crunch is that it’s so easy to understand.

It’s not like so many other things in modern life – the word algorithm, for example – where we just nod sagely and pretend we know what on earth people are talking about.

No, the credit crunch was straightforward: lots of greedy American bankers giving mortgages to poor people, the so-called subprime mortgages. They then packaged these mortgages up, in some ill-defined way and sold them on to other – equally daft – bankers, including some of our own.

Then, surprise, surprise, the poor people couldn’t meet their mortgage repayments, so their loans aren’t worth so much and the bankers that bought them were in trouble.

So far, so good. Or, at least, so far, so easy to understand.

Except that this week, the International Monetary Fund warned the toxic debts racked up by banks and insurers could reach £2.7 trillion. Dedicated readers of this column will remember that back in November 2007 I shared with them a calculation based on an estimate that four million householders in the US could default on their home loans. I also assumed an average loan for these householders of £100,000, giving us a total subprime loss of £400bn.

At that time I thought I was being pessimistic, as analysts were talking in terms of a total of £250bn. In fact, I wasn’t as wrong as them, but I still underestimated the true scale of the problem by a factor of about seven. Heck, with those kind of skills with numbers and forecasting, I should be heading up RBS.

But, the question remains, where does the all toxic debt difference – a little matter of more than £2trn – come from? Not from the US housing market, that’s for sure. Such a figure would represent more than 12% of the total number of US households – mortgaged and unmortgaged – at an average house valuation of £200,000. Things may be bad over there, but they’re certainly not that bad.

So, it seems the credit crunch was never that easy to understand after all. It also seems maybe there’s something we’re still not being told as to where it all went horribly wrong.

Peter Jackson is a writer and ex-business editor of The Journal – p.jackson77@btinternet.com