When the markets go nuts and traders sell short and trigger sell programs, they don't ever just say, "Hey, we're doing this to make a fast buck and profit from fear." They always have some supposedly legitimate, "statesmanlike" reason.
Today, the reason is supposedly terror in the subprime mortgage market. To put this as frankly as possible, this is just nonsense.
Even if subprime delinquencies and defaults are up, they're a tiny portion of total mortgages. Suppose 13 percent of subprime mortgages are in default. Subprime itself is less than 15 percent of total mortgage debt, so that means that roughly 2 percent of mortgage debt is delinquent or in default.
Yes, that's more than it used to be, and is a disaster for the subprime mortgage companies.
But when a mortgage defaults, the lender takes back the house or condo, sells it, and usually recovers about 75 percent of the loan value or more. That means the real loss would be about 25 percent of 2 percent, or 1/2 of 1 percent.
In the context of a market as huge as the nation's mortgage market, that's not a lot. A few companies will go bankrupt, and someone will make a killing buying their bonds and portfolios at a huge discount as they turn out to be worth a lot more than people thought in March 2007. But it won't mean a lot to a roughly $14 trillion economy, of which the subprime mortgage market is a tiny blip.
~ Ben Stein, "The Long and the Short of Down-Market Investing," Yahoo! Finance, March 16, 2007